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UNITED FIRE GROUP INC - Annual Report: 2015 (Form 10-K)

Table of Contents


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-K
R Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015
OR

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______
Commission File Number 001-34257

UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
Iowa
 
45-2302834
(State or other jurisdiction of incorporation or organization)
 
(I.R.S Employer Identification No.)
118 Second Avenue SE
Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 399-5700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
The NASDAQ Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES £ NO R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES £ NO R

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 £

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer R
 
Accelerated filer £
 
Non-accelerated filer £
 
Smaller reporting company £

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

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2015 was approximately $773.5 million. For purposes of this calculation, all directors and executive officers of the registrant are considered affiliates. As of February 24, 2016, 25,200,422 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, for its annual shareholder meeting to be held on May 18, 2016.


Table of Contents

FORM 10-K TABLE OF CONTENTS
 
Page
 
 
Forward-Looking Information
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 12
 Exhibit 21
 Exhibit 23.1
 Exhibit 23.2
 Exhibit 23.3
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2


Table of Contents

FORWARD-LOOKING INFORMATION
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 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), 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. See Part I, Item 1A "Risk Factors" of this report for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include but are not limited to the following:

The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy; the occurrence of catastrophic events, including international events, significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics;
The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses and our life insurance reserve for future policy benefits;
Geographic concentration risk in both property and casualty insurance and life insurance segments;
The potential disruption of our operations and reputation due to unauthorized data access, cyber-attacks or cyber-terrorism and other security breaches;
Developments in general economic conditions, domestic and global financial markets, interest rates and other-than-temporary impairment losses that could affect the performance of our investment portfolio;
Our ability to effectively underwrite and adequately price insured risks;
Changes in industry trends, an increase in competition and significant industry developments;
Litigation or regulatory actions that could require us to pay significant damages, fines or penalties or change the way we do business;
Lowering of one or more of the financial strength ratings of our operating subsidiaries or our issuer credit ratings and the adverse impact such action may have on our premium writings, policy retention, profitability and liquidity;
Governmental actions, policies and 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; laws, regulations and stock exchange requirements relating to corporate governance and the cost of compliance;
Our relationship with and the financial strength of our reinsurers; and
Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network.

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 ("SEC"), we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.


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Table of Contents

PART I.

ITEM 1. BUSINESS
 
GENERAL DESCRIPTION
United Fire Group, Inc. ("UFG", "United Fire", the "Registrant", the "Company", "we", "us", or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. Our insurance company subsidiaries are currently licensed as a property and casualty insurer in 46 states, plus the District of Columbia and as a life insurer in 37 states. United Fire & Casualty Company was incorporated in Iowa in January 1946. Our principal executive office is located at 118 Second Avenue SE, Cedar Rapids, Iowa 52401; telephone: 319-399-5700.
United Fire Group, Inc. owns 100 percent of one subsidiary, United Fire & Casualty Company. United Fire & Casualty Company owns 100 percent of eight subsidiaries: United Life Insurance Company, Addison Insurance Company, Lafayette Insurance Company, United Fire & Indemnity Company, Mercer Insurance Company, Financial Pacific Insurance Company, UFG Specialty Insurance Company (formerly known as Texas General Indemnity Company) and United Real Estate Holdings Company, LLC. Mercer Insurance Company owns 100 percent of two subsidiaries: Franklin Insurance Company and Mercer Insurance Company of New Jersey, Inc. United Fire Lloyds is an affiliate of United Fire & Indemnity Company.
In 2015, the Company dissolved three of its holding companies in order to flatten our organizational chart. The companies dissolved were American Indemnity Financial Corporation, Mercer Insurance Group, Inc. and Financial Pacific Insurance Group, Inc. In addition, Texas General Indemnity Company was renamed UFG Specialty Insurance Company on July 1, 2015.
Holding Company Reorganization
On February 1, 2012, we completed a holding company reorganization (the "Reorganization") of United Fire Group, Inc., United Fire & Casualty Company, and UFC MergeCo, Inc., an Iowa corporation formed for the purpose of facilitating the Reorganization. The Reorganization agreement was approved and adopted by United Fire & Casualty Company shareholders at a special meeting of shareholders held on January 24, 2012.
The Reorganization agreement provided for the merger of United Fire & Casualty Company with UFC MergeCo, Inc., with United Fire & Casualty Company surviving the merger as a wholly owned subsidiary of United Fire Group, Inc. Each share of common stock, par value $3.33 1/3 per share, of United Fire & Casualty Company issued and outstanding immediately prior to the effective time of the merger, converted into one duly issued, fully paid and nonassessable share of common stock, par value $0.001 per share, of United Fire Group, Inc. In addition, each outstanding option to purchase or right to acquire shares of United Fire & Casualty Company common stock was automatically converted into an option to purchase or right to acquire, upon the same terms and conditions, an identical number of shares of United Fire Group, Inc. common stock.
Upon completion of the Reorganization, United Fire Group, Inc., an Iowa corporation, replaced United Fire & Casualty Company, an Iowa corporation, as the publicly held corporation, and the holders of United Fire & Casualty Company common stock then held the same number of shares at the same ownership percentage of United Fire Group, Inc. as they held of United Fire & Casualty Company immediately prior to the Reorganization. On February 2, 2012, shares of United Fire Group, Inc. common stock commenced trading on the NASDAQ Global Select Market under the ticker symbol "UFCS."
Employees
As of December 31, 2015, we employed 1,057 full-time employees and 13 part-time employees. We are not a party to any collective bargaining agreement.



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Reportable Segments
We report our operations in two business segments: property and casualty insurance and life insurance. Our property and casualty insurance segment is comprised of commercial lines insurance, including surety bonds, personal lines insurance and assumed reinsurance. Our life insurance segment is comprised of deferred and immediate fixed annuities, universal life insurance products and traditional life insurance products. A table reflecting revenues, net income and assets attributable to our operating segments is included in Part II, Item 8, Note 10 "Segment Information." All intercompany transactions have been eliminated in consolidation.
All of our property and casualty insurance subsidiaries and our affiliate belong to an intercompany reinsurance pooling arrangement. On July 1, 2015, UFG Specialty Insurance Company (formerly known as Texas General Indemnity Company) entered the pooling arrangement. Pooling arrangements permit the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant's own surplus level. Under such arrangements, the members share substantially all of the insurance business that is written and allocate the combined premiums, losses and expenses based on percentages defined in the arrangement.
Our life insurance segment consists solely of the operations of United Life Insurance Company.
Available Information
We provide free and timely access to all our reports filed with the SEC in the Investor Relations section of our website at www.unitedfiregroup.com. Under the "Investor Relations" tab, select "Financial Information" and then, under the "Investor Relations" tab, select "SEC Filings" to view the list of our SEC filings, which includes annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, beneficial ownership reports on Forms 3, 4 and 5 and amendments to reports filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the Exchange Act. Such reports are made available as soon as reasonably practicable after they are filed with or furnished to the SEC.
Our Code of Ethics and Business Conduct is also available at www.unitedfiregroup.com in the Investor Relations section. To view it, under the "Investor Relations" tab, select "Corporate Governance" and then "Code of Ethics and Business Conduct."
Free paper copies of any materials that we file with or furnish to the SEC can also be obtained by writing to Investor Relations, United Fire Group, Inc., 118 Second Avenue SE, Cedar Rapids, Iowa 52401.

MARKETING AND DISTRIBUTION
We market our products through our home office in Cedar Rapids, Iowa, and five regional locations: Westminster, Colorado, a suburb of Denver; Webster, Texas; Pennington, New Jersey; Los Angeles, California and Rocklin, California. We are represented through approximately 1,200 independent property and casualty agencies and by approximately 1,200 independent life agencies.









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Property and Casualty Insurance Segment
In 2015, 2014 and 2013 the direct statutory premiums written by our property and casualty insurance operations were distributed as follows:
 
Years Ended December 31,
% of Total
(In Thousands)
2015
2014
2013
2015
2014
2013
Texas
$
142,485

$
122,559

$
104,775

15.4
%
14.6
%
13.9
%
California
109,420

92,754

79,326

11.8

11.1

10.5

Iowa
99,949

97,790

92,976

10.8

11.7

12.3

Missouri
53,867

50,704

47,787

5.8

6.0

6.3

New Jersey
50,979

51,436

51,992

5.5

6.1

6.9

Colorado
45,805

40,291

36,014

4.9

4.8

4.8

Minnesota
44,993

39,844

33,434

4.9

4.8

4.4

Illinois
43,381

41,760

38,012

4.7

5.0

5.0

Louisiana
36,594

36,733

36,352

3.9

4.4

4.8

All Other States
299,027

264,712

233,926

32.3

31.5

31.1

Direct Statutory Premiums Written
$
926,500

$
838,583

$
754,594

100.0
%
100.0
%
100.0
%
We staff our regional offices with underwriting, claims and marketing representatives and administrative technicians, all of whom provide support and assistance to the independent agencies. Also, home office staff technicians and specialists provide support to our subsidiaries, regional offices and independent agencies. We use management reports to monitor subsidiary and regional offices for overall results and conformity to our business policies.
Competition
The property and casualty insurance industry is highly competitive. We compete with numerous property and casualty insurance companies in the regional and national market, many of which are substantially larger and have considerably greater financial and other resources. Except for regulatory considerations, there are limited barriers to entry into the insurance industry. Our competitors may be domestic or foreign, as well as licensed or unlicensed. The exact number of competitors within the industry is not known. Insurers compete on the basis of reliability, financial strength and stability, ratings, underwriting consistency, service, business ethics, price, performance, capacity, policy terms and coverage conditions.
In addition, because our products are marketed exclusively through independent insurance agencies, most of which represent more than one company, we face competition within each agency and competition to retain qualified independent agents. Our competitors include companies that market their products through agents, as well as companies that sell insurance directly to their customers.
Because we rely solely on independent agencies, we offer a competitive commissions program and a rewarding profit-sharing plan as incentives for agents to place high-quality property and casualty insurance business with us. Property and casualty insurance agencies will receive profit-sharing payments of $21.2 million in 2016, based on profitable business produced by the agencies in 2015. In 2015 for 2014 business, agencies received $17.6 million in profit-sharing payments and in 2014 for 2013 business, agencies received $19.2 million in payments.
Our competitive advantages include our commitment to:
Strong agency relationships —
A stable workforce, with an average duration of employment of approximately 10.6 years, allows our agents to work with the same, highly-experienced personnel each day.


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Our organization is relatively flat, allowing our agents to be close to the highest levels of management and ensuring that our agents will receive answers quickly to their questions.
Exceptional service — our agents and policyholders always have the option to speak with a real person.
Fair and prompt claims handling — we view claims as an opportunity to prove to our customers that they have chosen the right insurance company.
Disciplined underwriting — we empower our underwriters with the knowledge and tools needed to make good decisions for the Company.
Superior loss control services — our loss control representatives make multiple visits to businesses and job sites each year to ensure safety.
Effective and efficient use of technology — we use technology to provide enhanced service to our agents and policyholders, not to replace our personal relationships, but to reinforce them.
Life Insurance Segment

Our life insurance subsidiary markets its products primarily in the Midwest, East Coast and West. In 2015, 2014 and 2013 the direct statutory premiums written by our life insurance operations were distributed as follows:
 
Years Ended December 31,
% of Total
(In Thousands)
2015
2014
2013
2015
2014
2013
Iowa
$
47,616

$
69,543

$
64,906

32.6
%
34.4
%
38.8
%
Illinois
16,128

19,428

19,375

11.0

9.6

11.6

Minnesota
13,269

20,325

16,074

9.1

10.1

9.6

Wisconsin
12,513

22,411

13,939

8.6

11.1

8.3

Nebraska
9,334

11,382

11,080

6.4

5.6

6.6

All Other States
47,236

58,887

41,923

32.3

29.2

25.1

Direct Statutory Premiums Written
$
146,096

$
201,976

$
167,297

100.0
%
100.0
%
100.0
%
Competition
We encounter significant competition in all lines of our life and fixed annuity business from other life insurance companies and other providers of financial services. Since our products are marketed exclusively through independent life insurance agencies that typically represent more than one company, we face competition within our agencies. Competitors include companies that market their products through agents, as well as companies that sell directly to their customers. The exact number of competitors within the industry is not known.
To attract and maintain relationships with our independent life insurance agencies, we offer competitive commission rates and other sales incentives. Our life insurance segment achieves a competitive advantage by offering products that are simple and straightforward, by providing outstanding customer service, by being accessible to our agents and customers, and by using technology in a variety of ways to assist our agents and improve the delivery of service to our policyholders.
OPERATING SEGMENTS
Information specific to the reportable business segments in our operations, including products, pricing and seasonality of premiums written is incorporated by reference from Note 10 "Segment Information" contained in Part II, Item 8, "Financial Statements and Supplementary Data." Additionally, for a detailed discussion of our operating results by segment, refer to the "Consolidated Results of Operations" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."



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REINSURANCE
Incorporated by reference from Note 4 "Reinsurance" contained in Part II, Item 8, "Financial Statements and Supplementary Data."
RESERVES
Property and Casualty Insurance Segment
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.

Liabilities for loss and loss settlement expenses reflect management's best estimates at a given point in time of what we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"), based on known facts, circumstances, and historical trends.

The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we will take action that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc. ("Regnier"), to render an opinion as to the adequacy of our statutory reserves annually. The actuarial opinion is filed in those states where we are licensed.

On a quarterly basis, United Fire's internal actuary performs a detailed actuarial review of IBNR reserves. This review includes a comparison of results from the most recent analysis of reserves completed by both our internal and external actuaries. Senior management meets with our internal actuary to review, on a regular and quarterly basis, the adequacy of carried reserves based on results from this actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate.

We do not discount loss reserves based on the time value of money. There are no material differences between our reserves established under U.S. generally accepted accounting principles ("GAAP") and our statutory reserves.

The following table illustrates the change in our estimate of loss reserves for our property and casualty insurance companies for the years 2005 through 2015. The first section shows the amount of the liability, as originally reported, at the end of each calendar year in our Consolidated Financial Statements. These reserves represent the estimated amount of losses and loss settlement expenses for losses arising in that year and all prior years that are unpaid at the end of each year, including an estimate for our IBNR losses, net of applicable ceded reinsurance. The second section displays the cumulative amount of net losses and loss settlement expenses paid for each year with respect to that liability. The third section shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the losses for individual years. The last section compares the latest re-estimated amount with the original estimate. Conditions and trends that have affected development of loss reserves in the past may not necessarily exist in the future. Accordingly, it would not be appropriate to project future redundancies or deficiencies based on this table.


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Table of Contents

(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
2005
2006
2007
2008
2009
2010
2011(1)
2012
2013
2014
2015
Gross liability for loss and loss
settlement expenses
$
620,100

$
518,886

$
496,083

$
586,109

$
606,045

$
603,090

$
945,051

$
971,911

$
960,651

$
969,437

$
1,003,895

Ceded loss and loss settlement
expenses
60,137

40,560

38,800

52,508

33,754

39,000

120,359

103,870

75,150

63,757

54,653

Net liability for loss and loss
settlement expenses
$
559,963

$
478,326

$
457,283

$
533,601

$
572,291

$
564,090

$
824,692

$
868,041

$
885,501

$
905,680

$
949,242

Cumulative net paid as of:
 
 
 
 
 
 
 
 
 
 
 
  One year later
$
230,455

$
148,593

$
140,149

$
195,524

$
165,046

$
146,653

$
194,156

$
216,026

$
241,981

$
251,503

 
  Two years later
321,110

235,975

265,361

304,622

260,872

230,800

317,623

367,456

386,428

 
 
  Three years later
380,294

332,768

345,092

373,765

312,451

283,837

422,458

466,261

 
 
 
  Four years later
456,919

390,763

392,676

406,773

347,682

327,497

485,957

 
 
 
 
  Five years later
502,455

422,669

416,656

429,477

372,868

348,433

 
 
 
 
 
  Six years later
527,136

441,202

434,437

448,097

386,311

 
 
 
 
 
 
  Seven years later
540,740

456,089

448,506

455,107

 
 
 
 
 
 
 
  Eight years later
553,035

467,239

453,118

 
 
 
 
 
 
 
 
  Nine years later
561,708

470,572

 
 
 
 
 
 
 
 
 
  Ten years later
563,209

 
 
 
 
 
 
 
 
 
 
Net liability re-estimated as of:
 
 
 
 
 
 
 
 
 
 
 
  End of year
$
559,963

$
478,326

$
457,283

$
533,601

$
572,291

$
564,090

$
824,692

$
868,041

$
885,501

$
905,680

$
949,242

  One year later
534,998

433,126

457,831

559,816

526,413

502,995

751,265

810,554

828,757

865,285

 
  Two years later
508,774

453,474

502,177

547,824

497,136

457,532

749,491

795,328

805,069

 
 
  Three years later
538,451

497,629

503,992

537,912

461,677

431,213

741,455

772,413

 
 
 
  Four years later
574,484

500,071

503,720

514,763

446,825

417,962

726,325

 
 
 
 
  Five years later
582,343

507,507

494,027

503,175

439,961

413,415

 
 
 
 
 
  Six years later
592,772

503,510

487,514

499,302

435,451

 
 
 
 
 
 
  Seven years later
589,661

498,735

488,692

492,001

 
 
 
 
 
 
 
  Eight years later
586,083

502,926

481,542

 
 
 
 
 
 
 
 
  Nine years later
589,873

495,994

 
 
 
 
 
 
 
 
 
  Ten years later
583,374

 
 
 
 
 
 
 
 
 
 
Net redundancy (deficiency)
$
(23,411
)
$
(17,668
)
$
(24,259
)
$
41,600

$
136,840

$
150,675

$
98,367

$
95,628

$
80,432

$
40,395

 
Net re-estimated liability
583,374

495,994

481,542

492,001

435,451

413,415

726,325

772,413

805,069

865,285

 
Re-estimated ceded loss and loss
settlement expenses
$
102,093

$
70,210

$
64,866

$
75,230

$
60,323

$
64,378

$
87,706

$
83,353

$
69,082

$
61,588

 
Gross re-estimated liability
$
685,467

$
566,204

$
546,408

$
567,231

$
495,774

$
477,793

$
814,031

$
855,766

$
874,151

$
926,873

 
Gross redundancy (deficiency)
$
(65,367
)
$
(47,318
)
$
(50,325
)
$
18,878

$
110,271

$
125,297

$
131,020

$
116,145

$
86,500

$
42,564

 
(1) Amounts shown in the 2011 column of the table include both 2011 and prior to 2011 accident year development for Mercer Insurance Group, which was acquired on March 28, 2011 and accounted for in accordance with ASC 805 Business Combinations.
For a more detailed discussion of our loss reserves, refer to the "Critical Accounting Policies" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 5 "Reserves for Losses and Loss Settlement Expenses" contained in Part II, Item 8, "Financial Statements and Supplementary Data."
Life Insurance Segment
We calculate the policy reserves reported in our Consolidated Financial Statements in accordance with GAAP. For our fixed annuities and universal life policies, we establish a benefit reserve at the time of policy issuance in an amount equal to the deposits received. Subsequently, we adjust the benefit reserve for any additional deposits, interest credited and partial or complete withdrawals, as well as insurance and other expense charges. We base policy reserves for other life products on the projected contractual benefits and expenses and interest rates appropriate to those products. We base reserves for accident and health products, which are a minor portion of our reserves, on appropriate morbidity tables.



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We determine reserves for statutory purposes based upon mortality rates and interest rates specified by Iowa state law. Our life insurance subsidiary's reserves meet or exceed the minimum statutory requirements. Griffith, Ballard & Company, an independent actuary, assists us in developing and analyzing our reserves on both a GAAP and statutory basis.
For further discussion of our life insurance segment's reserves, refer to the "Critical Accounting Policies" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
INVESTMENTS
Incorporated by reference from Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the headings "Investments," "Market Risk" and "Critical Accounting Policies" and Note 1 "Significant Accounting Policies" under the headings "Investments," Note 2 "Summary of Investments," and Note 3 "Fair Value of Financial Instruments," contained in Part II, Item 8, "Financial Statements and Supplementary Data."
REGULATION
The insurance industry is subject to comprehensive and detailed regulation and supervision. Each jurisdiction in which we operate has established supervisory agencies with broad administrative powers. While we are not aware of any currently proposed or recently enacted state or federal regulation that would have a material impact on our operations, we cannot predict the effect that future regulatory changes might have on us.
State Regulation
We are subject to extensive regulation, primarily at the state level. The method, extent and substance of such regulation varies by state, but generally has its source in National Association of Insurance Commissioners ("NAIC") model laws and regulations that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to a state regulatory agency. Moreover, the NAIC Accreditation Program requires state regulatory agencies to meet baseline standards of solvency regulation, particularly with respect to regulation of multi-state insurers. In general, such regulation is intended for the protection of those who purchase or use our insurance products, and not our shareholders. These rules have a substantial effect on our business and relate to a wide variety of matters including: insurance company licensing and examination; the licensing of insurance agents and adjusters; price setting or premium rates; trade practices; approval of policy forms; claims practices; restrictions on transactions between our subsidiaries and their affiliates, including the payment of dividends; investments; underwriting standards; advertising and marketing practices; capital adequacy; and the collection, remittance and reporting of certain taxes, licenses and fees.
The state laws and regulations that have the most significant effect on our insurance operations and financial reporting are discussed below.
Insurance Holding Company Regulation
We are regulated as an insurance holding company system in the states of domicile of our property and casualty insurance companies and life insurance subsidiary: Iowa (United Fire & Casualty Company, United Life Insurance Company, UFG Specialty Insurance Company and Addison Insurance Company), California (Financial Pacific Insurance Company), Louisiana (Lafayette Insurance Company), New Jersey (Mercer Insurance Company of New Jersey, Inc.), Pennsylvania (Mercer Insurance Company and Franklin Insurance Company) and Texas (United Fire & Indemnity Company and United Fire Lloyds). These regulations require that we annually furnish financial and other information about the operations of the individual companies within our holding company system. Generally, the insurance laws of these states provide that notice to the state insurance commissioner is required before finalizing any transaction affecting the ownership or control of an insurer and before finalizing certain material transactions between an insurer and any person or entity within its holding company system. In addition, some of those transactions cannot be finalized without the commissioner's prior approval.


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Most states have now adopted the version of the Model Insurance Holding Company System Regulation Act and Regulation as amended by the NAIC in December 2010 (the "Amended Model Act") to introduce the concept of "enterprise risk" within an insurance company holding system. Enterprise risk is defined as any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance holding company system as a whole. The Amended Model Act imposes more extensive informational requirements on us, including requiring us to prepare an annual enterprise risk report that identifies the material risks within our insurance company holding system that could pose enterprise risk to our licensed insurers. Compliance with new reporting requirements under the Amended Model Act began for us in 2014 for the 2013 fiscal year.
Restrictions on Shareholder Dividends
As an insurance holding company with no independent operations or source of revenue, our capacity to pay dividends to our shareholders is based on the ability of our insurance company subsidiaries to pay dividends to us. The ability of our subsidiaries to pay dividends to us is regulated by the laws of their state of domicile. Under these laws, insurance companies must provide advance informational notice to the domicile state insurance regulatory authority prior to payment of any dividend or distribution to its shareholders. Prior approval from the state insurance regulatory authority must be obtained before payment of an "extraordinary dividend" as defined under the state's insurance code. The amount of ordinary dividends that may be paid to us is subject to certain limitations, the amounts of which change each year. In all cases, we may pay dividends only from our earned surplus. Refer to the "Market Information" section of Part II, Item 5, "Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities," and Note 6 "Statutory Reporting, Capital Requirements and Dividends and Retained Earnings Restrictions," contained in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information about the dividends we paid during 2015.
Price Regulation
Nearly all states have insurance laws requiring us to file rate schedules, policy or coverage forms, and other information with the state's regulatory authority. In certain states, rate schedules, policy forms, or both, must be approved prior to use. While insurance laws vary from state to state, their objectives are generally the same: an insurance rate cannot be excessive, inadequate or unfairly discriminatory. The speed with which we can change our rates in response to competition or in response to increasing costs depends, in part, on the willingness of state regulators to allow adequate rates for the business we write.
Investment Regulation
We are subject to various state regulations requiring investment portfolio diversification and limiting the concentration of investments we may maintain in certain asset categories. Failure to comply with these regulations leads to the treatment of nonconforming investments as nonadmitted assets for purposes of measuring statutory surplus. Further, in some instances, state regulations require us to sell certain nonconforming investments.
Exiting Geographic Markets; Canceling and Nonrenewing Policies
Most states regulate our ability to exit a market. For example, states limit, to varying degrees, our ability to cancel and nonrenew insurance policies. Some states prohibit us from withdrawing one or more types of insurance business from the state, except upon prior regulatory approval. Regulations that limit policy cancellation and nonrenewal may restrict our ability to exit unprofitable markets.
Insurance Guaranty Associations
Each state has insurance guaranty association laws. Membership in a state's insurance guaranty association is generally mandatory for insurers wishing to do business in that state. Under these laws, associations may assess their members for certain obligations that insolvent insurance companies have incurred with regard to their policyholders and claimants.


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Typically, states assess each solvent association member with an amount related to that member's proportionate share of business written by all association members within the state. Most state guaranty associations allow solvent insurers to recoup the assessments they are charged through future rate increases, surcharges or premium tax credits. However, there is no assurance that we will ultimately recover these assessments. We cannot predict the amount and timing of any future assessments or refunds under these laws.
Shared Market and Joint Underwriting Plans
State insurance regulations often require insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations. These are mechanisms that generally provide applicants with various types of basic insurance coverage that may not otherwise be available to them through voluntary markets. Such mechanisms are most commonly instituted for automobile and workers' compensation insurance, but many states also mandate participation in Fair Access to Insurance Requirements ("FAIR") Plans or Windstorm Plans, which provide basic property coverage. Participation is based upon the amount of a company's voluntary market share in a particular state for the classes of insurance involved. Policies written through these mechanisms may require different underwriting standards and may pose greater risk than those written through our voluntary application process.
Statutory Accounting Rules
For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, state laws require us to calculate and report certain data according to statutory accounting rules as defined in the NAIC Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies.
Insurance Reserves
State insurance laws require that insurance companies analyze the adequacy of their reserves annually. Our appointed actuaries must submit an opinion that our statutory reserves are adequate to meet policy claims-paying obligations and related expenses.
Financial Solvency Ratios
The NAIC annually calculates 13 financial ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. A "usual range" of results for each of these ratios is used by insurance regulators as a benchmark. Departure from the usual range on four or more of the ratios could lead to inquiries from individual state insurance departments as to certain aspects of a company's business. In addition to the financial ratios, states also require us to calculate a minimum capital requirement for each of our insurance companies based on individual company insurance risk factors. These "risk-based capital" results are used by state insurance regulators to identify companies that require regulatory attention or the initiation of regulatory action. At December 31, 2015, all of our insurance companies had capital in excess of the required levels.
Federal Regulation
Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives and legislation often have an impact on our business. These initiatives and legislation include tort reform proposals, proposals addressing natural catastrophe exposures, terrorism risk mechanisms, federal financial services reforms, various tax proposals affecting insurance companies, and possible regulatory limitations, impositions and restrictions arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), and the Patient Protection and Affordable Care Act.
Various legislative and regulatory efforts to reform the tort liability system have impacted and will continue to impact our industry. Although there has been some tort reform with positive impact to the insurance industry, new causes of action and theories of damages continue to be proposed in state court actions or by federal or state legislatures that continue to expand liability for insurers and their policyholders. For example, some state legislatures have from time to time considered legislation addressing direct actions against insurers related to bad


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faith claims. As a result of this unpredictability in the law, insurance underwriting is expected to continue to be difficult in commercial lines, professional liability and other specialty coverages.
Dodd-Frank expanded the federal presence in insurance oversight and may increase regulatory requirements that are applicable to us. Dodd-Frank's requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance (property or casualty insurance placed with insurers that are eligible to accept insurance, but are not licensed to write insurance in a particular state). Dodd-Frank also established the Federal Insurance Office within the U.S. Department of the Treasury that is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters, and preempt state insurance measures under certain circumstances.
Dodd-Frank also contains a number of provisions related to corporate governance and disclosure matters. In
response to Dodd-Frank, the SEC has adopted or proposed rules regarding director independence, director and officer hedging activities, executive compensation clawback policies, compensation advisor independence, pay versus performance disclosures, internal pay equity disclosures, and shareholder proxy access. We continue to monitor developments under Dodd-Frank and their impact on us, insurers of similar size and the insurance industry as a whole.
The Patient Protection and Affordable Care Act and the related amendments in the Health Care and Education Reconciliation Act may increase our operating costs and underwriting losses. This landmark legislation continues to result in numerous changes within the health care industry that could create additional operating costs for us, particularly with respect to our workers' compensation products.
FINANCIAL STRENGTH AND ISSUER CREDIT RATING
Our financial strength, as measured by statutory accounting principles, is regularly reviewed by an independent rating agency that assigns a rating based upon criteria such as results of operations, capital resources and minimum policyholders' surplus requirements. An insurer's financial strength rating is one of the primary factors evaluated by those in the market to purchase insurance. A poor rating indicates that there is an increased likelihood that the insurer could become insolvent and therefore not able to fulfill its obligations under the insurance policies it issues. This rating can also affect an insurer's level of premium writings, the lines of business it can write and, for insurers like us that are also public registrants, the market value of its securities.
Our property and casualty insurers are rated by A.M. Best Company ("A.M. Best") on a group basis. Our pooled property and casualty insurers have all received an "A" (Excellent) financial strength rating from A.M. Best. Our life insurance subsidiary has received an "A-" (Excellent) financial strength rating from A.M. Best. According to A.M. Best, companies rated "A" and "A-" have "an excellent ability to meet their ongoing obligations to policyholders."
A.M. Best also assigns issuer credit ratings based on a company's ability to repay its debts. All of our property and casualty insurers have received an issuer credit rating of "a" from A.M. Best. Our life insurance subsidiary has received an issuer credit rating of "a-" from A.M. Best. Beginning in 2012, our holding company parent was also rated by A.M. Best, receiving an issuer credit rating of "bbb."















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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information concerning the following executive officers:
Name
Age
Position
Randy A. Ramlo
54
President and Chief Executive Officer
Michael T. Wilkins
52
Executive Vice President and Chief Operating Officer
Dawn M. Jaffray
49
Senior Vice President and Chief Financial Officer
Barrie W. Ernst
61
Vice President and Chief Investment Officer
Neal R. Scharmer
59
Vice President, General Counsel and Corporate Secretary
Michael J. Sheeley
55
Vice President and Chief Operating Officer, United Life Insurance Company
A brief description of the business experience of these officers follows:
Randy A. Ramlo became our President and Chief Executive Officer in May 2007. He previously served as our Chief Operating Officer from May 2006 until May 2007, as Executive Vice President from May 2004 until May 2007, and as Vice President, Fidelity and Surety, from November 2001 until May 2004. He also worked as an underwriting manager in our Great Lakes region. Mr. Ramlo began his employment with us as an underwriter in 1984.
Michael T. Wilkins became our Executive Vice President and Chief Operating Officer in May 2014. He served as our Executive Vice President, Corporate Administration, from May 2007 to May 2014. He was our Senior Vice President, Corporate Administration, from May 2004 until May 2007, our Vice President, Corporate Administration, from August 2002 until May 2004 and the resident Vice President in our Lincoln regional office from 1998 until 2002. Prior to 1998, Mr. Wilkins held various other positions within the Company since joining us in 1985.
Dawn M. Jaffray became our Senior Vice President and Chief Financial Officer in May 2015. Ms. Jaffray previously served as Chief Financial Officer of Soleil Advisory Group, a consulting firm specializing in operational consulting, mergers and acquisitions, investment and strategy from 2009 to 2015. Prior to her service with Soleil Advisory Group, Ms. Jaffray held numerous positions in insurance operations and mergers / acquisition activities, primarily in the role of principal financial officer. Ms. Jaffray's business experience has been focused in particular on insurance, finance and capital management.
Barrie W. Ernst is our Vice President and Chief Investment Officer. He joined us in August 2002. Previously, Mr. Ernst served as Senior Vice President of SCI Financial Group in Cedar Rapids, Iowa, where he worked from 1980 to 2002. SCI Financial Group was a regional financial services firm providing brokerage, insurance and related services to its clients.
Neal R. Scharmer was appointed our Vice President and General Counsel in May 2001 and Corporate Secretary in May 2006. He joined us in 1995.
Michael J. Sheeley was appointed Vice President and Chief Operating Officer of United Life Insurance Company in March 2011. Prior to assuming leadership of United Life Insurance Company, Mr. Sheeley served us as personal lines underwriting manager from 1991 to 2011. He has also served in various capacities including commercial underwriting and claims since joining us in 1985.



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ITEM 1A. RISK FACTORS
We provide readers with the following discussion of risks and uncertainties relevant to our business. These are factors that we believe could cause our actual results to differ materially from our historic or anticipated results. We could also be adversely affected by other factors, in addition to those listed here. Additional information concerning factors that could cause actual results to differ materially from those contained in the forward-looking statements is set forth in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Risks Relating to Our Business
The occurrence, frequency and severity of catastrophe losses are unpredictable and may adversely affect our results of operations, liquidity and financial condition.
Our property and casualty insurance operations expose us to claims arising from catastrophic events affecting multiple policyholders. Such catastrophic events consist of various natural disasters, including, but not limited to, hurricanes, tornadoes, windstorms, hailstorms, fires and wildfires, earthquakes, severe winter weather, tropical storms, volcanic eruptions and man-made disasters such as terrorist acts (including biological, chemical or radiological events), explosions, infrastructure failures and results from political instability. We have exposure to tropical storms and hurricanes along the Gulf Coast, Eastern and Southeastern coasts of the United States. We have exposure to tornadoes, windstorms and hail storms throughout the United States. We have exposure to earthquakes along the West Coast and the New Madrid Fault area. Our automobile and inland marine business also exposes us to losses arising from floods and other perils.
Property damage resulting from catastrophes is the greatest risk of loss we face in the ordinary course of our business. We have exposure to catastrophe losses under both our commercial insurance policies and our personal insurance policies. The losses from catastrophic events are a function of both the extent of our exposure, the frequency and severity of the events themselves and the level of reinsurance assumed and ceded. For example, the losses experienced from a tornado will vary on whether the location of the tornado was in a highly populated or unpopulated area, the concentration of insureds in that area and the severity of the tornado. Increases in the value and geographic concentration of insured property and the effects of inflation could increase the severity of claims from a catastrophic event.
Long-term weather trends may be changing and new types of catastrophe losses may be developing due to climate change, which is a phenomenon that has been associated with extreme weather events linked to rising temperatures, including effects on global weather patterns, greenhouse gases, sea, land and air temperature, sea levels, rain and snow. While the emerging science regarding climate change and its connection to extreme weather events continues to be debated, in recent years there has been an increase in frequency and severity of tornadoes and hailstorms, and hurricanes are now impacting areas further inland than experienced in the recent past. Such changes in climate conditions could cause our underlying modeling data to be less accurate, limiting our ability to evaluate and manage our risk.
In addition, as with catastrophe losses generally, it can take a long time for us to determine our ultimate losses associated with a particular catastrophic event. The inability to access portions of the impacted area, the complexity of the losses, legal and regulatory uncertainty and the nature of the information available for certain catastrophic events may affect our ability to estimate the claims and claim adjustment expense reserves. Such complex factors include, but are not limited to: determining the cause of the damage, evaluating general liability exposures, estimating additional living expenses, the impact of demand surge, infrastructure disruption, fraud, business interruption costs and reinsurance collectability.
The timing of a catastrophic occurrence at the end or near the end of a reporting period may also affect the information available to us when estimating claims and claim adjustment expense reserves for the reporting period. As our claims experience for a particular catastrophe develops, we may be required to adjust our reserves to reflect our revised estimates of the total cost of claims. However, because the occurrence and severity of catastrophes are


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inherently unpredictable and may vary significantly from year to year and region to region, historical results of operations may not be indicative of future results of operations.
Catastrophes may reduce our net income, cause substantial volatility in our financial results for any fiscal quarter or year or otherwise adversely affect our financial condition, liquidity or results of operations. Catastrophes may also negatively affect our ability to write new business.
Following catastrophes there are also sometimes legislative, administrative and judicial decisions that seek to expand insurance coverage for claims beyond the original intent of the policies or seek to prevent the application of deductibles. Our ability to manage catastrophic exposure may be limited by public policy considerations, the political environment, changes in the general economic climate and/or social responsibilities.
Our reserves for property and casualty insurance losses and loss settlement expenses and our life insurance reserves for future policy benefits are based on estimates and may be inadequate, adversely impacting our financial results.
We maintain insurance reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjustment process, for reported and unreported claims and for future policy benefits. Our reserves may prove to be inadequate, which may result in future charges to earnings and/or a downgrade of our financial strength rating or the financial strength ratings of our insurance company subsidiaries.
Insurance reserves represent our best estimate at a given point in time. They are not an exact calculation of liability but instead are complex estimates, which are a product of actuarial expertise and projection techniques from a number of assumptions and expectations about future events, many of which are highly uncertain.
The process of estimating claims and claims adjustment expense reserves involves a high degree of judgment. These estimates are based on historical data and the impact of various factors such as:
actuarial and statistical projections of the cost of settlement and administration of claims reflecting facts and circumstances then known;
historical claims information and loss emergence patterns;
assessments of currently available data;
estimates of future trends in claims severity and frequency;
judicial theories of liability;
economic factors such as inflation;
estimates and assumptions regarding social, judicial and legislative trends, and actions such as class action lawsuits and judicial interpretation of coverages or policy exclusions; and
the level of insurance fraud.
Many of these factors are not quantifiable. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled.
Along with other insurers, we use internal and external models in assessing our exposure to catastrophe losses that assume various conditions and probability scenarios; however, these models do not necessarily accurately predict future losses or accurately measure losses currently incurred. Models for catastrophes use historical information about various catastrophes and details about our in-force business. While we use this information in our pricing and risk managements, there are limitations with respect to their usefulness in predicting losses in any reporting period. Such limitations lead to questionable predictive capability and post-event measurements that have not been well understood or proven to be sufficiently reliable. In addition, the models are not necessarily reflective of our state-


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specific policy language, demand surge for labor and materials or loss settlement expenses, all of which are subject to wide variation.
For our life insurance business, we calculate life insurance product reserves based on our assumptions, including estimated premiums we will receive over the assumed life of the policy, the timing of the event covered by the insurance policy and the amount of benefits or claims to be paid. The premiums that we charge and the liabilities that we hold for future policy benefits are based on assumptions reflecting a number of factors, including the amount of premiums that we will receive in the future, the rate of return on assets we purchase with premiums received, expected claims, mortality, morbidity, expenses and persistency, which is the measurement of the percentage of insurance policies remaining in force from year to year. However, due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims, we cannot determine precisely the amounts we will ultimately pay to settle these liabilities. To the extent that actual experience is less favorable than our underlying assumptions, we could be required to increase our liabilities, which may harm our financial strength and reduce our profitability.
For example, if mortality rates are higher than our pricing assumptions, we will be required to make greater claims payments on our life insurance policies than we had projected. Our results of operations may also be adversely impacted by an increase in morbidity rates.
Actual loss and loss settlement expenses paid might exceed our reserves. If our loss reserves are insufficient, or if we believe our loss reserves are insufficient to cover our actual loss and loss settlement expenses, we will have to increase our loss reserves and incur charges to our earnings, which could indicate that premium levels were insufficient. As such, deviations from one or more of these assumptions could result in a material adverse impact on our Consolidated Financial Statements and our financial strength rating or the financial strength ratings of our insurance company subsidiaries could be downgraded.
For a detailed discussion of our reserving process and the factors we consider in estimating reserves, refer to the "Critical Accounting Policies" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Our geographic concentration in both our property and casualty insurance and life insurance segments ties our performance to the business, economic and regulatory conditions of certain states.
The following states provided 49.3 percent of the direct statutory premiums written for the property and casualty insurance segment in 2015: Texas (15.4 percent), California (11.8 percent), Iowa (10.8 percent), Missouri (5.8 percent) and New Jersey (5.5 percent). The following states provided 67.7 percent of the direct statutory premiums written for the life insurance segment in 2014: Iowa (32.6 percent), Illinois (11.0 percent), Minnesota (9.1 percent), Wisconsin (8.6 percent), and Nebraska (6.4 percent).
Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in the principal states in which we do business. With respect to regulatory conditions, the NAIC and state legislators continually reexamine existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws and regulations. In a time of financial uncertainty or a prolonged economic downturn, regulators may choose to adopt more restrictive insurance laws and regulations. Changes in regulatory or any other of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on us compared to companies that are more geographically diversified. In addition, our exposure to severe losses from localized natural perils, such as hurricanes or hailstorms, is increased in those areas where we have written a significant amount of property insurance policies.




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Unauthorized data access, cyber attacks and other security breaches could have an adverse impact on our business and reputation.
We rely on computer systems to conduct our business for our customer service, marketing and sales activities, customer relationship management and producing financial statements. Our business and operations rely on secure and efficient processing, storage and transmission of customer and Company data, including personally identifiable information. Our ability to effectively operate our business depends upon our ability, and the ability of certain third party vendors and business partners, to access our computer systems to perform necessary business functions, such as providing quotes and product pricing, billing and processing premiums, administering claims, and reporting our financial results.
We retain confidential information on our computer systems, including customer information and proprietary business information belonging to us and our policyholders. Our business and operations depend upon our ability to safeguard this personally identifiable information. Our systems may be vulnerable to unauthorized access and hackers, computer viruses, and other scenarios in which our data may be compromised.
Cyber attacks involving these systems, or those of our third party vendors, could be carried out remotely and from multiple sources and could interrupt, damage, or otherwise adversely affect the operations of these critical systems. Cyber attacks could result in the modification or theft of data, the distribution of false information, or the denial of service to users. Threats to data security can emerge from a variety of sources and change rapidly, resulting in the ongoing need to expend resources to secure our data in accordance with customer expectations and statutory and regulatory requirements.
Any compromise of the security of our data could expose us to liability and harm our reputation, which could affect our business and results of operations. We continually enhance our operating procedures and internal controls to effectively support our business and comply with our regulatory and financial reporting requirements, but there can be no assurances that we will be able to implement security measures adequate to prevent every security breach.
Although, to date, we do not believe we have experienced any material cyber attacks, the occurrence, scope and effect of any cyber attack may remain undetected for a period of time. We maintain cyber liability insurance coverage that provides both third-party liability and first-party insurance coverages; however, our insurance may be insufficient to cover all losses and expenses related to a cyber attack.
Conditions in the global capital markets and the economy generally may weaken materially and adversely affect our business and results of operations.
Our results of operations, financial position and liquidity are materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and elsewhere around the world. Recently, concerns over the depth and breadth of the economic recovery, overall level of U.S. national debt, extraordinary monetary accommodation by central banks, energy costs and geopolitical issues have contributed to increased uncertainty. These factors, combined with a lack of fiscal policy leadership, reduced business and consumer confidence and continued high unemployment, have negatively impacted the U.S. economy. Although conditions have gradually improved since the financial crisis of 2008-2009, a meaningful deterioration in economic activity and/or capital market liquidity could have an adverse impact on our results of operations.
Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, investor and consumer confidence and inflation levels all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment, negative investor sentiment and lower consumer spending, the demand for our insurance products could be adversely affected. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies causing a change in our exposure.


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We are subject to certain risks related to our investment portfolio that could negatively affect our profitability.
Investment income is an important component of our net income and overall profitability. We invest premiums received from policyholders and other available cash to generate investment income and capital appreciation, while also maintaining sufficient liquidity to pay covered claims, operating expenses and dividends. As discussed in detail below, general economic conditions, changes in financial markets and many other factors beyond our control can adversely affect the value of our investments and the realization of investment income.
We primarily manage our investment portfolio internally under required statutory guidelines and investment guidelines approved by our Board of Directors and the boards of directors of our subsidiaries. Although these guidelines stress diversification and capital preservation, our investments are subject to a variety of risks, including:

Credit Risk - The value of our investment in marketable securities is subject to impairment as a result of deterioration in the creditworthiness of the issuer. Such impairments could reduce our net investment income and result in realized investment losses. The vast majority of our investments (98.3 percent at December 31, 2015) are made in investment-grade securities. Although we try to manage this risk by diversifying our portfolio and emphasizing credit quality, our investments are subject to losses as a result of a general downturn in the economy.
Interest Rate Risk - A significant portion of our investment portfolio (90.4 percent at December 31, 2015) consists of fixed income securities, primarily corporate and municipal bonds (66.7 percent at December 31, 2015). These securities are sensitive to changes in interest rates. An increase in interest rates typically reduces the fair value of fixed income securities, while a decline in interest rates reduces the investment income earned from future investments in fixed income securities. In recent periods, interest rates have been at or near historic lows. It is possible that this trend may continue for a prolonged period of time. We generally hold our fixed income securities to maturity, so our interest rate exposure does not usually result in realized losses. However, rising interest rates could result in a significant reduction of the book value of our equity investments. Low interest rates, and low investable yields, could adversely impact our net earnings as reinvested funds produce lower investment income.
Fluctuations in interest rates may cause increased surrenders and withdrawals from our life insurance and annuity products. In periods of rising interest rates, or if long-term interest rates rise dramatically within a very short time period, certain segments of our life insurance and annuities businesses may be exposed to disintermediation risk, which refers to the risk that surrenders and withdrawals of life insurance policies and annuity contracts, along with policy loans, may increase as policyholders seek to buy products with perceived higher rates of return. This may require us to liquidate assets in an unrealized loss position. Due to the long-term nature of the liabilities associated with certain segments of our life insurance business, sustained declines in long-term interest rates may subject us to reinvestment risks and increased hedging costs. In other situations, a sudden change in interest rates may result in an unexpected change in the duration of certain life insurance liabilities, creating asset and liability duration mismatches.
Interest rates are highly sensitive to many factors beyond our control including general economic conditions, changes in governmental regulations and monetary policy, and national and international political conditions.

Liquidity Risk - We seek to match the maturities of our investment portfolio with the estimated payment date of our loss and loss adjustment expense reserves to ensure strong liquidity and avoid having to liquidate securities to fund claims. Risk such as inadequate loss and loss adjustment reserves or unfavorable trends in litigation could potentially result in the need to sell investments to fund these liabilities. This could result in significant realized losses depending on the conditions of the general market, interest rates and credit profile of individual securities.
Further, our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the portion of the investment portfolio


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that is carried at fair value as reflected in our financial statements is not reflective of prices at which actual transactions could occur.

Market Risk - Our investments are subject to risks inherent in the global financial system and capital markets. The value and risks of our investments may be adversely affected if the functioning of those markets is disrupted or otherwise affected by local, national or international events, such as: changes in regulation or tax policy; changes in legislation relating to bankruptcy or other proceedings; infrastructure failures; wars or terrorist attacks; the overall health of global economies; a significant change in inflation expectations; a significant devaluation of government or private sector credit and/or currency values; and other factors or events not specifically attributable to changes in interest rates, credit losses, and liquidity needs.

Credit Spread Risk - Our exposure to credit spreads primarily relates to market price variability and reinvestment risk associated with changes in credit spreads. Valuations may include assumptions or estimates that may have significant period-to-period changes from market volatility, which could have a material adverse effect on our results of operations or financial condition.
Our fixed maturity investment portfolio is invested substantially in state, municipal and political subdivision bonds. Our fixed maturity investment portfolio could be subject to default or impairment, in particular:

Due to the impact of the financial crisis that occurred in 2008 and 2009, many states and local governments have been operating under deficits or projected deficits which may have an impact on the valuation of our municipal bond portfolio.

There is a risk of widespread defaults which may increase if some issuers chose to voluntarily default instead of implementing fiscal measures such as increasing tax rates or reducing spending. Such risk may also increase if there are changes in legislation permitting states, municipalities and political subdivisions to file for bankruptcy protection where they were not permitted to before. Judicial interpretations in such bankruptcy proceedings may also adversely affect the collectability of principal and interest, and/or valuation of our bonds. Changes in tax laws impacting marginal tax rates, exemptions, deductions, credits and/or the preferred tax treatment of municipal obligations could also adversely affect the market value of municipal obligations. Since a large portion of our investment portfolio (26.8 percent at December 31, 2015) is invested in tax-exempt municipal obligations, any such changes in tax law could adversely affect the value of our investment portfolio.
We exercise prudence and significant judgment in analyzing and validating fair values, which are primarily provided by third parties, for securities in our investment portfolio, including those that are not regularly traded in active markets. We also exercise prudence and significant judgment in determining whether the impairment of particular investments is temporary or other-than-temporary. Due to the inherent uncertainties involved in these judgments, we may incur unrealized losses and subsequently conclude that other-than-temporary write downs of our investments are required.
Our success depends primarily on our ability to underwrite risks effectively and adequately price the risks we underwrite.
The results of our operations and our financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of determinable and indeterminable risks based on available information. Adequate rates are necessary to generate premiums sufficient to pay losses, loss settlement expenses and underwriting expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. We could under price risks which would adversely affect our profit margins. Conversely, we could overprice risks which could reduce our sales volume and competitiveness. Our ability to undertake these efforts successfully, and to price our products accurately, is subject to a number of risks and uncertainties, including but not limited to:


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the availability of sufficient reliable data and our ability to properly analyze available data;

market and competitive conditions;

changes in medical care expenses and restoration costs;

our selection and application of appropriate pricing techniques; and

changes in the regulatory market, applicable legal liability standards and in the civil litigation system generally.
The cyclical nature of the property and casualty insurance industry may affect our financial performance.
The property and casualty insurance industry is cyclical in nature and has historically been characterized by soft markets (periods of relatively high levels of price competition, less restrictive underwriting standards and generally low premium rates) followed by hard markets (periods of capital shortages resulting in a lack of insurance availability, relatively low levels of price competition, more selective underwriting of risks and relatively high premium rates). During soft markets, we may lose business to competitors offering competitive insurance at lower prices. We may reduce our premiums or limit premium increases leading to a reduction in our profit margins and revenues. We expect these cycles to continue.
The demand for property and casualty insurance can also vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases. Fluctuations in demand and competition could produce underwriting results that would have a negative impact on the results of our operations and financial condition.
The effects of emerging claim and coverage issues and class action litigation on our business are uncertain.
We are subject to certain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social, economic and other environmental conditions change, including unexpected and unintended issues related to claims and coverage. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number and/or size of claims, resulting in further increases in our reserves. The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict. Examples of these issues include:
judicial expansion of policy coverage and the impact of new theories of liability;

an increase of plaintiffs targeting property and casualty insurers, including us, in purported class action litigation regarding claims handling and other practices;

medical developments that link health issues to particular causes, resulting in liability or workers' compensation (for example, cumulative trauma);

claims relating to unanticipated consequences of current or new technologies;

an increase in the variety, number and size of claims relating to liability losses, which often present complex coverage and damage valuation questions;

claims relating to potentially changing climate conditions, including higher frequency and severity of weather-related events; and

adverse changes in loss cost trends, including inflationary pressure in medical cost and auto and home repair costs.


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A downgrade or a potential downgrade in our financial strength or issuer credit ratings could result in a loss of business and could have a material adverse effect on our financial condition and results of operations.
Ratings are an important factor in establishing the competitive position of insurance companies. Third-party rating agencies assess and rate the claims-paying ability, capital strength and creditworthiness of insurers and reinsurers based on criteria established by the agencies. A.M. Best rates our property and casualty insurance companies on a group basis. Our life insurance subsidiary receives a separate rating. Since 2012, A.M. Best has also given an issuer credit rating to our parent holding company. The table below shows the current ratings assigned to our companies by A.M. Best.
 
Financial Strength Rating
Issuer Credit Rating
Rating Held Since
Property and Casualty Insurers
A
a
1994
Life Insurer
A-
a-
1998
United Fire Group, Inc.
N/A
bbb
2012
Financial strength and issuer credit ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength, creditworthiness and quality of insurers and reinsurers. These ratings are not evaluations directed to potential purchasers of our common stock and are not recommendations to buy, sell or hold our common stock. These ratings are subject to change at any time and could be revised downward or revoked at the sole discretion of the rating agency. Downgrades in our financial strength ratings could adversely affect our ability to access the capital markets or could lead to increased borrowing costs in the future. Perceptions of the Company by investors, producers, other businesses and consumers could also be significantly impaired.
We believe that the ratings assigned by A.M. Best are an important factor in marketing our products. Our ability to retain our existing business and to attract new business in our insurance operations depends on our ratings by this agency. Our failure to maintain our ratings, or any other adverse development with respect to our ratings, could cause our current and future independent agents and policyholders to choose to transact their business with more highly rated competitors. If A.M. Best downgrades our ratings or publicly indicates that our ratings are under review, it is likely that we will not be able to compete as effectively with our competitors and our ability to sell insurance policies could decline, leading to a decrease in our premium revenue and earnings. For example, many of our agencies and policyholders have guidelines that require us to have an A.M. Best financial strength rating of "A-" or higher. A reduction of our A.M. Best ratings below "A-" would prevent us from issuing policies to a portion of our current policyholders or other potential policyholders with ratings requirements. Additionally, a ratings downgrade could materially increase the number of surrenders for all or a portion of the net cash values by the owners of policies and contracts we have issued, and materially increase the number of withdrawals by policyholders of cash values from their policies.
A reduction in our issuer credit rating could limit our ability to access capital markets or significantly increase the cost to us of raising capital. The failure of our insurance company subsidiaries to maintain their current ratings could dissuade a lender or reinsurance company from conducting business with us. A ratings downgrade could also cause some of our existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or creation of additional financial obligations. It might also increase our interest or reinsurance costs.
We are exposed to credit risk in certain areas of our operations.
In addition to exposure to credit risk related to our investment portfolio, we are exposed to credit risk in several other areas of our business operations, including from:
our reinsurers, who are obligated to us under our reinsurance agreements. See the risk factor titled "Market conditions may affect our access to and the cost of reinsurance and our reinsurers may not pay losses in a timely manner, or at all," for a discussion of the credit risk associated with our reinsurance program;



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some of our independent agents, who collect premiums from policyholders on our behalf and are required to remit the collected premiums to us;

some of our policyholders, which may be significant; and

our surety insurance operations, where we guarantee to a third party that our bonded principal will satisfy certain performance obligations (for example, as in a construction contract) or certain financial obligations. If our policyholder defaults, we may suffer losses and be unable to be reimbursed by our policyholder.
To a large degree, the credit risk we face is a function of the economy; accordingly, we face a greater risk during periods of economic downturn. While we attempt to manage these risks through underwriting and investment guidelines, collateral requirements and other oversight mechanisms, our efforts may not be successful. For example, collateral obtained may subsequently have little or no value. As a result, our exposure to credit risk could materially and adversely affect our results of operation and financial condition.
We are subject to comprehensive laws and regulations, changes to which may have an adverse effect on our financial condition and results of operations.
Insurance is a highly regulated industry. We are subject to extensive supervision and regulation by the states in which we operate. As a public company, we are also subject to increased regulation at the federal level. Our ability to comply with these laws and regulations and obtain necessary and timely regulatory action is, and will continue to be, critical to our success and ability to earn profits.
Examples of regulations that pose particular risks to our ability to earn profits include the following:
Required licensing. Our insurance company subsidiaries operate under licenses issued by various state insurance departments. If a regulatory authority were to revoke an existing license or deny or delay granting a new license, our ability to continue to sell insurance or to enter or offer new insurance products in that market would be substantially impaired.

Regulation of insurance rates, fees and approval of policy forms. The insurance laws of most states in which we operate require insurance companies to file insurance premium rate schedules and policy forms for review and approval. When our loss ratio compares favorably to that of the industry, state regulatory authorities may resist or delay our efforts to raise premium rates, even if the property and casualty industry generally is not experiencing regulatory resistance to premium rate increases. If premium rate increases we deem necessary are not approved, we may not be able to respond to market developments and increased costs in that state. State regulatory authorities may even impose premium rate rollbacks or require us to pay premium refunds to policyholders, affecting our profitability. If insurance policy forms we seek to use are not approved by state insurance departments, our ability to offer new products and grow our business in that state could be substantially impaired.

Restrictions on cancellation, nonrenewal or withdrawal. Many states have laws and regulations restricting an insurance company's ability to cease or significantly reduce its sales of certain types of insurance in that state, except pursuant to a plan that is approved by the state insurance departments. These laws and regulations could limit our ability to exit or reduce our business in unprofitable markets or discontinue unprofitable products. For example, the State of Louisiana has a law prohibiting the nonrenewal of homeowners policies written for longer than three years except under certain circumstances, such as for nonpayment of premium or fraud committed by the insured. Additionally, our ability to adjust terms or increase pricing requires approval of regulatory authorities in certain states.

Risk-based capital and capital adequacy requirements. Our insurance company subsidiaries and affiliate are subject to risk-based capital requirements that require us to report our results of risk-based capital calculations to state insurance departments and the NAIC. These standards apply specified risk factors to various asset, premium and reserve components of statutory capital and surplus reported in our statutory


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basis of accounting financial statements. Any failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject us or our subsidiaries and affiliate to further examination or corrective action by state regulators, including limitations on our writing of additional business, state supervision or liquidation.

Transactions between insurance companies and their affiliates. Transactions between us, our insurance company subsidiaries and our affiliates generally must be disclosed to, and in some cases approved by, state insurance departments. State insurance departments may refuse to approve or delay their approval of a transaction, which may impact our ability to innovate or operate efficiently.

Required participation in guaranty funds and assigned risk pools. Certain states have enacted laws that require a property and casualty insurer conducting business in that state to participate in assigned risk plans, reinsurance facilities, and joint underwriting associations where participating insurers are required to provide coverage for assigned risks. The number of risks assigned to us by these plans is based on our share of total premiums written in the voluntary insurance market for that state. Pricing is controlled by the plan, often restricting our ability to charge the premium rate we might otherwise charge. Wherever possible, we utilize a designated servicing carrier to fulfill our obligations under these plans. Designated servicing carriers charge us fees to issue policies, adjust and settle claims and handle administrative reporting on our behalf. In these markets, we may be compelled to underwrite significant amounts of business at lower than desired premium rates, possibly leading to an unacceptable return on equity. While these facilities are generally designed so that the ultimate cost is borne by policyholders, the exposure to assessments and our ability to recoup these assessments through adequate premium rate increases may not offset each other in our financial statements. Moreover, even if they do offset each other, they may not offset each other in our financial statements for the same fiscal period, due to the ultimate timing of the assessments and recoupments or premium rate increases. Additionally, certain states require insurers to participate in guaranty funds to bear a portion of the unfunded obligations of impaired or insolvent insurance companies. These state funds periodically assess losses against all insurance companies doing business in the state. Our operating results and financial condition could be adversely affected by any of these factors.

Restrictions on the amount, type, nature, quality and concentration of investments. The various states in which we are domiciled have certain restrictions on the amount, type, nature, quality and concentration of our investments. Generally speaking, these regulations require us to be conservative in the nature and quality of our investments and restrict our ability to invest in riskier, but often higher yield investments. These restrictions may make it more difficult for us to obtain our desired investment results.

State and federal tax laws. Current federal income tax laws generally permit the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products. Taxes, if any, are payable on income attributable to a distribution under the contract for the year in which the distribution is made. The U.S. Congress has, from time to time, considered legislation that would reduce or eliminate the benefit of such deferral of taxation on the accretion of value within life insurance and nonqualified annuity contracts. Enactment of this legislation, including a simplified "flat tax" income structure with an exemption from taxation for investment income, could result in fewer sales of our insurance, annuity and investment products.

In addition, changes in the federal estate tax laws could negatively affect the demand for the types of life insurance used in estate planning. In addition, we benefit from certain tax items, including but not limited to, tax-exempt bond interest, dividends-received deductions, tax credits (such as foreign tax credits) and insurance reserve deductions. From time to time, the U.S. Congress, as well as foreign, state and local governments, considers legislation that could reduce or eliminate the benefits associated with these tax items. If such legislation is adopted, our profitability could be negatively impacted. We continue to evaluate the impact that potential tax reform, which lacks sufficient detail and is relatively uncertain, may have on our future results of operations and financial condition.



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Terrorism Risk Insurance. On January 12, 2015, President Obama signed into law The Terrorism Risk Insurance Program Reauthorization Act of 2015 ("TRIPRA"). TRIPRA extends the Terrorism Risk Insurance Program until December 31, 2020; gradually increases the coverage trigger for shared terrorism losses between the federal government and the insurance industry to $200 billion per year (up from $100 billion); and gradually increases the industry-wide retention to $37.5 billion per year (up from $27.5 billion). For further information about TRIPRA and its effect on our operations, refer to the information in the "Consolidated Results of Operations" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Accounting standards. We prepare our consolidated financial statements in conformity with GAAP, which is periodically revised and/or expanded by recognized authoritative bodies, including the Financial Accounting Standards Board ("FASB"). These principles are subject to interpretation by the SEC and various other bodies formed to interpret and create appropriate accounting principles and guidance. The FASB is currently working on several joint projects in conjunction with the International Accounting Standards Board ("IASB") that could result in a convergence of GAAP with International Financial Reporting Standards. These projects may result in significant changes to GAAP. Changes in GAAP and financial reporting requirements, or the interpretation of GAAP or those requirements, may have an impact on the content and presentation of our financial results and could have adverse consequences on our financial results, including lower reported results of operations and shareholders' equity and increased volatility and decreased comparability of our reported results with our historic results and with the results of other insurers. In addition, the required adoption of new accounting standards may result in significant incremental costs associated with initial implementation of and ongoing compliance with those standards. Additional information regarding recently proposed and adopted accounting standards and their potential impact on us is set forth in Note 1 “Summary of Significant Accounting Policies” to Part II, Item 8, “Financial Statements and Supplementary Data.”

Corporate Governance and Public Disclosure Regulation. Changing laws, regulations and standards relating to corporate governance and public disclosure, including Dodd-Frank, the Sarbanes-Oxley Act of 2002 and related SEC regulations, as well as the listing standards of the NASDAQ Stock Market, have created and are continuing to create uncertainty for public companies. While the federal government has not historically regulated the insurance business, in 2010 Dodd-Frank established a Federal Insurance Office within the U.S. Department of the Treasury. The Federal Insurance Office has limited regulatory authority and is empowered to gather data and information regarding the insurance industry and insurers, monitor aspects of the insurance industry, identify issues with regulation of insurers that could contribute to a systemic crisis in the insurance industry or the overall financial system, coordinate federal policy on international insurance matters and preempt state insurance measures under certain circumstances. While certain details and much of the impact of Dodd-Frank will not be known for some time, Dodd-Frank and other federal regulation adopted in the future may impose burdens on us, including impacting the ways we conduct our business, increasing compliance costs and duplicating state regulation. Additional regulation under these laws in the area of compensation disclosure, particularly regarding internal pay equity, officer and director hedging activities and compensation clawback policies is still expected.

U.S. Social Security Administration's Death Master File. We have received regulatory inquiries from certain state insurance regulators relating to compliance with unclaimed property laws and the use of data available on the U.S. Social Security Administration's Death Master File (or a similar database) to identify instances where benefits under life insurance policies, annuities and retained asset accounts are payable. It is possible that other jurisdictions may pursue similar inquiries and that such inquiries may result in payments to beneficiaries, escheatment of funds deemed abandoned under state laws and changes to procedures for the identification and escheatment of abandoned property.
Compliance with these laws and regulations requires us to incur administrative costs that decrease our profits. These laws and regulations may also prevent or limit our ability to underwrite and price risks accurately, obtain timely premium rate increases necessary to cover increased costs, discontinue unprofitable relationships or exit unprofitable markets and otherwise continue to operate our business profitably. In addition, our failure to comply with these laws


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and regulations could result in actions by state or federal regulators, including the imposition of fines and penalties or, in an extreme case, revocation of our ability to do business in one or more states. Finally, we could face individual, group and class action lawsuits by our policyholders and others for alleged violations of certain state laws and regulations. Each of these regulatory risks could have a negative effect on our profitability.
Market conditions may affect our access to and the cost of reinsurance and our reinsurers may not pay losses in a timely manner, or at all.
As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of the risk that we and our insurance company subsidiaries and affiliates underwrite, by transferring (or ceding) part of the risk we have assumed to a reinsurance company in exchange for part of the premium we receive in connection with the risk. These reinsurance arrangements diversify our business and reduce our exposure to large losses or from hazards of an unusual nature. As of December 31, 2015, we ceded premium written of $56.9 million to our reinsurers.
Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, it does not eliminate our liability to our policyholders because we remain liable as the direct insurer on all of the reinsured risks. As a result we are subject to credit risk relating to our ability to recover amounts due from our reinsurers.
Our ability to collect reinsurance recoverables may be subject to uncertainty. Our losses must meet the qualifying conditions of the reinsurance agreement. Our reinsurance agreements are subject to specified limits and we would not have reinsurance coverage to the extent that it exceeds those limits. We are also subject to the risk that reinsurers may dispute their obligations to pay our claims. Reinsurers must have the financial capacity and willingness to make payments under the terms of a reinsurance agreement or program. Reinsurers may dispute amounts we believe are due to us. Particularly, following a major catastrophic event, our inability to collect a material recovery from a reinsurer on a timely basis, or at all, could have a material adverse effect on our liquidity, operating results and financial condition.
Market conditions determine the availability and cost of the reinsurance protection we purchase, which affects the level of our business profitability, as well as the level and types of risk we retain. Although we purposely work with several reinsurance intermediaries and reinsurers, we may be unable to maintain our current reinsurance facilities or obtain other reinsurance facilities in adequate amounts and at favorable premium rates. Moreover, there may be a situation in which we have more than two catastrophic events within one policy year. Because our current catastrophe reinsurance program only allows for one automatic reinstatement at an additional reinstatement premium, we would be required to obtain a new catastrophe reinsurance policy to maintain our current level of catastrophe reinsurance coverage. Such coverage may be difficult to obtain, particularly if it is necessary to do so during hurricane season following the second catastrophe. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposure to risk will increase or, if we are unwilling to bear an increase in net risk exposures, we will have to reduce the amount of risk we underwrite.
We face significant competitive pressures in our business that could cause demand for our products to fall or hinder our ability to introduce new products or services and keep pace with advances in technology, reducing our revenue and profitability.
The insurance industry is highly competitive and will likely remain that way for the foreseeable future. In our property and casualty insurance business and in our life insurance business we compete, and will continue to compete, with many major U.S. and non-U.S. insurers and smaller regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies, and diversified financial services companies, including banks, mutual funds, broker-dealers and asset-managers. Except for regulatory considerations, there are few barriers to entry in the insurance market. National banks, with their large existing customer bases, may increasingly compete with insurers as a result of court rulings allowing national banks to sell annuity products in some circumstances, and as a result of new legislation removing restrictions on bank affiliations with insurers. These developments may increase competition, by increasing the number, size and financial strength of competitors who may be able to offer, due to economies of scale, more competitive pricing than we can.


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Our competitors may attempt to increase their market share by lowering rates. In that case, we could experience reductions in our underwriting margins or sales of insurance policies. Losing business to competitors offering similar products at lower prices or who have a competitive advantage may adversely affect the results of our operations. Additionally, economic conditions may reduce the total volume of business available to us and our competitors.
We price our insurance products based on estimated profit margins, and we may not be able to react in a timely manner to reprice our insurance products to respond to changes in the market. Some of our competitors may be larger and have far greater financial, technology and marketing resources than we do. If new or existing competitors decide to target our policyholder base by offering similar or enhanced product offerings or technologies at lower prices than we are able to offer, our premium revenue and our profitability could decline.
Our products are marketed exclusively through independent insurance agencies, most of which represent more than one company. We face competition within each agency and competition to retain qualified independent agents. Our competitors include companies that market their products through agents, as well as companies that sell insurance directly to their customers. In personal insurance, the use of comparative rating technologies has impacted our business and may continue to impact the entire industry. This has resulted in an increase in the total level of quote activity but a lower percentage of quotes have resulted in new business from customers. There is also the potential for similar technology to be used to compare rates for small business.
The successful implementation of our business model depends on our ability to adapt to evolving technologies and industry standards and introduce new products and services. There is no guarantee we will be able to introduce new or improved products, or that our products will achieve market acceptance. We may also not be successful in using new technologies effectively or adapting our proprietary technology to evolving customer requirements, causing our products or services to become obsolete.
Technology may be increasingly playing a role in our ability to be competitive. Innovations such as telematics and other usage-based methods of determining premiums may impact product design and pricing and may be an increasingly important factor in our ability to be competitive. Our competitive position may also be impacted by our ability to institute technology that collects and analyzes a wide variety of data points to make underwriting or other decisions.
Our business depends on the uninterrupted operations of our facilities, systems and business functions.
Our business depends on our employees' or vendors' ability to perform necessary business functions, such as processing new and renewal policies, providing customer service, making claims payments, facilitating collections and cancellations and performing actuarial functions necessary for pricing and product development. We increasingly rely on technology and systems to accomplish these business functions in an efficient and uninterrupted fashion. Our inability to access our facilities or a failure of technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis or affect the accuracy of transactions. If sustained or repeated, such a business interruption or system failure could result in a deterioration of our ability to write and process new and renewal business, serve our agents and policyholders or perform other necessary business functions as discussed above.
If a natural disaster or a terrorist act occurs, our company and employees could be directly adversely affected, depending on the nature of the event. We have an emergency preparedness plan that consists of the information and procedures required to enable rapid recovery from an occurrence, such as natural disaster or business disruption, which could potentially disable us for an extended period of time. This plan was successfully tested during 2008, both by the Midwest flooding that affected our corporate headquarters in Cedar Rapids, Iowa, and by Hurricane Ike that affected our Gulf Coast regional office in Galveston, Texas. It was also tested, to a lesser extent, by Super Storm Sandy in 2012 that affected our East Coast regional office in Pennington, New Jersey.


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Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, as well as our access to and the cost of capital.
Although capital market conditions have improved, our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by continued volatility, uncertainty and disruptions in the capital and credit markets.
We maintain a level of cash and securities which, combined with expected cash inflows from investments and operations, is believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations. However, withdrawal and surrender levels may differ from anticipated levels for a variety of reasons, such as changes in economic conditions or changes in our claims paying ability and financial strength ratings. In the event our current internal sources of liquidity do not satisfy our needs, we have entered into a $50 million revolving unsecured credit facility that we can access, which also allows the Company to increase the aggregate amount of the commitments thereunder by up to $100 million. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity as well as customers' or lenders' perception of our long- or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us.
Disruptions, uncertainty or volatility in the capital and credit markets may limit our access to capital required to operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities; satisfy statutory capital requirements; and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter term securities than we prefer, utilize available internal resources or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility and liquidity.
We may experience difficulty in integrating future acquisitions to our operations.
The successful integration of any newly acquired businesses into our operations will require, among other things:
the timely receipt of any required regulatory approvals;
the retention and assimilation of their key management, sales and other personnel;
the coordination of their lines of insurance products and services;
the adaptation of their technology, information systems and other processes; and
the retention and transition of their customers.
Unexpected difficulties in integrating any acquisition could result in increased expenses and the diversion of management time and resources. If we do not successfully integrate any acquired business into our operations, we may not realize the anticipated benefits of the acquisition, which could have a material adverse impact on our financial condition and results of operations. Further, any potential acquisitions may require significant capital outlays and, if we issue equity or convertible debt securities to pay for an acquisition, the issuance may be dilutive to our existing shareholders.
The exclusions and limitations in our policies may not be enforceable.
Many of the policies we issue include exclusions and other conditions that define and limit coverage, which exclusions and conditions are designed to manage our exposure to certain types of risks and expanding theories of legal liability. In addition, many of our policies limit the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter than the statutory period under which these claims can be brought by our policyholders. While these exclusions and limitations help us assess and control our loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted which modifies or bars the use of these exclusions and limitations. This could result in higher than anticipated losses by extending coverage beyond the intent of our underwriting. In some instances, these changes may not become apparent until sometime after we have issued the insurance policies that are affected by these


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changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.
Our internal controls are not fail-safe.
As a result of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control objectives have been or will be met, and that every instance of error or fraud has been or will be detected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake.
The determination of the amount of impairments taken on our investments requires estimates and assumptions which are subject to differing interpretations and could materially impact our results of operations or financial position.
The determination of the amount of impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. There can be no assurance that our management has accurately assessed the level of impairments taken in our financial statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.
Additionally, our management considers a wide range of factors about the instrument issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the instrument and in assessing the prospects for recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
Risks Relating to Our Common Stock
The ability of our subsidiaries to pay dividends may affect our liquidity and ability to meet our obligations.
As a holding company, we have no significant independent operations of our own. Our principal sources of funds are dividends and other payments received from our subsidiaries. We rely on those dividends for our liquidity and to meet our obligations to pay dividends to shareholders and make share repurchases. Dividends from those subsidiaries depend on their statutory surplus, earnings and regulatory restrictions.
State insurance laws limit the ability of insurance subsidiaries to pay dividends and require our insurance subsidiaries to maintain specified minimum levels of statutory capital and surplus. The actual ability to pay dividends may further be constrained by business and regulatory considerations, such as the impact of dividends on surplus, by our competitive position and by the amount of premiums that we can write. Ordinary dividend payments, or dividends that do not require prior approval by the insurance subsidiaries' domiciliary state insurance regulator are generally limited to amounts determined by a formula which varies by jurisdiction. Extraordinary dividends, on the other hand, require prior regulatory approval by the insurance subsidiaries' domiciliary state insurance regulator before they can be made.
In addition, competitive pressures generally require insurance companies to maintain insurance financial strength ratings. These restrictions and other regulatory requirements affect the ability of our insurance subsidiaries to make dividend payments to us. At times we may not be able to pay dividends on our common stock, or we may be required to seek prior approval from the applicable regulatory authority before we can pay any such dividends. In addition, the payment of dividends by us is within the discretion of our Board of Directors and will depend on numerous factors, including our financial condition, our capital requirements and other factors that our Board of Directors considers relevant.


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The price of our common stock may be volatile.
The trading price of our common stock may fluctuate substantially due to a variety of factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could be significant and could cause a loss in the amount invested in our shares of common stock. Factors that could cause fluctuations include, but are not limited to, the following:
variations in our actual or anticipated operating results or changes in the expectations of financial market analysts with respect to our results;

investor perceptions of the insurance industry in general and the Company in particular;

market conditions in the insurance industry and any significant volatility in the market;

major catastrophic events; and

departure of key personnel.
Certain provisions of our organizational documents, as well as applicable insurance laws, could impede an attempt to replace or remove our management, prevent the sale of the Company or prevent or frustrate any attempt by shareholders to change the direction of the Company, each of which could diminish the value of our common stock.
Our articles of incorporation and bylaws, as well as applicable laws governing corporations and insurance companies, contain provisions that could impede an attempt to replace or remove our management or prevent the sale of the Company that, in either case, shareholders might consider being in their best interests. For example:
our Board of Directors is divided into three classes. At any annual meeting of our shareholders, our shareholders have the right to appoint approximately one-third of the directors on our Board of Directors. Consequently, it will take at least two annual shareholder meetings to effect a change in control of our Board of Directors;

our articles of incorporation limit the rights of shareholders to call special shareholder meetings;

our articles of incorporation set the minimum number of directors constituting the entire Board of Directors at nine and the maximum at 15, and they require approval of holders of 60.0 percent of all outstanding shares to amend these provisions. Within the range, the Board of Directors may increase by one each year the number of directors serving on the Board of Directors;

our articles of incorporation require the affirmative vote of 60.0 percent of all outstanding shares to approve any plan of merger, consolidation, or sale or exchange of all, or substantially all, of our assets;

our Board of Directors may fill vacancies on the Board of Directors;

our Board of Directors has the authority, without further approval of our shareholders, to issue shares of preferred stock having such rights, preferences and privileges as the Board of Directors may determine;
 
Section 490.1110 of the Iowa Business Corporation Act imposes restrictions on mergers and other business combinations between us and any holder of 10.0 percent or more of our common stock; and

Section 490.624A of the Iowa Business Corporation Act authorizes the terms and conditions of stock rights or options issued by us to include restrictions or conditions that preclude or limit the exercise, transfer, or receipt of such rights or options by a person, or group of persons, owning or offering to acquire a specified number or percentage of the outstanding common shares or other securities of the corporation.


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Table of Contents

Further, the insurance laws of Iowa and the states in which our insurance company subsidiaries are domiciled prohibit any person from acquiring direct or indirect control of us or our insurance company subsidiaries, generally defined as owning or having the power to vote 10.0 percent or more of our outstanding voting stock, without the prior written approval of state regulators.
These provisions of our articles of incorporation and bylaws, and these state laws governing corporations and insurance companies, may discourage potential acquisition proposals. These provisions and state laws may also delay, deter or prevent a change of control of the Company, in particular through unsolicited transactions that some or all of our shareholders might consider to be desirable. As a result, efforts by our shareholders to change the direction or the Company's management may be unsuccessful, and the existence of such provisions may adversely affect market prices for our common stock if they are viewed as discouraging takeover attempts.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own seven buildings and related parking facilities in Cedar Rapids, Iowa. Our corporate headquarters includes: a five-story office building, a two-story office building and an eight-story office building in which a portion of the first floor is leased to commercial tenants. We also own three surrounding buildings as part of a commercial office complex. In September 2015, we acquired a two-story office building adjacent to our corporate headquarters, which is leased to commercial tenants.
In addition, three of our regional office locations in Lock Haven, Pennsylvania; Pennington, New Jersey; and Rocklin, California, conduct operations in office space that we own. We also own a tract of land adjacent to the Pennington office. Our other three regional office locations in Los Angeles, California; Westminster, Colorado; and Webster, Texas, and our claims office in Metairie, Louisiana, conduct operations in leased office space.
The following table shows a brief description of our owned and leased office space as of December 31, 2015.


29

Table of Contents

Location
Utilized by
Owned or Leased
Lease Expiration Date
Corporate Headquarters – Cedar Rapids, Iowa
 
 
 
118 2nd Ave SE
Corporate administration, property and casualty segment
Owned
N/A
203 2nd St SE
Corporate administration, life segment
Owned
N/A
109 2nd St SE
Property and casualty segment
Owned
N/A
118 2nd St SE
Corporate administration, property and casualty segment
Leased
January 1, 2017
Commercial Office Complex – Cedar Rapids, Iowa
 
 
 
101 2nd St SE
Commercial tenants
Owned
N/A
107 2nd St SE
Commercial tenants
Owned
N/A
101 1st Ave SE
Commercial tenants
Owned
N/A
Denver Regional Office – Westminster, Colorado
 
 
 
7301 N Federal Blvd Ste 200
Property and casualty segment
Leased
June 30, 2018
East Coast Regional Office –
 
 
 
Lock Haven Office – Lock Haven, Pennsylvania
 
 
 
100 Mercer Dr
Property and casualty segment
Owned
N/A
Pennington Office – Pennington, New Jersey
 
 
 
10 N Hwy 31
Property and casualty segment
Owned
N/A
Specialty Division Office – Los Angeles, California
 
 
 
725 S Figueroa St Ste 1870
Property and casualty segment
Leased
October 24, 2021
Gulf Coast Regional Office –
 
 
 
Houston Office – Webster, Texas
 
 
 
455 E Medical Ctr Blvd
Property and casualty segment
Leased
September 20, 2022
Dallas Office – McKinney, Texas
 
 
 
321 N Central Expy Ste 230
Property and casualty segment
Leased
June 30, 2020
New Orleans Claims Office – Metairie, Louisiana
 
 
 
2800 Veterans Hwy Ste 253
Property and casualty segment
Leased
May 22, 2020
West Coast Regional Office –
 
 
 
Rocklin, California
 
 
 
3880 Atherton Rd
Property and casualty segment
Owned
N/A
Reno, Nevada
 
 
 
516 Ryland St
Property and casualty segment
Leased
August 14, 2017


ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business, the Company is a party to a variety of legal proceedings. While the final outcome of these legal proceedings cannot be predicted with certainty, management believes all of the proceedings pending as of December 31, 2015 to be ordinary and routine and does not expect these legal proceedings to have a material adverse effect on the Company's financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.




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Table of Contents

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Shareholders
United Fire Group, Inc.'s common stock is traded on the NASDAQ stock market under the symbol "UFCS." On February 24, 2016, there were 816 holders of record of United Fire Group, Inc. common stock. The number of record holders does not reflect shareholders who beneficially own common stock in nominee or street name, but does include participants in our employee stock purchase plan.
Dividends
Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2015, our insurance company subsidiary, United Fire & Casualty, is able to make a maximum of $53.1 million in dividend payments without prior regulatory approval.
The table in the following section shows the quarterly cash dividends declared in 2015 and 2014. Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds and there can be no assurance that we will continue to pay such dividends or the amount of such dividends.
Additional information about these restrictions is incorporated by reference from Note 6 "Statutory Reporting, Capital Requirements and Dividends and Retained Earnings Restrictions" contained in Part II, Item 8, "Financial Statements and Supplementary Data."












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Table of Contents

Market Information
The following table sets forth the high and low trading price as reported on the NASDAQ stock market for our common stock for the calendar periods indicated, as well as the amount of cash dividends declared on our common stock.
 
Share Price
 
Cash Dividends
Declared per share
 
High
Low
 
2015
 
 
 
 
Quarter Ended:
 
 
 
 
March 31
$
31.94

$
27.57

 
$
0.20

June 30
34.09

29.31

 
0.22

September 30
37.00

31.68

 
0.22

December 31
40.64

33.70

 
0.22

Year-end closing share price: $38.31
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
Quarter Ended:
 
 
 
 
March 31
$
32.02

$
24.15

 
$
0.18

June 30
31.44

26.50

 
0.20

September 30
30.55

27.36

 
0.20

December 31
32.70

27.36

 
0.20

Year-end closing share price: $29.73
 
 
 
 
Issuer Purchases of Equity Securities

Under our share repurchase program, we may purchase our 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, general economic and market conditions, and corporate and regulatory requirements. Our share repurchase program may be modified or discontinued at any time.






















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Table of Contents

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 Exchange Act, during the year ended December 31, 2015:
Period
Total
Number of
Shares Purchased (1)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as a Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that may yet be
Purchased Under the
Plans or Programs
1/1/15 - 1/31/15
37,637

 
$
28.78

 
37,637

 
1,570,645

2/1/15 - 2/28/15

 

 

 
1,570,645

3/1/15 - 3/31/15

 

 

 
1,570,645

4/1/15 - 4/30/15

 

 

 
1,570,645

5/1/15 - 5/31/15
11,768

 
29.83

 
11,768

 
1,558,877

6/1/15 - 6/30/15
300

 
30.00

 
300

 
1,558,577

7/1/15 - 7/31/15

 

 

 
1,558,577

8/1/15 - 8/31/15
1,908

 
33.00

 
1,908

 
1,556,669

9/1/15 - 9/30/15
27,783

 
32.99

 
27,783

 
1,528,886

10/1/15 - 10/31/15

 

 

 
1,528,886

11/1/15 - 11/30/15

 

 

 
1,528,886

12/1/15 - 12/31/15

 

 

 
1,528,886

Total
79,396

 
 
 
79,396

 
 
(1) Our share repurchase program was originally announced in August 2007. In August 2014, our Board of Directors authorized the repurchase of up to an additional 1,000,000 shares of common stock through the end of August 2016. This is in addition to the 818,601 shares of common stock remaining under its previous authorization in August 2012.
United Fire Group, Inc. Common Stock Performance Graph
The following graph compares the performance of an investment in United Fire Group Inc.'s common stock from December 31, 2010 through December 31, 2015, with the Standard & Poor's 500 Index ("S&P 500 Index"), and the Standard & Poor's 600 Property and Casualty Index ("S&P 600 P&C Index"). The graph assumes $100 was invested on December 31, 2010 in our common stock and each of the below listed indices and that all dividends were reinvested on the date of payment without payment of any commissions. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.



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Table of Contents

The following table shows the data used in the total return performance graph above.
 
Period Ended
Index
12/31/10
 
12/31/11
 
12/31/12
 
12/31/13
 
12/31/14
 
12/31/15
United Fire Group, Inc.
$
100.00

 
$
93.30

 
$
103.83

 
$
139.67

 
$
148.87

 
$
196.92

S&P 500 Index
100.00

 
102.11

 
118.45

 
156.82

 
178.28

 
180.75

S&P 600 P&C Index
100.00

 
109.39

 
118.50

 
151.02

 
158.79

 
182.46

The foregoing performance graph is being furnised as part of this Annual Report on Form 10-K solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish our shareholders with such information, and therefore, shall not be deemed to be filed or incorporated by reference into any filings by the Company under the Securities Act or Exchange Act.

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data derived from the Consolidated Financial Statements of United Fire Group, Inc. and its subsidiaries and affiliates. The data should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 8, "Financial Statements and Supplementary Data."


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Table of Contents

(In Thousands, Except Per Share Data)
 
 
 
 
 
 
 
 
 
Years Ended December 31
2015
 
2014
 
2013
 
2012
 
2011
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total cash and investments
$
3,249,209

 
$
3,261,535

 
$
3,142,330

 
$
3,151,829

 
$
3,052,535

Total assets
3,890,376

 
3,856,689

 
3,720,672

 
3,694,653

 
3,618,924

 
 
 
 
 
 
 
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
 
 
 
 
 
 
Property and casualty insurance
1,003,895

 
969,437

 
960,651

 
971,911

 
945,051

Life insurance
1,372,358

 
1,447,764

 
1,472,132

 
1,498,176

 
1,476,281

Unearned premiums
415,057

 
378,725

 
340,464

 
311,650

 
288,991

Total liabilities
3,011,479

 
3,039,274

 
2,937,839

 
2,965,476

 
2,922,783

 
 
 
 
 
 
 
 
 
 
Net unrealized investment gains, after tax
128,369

 
149,623

 
116,601

 
144,096

 
124,376

Repurchase of United Fire Group, Inc. common stock
(2,423
)
 
(12,942
)
 
(1,644
)
 
(7,301
)
 
(12,433
)
Total stockholders' equity
878,897

 
817,415

 
782,833

 
729,177

 
696,141

 
 
 
 
 
 
 
 
 
 
Book value per share
34.94

 
32.67

 
30.87

 
28.90

 
27.29

 
 
 
 
 
 
 
 
 
 
Consolidated Income Statement Data:
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Net premiums written
$
967,064

 
$
866,120

 
$
783,463

 
$
720,881

 
$
604,867

Net premiums earned
930,890

 
828,330

 
754,846

 
694,994

 
586,783

Investment income, net of investment expenses
100,781

 
104,609

 
112,799

 
111,905

 
109,494

Net realized investment gains
2,846

 
7,270

 
8,695

 
5,453

 
6,440

Other income
401

 
1,685

 
702

 
891

 
2,291

Consolidated revenues
$
1,034,918

 
$
941,894

 
$
877,042

 
$
813,243

 
$
705,008

 
 
 
 
 
 
 
 
 
 
Losses and loss settlement expenses
 
 
 
 
 
 
 
 
 
Property and casualty insurance
520,087

 
509,811

 
437,354

 
439,137

 
407,831

Life insurance
29,001

 
26,432

 
21,461

 
20,569

 
22,558

Amortization of deferred policy acquisition costs (1)
186,817

 
167,449

 
153,677

 
141,834

 
153,176

Other underwriting expenses (1)
102,937

 
94,871

 
89,861

 
81,125

 
58,757

Net income
89,126

 
59,137

 
76,140

 
40,212

 
11

 
 
 
 
 
 
 
 
 
 
Property and Casualty Insurance Segment Data:
 
 
 
 
 
 
 
 
 
Net premiums written
887,874

 
804,715

 
722,821

 
655,331

 
551,923

Net premiums earned
851,695

 
766,939

 
694,192

 
629,411

 
533,771

Net income (loss)
85,320

 
52,376

 
67,456

 
33,512

 
(7,639
)
Combined ratio(2)
92.0
%
 
97.8
%
 
94.8
%
 
101.2
%
 
112.1
%
 
 
 
 
 
 
 
 
 
 
Life Insurance Segment Data:
 
 
 
 
 
 
 
 
 
Net premiums earned
79,195

 
61,391

 
60,654

 
65,583

 
53,012

Net income
3,806

 
6,761

 
8,684

 
6,700

 
7,650

 
 
 
 
 
 
 
 
 
 
Earnings Per Share Data:
 
 
 
 
 
 
 
 
 
Basic earnings per common share
3.56

 
2.34

 
3.01

 
1.58

 

Diluted earnings per common share
3.53

 
2.32

 
2.98

 
1.58

 

 
 
 
 
 
 
 
 
 
 
Other Supplemental Data:
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
0.86

 
0.78

 
0.69

 
0.60

 
0.60

(1)
In 2012, we adopted new deferred policy acquisition cost accounting guidance on a prospective basis. As a result of the adoption, the amount of underwriting expenses eligible for deferral has decreased.
(2)
The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business.




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Table of Contents

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis should be read in conjunction with Part II, Item 6, "Selected Financial Data" and Part II, Item 8, "Financial Statements and Supplementary Data." Amounts (except per share amounts) are presented in thousands, unless otherwise noted.

FORWARD-LOOKING STATEMENTS

It is important to note that our actual results could differ materially from those projected in any forward-looking statements in this Form 10-K. Please refer to "Forward-Looking Information" and Part I, Item 1A, "Risk Factors" of this report for information concerning factors that could cause actual results to differ materially from the forward-looking statements contained in this Form 10-K.

BUSINESS OVERVIEW
Originally founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("UFG", "United Fire", the "Registrant", the "Company", "we", "us", "our") and its consolidated insurance company subsidiaries provide insurance protection for individuals and businesses through several regional companies. Our property and casualty insurance company subsidiaries are licensed in 46 states plus the District of Columbia and are represented by approximately 1,200 independent agencies. Our life insurance subsidiary is licensed in 37 states and is represented by approximately 1,200 independent agencies.
Segments
We operate two business segments that are comprised of a wide range of products:
property and casualty insurance, which includes commercial insurance, personal insurance, surety bonds and assumed reinsurance; and
life insurance, which includes deferred and immediate annuities, universal life products and traditional life (primarily single premium whole life insurance) products.
We manage these business segments separately, as they generally do not share the same customer base, and they each have different products, pricing, and expense structures.
For 2015, property and casualty business accounted for approximately 91.5 percent of our net premiums earned, with the majority of which, 91.9 percent, was generated from commercial insurance. Life insurance business made up approximately 8.5 percent of our net premiums earned, of which over 68.5 percent was generated from traditional life insurance products.
Pooling Arrangement

All of our property and casualty insurance subsidiaries are members of an intercompany reinsurance pooling arrangement. On July 1, 2015, UFG Specialty Insurance Company (formerly known as Texas General Indemnity Company) entered the pooling arrangement. The Company's pooling arrangement permits the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant’s own surplus level.
Geographic Concentration
For 2015, approximately 49.3 percent of our property and casualty statutory direct written premiums were written in Texas, California, Iowa, Missouri and New Jersey; approximately 69.3 percent of our life insurance premiums were written in Iowa, Illinois, Minnesota, Wisconsin and Nebraska.



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Table of Contents

Sources of Revenue and Expense
We evaluate segment profit or loss based upon operating and investment results. Segment profit or loss described in the following sections of Management's Discussion and Analysis is reported on a pre-tax basis. Additional segment information is presented in Part II, Item 8, Note 10 "Segment Information" to the Consolidated Financial Statements.
Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, future policy benefits, underwriting and other operating expenses and interest on policyholders' accounts.
Profit Factors
Our profitability is influenced by many factors, including price, competition, economic conditions, investment returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, prudent management of our investments, appropriate matching of assets and liabilities and effective and efficient use of technology.

MEASUREMENT OF RESULTS
Our consolidated financial statements are prepared on the basis of GAAP. We also prepare financial statements for each of our insurance company subsidiaries based on statutory accounting principles and file them with insurance regulatory authorities in the states where they do business.
Management evaluates our operations by monitoring key measures of growth and profitability. We believe that disclosure of certain non-GAAP financial measures enhances investor understanding of our financial performance. The following provides further explanation of the key measures management uses to evaluate our results:
Catastrophe losses is a commonly used non-GAAP financial measure, which utilizes the designations of the Insurance Services Office ("ISO") and are reported with losses and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25.0 million or more in U.S. industry-wide direct insured losses to property and that affect a significant number of insureds and insurers ("ISO catastrophe"). In addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may include U.S. or international losses, that 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. 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 our periodic earnings.
 
Years Ended December 31,
(In Thousands)
2015
 
2014
 
2013
ISO catastrophes
$
25,380

 
$
47,351

 
$
27,222

Non-ISO catastrophes (1)
6,933

 
2,328

 
2,994

Total catastrophes
$
32,313

 
$
49,679

 
$
30,216

(1) Includes international assumed losses.


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Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS
 
Years Ended December 31,
 
% Change
 
 
 
 
 
 
 
2015
 
2014
(In Thousands)
2015
 
2014
 
2013
 
vs. 2014
 
vs. 2013
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
930,890

 
$
828,330

 
$
754,846

 
12.4
 %
 
9.7
 %
Investment income, net of investment expenses
100,781

 
104,609

 
112,799

 
(3.7
)
 
(7.3
)
Net realized investment gains (losses)
 
 
 
 
 
 
 

 
 
Other-than-temporary impairment charges
(1,300
)
 

 
(139
)
 
NM

 
NM

All other net realized gains
4,146

 
7,270

 
8,834

 
(43.0
)
 
(17.7
)
Total net realized investment gains
2,846

 
7,270

 
8,695

 
(60.9
)
 
(16.4
)
Other income
401

 
1,685

 
702

 
(76.2
)
 
140.0

Total revenues
$
1,034,918

 
$
941,894

 
$
877,042

 
9.9
 %
 
7.4
 %
 
 
 
 
 
 
 
 
 
 
Benefits, losses and expenses
 
 
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
549,088

 
$
536,243

 
$
458,814

 
2.4
 %
 
16.9
 %
Increase in liability for future policy benefits
50,945

 
36,623

 
37,625

 
39.1

 
(2.7
)
Amortization of deferred policy acquisition costs
186,817

 
167,449

 
153,677

 
11.6

 
9.0

Other underwriting expenses
102,937

 
94,871

 
89,861

 
8.5

 
5.6

Interest on policyholders' accounts
23,680

 
30,245

 
35,163

 
(21.7
)
 
(14.0
)
Total benefits, losses and expenses
$
913,467

 
$
865,431

 
$
775,140

 
5.6
 %
 
11.6
 %
 
 
 
 
 
 
 
 
 
 
Income before income taxes
$
121,451

 
$
76,463

 
$
101,902

 
58.8
 %
 
(25.0
)%
Federal income tax expense
32,325

 
17,326

 
25,762

 
86.6
 %
 
(32.7
)%
Net income
$
89,126

 
$
59,137

 
$
76,140

 
50.7
 %
 
(22.3
)%
NM = not meaningful
Consolidated Results of Operations
In 2015, the increase in net income was driven by a 12.4 percent increase in net premiums earned, which was the result of organic growth from new business and rate increases in the property and casualty segment. This increase in premiums was offset by a decrease in investment income and net realized investment gains and a proportionately lower increase in losses and loss settlement expenses on a better performing underlying book of business.
In 2014, the decrease in net income was driven by an increase in losses and loss settlement expenses offset by an increase in property and casualty premium revenue. The increase in losses and loss settlement expenses is primarily attributable to an increase in catastrophe losses from spring and summer convective storms in regions of the U.S. where we conduct much of our business and an increase in frequency and severity in fire-related losses in our commercial property line of business. Net premiums earned increased to $828.3 million compared to $754.8 million in 2013. The increase in property and casualty premium revenue represents organic growth and is the result of a combination of rate increases across most commercial and personal lines and, to a lesser extent, new business writings.



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Table of Contents

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

Property and Casualty Insurance Segment
 
Years Ended December 31,
 
% Change
 
 
 
2015
 
2014
(In Thousands)
2015
 
2014
 
2013
 
vs. 2014
 
vs. 2013
Net premiums written
$
887,874

 
$
804,715

 
$
722,821

 
10.3
 %
 
11.3
 %
Net premiums earned
$
851,695

 
$
766,939

 
$
694,192

 
11.1

 
10.5

Losses and loss settlement expenses
(520,087
)
 
(509,811
)
 
(437,353
)
 
2.0

 
16.6

Amortization of deferred policy acquisition costs
(180,183
)
 
(161,310
)
 
(147,175
)
 
11.7

 
9.6

Other underwriting expenses
(83,631
)
 
(79,117
)
 
(73,626
)
 
5.7

 
7.5

Underwriting gain
$
67,794

 
$
16,701

 
$
36,038

 
305.9
 %
 
(53.7
)%
 
 
 
 
 
 
 
 
 
 
Investment income, net of investment expenses
46,559

 
44,236

 
46,332

 
5.3
 %
 
(4.5
)%
Net realized investment gains (losses)
 
 
 
 
 
 
 
 
 
Other-than-temporary impairment charges

 

 
(139
)
 
 %
 
(100.0
)%
All other net realized gains
1,124

 
4,177

 
6,400

 
(73.1
)
 
(34.7
)
Total net realized investment gains
1,124

 
4,177

 
6,261

 
(73.1
)%
 
(33.3
)%
Other income (loss)
(107
)
 
911

 
88

 
(111.7
)
 
NM

Income before income taxes
$
115,370

 
$
66,025

 
$
88,719

 
74.7
 %
 
(25.6
)%
 
 
 
 
 
 
 
 
 
 
GAAP Ratios:
 
 
 
 
 
 
 
 
 
Net loss ratio (without catastrophes)
57.2
%
 
60.0
%
 
58.6
%
 
(4.7
)%
 
2.4
 %
Catastrophes - effect on net loss ratio
3.8

 
6.5

 
4.4

 
(41.5
)
 
47.7

Net loss ratio(1)
61.0
%
 
66.5
%
 
63.0
%
 
(8.3
)%
 
5.6
 %
Expense ratio (2)
31.0

 
31.3

 
31.8

 
(1.0
)
 
(1.6
)
Combined ratio(3)
92.0
%
 
97.8
%
 
94.8
%
 
(5.9
)%
 
3.2
 %
 
 
 
 
 
 
 
 
 
 
Statutory Ratios:
 
 
 
 
 
 
 
 
 
Net loss ratio (without catastrophes)
57.4
%
 
60.2
%
 
58.9
%
 
(4.7
)%
 
2.2
 %
Catastrophes - effect on net loss ratio
3.8

 
6.5

 
4.4

 
(41.5
)
 
47.7

Net loss ratio(1)
61.2
%
 
66.7
%
 
63.3
%
 
(8.2
)%
 
5.4
 %
Expense ratio (2)
32.2

 
31.4

 
32.0

 
2.5

 
(1.9
)
Combined ratio(3)
93.4
%
 
98.1
%
 
95.3
%
 
(4.8
)%
 
2.9
 %
NM = not meaningful
(1) The net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our Consolidated Financial Statements.
(2) The GAAP expense ratio is calculated by dividing nondeferred underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance business. The statutory expense ratio, presented here, is calculated in a similar fashion as GAAP but uses net premiums written instead of net premiums earned.
(3) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.

For the year ended December 31, 2015, our property and casualty insurance segment reported income before income taxes of $115.4 million compared to income before income taxes of $66.0 million in the same period in 2014. The increase in income before income taxes during 2015 as compared to 2014 was driven by organic premium growth from new business and rate increases slightly offset by a proportionately lower increases in losses and loss settlement expenses and underwriting expenses on a better performing underlying book of business. Net premiums earned increased 11.1 percent as compared to 2014.

For the year ended December 31, 2014, our property and casualty insurance segment reported income before income taxes of $66.0 million compared to income before income taxes of $88.7 million in the same period in 2013. The


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decrease in income before income taxes during 2014 as compared to 2013 is primarily due to an increase in losses and loss settlement expenses partially offset by a 10.5 percent increase in net premiums earned.
Premiums
The following table shows our premiums written and earned for 2015, 2014 and 2013:
 
 
 
 
 
 
 
% Change
(In Thousands)
 
 
 
 
 
 
2015
 
2014
Years ended December 31,
2015
 
2014
 
2013
 
vs. 2014
 
vs. 2013
Direct premiums written
$
926,500

 
$
838,584

 
$
754,594

 
10.5
%
 
11.1
 %
Assumed premiums written
18,290

 
16,421

 
18,938

 
11.4

 
(13.3
)
Ceded premiums written
(56,916
)
 
(50,290
)
 
(50,711
)
 
13.2

 
(0.8
)
Net premiums written
$
887,874

 
$
804,715

 
$
722,821

 
10.3
%
 
11.3
 %
Net premiums earned
851,695

 
766,939

 
694,192

 
11.1

 
10.5

Net Premiums Written
Net premiums written comprise direct and assumed premiums written, less ceded premiums written. Direct premiums written are the total policy premiums, net of cancellations, associated with policies issued and underwritten by our property and casualty insurance segment. Assumed premiums written are the total premiums associated with the insurance risk transferred to us by other insurance and reinsurance companies pursuant to reinsurance contracts. Ceded premiums written is the portion of direct premiums written that we cede to our reinsurers under our reinsurance contracts. Net premiums earned are recognized ratably over the life of a policy and differ from net premiums written, which are recognized on the effective date of the policy.
Direct Premiums Written
Direct premiums written increased $87.9 million in 2015 as compared to 2014 due to organic growth from a combination of new business and rate increases.
Direct premiums written increased $84.0 million in 2014 as compared to 2013 due to organic growth from a combination of rate increases across most commercial and personal lines and new business writings.
Assumed Premiums Written
Assumed premiums written increased $1.9 million in 2015 as compared to 2014 due the addition of one new program to our portfolio. The new assumed program is for international catastrophes excluding the United States with the largest exposure to European wind perils. In 2015, we also renewed our participation in all of our assumed programs.
Assumed premiums written decreased $2.5 million in 2014 as compared to 2013 due to softening reinsurance market conditions. We renewed our participation levels in all but one of our active assumed programs and added one new program to replace the lost premium from the program not renewed.
Ceded Premiums Written
Direct and assumed premiums written are reduced by the ceded premiums that we pay to reinsurers. For 2015, we ceded 13.2 percent more premium to reinsurers as a result of growth in direct written premiums. For 2014, we benefited from softening market conditions and decreasing ceding rates that allowed us to cede 0.8 percent less premium while growing direct premiums written by 11.1 percent as compared to 2013.




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Losses and Loss Settlement Expenses
Catastrophe Exposures
Catastrophe losses are inherent risks of the property and casualty insurance business. Catastrophic events include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds, winter storms and other natural disasters, along with man-made exposures to losses resulting from, without limitation, acts of war, acts of terrorism and political instability. Such events result in insured losses that can be, and may continue to be, a material factor in our results of operations and financial position, as the extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. Because the level of insured losses that may occur in any one year cannot be accurately predicted, these losses contribute to fluctuations in our year-to-year results of operations and financial position. Some types of catastrophes are more likely to occur at certain times within the year than others, which adds an element of seasonality to our property and casualty insurance claims. Our property and casualty insurance segment experiences some seasonality with regard to premiums written, which are generally highest in January and July and lowest during the fourth quarter. Losses and loss settlement expenses incurred tend to remain consistent throughout the year, with the exception of catastrophe losses, which generally are highest in the second and third quarters. The frequency and severity of catastrophic events are difficult to accurately predict in any year. However, some geographic locations are more susceptible to these events than others.
We control our direct insurance exposures in regions that are prone to naturally occurring catastrophic events through a combination of geographic diversification, restrictions on the amount and location of new business production in such regions, and reinsurance. We regularly assess our concentration of risk exposures in natural catastrophe exposed areas. We have strategies and underwriting standards to manage these exposures through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance coverage. We use catastrophe modeling and a risk concentration management tool to monitor and control our accumulations of potential losses in natural catastrophe exposed areas of the United States, such as the Gulf and East Coasts, as well as in areas of exposure in other countries where we are exposed to a portion of an insurer's underwriting risk under our assumed reinsurance contracts.
Overall, the models indicate increased risk estimates for our exposure to hurricanes in the U.S., but the impact of the models on our book of business varies significantly among the regions that we model for hurricanes. Based on our analysis, we have implemented more targeted underwriting and rate initiatives in some regions. We will continue to take underwriting actions and/or purchase additional reinsurance as necessary to reduce our exposure.
Catastrophe modeling generally relies on multiple inputs based on experience, science, engineering and history, and the selection of those inputs requires a significant amount of judgment. The modeling results may also fail to account for risks that are outside the range of normal probability or are otherwise unforeseen. Because of this, actual results may differ materially from those derived from our modeling assumptions.
Despite our efforts to manage our catastrophe exposure, the occurrence of one or more severe natural catastrophic events in heavily populated areas could have a material effect on our results of operations, financial condition or liquidity.
The process of estimating and establishing reserves for losses incurred from catastrophic events is inherently uncertain and the actual ultimate cost of a claim, net of reinsurance recoveries, may vary materially from the estimated amount reserved. Although we reinsure a portion of our exposure, reinsurance may prove to be inadequate if a major catastrophic event exceeds our reinsurance limits or if we experience a number of small catastrophic events that individually fall below our reinsurance retention level.
Catastrophe Losses
In 2015, our pre-tax catastrophe losses were $32.3 million, a decrease as compared to $49.7 million and an increase as compared to $30.2 million in 2014 and 2013, respectively. The decrease in catastrophe losses in 2015 is primarily due to elevated losses in the prior year. In 2014, there was an increase in catastrophes from spring and summer


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convective storms in regions of the U.S. where we conduct much of our business. In 2015, our catastrophe losses included 37 catastrophes, where our largest single pre-tax catastrophe loss totaled $4.0 million. In 2014 our catastrophe losses included 26 catastrophes, where our largest single pre-tax catastrophe loss totaled $7.7 million and in 2013 our catastrophe losses included 29 catastrophes, where our largest single pre-tax catastrophe loss totaled $4.0 million.
Catastrophe Reinsurance
In 2015, 2014 and 2013, we did not exceed our catastrophe reinsurance retention level of $20.0 million.
We use many reinsurers, both domestic and foreign, which helps us to avoid concentrations of credit risk associated with our reinsurance. All reinsurers we do business with must meet the following minimum criteria: capital and surplus of at least $250.0 million and an A.M. Best rating or an S&P rating of at least "A-." If a reinsurer is rated by both rating agencies, then both ratings must be at least an "A-."
The following table represents the primary reinsurers we utilize and their financial strength ratings as of December 31, 2015:
Name of Reinsurer
A.M. Best
S&P Rating
Arch Reinsurance Company
A+
A+
FM Global
A+
N/A
Hannover Rueckversicherung AG (1) (2)
A+
AA-
Lloyd's
A
A+
MS Frontier
A
A+
Partner Re(1)(2)
A
A+
QBE Reinsurance Corporation (1)
A
A+
R&V Versicherung AG (2)
N/A
AA-
SCOR Reinsurance Company(1)(2)
A
AA-
Tokio Millennium Re Ltd
A++
A+
(1)
Primary reinsurers participating in the property and casualty excess of loss programs.
(2)
Primary reinsurers participating in the surety excess of loss program.
Refer to Part II, Item 8, Note 4 "Reinsurance" for further discussion of our reinsurance programs.
Terrorism Coverage
The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law on December 27, 2007. In January 2015, President Obama signed into law The Terrorism Risk Insurance Program Reauthorization Act of 2015 ("TRIPRA"). TRIPRA extends the Terrorism Risk Insurance Program until December 31, 2020; gradually increases the coverage trigger for shared terrorism losses between the federal government and the insurance industry to $200 billion per year (up from $100 billion); and gradually increases the industry-wide retention to $37.5 billion per year (up from $27.5 billion). TRIPRA coverage includes most direct commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an insurer, with exclusions for commercial automobile insurance, burglary and theft insurance, surety, professional liability insurance and farm owners multiple peril insurance. Under TRIPRA, each insurer has a deductible amount, which is 20.0 percent of the prior year's direct commercial lines earned premiums for the applicable lines of business, and retention of 15.0 percent above the deductible. No insurer that has met its deductible shall be liable for the payment of any portion of that amount that exceeds the annual aggregate loss cap specified in TRIPRA. TRIPRA provides marketplace stability. As a result, coverage for terrorist events in both the insurance and reinsurance markets is often available. The amount of aggregate losses necessary for an act of terrorism to be certified by the U.S. Secretary of Treasury, the Secretary of State and the Attorney General was $100.0 million for 2015 and remains the same for 2016. Our TRIPRA deductible was $99.2 million for 2015 and our TRIPRA deductible will be $111.1 million for 2016. Our catastrophe and non-catastrophe reinsurance programs provide limited coverage for terrorism exposure excluding nuclear, biological and chemical-related claims.


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2015 Results
In 2015, although our losses and loss settlement expenses were 2.0 percent higher than 2014, our net loss ratio decreased 5.5 points due to a better performing underlying book of business and a decrease in catastrophe losses. Catastrophe losses decreased to $32.3 million in both our direct business and assumed reinsurance business as compared to $49.7 million in 2014.
2014 Results
In 2014, our losses and loss settlement expenses were affected by catastrophe losses of $49.7 million in both our direct business and assumed reinsurance business as compared to $30.2 million in 2013 and also by an increase in our non-catastrophe results from an increase in frequency and severity in fire-related losses in our commercial property line of business.
2013 Results
In 2013, our losses and loss settlement expenses were affected by a reduction of $34.5 million in catastrophe losses in both our direct business and assumed reinsurance business as compared to 2012, and also, to a lesser extent, by an improvement in our non-catastrophe results.
Reserve Development

For many liability claims, significant periods of time, ranging up to several years, and for certain construction defect claims, more than a decade, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement or other disposition of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability. Reserves for these long-tail coverages represent a significant portion of our overall carried reserves.

When establishing reserves and monitoring reserve adequacy, we analyze historical data and consider the potential impact of various loss development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long-tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific dollar impact of any individual factor on the development of reserves.

Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after information about a claim becomes available. This approach tends to produce, on average, prudently conservative case reserves, which we expect to result in some level of favorable development over the course of settlement.

2015 Development

The property and casualty insurance segment experienced $40.4 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2015. Three lines in aggregate accounted for a majority of the favorable development. The largest single contributor was long-tail liability with $23.0 million of favorable development followed by workers' compensation with $22.1 million of favorable development and auto physical damage with $4.4 million of favorable development for the year ended December 31, 2015. The favorable development is attributable to reductions in reserves for reported claims as well as reductions in required reserves for incurred but not reported claims combined with continued successful management of litigation expenses. These


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reserve decreases were more than sufficient to offset claim payments. The favorable development was partially offset by adverse development, the majority coming from three lines which included property with $5.6 million of adverse development from an increase in severity and frequency of losses, assumed reinsurance with $8.1 million of adverse development due to prior year development of catastrophe losses and commercial auto liability with $2.8 million of adverse development due to an increase in frequency of losses in the year ended December 31, 2015. No other single line of business contributed a significant portion of the total development.

2014 Development

The property and casualty insurance segment experienced $56.7 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2014. The significant drivers of the favorable reserve development in 2014 were our long-tail liability lines, workers' compensation, and automobile (both liability and physical damage), which collectively contributed $54.3 million of the total development. Much of the favorable long-tail liability development came from loss adjustment expense and is attributed to our litigation management initiative. Workers' compensation favorable development was due to the combination of claim reserve decreases along with favorable changes affecting loss adjustment expense. Changes in reserve development patterns have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial auto liability continues to benefit from loss control and re-underwriting initiatives over the past two years as well as favorable changes affecting loss adjustment expense as reserve development patterns also showed a redundancy in reserves along with less need for IBNR claim reserves.

2013 Development

The property and casualty insurance segment experienced $57.5 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2013. The favorable reserve development on prior year reserves was primarily related to our long-tail lines of commercial business including other liability, workers' compensation and auto liability. The significant driver of the favorable reserve development in 2013 was the other liability line which contributed $33.5 million of the total, primarily due to additional recognition of relatively recent changes in reserve development patterns which have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Also contributing to the favorable reserve development in 2013, only to a lesser extent than the other liability line of business, were workers' compensation, commercial auto liability and surety lines of business, which contributed $7.5 million, $6.3 million and $4.7 million, respectively, to the favorable reserve development.

Reserve development amounts can vary significantly from year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business.



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Net Loss Ratios by Line
The following table depicts our net loss ratios for 2015, 2014 and 2013:
Years ended December 31,
2015
 
2014
 
2013
(In Thousands)
Net Premiums Earned
 
Net Losses and Loss Settlement Expenses Incurred
 
Net Loss Ratio
 
Net Premiums Earned
 
Net Losses and Loss Settlement Expenses Incurred
 
Net Loss Ratio
 
Net Premiums Earned
 
Net Losses and Loss Settlement Expenses Incurred
 
Net Loss Ratio
Commercial lines
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liability
$
261,303

 
$
130,904

 
50.1
%
 
$
228,426

 
$
106,827

 
46.8
%
 
$
199,548

 
$
98,013

 
49.1
 %
Fire and allied lines
202,375

 
128,479

 
63.5

 
181,710

 
148,856

 
81.9

 
165,081

 
95,158

 
57.6

Automobile
185,970

 
152,558

 
82.0

 
164,537

 
122,683

 
74.6

 
147,026

 
120,354

 
81.9

Workers' compensation
95,672

 
47,106

 
49.2

 
88,522

 
63,425

 
71.6

 
81,616

 
73,179

 
89.7

Fidelity and surety
21,362

 
2,001

 
9.4

 
19,212

 
1,597

 
8.3

 
18,746

 
(2,201
)
 
(11.7
)
Other
2,158

 
428

 
19.8

 
2,741

 
153

 
5.6

 
1,861

 
126

 
6.8

Total commercial lines
$
768,840

 
$
461,476

 
60.0
%
 
$
685,148

 
$
443,541

 
64.7
%
 
$
613,878

 
$
384,629

 
62.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal lines
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fire and allied lines
$
44,075

 
$
28,815

 
65.4
%
 
$
44,376

 
$
38,644

 
87.1
%
 
$
42,949

 
$
28,235

 
65.7
 %
Automobile
24,120

 
17,817

 
73.9

 
23,276

 
20,571

 
88.4

 
22,185

 
16,872

 
76.1

Other
1,021

 
296

 
29.0

 
994

 
1,972

 
198.4

 
774

 
2,637

 
NM

Total personal lines
$
69,216

 
$
46,928

 
67.8
%
 
$
68,646

 
$
61,187

 
89.1
%
 
$
65,908

 
$
47,744

 
72.4
 %
Reinsurance assumed
$
13,639

 
$
11,683

 
85.7
%
 
$
13,145

 
$
5,083

 
38.7
%
 
$
14,406

 
$
4,980

 
34.6
 %
Total
$
851,695

 
$
520,087

 
61.0
%
 
$
766,939

 
$
509,811

 
66.5
%
 
$
694,192

 
$
437,353

 
63.0
 %
NM=Not meaningful







45

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Commercial Lines
The net loss ratio in our commercial lines of business, excluding assumed reinsurance, was 60.0 percent in 2015 compared to 64.7 percent in 2014 and 62.7 percent in 2013. The improvement in 2015 as compared to 2014 was primarily the result of a decrease in net losses and loss settlement expenses incurred in fire and allied lines and workers' compensation partially offset by an increase in losses in commercial automobile. The prior year results included an increase in catastrophe losses from spring and summer storms in regions of the U.S where we conduct much of our business and an increase in frequency and severity in fire-related losses in our commercial property line of business.
The deterioration in 2014 as compared to 2013 was primarily the result of an increase in catastrophe losses from spring and summer storms in regions of the U.S where we conduct much of our business and an increase in frequency and severity in fire-related losses in our commercial property line of business partially offset by an improvement in the loss ratio for workers' compensation and commercial automobile insurance.
Other Liability
Other liability is business insurance covering bodily injury and property damage arising from general business operations, accidents on the insured's premises and products manufactured or sold. Because of the long-tail nature of liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim.
In recent years, we began to use our loss control department more extensively in an attempt to return this line of business to a higher level of profitability. For example, our loss control department has representatives who make multiple visits each year to businesses and job sites to ensure safety. We also non-renew accounts that no longer meet our underwriting or pricing guidelines. We avoid accounts that have become too underpriced for the risk.
Construction Defect Losses
Incurred losses from construction defect claims were $3.6 million in 2015 compared to $10.1 million and $13.7 million in 2014 and 2013, respectively. At December 31, 2015, we had $28.8 million in construction defect loss and loss settlement expense reserves (excluding IBNR reserves which is calculated at the overall other liability commercial line), which consisted of 1,721 claims. In comparison, at December 31, 2014, we had reserves of $33.6 million, excluding IBNR reserves, consisting of 1,597 claims. The decrease in the incurred losses and reserves is due to a decrease in loss severity.
Construction defect claims generally relate to allegedly defective work performed in the construction of structures such as apartments, condominiums, single family dwellings or other housing, as well as the sale of defective building materials. Such claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. The reporting of such claims can be quite delayed due to an extended statute of limitations, sometimes up to ten years. Court decisions have expanded insurers' exposure to construction defect claims as well. Defense costs are also a part of the insured expenses covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims.

We have exposure to construction defect liabilities in Colorado and surrounding states. We have historically insured small- to medium-sized contractors in this geographic area. In an effort to limit the number of future claims from multi-unit buildings, we implemented policy exclusions in 2009, later revised in 2010, that exclude liability coverage for contractors performing "residential structural" operations on any building project with more than 12 units or on single family homes in any subdivision where the contractor is working on more than 15 homes. The exclusions do not apply to remodeling or repair of an existing structure. We also changed our underwriting guidelines to add a professional liability exclusion when contractors prepare their own design work or blueprints and implemented the multi-family exclusion and tract home building limitation form for the state of Colorado and our other western states as a means to reduce our exposure in future years. When offering commercial umbrella coverage for structural residential contractors, limits of liability are typically limited to a maximum of $2.0 million per occurrence. Requests to provide additional insured status for "developers" are declined.


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As a result of our acquisition of Mercer Insurance Group in 2011, we added construction defect exposure in the states of California, Nevada and Arizona. Mercer Insurance Group has been writing in these states for more than 20 years. In order to minimize our exposure to construction defect claims in this region, we continually review the coverage we offer and our pricing models. In an effort to limit our exposure from residential multi-unit buildings, we started including condominium and townhouse construction policy exclusions in 2012 for our contracting policies in this region. For the majority of our residential contractors we limit the size of any tracts the contractor is working on to 25 homes or less and do not include a continuous trigger with our designated work exclusion. In a majority of the policies in our small service, repair and remodel contractors program, we have a favorable new residential construction exclusion. We also apply strict guidelines when additional insured forms are required and changed our underwriting guidelines to limit our exposure to large, multi-party construction defect claims. 
Commercial Fire and Allied Lines
Commercial fire and allied lines include fire, allied lines, commercial multiple peril and inland marine. The insurance covers losses to an insured's property, including its contents, from weather, fire, theft or other causes. We provide this coverage through a variety of business policies.
The improvement in the net loss ratio in 2015 as compared to 2014 was primarily attributable to elevated losses in the prior year. In 2014, there were elevated catastrophe losses from spring and summer storms in regions of the U.S. where we conduct much of our business and an increase in frequency and severity in fire-related losses in our commercial property line of business.
The deterioration in the net loss ratio in 2014 as compared to 2013, was due to an increase in catastrophe losses from spring and summer storms in regions of the U.S. where we conduct much of our business and an increase in frequency and severity in fire-related losses in our commercial property line of business.
Commercial Automobile
Our commercial automobile insurance covers physical damage to an insured's vehicle, as well as liabilities to third parties. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft, flood or other causes. Automobile liability insurance covers bodily injury, damage to property resulting from automobile accidents caused by the insured, uninsured or underinsured motorists and the legal costs of defending the insured against lawsuits. The deterioration in our commercial automobile insurance line in 2015 as compared to 2014 was due to an increase in severity of claims combined with additional reserves for incurred but not reported claims in 2015 primarily from an adverse development experience trend from an increase in highway roadway use by commercial vehicles. The improvement in our commercial automobile insurance line in 2014 as compared to 2013 was primarily due to favorable results from loss control and re-underwriting initiatives which focused on under-performing accounts and agents.
Workers' Compensation
We consider our workers' compensation business to be a companion product; we rarely write stand-alone workers' compensation policies. Our workers' compensation insurance covers primarily small- to mid-size accounts.
The improvement in our workers' compensation line of business in 2015 as compared to 2014 was due to a decrease in severity and frequency of claims and favorable development in reserves for reported claims. The improvement in our workers' compensation line of business in 2014 as compared to 2013 was due to the combined effects of lower claim frequency and favorable reserve development from previously reported claims.
The challenges faced by workers' compensation insurance providers to attain profitability include the regulatory climates in some states that make it difficult to obtain appropriate premium rate increases and inflationary medical costs. Despite these pricing issues, we continue to believe that we can improve the results of this line of business. Consequently, we have increased the utilization of our loss control unit in the analysis of current risks, with the


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intention of increasing the quality of our workers' compensation book of business. We are currently using these modeling analytics to assist us in risk selection, and we will continue to evaluate the model results.
Fidelity and Surety
Our surety products guarantee performance and payment by our bonded principals. Our contract bonds protect owners from failure to perform on the part of our principals. In addition, our surety bonds protect material suppliers and subcontractors from nonpayment by our contractors. When surety losses occur, our loss is determined by estimating the cost to complete the remaining work and to pay the contractor's unpaid bills, offset by contract funds due to the contractor, reinsurance, and the value of any collateral to which we may have access.
In 2015, the loss ratio increased slightly as compared to 2014 due to a single large claim incurred in the first quarter of 2015. In 2014, the loss ratio increased as compared to 2013 which experienced a decrease in claim frequency along with a release of IBNR reserves as a result of actual emergence of paid losses being less than expected. This resulted in the negative loss ratio in 2013.

During 2015, there were two claims that exceeded our $1.5 million surety excess of loss reinsurance retention level. During 2014 and 2013 there were no claims that exceeded our $1.5 million reinsurance retention level.
Personal Lines
Our personal lines consist primarily of fire and allied lines (including homeowners) and automobile lines. In 2015, the net loss ratio improved 21.3 percentage points compared to 2014. The change was primarily due to a decrease in net losses and loss settlement expenses incurred in the fire and allied lines of business due to less catastrophe losses in 2015. In 2014, the net loss ratio increased 16.7 percentage points compared to 2013. The change was primarily due to catastrophe loss experience from spring and summer storms in the United States in 2014.
We will continue pursuing opportunities to grow our personal lines business in the future. We have added within our CATography™ Underwriter tool the ability to determine whether the premium we charge for an exposure is adequate in areas where hurricanes and earthquakes occur. We have also implemented predictive analytics and data prefill for our personal automobile line. Data prefill is a data accessing methodology that allows for a more complete profile of our customers at the agent's point of sale during the quotation process.
Assumed Reinsurance
Our assumed reinsurance is the business we choose to write by participating in programs insuring insurance companies. The net loss ratio deterioration in 2015 was due to an increase in catastrophe losses assumed. The net loss ratio deterioration in 2014 was due to a combination of an increase in catastrophe losses, from development of losses on prior year catastrophes, and from an increase in frequency and severity in fire-related losses. The net loss ratio improvement in 2013 was driven by a decrease in catastrophe losses.

In 2015, we renewed our participation in all of our assumed programs and added one new program to our portfolio.

In 2014, we renewed our participation in all but one of our assumed programs and added one new program to our portfolio. We increased participation in one program in our assumed portfolio to replace lost premium from the program not renewed.

In 2013, we renewed our participation in all but one of our assumed programs and added two new programs to our portfolio.We added two new programs to replace the lost premium from the program not renewed and to take advantage of areas where we had exposure capacity.  One of the new programs has worldwide exposure and the other has exposure in the United Kingdom and Japan. 
Other Underwriting Expenses
Our underwriting expense ratio, which is a percentage of other underwriting expenses over net premiums earned, was 31.0 percent, 31.3 percent and 31.8 percent for 2015, 2014, and 2013, respectively. The underwriting expense


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ratio improved slightly in 2015 due to the improvement in the profitability in certain lines of business, which led to an increase in the amount of underwriting expenese eligible for deferral, elimination of duplicate costs associated with the previously disclosed Mercer Insurance Group, Inc. integration and completion of technology projects, all partially offset by an increase in post-retirement benefit costs.
The decrease in the underwriting expense ratio in 2014 was primarily due to a decrease in employee compensation and employee benefit costs offset slightly by a decrease in underwriting expenses eligible for deferral due to a deterioration in the profitability of certain lines of business caused by an increase in claims severity.

Life Insurance Segment Results
 
Years Ended December 31,
 
% Change
 
 
 
 
 
 
 
2015
 
2014
(In Thousands)
2015
 
2014
 
2013
 
vs. 2014
 
vs. 2013
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
79,195

 
$
61,391

 
$
60,654

 
29.0
 %
 
1.2
 %
Investment income, net
54,222

 
60,373

 
66,467

 
(10.2
)%
 
(9.2
)%
Net realized investment gains (losses)
 
 
 
 
 
 
 
 
 
Other-than-temporary impairment charges
(1,300
)
 

 

 
NM

 
 %
All other net realized gains
3,022

 
3,093

 
2,434

 
(2.3
)%
 
27.1
 %
Net realized investment gains
1,722

 
3,093

 
2,434

 
(44.3
)%
 
27.1
 %
Other income
508

 
774

 
614

 
(34.4
)%
 
26.1
 %
Total revenues
$
135,647

 
$
125,631

 
$
130,169

 
8.0
 %
 
(3.5
)%
 
 
 
 
 
 
 
 
 
 
Benefits, Losses and Expenses
 
 
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
29,001

 
$
26,432

 
$
21,461

 
9.7
 %
 
23.2
 %
Increase in liability for future policy benefits
50,945

 
36,623

 
37,625

 
39.1
 %
 
(2.7
)%
Amortization of deferred policy acquisition costs
6,634

 
6,139

 
6,502

 
8.1
 %
 
(5.6
)%
Other underwriting expenses
19,306

 
15,754

 
16,235

 
22.5
 %
 
(3.0
)%
Interest on policyholders' accounts
23,680

 
30,245

 
35,163

 
(21.7
)%
 
(14.0
)%
Total benefits, losses and expenses
$
129,566

 
$
115,193

 
$
116,986

 
12.5
 %
 
(1.5
)%
 
 
 
 
 
 
 
 
 
 
Income before income taxes
$
6,081

 
$
10,438

 
$
13,183

 
(41.7
)%
 
(20.8
)%
NM =Not meaningful
United Life Insurance Company underwrites all of our life insurance business. Our principal life insurance products are deferred and immediate annuities, universal life products and traditional life (primarily single premium whole life insurance) products. We also underwrite and market other traditional products, including term life insurance and whole life insurance. Deferred and immediate annuities (49.4 percent), traditional life products (38.5 percent), universal life products (10.5 percent), and other life products (1.6 percent) comprised our 2015 life insurance premium revenues, as determined on the basis of statutory accounting principles. We do not write variable annuities or variable insurance products.

Income before income taxes for our life insurance segment totaled $6.1 million in 2015 compared to $10.4 million in 2014 and $13.2 million in 2013. The decrease in net income before income taxes from 2014 to 2015 was primarily a result of a decrease in net investment income, an increase in losses and loss settlement expenses and an increase in the increase in liability for future policy benefits, all partially offset by an increase in net premiums earned from higher sales of single premium whole life policies ("SPWL") and a decrease in interest on policyholders' accounts due to a decline in the crediting rate paid on continued net withdrawals of annuity products.

The decrease in net income before income taxes from 2013 to 2014 was primarily a result of a decrease in net investment income and an increase in losses and loss settlement expenses due to an increase in death benefits paid, which were partially offset by a decrease in interest on policyholders' accounts which is due to continued net


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withdrawals of annuity products and a decline in the increase in liability for future policy benefits as a result of a decline in sales of SPWL policies.
In 2015, net investment income decreased 10.2 percent as compared to 2014 and decreased 9.2 percent in 2014 as compared to 2013. The decrease is due to lower asset base from declining annuity deposits and the decline in the reinvestment interest rates from the low interest rate environment. For discussion of our consolidated investment results, see the "Investments" section contained in this Item.
Net premiums earned increased 29.0 percent in 2015 as compared to 2014 primarily due to an increase in sales of SPWL policies. Net premiums earned increased 1.2 percent in 2014 as compared to 2013 due in part to an increase in the sale of single premium immediate annuities.

Underwriting expenses increased 22.5 percent in 2015 as compared to 2014 due to an increase in SPWL commissions related to the increase in premiums as previously mentioned and an increase in our postretirement benefit plan expenses.

Deferred annuity deposits decreased 55.7 percent in 2015, as compared to 2014. We gradually lowered the credited rate offered on our deferred annuity products in the low interest rate environment, which resulted in the decrease in deferred annuity deposits. Deferred annuity deposits increased 34.0 percent in 2014 as compared to 2013 due to crediting rate increases which occurred in the latter half of 2013.

Net cash outflow related to the Company's annuity business was $129.7 million in 2015 compared to a net cash outflow of $77.7 million in 2014 and 2013. This result is attributed to the activity described previously.
The fixed annuity deposits that we collect are not reported as net premiums earned under GAAP. Instead, we invest annuity deposits and record them as a liability for future policy benefits. The revenue that is generated from fixed annuity products consists of policy surrender charges and investment income. The difference between the yield we earn on our investment portfolio and the interest we credit on our fixed annuities is known as the investment spread. The investment spread is a major driver of the profitability for all of our annuity products. As of December 31, 2015, our investment spread on our annuity products was 1.34 percent as compared to 1.02 percent at December 31, 2014.
Federal Income Taxes
We reported a federal income tax expense of $32.3 million, $17.3 million and $25.8 million in 2015, 2014, and 2013, respectively. Our effective federal tax rate varied from the statutory federal income tax expense rate of 35.0 percent in each year, due primarily to our portfolio of tax-exempt securities.
As of December 31, 2015, we had a net operating loss ("NOL") carryforward of $4.7 million, which is due to our purchase of American Indemnity Financial Corporation in 1999. No NOLs will expire in 2016. 
Due to our determination that we may not be able to fully realize the benefits of the NOLs acquired in the purchase of American Indemnity Financial Corporation, which are only available to offset the future taxable income of our property and casualty insurance operations and are further limited as to the amount that can be utilized in any given year, we have recorded a valuation allowance against these NOLs that totaled $1.3 million at December 31, 2015. Based on a yearly review, we determine whether the benefit of the NOLs can be realized, and, if so, the decrease in the valuation allowance is recorded as a reduction to current federal income tax expense. If NOLs expire during the year, the decrease in the valuation allowance is offset with a corresponding decrease to the deferred income tax asset. The valuation allowance was reduced by $0.6 million in 2015 due to the realization of $1.6 million in NOLs.
As of December 31, 2015, we had no alternative minimum tax ("AMT") credit carryforwards.


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INVESTMENTS
Investment Environment

Two of the primary themes for 2015 were the dramatic decline in commodity prices and a stronger U.S. dollar. There were also a host of several other macro trends that dominated the market narrative at various times throughout the year. Examples include the slowing Chinese economy, diverging monetary policy among global central banks, a tepid U.S. economic recovery and a fast-approaching presidential election. Collectively, the increase in uncertainty negatively impacted investor confidence and resulted in a year where capital markets provided flat to negative returns. Global equities and commodities were lower with emerging markets and high-beta credit under performing. Interest rates in the United States were flat, though they traded in a 100 basis point range throughout the year, while rates in Europe and Japan fell meaningfully in response to increased monetary stimulus.

As anticipated, the U.S. Federal Reserve began its move towards policy normalization at the end of 2015. The U.S. economy continues to expand at a moderate pace with positive trends seen in employment, housing demand, consumer fuel prices, and auto sales. Overall investment yields remain near their secular lows, but did increase toward year-end due to negative price dislocation in the energy and metals sectors, and the contagion effects this had on other segments of the market.

Our investment portfolio has a small amount of exposure to energy and certain industrials which were most adversely impacted by the fall in commodity prices. However, the vast majority of those holdings are in highly rated, highly capitalized companies. If this weak commodity environment persists, the credit rating of some of our fixed maturity securities may be downgraded from investment grade to non-investment grade.  However, we believe we have ample capacity in the portfolio to manage that transition should it occur. In general, we expect investment yields will remain bounded by central bank monetary policy and the slow pace of global economic growth, and we anticipate periodic spikes in volatility to result in inconsistent liquidity over the near term.
Investment Philosophy

The Company's assets are invested to meet liquidity needs and maximize after-tax returns while maintaining an appropriate balance of risk. The return on our portfolio is an important component of overall financial results, but quality and safety of principal is the highest priority of our investment program. Our general investment philosophy is to purchase financial instruments with the expectation that we will hold them to their maturity. However, active management of our available-for-sale portfolio is considered necessary to achieve portfolio objectives and maximize risk-adjusted returns as market conditions change. 

We work with our insurance company subsidiaries to develop an appropriate investment strategy that aligns with their business needs and supports United Fire's strategic plan and risk appetite.  The portfolio is structured so as to be in compliance with state insurance laws that prescribe the quality, concentration and type of investments that may be made by insurance companies.  All but a small portion of our investment portfolio is managed internally.
Investment Portfolio
Our invested assets at December 31, 2015 totaled $3.1 billion, compared to $3.2 billion at December 31, 2014, a decrease of $28.2 million. At December 31, 2015, fixed maturity securities and equity securities comprised 90.4 percent and 7.6 percent of our investment portfolio, respectively. Because the primary purpose of the investment portfolio is to fund future claims payments, we utilize a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government and government agency bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to stay fully invested (i.e., minimize cash balances). If additional cash is needed we have an ability to borrow funds available under our revolving credit facility.





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Table of Contents

Composition
We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation and regulatory requirements. We 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 December 31, 2015 is presented at carrying value in the following table:
 
Property & Casualty Insurance Segment
 
Life Insurance Segment
 
Total
 
 
 
Percent
 
 
 
Percent
 
 
 
Percent
(In Thousands)
 
 
of Total
 
 
 
of Total
 
 
 
of Total
Fixed maturities: (1)
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
$
600

 
%
 
$
72

 
%
 
$
672

 
%
Available-for-sale
1,374,069

 
83.4

 
1,450,892

 
97.0

 
2,824,961

 
90.0

Trading securities
12,622

 
0.8

 

 

 
12,622

 
0.4

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
216,683

 
13.1

 
19,564

 
1.3

 
236,247

 
7.5

Trading securities
4,353

 
0.3

 

 

 
4,353

 
0.1

Mortgage loans

 

 
3,961

 
0.3

 
3,961

 
0.1

Policy loans

 

 
5,618

 
0.4

 
5,618

 
0.2

Other long-term investments
39,163

 
2.4

 
14,988

 
1.0

 
54,151

 
1.7

Short-term investments
175

 

 

 

 
175

 

Total
$
1,647,665

 
100.0
%
 
$
1,495,095

 
100.0
%
 
$
3,142,760

 
100.0
%
(1) Available-for-sale and trading fixed maturities are carried at fair value. Held-to-maturity fixed maturities are carried at amortized cost.

At December 31, 2015, we classified $2.8 billion, or 99.5 percent, of our fixed maturities portfolio as available-for-sale, compared to $2.8 billion, or 99.4 percent, at December 31, 2014. Available-for-sale securities are carried at fair value, with changes in fair value recognized as a component of accumulated other comprehensive income in stockholders' equity. We classify our remaining fixed maturities as held-to-maturity or trading. We record held-to-maturity securities at amortized cost. We record trading securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings.

As of December 31, 2015 and 2014, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.

Credit Quality

The following table shows the composition of fixed maturity securities held in our available-for-sale, held-to-maturity and trading security portfolios by credit rating at December 31, 2015 and 2014. Information contained in the table is generally based upon the issue credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain it from Standard & Poor's.
(In Thousands)
December 31, 2015
 
December 31, 2014
Rating
Carrying Value

 
% of Total
 
Carrying Value
 
% of Total
AAA
$
838,318

 
29.6
%
 
$
896,367

 
31.4
%
AA
724,023

 
25.5

 
637,305

 
22.3

A
670,098

 
23.6

 
621,293

 
21.7

Baa/BBB
556,667

 
19.6

 
641,497

 
22.4

Other/Not Rated
49,149

 
1.7

 
63,876

 
2.2

 
$
2,838,255

 
100.0
%
 
$
2,860,338

 
100.0
%


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Table of Contents

Duration
Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement used to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.

Group

The weighted average effective duration of our portfolio of fixed maturity securities was 5.2 years at December 31, 2015 compared to 5.0 years at December 31, 2014.

Property and Casualty Insurance Segment

The weighted average effective duration of our portfolio of fixed maturity securities was 5.2 years at December 31, 2015 compared to 4.8 years at December 31, 2014.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at December 31, 2015, 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
 
Amortized
 
Fair
 
Amortized
 
Fair
 
Amortized
 
Fair
December 31, 2015
Cost
 
Value
 
Cost
 
Value
 
Cost
 
Value
Due in one year or less
$

 
$

 
$
54,476

 
$
54,804

 
$
1,526

 
$
2,001

Due after one year through five years
600

 
601

 
433,342

 
449,874

 
7,596

 
7,676

Due after five years through 10 years

 

 
318,714

 
324,604

 
130

 
404

Due after 10 years

 

 
380,222

 
387,649

 
2,223

 
2,541

Asset-backed securities

 

 
3,206

 
3,380

 

 

Mortgage-backed securities

 

 
14,946

 
15,286

 

 

Collateralized mortgage obligations

 

 
138,044

 
138,471

 

 

 
$
600

 
$
601

 
$
1,342,950

 
$
1,374,068

 
$
11,475

 
$
12,622


Life Insurance Segment

The weighted average effective duration of our portfolio of fixed maturity securities at December 31, 2015 was 5.3 years compared to 5.2 years at December 31, 2014.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at December 31, 2015, 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.


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Table of Contents

(In Thousands)
Held-To-Maturity
 
Available-For-Sale
 
Amortized
 
Fair
 
Amortized
 
Fair
December 31, 2015
Cost
 
Value
 
Cost
 
Value
Due in one year or less
$

 
$

 
$
50,710

 
$
51,106

Due after one year through five years

 

 
386,276

 
390,418

Due after five years through 10 years

 

 
671,182

 
664,691

Due after 10 years

 

 
112,158

 
113,396

Asset-backed securities

 

 
2,255

 
2,286

Mortgage-backed securities
72

 
74

 
1,467

 
1,452

Collateralized mortgage obligations

 

 
226,071

 
227,544

 
$
72

 
$
74

 
$
1,450,119

 
$
1,450,893


Investment Results
We invest the premiums received from our policyholders and annuitants in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, changes in interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Net investment income decreased 3.7 percent in 2015, compared with the same period of 2014, due to the decline in invested assets and decline in reinvestment interest rates from the low interest rate environment. We expect to maintain our investment philosophy of purchasing quality investments rated investment grade or better.
We regularly monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in 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 or based on the value calculated using a discounted cash flow model. 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 and losses 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 December 31, 2015 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. It is possible that we could recognize impairment charges in future periods on securities that we own at December 31, 2015 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 other-than-temporary impairment write-downs.  












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Table of Contents

Our investment results are summarized in the following table:
(In Thousands)
 
 
 
 
 
 
% Change
 
 
 
 
 
 
 
2015
 
2014
As of and for the Years Ended December 31,
2015
 
2014
 
2013
 
vs. 2014
 
vs. 2013
Investment income, net
$
100,781

 
$
104,609

 
$
112,799

 
(3.7
)%
 
(7.3
)%
Net realized investment gains (losses)
 
 
 
 
 
 
 
 
 
Other-than-temporary impairment charges
$
(1,300
)
 
$

 
$
(139
)
 

 
NM

All other net realized gains
4,146

 
7,270

 
8,834

 
(43.0
)
 
(17.7
)
Total net realized investment gains
$
2,846

 
$
7,270

 
$
8,695

 
(60.9
)%
 
(16.4
)%
Net unrealized investment gains, after tax
$
128,369

 
$
149,623

 
$
116,601

 
(14.2
)%
 
28.3
 %
NM=not meaningful
Net Investment Income
In 2015, our investment income, net of investment expenses, decreased $3.8 million to $100.8 million as compared to 2014, primarily due the decline in invested assets and decline in reinvestment interest rates from the low interest rate environment.
In 2014, our investment income, net of investment expenses, decreased $8.2 million to $104.6 million as compared to 2013, primarily due to a decrease in value of investments that are accounted for under the equity method of accounting and from declining investment yields.
The following table summarizes the components of net investment income:
(In Thousands)
Years Ended December 31,
2015
 
2014
 
2013
Investment income
 
 
 
 
 
Interest on fixed maturities
$
92,777

 
$
97,969

 
$
101,950

Dividends on equity securities
7,208

 
6,602

 
5,806

Income on other long-term investments
 
 
 
 
 
Interest
2,567

 
1,927

 
1,194

Change in value (1)
3,266

 
1,917

 
7,030

Interest on mortgage loans
237

 
252

 
266

Interest on short-term investments
6

 
5

 
6

Interest on cash and cash equivalents
305

 
255

 
239

Other
1,452

 
1,998

 
1,632

Total investment income
$
107,818

 
$
110,925

 
$
118,123

Less investment expenses
7,037

 
6,316

 
5,324

Investment income, net
$
100,781

 
$
104,609

 
$
112,799

(1)
Represents the change in value of our interests in limited liability partnerships that are recorded on the equity method of accounting.

In 2015, 86.0 percent of our gross investment income originated from interest on fixed maturities, compared to 88.3 percent and 86.3 percent in 2014 and 2013, respectively.





55

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The following table details our annualized yield on average invested assets for 2015, 2014 and 2013, which is based on our invested assets (including money market accounts) at the beginning and end of the year divided by net investment income:
(In Thousands)
 
 
 
 
 

Years ended December 31,
Average
Invested Assets
 
Investment
Income, Net
 
Annualized Yield on
Average Invested Assets
2015
$
3,181,311

 
$
100,781

 
3.2
%
2014
3,143,502

 
104,609

 
3.3
%
2013
3,088,962

 
112,799

 
3.7

Net Realized Investment Gains and Losses
In 2015, 2014 and 2013, we reported net realized investment gains of $2.8 million, $7.3 million and $8.7 million, respectively. The following table summarizes the components of our net realized investment gains or losses:
(In Thousands)
Years Ended December 31,
2015
 
2014
 
2013
Net realized investment gains (losses)
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
Held-to-maturity
$

 
$

 
$
1

Available-for-sale
3,294

 
3,353

 
3,211

Trading securities
 
 
 
 
 
Change in fair value
(1,353
)
 
609

 
1,183

Sales
1,381

 
1,339

 
788

Equity securities:
 
 
 
 
 
Available-for-sale
2,521

 
1,732

 
3,739

Trading securities
 
 
 
 
 
Change in fair value
(448
)
 
238

 
(126
)
Sales
66

 
(1
)
 
38

Other long-term investments
(1,315
)
 

 

Other-than-temporary-impairment charges:
 
 
 
 
 
Fixed maturities
(1,300
)
 

 
(139
)
Total net realized investment gains
$
2,846

 
$
7,270

 
$
8,695

Net Unrealized Investment Gains and Losses
As of December 31, 2015, net unrealized investment gains, after tax, totaled $128.4 million compared to $149.6 million and $116.6 million as of December 31, 2014 and 2013, respectively. The decrease in unrealized gains in 2015 is the result of a decrease in the fair value of the fixed maturity portfolio due to an increase in interest rates and the decrease in the equity portfolio due to a decline in the financial markets. The increase in unrealized gains in 2014 resulted from an increase in the fair value of both the fixed maturity portfolio and the equity portfolio.
 







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The following table summarizes the change in our net unrealized investment gains (losses):
(In Thousands)
Years Ended December 31,
2015
 
2014
 
2013
Changes in net unrealized investment gains (losses):
 
 
 
 
 
Available-for-sale fixed maturity securities
$
(37,621
)
 
$
51,814

 
$
(132,579
)
Equity securities
(6,459
)
 
15,781

 
48,176

Deferred policy acquisition costs
11,380

 
(16,789
)
 
42,102

Income tax effect
11,446

 
(17,784
)
 
14,806

Total change in net unrealized investment gains, net of tax
$
(21,254
)
 
$
33,022

 
$
(27,495
)
Market Risk
Our Consolidated Balance Sheets include financial instruments whose fair values are subject to market risk. The active management of market risk is integral to our operations. Market risk is the potential for loss due to a decrease in the fair value of securities resulting from uncontrollable fluctuations, such as: interest rate risk, equity price risk, foreign exchange risk, credit risk, inflation, or geopolitical conditions. Our primary market risk exposures are: changes in interest rates, deterioration of credit quality in specific issuers, sectors or the economy as a whole, and an unforeseen decrease in the liquidity of securities we hold. We have no foreign exchange risk.
Interest Rate Risk
Interest rate risk is the price sensitivity of a fixed income maturity security or portfolio of securities to changes in level of interest rates. Generally, there is an inverse relationship between changes in interest rates and changes in the price of a fixed income/maturity security. Plainly stated, if interest rates go up (down), bond prices go down (up). A vast majority of our holdings are fixed income maturity and other interest rate sensitive securities that will decrease (increase) in value as interest rates increase (decrease). While it is generally our intent to hold our investments in fixed maturity securities to maturity, we have classified a majority of our fixed maturity portfolio as available-for-sale. Available-for-sale fixed income maturity securities are carried at fair value on the Consolidated Balance Sheets with unrealized gains or losses reported net of tax in Accumulated Other Comprehensive Income. A change in the prevailing interest rates generally translates into a change in the fair value of our fixed income/maturity securities, and by extension, our overall book value.
Market Risk and Duration
We analyze potential changes in the value of our investment portfolio due to the market risk factors noted above within the overall context of asset and liability management. A technique we use in the management of our investment portfolio is the calculation of duration. Our actuaries estimate the payout pattern of our reserve liabilities to determine their duration, which is the present value of the weighted average payments expressed in years. We then establish a target duration for our investment portfolio so that at any given time the estimated cash generated by the investment portfolio will closely match the estimated cash required for the payment of the related reserves. We structure the investment portfolio to meet the target duration to achieve the required cash flow, based on liquidity and market risk factors.
Duration relates primarily to our life insurance segment because the long-term nature of these reserve liabilities increases the importance of projecting estimated cash flows over an extended time frame. At December 31, 2015, our life insurance segment had $744.9 million in deferred annuity liabilities for which investments in fixed maturity securities were specifically allocated.
The duration of the life insurance segment's investment portfolio must take into consideration interest rate risk. This is accomplished through the use of sensitivity analysis, which measures the price sensitivity of the fixed maturities to changes in interest rates. The alternative valuations of the investment portfolio, given the various hypothetical interest rate changes utilized by the sensitivity analysis, allow management to revalue the potential cash flow from


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the investment portfolio under varying market interest rate scenarios. Duration can then be recalculated at the differing levels of projected cash flows.
Impact of Interest Rate Changes
The amounts set forth in the following table detail the impact of hypothetical interest rate changes on the fair value of fixed maturity securities held at December 31, 2015. The sensitivity analysis measures the change in fair values arising from immediate changes in selected interest rate scenarios. We employed hypothetical parallel shifts in the yield curve of plus or minus 100 and 200 basis points in the simulations. Additionally, based upon the yield curve shifts, we employ estimates of prepayment speeds for mortgage-related products and the likelihood of call or put options being exercised within the simulations. According to this analysis, at current levels of interest rates, the duration of the investments supporting the deferred annuity liabilities is 2.15 years longer than the projected duration of the liabilities. If interest rates increase by 100 or 200 basis points, the duration of the investments supporting the deferred annuity liabilities would be 3.38 years and 4.07 years longer, respectively, than the projected duration of the liabilities.
The selection of a 100-basis-point and 200-basis-point increase or decrease in interest rates should not be construed as a prediction by our management of future market events, but rather as an illustration of the potential impact of an event.


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December 31, 2015
-200 Basis
 
-100 Basis
 
 
 
+100 Basis
 
+ 200 Basis
(In Thousands)
Points
 
Points
 
Base
 
Points
 
 Points
HELD-TO-MATURITY
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
Corporate bonds - Technology, Media & Telecommunications
$
486

 
$
468

 
$
451

 
$
435

 
$
420

Corporate bonds - financial services
155

 
153

 
150

 
147

 
145

Mortgage-backed securities
75

 
75

 
74

 
72

 
70

Total Held-to-Maturity Fixed Maturities
$
716

 
$
696

 
$
675

 
$
654

 
$
635

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
22,680

 
$
22,156

 
$
21,649

 
$
21,161

 
$
20,689

U.S. government agency
242,324

 
239,424

 
233,030

 
216,894

 
199,210

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
  General obligations:
 
 
 
 
 
 
 
 
 
     Midwest
177,960

 
171,828

 
165,456

 
158,697

 
152,058

     Northeast
64,832

 
61,690

 
58,445

 
54,975

 
51,592

     South
140,437

 
134,864

 
128,789

 
122,276

 
115,985

     West
119,117

 
112,934

 
106,814

 
100,728

 
94,924

   Special revenue:
 
 
 
 
 
 
 
 
 
     Midwest
174,269

 
166,052

 
157,706

 
149,174

 
140,918

     Northeast
28,253

 
26,392

 
24,599

 
22,843

 
21,169

     South
166,982

 
157,646

 
148,437

 
139,295

 
130,561

     West
90,784

 
86,390

 
82,041

 
77,698

 
73,517

Foreign bonds
88,243

 
85,321

 
82,528

 
79,861

 
77,316

Public utilities
238,873

 
226,909

 
215,683

 
205,148

 
195,286

Corporate bonds
 
 
 
 
 
 
 
 
 
Energy
123,382

 
118,102

 
113,119

 
108,422

 
103,998

Industrials
248,292

 
235,896

 
224,255

 
213,328

 
203,094

Consumer goods and services
193,589

 
183,793

 
174,597

 
165,961

 
167,867

Health care
103,304

 
98,251

 
93,509

 
89,060

 
84,887

Technology, media and telecommunications
158,567

 
150,242

 
142,400

 
135,038

 
128,189

Financial services
289,255

 
275,996

 
263,485

 
251,577

 
240,349

Mortgage backed securities
21,194

 
18,763

 
16,738

 
15,011

 
13,502

Collateralized mortgage obligations
401,925

 
388,963

 
366,015

 
337,475

 
307,099

Asset-backed securities
5,970

 
5,786

 
5,666

 
5,558

 
5,457

Total Available-For-Sale Fixed Maturities
$
3,100,232

 
$
2,967,398

 
$
2,824,961

 
$
2,670,180

 
$
2,527,667

TRADING
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
 
 
Industrial
$
3,795

 
$
3,674

 
$
3,558

 
$
3,448

 
$
3,343

Consumer
130

 
124

 
118

 
114

 
109

Health care
2,178

 
2,095

 
2,032

 
1,981

 
1,942

Financial services
4,337

 
4,235

 
4,094

 
3,899

 
3,700

Technology, media and telecommunications
416

 
372

 
335

 
304

 
278

Redeemable preferred stock
2,485

 
2,485

 
2,485

 
2,485

 
2,485

Total Trading Fixed Maturities
$
13,341

 
$
12,985

 
$
12,622

 
$
12,231

 
$
11,857

Total Fixed Maturity Securities
$
3,114,289

 
$
2,981,079

 
$
2,838,258

 
$
2,683,065

 
$
2,540,159

To the extent actual results differ from the assumptions utilized, our duration and interest rate measures could be significantly affected. As a result, these calculations may not fully capture the impact of nonparallel changes in the relationship between short-term and long-term interest rates.



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Equity Price Risk
Equity price risk is the potential loss arising from changes in the fair value (i.e., market price) of equity securities held in our portfolio. Changes in the price of an equity security may be due to a change in the future earnings capacity or strategic outlook of the security issuer, and what investors are willing to pay for those future earnings and related strategy. The carrying values of our equity securities are based on quoted market prices, from an independent source, as of the balance sheet date. Market prices of equity securities, in general, are subject to fluctuations that could cause the amount to be realized upon the future sale of the securities to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of the security issuer, the relative price of alternative investments, general market conditions, and supply/demand factors related to a particular security.
Impact of Price Change
The following table details the effect on the fair value of our investments in equity securities for a positive and negative 10 percent price change at December 31, 2015:
(In Thousands)
 
-10%
 
Base
 
+10%
Estimated fair value of equity securities
 
$
216,540

 
$
240,600

 
$
264,660

Foreign Currency Exchange Rate Risk
Foreign currency exchange rate risk arises from the possibility that changes in foreign exchange rates will impact our transactions with foreign reinsurers relating to the settlement of amounts due to or from foreign reinsurers in the normal course of business. We consider this risk to be immaterial to our operations.
Credit Risk
Credit risk is the willingness and ability of a borrower to repay on time and in full any principal and interest due to the lender. Losses related to credit risk are realized through the income statement and have a direct impact on the earnings of UFG. Given the vast majority of our holdings are fixed income maturity securities, we view credit risk as our primary investment risk. Our internal Investment Department has developed and maintains a rigorous underwriting process to analyze and measure the expected frequency and severity of loss (i.e., credit quality) for government, agency, municipal, structured security, and corporate bond issuers. The objective is to maintain the appropriate balance of risk in our portfolio, consistent with our Investment Policy Statement and conservative investment style, and ensure the portfolio is compensated appropriately for the credit risk it holds. We do have within our municipal bond holdings a small number of securities whose ratings were enhanced by third-party insurance for the payment of principal and interest in the event of an issuer default. A downgrade in the credit ratings of the insurers of these securities in 2015 and 2014 resulted in a corresponding downgrade in the ratings of the securities. Of the insured municipal securities in our investment portfolio, 99.3 percent and 98.9 percent were rated "A" or above, and 90.9 percent and 87.9 percent were rated "AA" or above at December 31, 2015 and 2014, respectively, without the benefit of insurance. Due to the underlying financial strength of the issuers of the securities, we believe that the loss of insurance would not have a material impact on our operations, financial position, or liquidity.
We have no direct exposure in any of the guarantors of our investments. Our largest indirect exposure with a single guarantor totaled $68.5 million or 24.9 percent of our insured municipal securities at December 31, 2015, as compared to $88.8 million or 25.8 percent at December 31, 2014. Our five largest indirect exposures to financial guarantors accounted for 71.4 percent and 74.8 percent of our insured municipal securities at December 31, 2015 and 2014, respectively.







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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 the receipt of premiums, annuity deposits, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of losses and loss settlement expenses, policyholder benefits under life insurance contracts, annuity withdrawals, the purchase of investments, operating expenses, dividends, pension plan contributions, and in recent years, common stock repurchases.
We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed by regulatory agencies in the United States.
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 timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes.
Historically, we have generated substantial cash inflows from operations. It is our policy to invest the cash generated from operations in securities with maturities that, in the aggregate, correlate to the anticipated timing of payments for losses and loss settlement expenses and future policyholder benefits of the underlying insurance policies, and annuity withdrawals. The majority of our assets are invested in available-for-sale fixed maturity securities.

The following table displays a summary of cash sources and uses in 2015, 2014 and 2013:
Cash Flow Summary
Years Ended December 31,
(In Thousands)
2015
 
2014
 
2013
Cash provided by (used in)
 
 
 
 
 
Operating activities
$
189,998

 
$
151,291

 
$
161,491

Investing activities
(36,286
)
 
(58,878
)
 
(101,986
)
Financing activities
(137,837
)
 
(94,032
)
 
(74,778
)
Net increase (decrease) in cash and cash equivalents
$
15,875

 
$
(1,619
)
 
$
(15,273
)
Operating Activities
Net cash flows provided by operating activities totaled $190.0 million, $151.3 million and $161.5 million in 2015, 2014 and 2013, respectively. Operating cash flows in 2015 reflect an increase in net income and the timing of the settlement of loss payments. Operating cash flows in 2014 reflect a higher level of property and casualty loss payments.
Our cash flows from operations were sufficient to meet our liquidity needs for 2015, 2014 and 2013.
Investing Activities
Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturity securities provide regular interest payments and allow us to match the duration of our liabilities. Equity securities provide dividend income, potential dividend income growth and potential appreciation. For further discussion of our investments, including our philosophy and portfolio, see the "Investment Portfolio" section contained in this Item.


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In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed maturity securities also can provide liquidity. During the next five years, $0.9 billion, or 31.0 percent of our fixed maturity portfolio will mature.
We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At December 31, 2015, our cash and cash equivalents included $20.8 million related to these money market accounts, compared to $28.1 million at December 31, 2014.
Net cash flows used in investing activities totaled $36.3 million, $58.9 million and $102.0 million in 2015, 2014 and 2013, respectively. In 2015, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments that totaled $674.9 million compared to $567.7 million and $508.3 million for the same period in 2014 and 2013, respectively. The cash inflows over the last three years primarily relate to redemptions of fixed maturity securities that are reinvested at lower interest rates as interest rates have been declining during this period.
Our cash outflows for investment purchases totaled $701.5 million in 2015, compared to $618.4 million and $601.8 million for the same period in 2014 and 2013, respectively.
Financing Activities
Net cash flows used in financing activities totaled $137.8 million, $94.0 million and $74.8 million in 2015, 2014 and 2013, respectively. In 2015, 2014 and 2013 we had $118.4 million, $63.5 million and 58.6 million, respectively, of net annuity withdrawals.
Dividends
Dividends paid to shareholders totaled $21.7 million, $19.7 million and $17.5 million in 2015, 2014 and 2013, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds.
As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2015, our insurance company subsidiary, United Fire & Casualty, was able to make a maximum of $53.1 million in dividend payments without prior regulatory approval. These restrictions are not expected to have a material impact in meeting our cash obligations.
Share Repurchases
Under our share repurchase program, first announced in August 2007, we may purchase our 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. Our share repurchase program may be modified or discontinued at any time.


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During 2015, 2014 and 2013, pursuant to authorization by our Board of Directors, we repurchased 79,396; 461,835; and 59,603 shares of our common stock respectively, which used cash totaling $2.4 million in 2015, $12.9 million in 2014 and $1.6 million in 2013. At December 31, 2015, we were authorized to purchase an additional 1,528,886 shares of our common stock under our share repurchase program, which expires in August 2016.
Credit Facilities
On February 2, 2016, the Company, as borrower, entered into a Credit Agreement (the "New Credit Agreement") by and among the Company, with the lenders from time to time party thereto and KeyBank National Association ("Key Bank"), as administrative agent, swingline lender and letter of credit issuer. The New Credit Agreement provides for a $50 million four-year unsecured revolving credit facility that includes a $20 million letter of credit subfacility and a swingline subfacility in the amount up to $5 million. The New Credit Agreement allows the Company to increase the aggregate amount of the commitments thereunder by up to $100 million, provided that no event of default has occurred and is continuing and certain other conditions are satisfied.
The New Credit Agreement is available for the Company's general corporate purposes, including liquidity, acquisitions and working capital. All unpaid principal and accrued interest under the New Credit Agreement is due and payable in full at maturity on February 2, 2020. Based on the type of loan, advances under the New Credit Agreement would bear interest on either the London interbank offered rate ("LIBOR") or a base rate plus, in each case, a calculated margin amount.
The unused commitments under the New Credit Agreement will be subject to a commitment fee that will be calculated at a per annum rate. The applicable margins for borrowings under the New Credit Agreement and the commitment fee thereunder will be determined by reference to a pricing grid based on the Company’s issuer credit rating by A.M. Best Company, Inc.
The New Credit Agreement contains customary representations, conditions to borrowing, covenants and events of default, including certain covenants that limit or restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to sell or transfer assets, enter into a merger or consolidate with another company, create liens, impose restrictions on subsidiary dividends, enter into sale-leaseback transactions, make investments or acquisitions, enter into certain reinsurance agreements, pay dividends during any period of default, enter into transactions with affiliates, change the nature of its business, or incur indebtedness. The New Credit Agreement also includes financial covenants that require the Company to (i) maintain a minimum consolidated net worth, (ii) maintain a minimum consolidated statutory surplus and (iii) not exceed a 0.35 to 1.0 debt to total capitalization ratio, measured on a quarterly basis.
In December 2011, United Fire & Casualty Company entered into a credit agreement with a syndicate of financial institutions as lenders, which terminated by expiration on its stated termination date of December 22, 2015. KeyBank National Association was the administrative agent, lead arranger, sole book runner, swingline lender, and letter of credit issuer, and Bankers Trust Company was the syndication agent. The four-year credit agreement provided for a $100,000 unsecured revolving credit facility that included a $20,000 letter of credit subfacility and a swing line subfacility in the amount of up to $5,000.
On June 4, 2013, United Fire & Casualty Company, United Fire Group, Inc. and the syndicated lenders entered into an Assignment, Joinder, Assumption, and Release Agreement (the "Joinder Agreement") transferring the obligations under the credit agreement from United Fire & Casualty Company to United Fire Group, Inc. Effective with the execution of the Joinder Agreement, United Fire & Casualty Company was released from any further obligations under the credit agreement.
During the term of this credit agreement, we had the right to increase the total credit facility from $100,000 up to $125,000 if no event of default has occurred and is continuing and certain other conditions are satisfied. The credit facility was available for general corporate purposes, including working capital, acquisitions and liquidity purposes. Any principal outstanding under the credit facility was due in full at maturity, on December 22, 2015. The interest rate was based on our monthly choice of either a base rate or the LIBOR plus, in each case, a calculated margin amount. A commitment fee on each lender's unused commitment under the credit facility was also payable quarterly.


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The credit agreement contained customary representations, covenants and events of default, including certain covenants that limit or restrict our ability to engage in certain activities. Subject to certain exceptions, those activities included restricting our ability to sell or transfer assets or enter into a merger or consolidate with another company, grant certain types of security interests, incur certain types of liens, impose restrictions on subsidiary dividends, enter into leaseback transactions, or incur certain indebtedness. The credit agreement contained certain financial covenants including covenants that required us to maintain a minimum consolidated net worth, a debt to capitalization ratio and minimum stockholders' equity. We were in compliance with all covenants of the credit agreement until it terminated by expiration on its stated termination date of December 22, 2015.
Stockholders' Equity
Stockholders' equity increased 7.5 percent to $878.9 million at December 31, 2015, from $817.4 million at December 31, 2014. The increase was primarily attributable to net income of $89.1 million along with the change in valuation of our retirement benefit obligations of $10.5 million, partially offset by a decrease in net unrealized investment gains of $21.3 million, net of tax, stockholder dividends of $21.7 million and share repurchases of $2.4 million. As of December 31, 2015, the book value per share of our common stock was $34.94, compared to $32.67 at December 31, 2014.
Risk-Based Capital
The NAIC adopted risk-based capital requirements, which requires us to calculate a minimum capital requirement for each of our insurance companies based on individual company insurance risk factors. These "risk-based capital" results are used by state insurance regulators to identify companies that require regulatory attention or the initiation of regulatory action. At December 31, 2015, all of our insurance companies had capital well in excess of required levels.
Contractual Obligations and Commitments
The following table shows our contractual obligations and commitments, including our estimated payments due by period, at December 31, 2015:
(In Thousands)
Payments Due By Period

Contractual Obligations
Total
 
Less Than
One Year
 
One to
Three Years
 
Three to
Five Years
 
More Than
Five Years
Future policy benefit reserves (1)
$
2,041,132

 
$
196,244

 
$
402,717

 
$
324,343

 
$
1,117,828

Loss and loss settlement expense reserves
1,003,895

 
330,912

 
298,683

 
130,917

 
243,383

Operating leases
20,097

 
5,935

 
10,359

 
3,649

 
154

Profit-sharing commissions
21,230

 
21,230

 

 

 

Pension plan contributions
6,384

 
6,384

 

 

 

Total
$
3,092,738

 
$
560,705

 
$
711,759

 
$
458,909

 
$
1,361,365

(1)
This projection of our obligation for future policy benefits considers only actual future cash outflows. The future policy benefit reserves presented on the Consolidated Balance Sheets is the net present value of the benefits to be paid, less the net present value of future net premiums.
Future Policy Benefits
The amounts presented for future payments to be made to policyholders and beneficiaries must be actuarially estimated and are not determinable from the contract. The projected payments are based on our current assumptions for mortality, morbidity and policy lapse, but are not discounted with respect to interest. Additionally, the projected payments are based on the assumption that the holders of our annuities and life insurance policies will withdraw their account balances upon the expiration of their contracts. Policies must remain in force for the policyholder or beneficiary to receive the benefit under the policy. Depending on the terms of a particular policy, future premiums from the policyholder may be required for the policy to remain in force. In contrast, the future policy benefit reserves for our life insurance segment presented on the Consolidated Balance Sheets are generally based on historical assumptions for mortality and policy lapse rates and are on a discounted basis. Accordingly, the amounts


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presented above for future policy benefit reserves significantly exceeds the amount of future policy benefit reserves reported on our Consolidated Balance Sheets at December 31, 2015.
Loss and Loss Settlement Expense Reserves
The amounts presented are estimates of the dollar amounts and time periods in which we expect to pay out our gross loss and loss settlement expense reserves. Because the timing of future payments may vary from the stated contractual obligation, these amounts are estimates based upon historical payment patterns and may not represent actual future payments. Refer to "Critical Accounting Policies: Loss and Loss Settlement Expenses — Property and Casualty Insurance Segment" in this section for further discussion.
Operating Leases
Our operating lease obligations are for the rental of office space, vehicles, computer equipment and office equipment. For further discussion of our operating leases, refer to Part II, Item 8, Note 13 "Lease Commitments."
Profit-Sharing Commissions
We offer our agents a profit-sharing plan as an incentive for them to place high-quality property and casualty insurance business with us. Based on business produced by the agencies in 2015, property and casualty agencies will receive profit-sharing payments of $21.2 million in 2016.
Pension Plan Payments
We estimated the pension contribution for 2016 in accordance with the Pension Protection Act of 2006 (the "Act"). Contributions for future years are dependent on a number of factors, including actual performance versus assumptions made at the time of the actuarial valuations and maintaining certain funding levels relative to regulatory requirements. Contributions in 2016, and in future years, are expected to be at least equal to the IRS minimum required contribution in accordance with the Act.
Funding Commitments
At December 31, 2015, pursuant to an agreement with our limited liability partnership investments, we are contractually committed to make capital contributions up to $10.3 million upon request of the partnerships through December 31, 2023.

CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that may potentially result in materially different results under different assumptions and conditions. We base our discussion and analysis of our results of operations and financial condition on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions we believe to be reasonable under the circumstances. Actual results could differ from those estimates. We believe our most critical accounting policies are as follows.
Investment Valuation
Upon acquisition, we classify investments in marketable securities as held-to-maturity, available-for-sale, or trading. We record investments in held-to-maturity fixed maturity securities at amortized cost. We record investments in available-for-sale and trading fixed maturity securities and equity securities at fair value. Other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method


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of accounting. We record mortgage loans at their unpaid principal balance and policy loans at the outstanding loan amount due from policyholders.
In general, investment securities are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility risk. Therefore, it is reasonably possible that changes in the fair value of our investment securities that are reported at fair value will occur in the near term and such changes could materially affect the amounts reported in the Consolidated Financial Statements. Also, it is reasonably possible that changes in the value of our investments in trading securities and limited liability partnerships could occur in the future and such changes could materially affect our results of operations as reported in our Consolidated Financial Statements.
Fair Value Measurement

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.
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. 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.
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 accounting guidance on fair value measurements.


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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.
When possible, 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 estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques 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. Our valuation techniques are discussed in more detail throughout this section.
The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities except for our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. In our opinion, the pricing obtained at December 31, 2015 was reasonable. Unusual fluctuations outside of our expectations are independently corroborated with an additional third party sources that use similar valuation techniques as discussed above. In addition, we also randomly select securities and independently corroborate the valuations obtained from our third party valuation service providers.
For the period ended December 31, 2015, the change in our available-for-sale securities categorized as Level 1 and Level 2 was the result of investment purchases that were made using funds held in our money market accounts and disposals. During the period ended December 31, 2015, there were no securities transferred between Level 1 and Level 2.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes. If pricing cannot be obtained from these sources, which occurs on a limited basis, management will perform a discounted cash flow analysis, using an appropriate risk-adjusted discount rate, on the underlying security to estimate fair value.
For further discussion on fair value measurements and disclosures refer to Note 3 "Fair Value of Financial Instruments" contained in Part II, Item 8, "Financial Statements and Supplementary Data."



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Other-Than-Temporary Impairment Charges ("OTTI")
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 or based on the value calculated using a discounted cash flow model. 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 determination of the amount of impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Additionally, our management considers a wide range of factors about the instrument issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the instrument and in assessing the prospects for recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
At December 31, 2015 and 2014, we had a number of securities with fair value less than the cost basis. The total unrealized loss on these securities was $28.1 million at December 31, 2015, compared with $13.9 million at December 31, 2014. At December 31, 2015, the largest pre-tax unrealized loss on an individual equity security was $0.2 million. Our rationale for not recording OTTI charges on these securities is discussed in Part II, Item 8, Note 2 "Summary of Investments."
Deferred Policy Acquisition Costs ("DAC") — Property and Casualty Insurance Segment
We record an asset for certain costs of underwriting new business, primarily commissions, premium taxes and variable underwriting and policy issue expenses that have been deferred. The amount of underwriting compensation expense eligible for deferral is based on time studies and a ratio of success in policy placement. At December 31, 2015 and 2014, our DAC asset was $90.5 million and $72.9 million, respectively.
The DAC asset is amortized over the life of the policies written, generally one year. We assess the recoverability of DAC on a quarterly basis by line of business. This assessment is performed by comparing recorded unearned premium to the sum of unamortized DAC and estimates of expected losses and loss settlement expenses. If the sum of these costs exceeds the amount of recorded unearned premium (i.e., the line of business is expected to generate an operating loss), the excess is recognized as an offset against the established DAC asset. We refer to this offset as a premium deficiency charge.
To calculate the premium deficiency charge by line of business, we estimate an expected loss and loss settlement expense ratio which is based on our best estimate of future losses for each line of business. Shock losses and large catastrophe losses not expected to continue in the future are excluded from this analysis. This calculation is performed on a quarterly basis and developed in conjunction with our quarterly reserving process. The expected loss and loss settlement expense ratios are the only assumptions we utilize in our premium deficiency calculation. Changes in these assumptions can have a significant impact on the amount of premium deficiency charge recognized for a line of business. With the completion of the Mercer Insurance Group, Inc. integration, we determined it was the appropriate time to review our DAC models. After reviewing our DAC model at March 31, 2015, we enhanced our property & casualty insurance segment DAC model by updating our aggregation of certain lines of business in a manner consistent with how the policies are currently being marketed and managed. The impact of these updates to the model resulted in an increase to DAC amortization of $2,144 and an increase to the DAC asset of $3,830 for the period ended December 31, 2015 as compared to what we would have recognized had we not updated our model.
The following table illustrates the hypothetical impact on the premium deficiency charge recorded for the quarter ended December 31, 2015, of reasonably likely changes in the assumed loss and loss settlement expense ratios


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utilized for purposes of this calculation. The entire impact of these changes would be recognized through income as other underwriting expenses. The following table illustrates the impact of potential changes in the expected loss and loss settlement expense ratios for all lines of business on the premium deficiency charge. The base amount indicated below is the actual premium deficiency charge recorded as an offset against the DAC asset established as of the quarter ended December 31, 2015:
Sensitivity Analysis — Impact of Changes in Projected Loss and Loss Settlement Expense Ratios
(In Thousands)
-10%
 
-5%
 
Base
 
+5%
 
+10%
Premium deficiency charge estimated
$

 
$

 
$

 
$
1,287

 
$
8,854

Actual future results could differ materially from our assumptions used to calculate the recorded DAC asset. Changes in our assumed loss and loss settlement expense ratios in the future would impact the amount of deferred costs in the period such changes in assumptions are made. The premium deficiency charge calculated for the quarter ended December 31, 2015 was $0.0 million compared to the premium deficiency charge of $4.0 million calculated for the same period of 2014. The improvement in the premium deficiency charge for the quarter ended December 31, 2015 as compared to the same period of 2014 was due to a combination of an improvement in incurred losses and the previously mentioned enhancements to the DAC model.
Deferred Policy Acquisition Costs — Life Insurance Segment
Costs that vary with and relate to the successful acquisition of life insurance and annuity business are deferred. Such costs consist principally of commissions, premium taxes, and related variable underwriting, agency and policy issue expenses. The amount of underwriting compensation expense eligible for deferral is based on time studies and a ratio of success in policy placement. At December 31, 2015 and 2014, our DAC asset was $77.7 million and $66.9 million, respectively.
We defer and amortize policy acquisition costs on traditional life insurance policies over the premium-paying period in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue. Expected annual premium revenue and gross profits are based on the same mortality and withdrawal assumptions used in determining future policy benefits. These assumptions are not revised after policy issuance unless the recorded DAC asset is deemed to be unrecoverable from future expected profits.
We defer policy acquisition costs related to non-traditional business and amortize these costs in proportion to the ratio of the expected annual gross profits to the expected total gross profits. The assumptions used to determine expected gross profits include claims, interest rate spread, mortality experience, and expense margins and policy lapse experience. Of these factors, we anticipate that assumptions for claims, investment returns, expenses and persistency are reasonably likely to have a significant impact on the rate of DAC amortization each year. Changes in the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs. The effect on amortization of DAC for revisions to estimated gross profits is reported in earnings in the period the estimated gross profits are revised.
We periodically review estimates of expected profitability and evaluate the need to "unlock" or revise the assumptions for the amortization of the DAC asset related to our non-traditional business. The primary assumptions utilized when estimating future profitability relate to interest rate spread, operating expenses, mortality and policy lapse experience. The table below illustrates the impact that a reasonably likely change in our assumptions used to estimate expected gross profits would have on the DAC asset for our non-traditional business recorded as of December 31, 2015. The entire impact of the changes illustrated would be recognized through income as an increase or decrease to amortization expense:


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Sensitivity Analysis — Impact of changes in assumptions on DAC asset
(In Thousands)
 
 
 
Changes in assumptions
-10%
 
+10%
Mortality experience
$
2,668

 
$
(2,807
)
Policy lapse experience
1,859

 
(1,735
)
Changes in assumptions
-1%
 
+1%
Interest rate spread
$
(1,547
)
 
$
1,498

A material change in these assumptions could have a significant negative or positive effect on our reported DAC asset, earnings and stockholders' equity.
The DAC asset recorded in connection with our non-traditional business is also adjusted with respect to estimated expected gross profits as a result of changes in the net unrealized gains or losses on available-for-sale fixed maturity securities allocated to support the block of deferred annuities and universal life policies. That is, because we carry available-for-sale fixed maturity securities at fair value, we make an adjustment to the DAC asset equal to the change in amortization that would have been recorded if we had sold such securities at their stated fair value and reinvested the proceeds at current yields. We include this adjustment, which is called "shadow" DAC, net of tax, as a component of accumulated other comprehensive income. At December 31, 2015 and 2014, the "shadow" DAC adjustment decreased our DAC asset by $2.0 million and $13.4 million, respectively.
Loss and Loss Settlement Expenses — Property and Casualty Insurance Segment
Reserves for losses and loss settlement expenses are reported using our best estimate of ultimate liability for claims that occurred prior to the end of any given reporting period, but have not yet been paid. Before credit for reinsurance recoverables, these reserves were $1,003.9 million and $969.4 million at December 31, 2015 and 2014, respectively. We purchase reinsurance to mitigate the impact of large losses and catastrophic events. Loss and loss settlement expense reserves ceded to reinsurers were $54.7 million for 2015 and $63.8 million for 2014. Our reserves, before credit for reinsurance recoverables, by line of business as of December 31, 2015, were as follows:
(In Thousands)
Case Basis
 
IBNR
 
Loss
Settlement
Expense
 
Total Reserves
Commercial lines
 
 
 
 
 
 
 
Fire and allied lines
$
55,001

 
$
9,629

 
$
18,211

 
$
82,841

Other liability
164,744

 
129,333

 
201,866

 
495,943

Automobile
108,120

 
32,611

 
35,575

 
176,306

Workers' compensation
154,513

 
9,300

 
29,048

 
192,861

Fidelity and surety
2,299

 
2,520

 
345

 
5,164

Miscellaneous
306

 
561

 
346

 
1,213

Total commercial lines
$
484,983

 
$
183,954

 
$
285,391

 
$
954,328

Personal lines
 
 
 
 
 
 
 
Automobile
$
7,460

 
$
1,229

 
$
1,615

 
$
10,304

Fire and allied lines
10,285

 
3,680

 
3,643

 
17,608

Miscellaneous
1,330

 
207

 
646

 
2,183

Total personal lines
$
19,075

 
$
5,116

 
$
5,904

 
$
30,095

Reinsurance assumed
14,314

 
5,105

 
53

 
19,472

Total
$
518,372

 
$
194,175

 
$
291,348

 
$
1,003,895





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Case-Basis Reserves

For each of our lines of business, with respect to reported claims, we establish reserves on a case-by-case basis. Our experienced claims personnel estimate these case-basis reserves using adjusting guidelines established by management. Our goal is to set the case-basis reserves at the ultimate expected loss amount as soon as possible after information about the claim becomes available.

Establishing the case reserve for an individual claim is subjective and complex, requiring us to estimate future payments and values that will be sufficient to settle an individual claim. Setting a reserve for an individual claim is an inherently uncertain process. When we establish and adjust individual claim reserves, we do so based on our knowledge of the circumstances and facts of the claim. Upon notice of a claim, we establish a preliminary (average claim cost) reserve based on the limited claim information initially reported. Subsequently, we conduct an investigation of each reported claim, which allows us to more fully understand the factors contributing to the loss and our potential exposure. This investigation may extend over a long period of time. As our claim investigation progresses, and as our claims personnel identify trends in claims activity, we may refine and adjust our estimates of case reserves. To evaluate and refine our overall reserving process, we track and monitor all claims until they are settled and paid in full, with all salvage and subrogation claims being resolved.
Most of our insurance policies are written on an occurrence basis that provides coverage if a loss occurs during the policy period, even if the insured reports the loss many years later. For example, some liability claims for construction defect coverage are reported 10 years or more after the policy period, and the workers' compensation coverage provided by our policies pays unlimited medical benefits for the duration of the claimant's injury up to the lifetime of the claimant. In addition, final settlement of certain claims can be delayed for years due to litigation or other reasons. Reserves for these claims require us to estimate future costs, including the effect of judicial actions, litigation trends and medical cost inflation, among others. Reserve development can occur over time as conditions and circumstances change many years after the policy was issued and/or the loss occurred.
Our loss reserves include amounts related to both short-tail and long-tail lines of business. "Tail" refers to the time period between the occurrence of a loss and the ultimate settlement of the claim. A short-tail insurance product is one where ultimate losses are known and settled comparatively quickly. Ultimate losses under a long-tail insurance product are sometimes not known and settled for many years. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary from the reserves initially established. Accordingly, long-tail insurance products can have significant implications on the reserving process.
Our short-tail lines of business include fire and allied lines, homeowners, commercial property, auto physical damage and inland marine. The amounts of the case-based reserves that we establish for claims in these lines depend upon various factors, such as individual claim facts (including type of coverage and severity of loss), our historical loss experience and trends in general economic conditions (including changes in replacement costs, medical costs and inflation).
For short-tail lines of business, the estimation of case-basis loss reserves is less complex than for long-tail lines because the claims relate to tangible property. Because of the relatively short time from claim occurrence to settlement, actual losses typically do not vary significantly from reserve estimates.
Our long-tail lines of business include workers' compensation and other liability. In addition, certain product lines such as personal and commercial auto, commercial multi-peril and surety include both long-tail coverages and short-tail coverages. For many long-tail liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability than for short-tail coverages.


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The amounts of the case-basis loss reserves that we establish for claims in long-tail lines of business depends upon various factors, including individual claim facts (including type of coverage, severity of loss and underlying policy limits), Company historical loss experience, changes in underwriting practice, legislative enactments, judicial decisions, legal developments in the awarding of damages, changes in political attitudes and trends in general economic conditions, including inflation. As with our short-tail lines of business, we review and make changes to long-tail case-based reserves based on our review of continually evolving facts as they become available to us during the claims settlement process. Our adjustments to case-based reserves are reported in the financial statements in the period that new information arises about the claim. Examples of facts that become known that could cause us to change our case-based reserves include, but are not limited to: evidence that loss severity is different than previously assessed; new claimants who have presented claims; and the assessment that no coverage exists.
Incurred But Not Reported ("IBNR") Reserves

On a quarterly basis, the Company's internal actuary performs a detailed analysis of IBNR reserves. This analysis uses various loss projection methods (paid and reported loss development) to provide several estimates of ultimate loss (or loss adjustment expense ("LAE")) for each individual year and line of business. The loss projection methods include paid loss development; reported loss development; expected loss emergence based on paid losses; and expected loss emergence based on reported losses. The two methods utilized by our internal actuary to project loss expenses are paid expenses development and development of the ratio of paid expense versus paid loss. Results of the projection methods are compared and a point estimate of ultimate loss (or LAE) is established. The specific projection methods used to establish point estimates vary depending on what is deemed most appropriate for a particular line of business and year. Results of several methods are averaged together to provide a final point estimate. IBNR estimates are derived by subtracting reported loss from projected ultimate loss.

Senior management meets with our internal actuary and controller quarterly to review the adequacy of carried IBNR reserves based on results from this actuarial analysis and makes adjustments for changes in business and other factors not completely captured by the data within the actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate. This method of establishing our IBNR reserves has consistently resulted in aggregate reserve levels that management believes are reasonable in comparison to the reserve estimates indicated by the actuarial analysis.

For our short-tail lines of business, IBNR reserves constitute a small portion of the overall reserves. These claims are generally reported and settled shortly after the loss occurs. In our long-tail lines of business, IBNR reserves constitute a relatively higher proportion of total reserves, because, for many liability claims, significant periods of time may elapse between the initial occurrence of the loss, the reporting of the loss to us, and the ultimate settlement of the claim.
Loss Settlement Expense Reserves
Loss settlement expense reserves include amounts ultimately allocable to individual claims, as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. We do not establish loss settlement expense reserves on a claim-by-claim basis. Instead, on a quarterly basis, our internal actuary performs a detailed statistical analysis (using historical data) to estimate the required reserve for unpaid loss settlement expenses. On a monthly basis, the required reserve estimate is adjusted to reflect additional earned exposure and expense payments that have occurred subsequent to completion of the quarterly analysis.
Generally, the loss settlement expense reserves for long-tail lines of business are a greater portion of the overall reserves, as there are often substantial legal fees and other costs associated with the complex liability claims that are associated with long-tail coverages. Because short-tail lines of business settle much more quickly and the costs are easier to determine, loss settlement expense reserves for such claims constitute a smaller portion of the total reserves.



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Reinsurance Reserves
The estimation of assumed and ceded reinsurance loss and loss settlement expense reserves is subject to the same factors as the estimation of loss and loss settlement expense reserves. In addition to those factors, which give rise to inherent uncertainties in establishing loss and loss settlement expense reserves, there exists a delay in our receipt of reported claims for assumed business due to the procedure of having claims first reported through one or more intermediary insurers or reinsurers.
Key Assumptions

Our internal and external actuaries and management use a number of key assumptions in establishing an estimate of loss and loss settlement expense reserves, including the following assumptions: future loss settlement expenses can be estimated based on the Company's historical ratios of loss settlement expenses paid to losses; the Company's case-basis reserves reflect the most up-to-date information available about the unique circumstances of each individual claim; no new judicial decisions or regulatory actions will increase our case-basis obligations; historical aggregate claim reporting and payment patterns will continue into the future consistent with the observable past; significant unique and unusual claim events have been identified and appropriate adjustments have been made; and, to the best of our knowledge, there are no new latent trends that would impact our case-basis reserves.

Our key assumptions are subject to change as actual claims occur and as we gain additional information about the variables that underlie our assumptions. Accordingly, management reviews and updates these assumptions periodically to ensure that the assumptions continue to be valid. If necessary, management makes changes not only in the estimates derived from the use of these assumptions, but also in the assumptions themselves. Due to the inherent uncertainty in the loss reserving process, management believes that there is a reasonable chance that modification to key assumptions could individually, or in aggregate, result in reserve levels that are either significantly above or below the actual amount for which the related claims will eventually settle.
As an example, if our loss and loss settlement expense reserves of $1,003.9 million as of December 31, 2015, is 10.0 percent inadequate, we would experience a reduction in future pre-tax earnings of up to $100.4 million. This reduction could be recorded in one year or multiple years, depending on when we identify the deficiency. The deficiency would also affect our financial position in that our equity would be reduced by an amount equivalent to the reduction in net income. Any deficiency that would be recognized in our loss and loss settlement expense reserves usually does not have a material effect on our liquidity because the claims have not been paid. Conversely, if our estimates of ultimate unpaid loss and loss settlement expense reserves prove to be redundant, our future earnings and financial position would be improved. We believe our reserving philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonable as to their relative position within a range of reasonable reserves from year-to-year.

We are unable to reasonably quantify the impact of changes in our key assumptions utilized to establish individual case-basis reserves on our total reported reserves because the impact of these changes would be unique to each specific case-basis reserve established. However, based on historical experience, we believe that aggregate case-basis reserve volatility levels of 5.0 percent and 10.0 percent can be attributed to the ultimate development of our net case-basis reserves. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards and an increase if the reserves were to be adjusted downwards. The table below details the impact of this development volatility on our reported net case-basis reserves at December 31, 2015:
(In Thousands)
 
 
 
Change in level of net case-basis reserve development
5%
 
10%
Impact on reported net case-basis reserves
$
23,825

 
$
47,651


Due to the formula-based nature of our IBNR and loss settlement expense reserve calculations, changes in the key assumptions utilized to generate these reserves can result in a quantifiable impact on our reported results. It is not possible to isolate and measure the potential impact of just one of these factors, and future loss trends could be


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partially impacted by all factors concurrently. Nevertheless, it is meaningful to view the sensitivity of the reserves to potential changes in these variables. To demonstrate the sensitivity of reserves to changes in significant assumptions, the following example is presented. The amounts reflect the pre-tax impact on earnings from a hypothetical percentage change in the calculation of IBNR and loss settlement expense reserves at December 31, 2015. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards and an increase if the reserves were to be adjusted downwards. We believe that the changes presented are reasonably likely based upon an analysis of our historical IBNR and loss settlement expense reserve experience.
(In Thousands)
 
 
 
Change in claim frequency and claim severity assumptions
5%
 
10%
Impact due to change in IBNR reserving assumptions
$
9,527

 
$
19,055


(In Thousands)
 
 
 
Change in LAE paid to losses paid ratio
1%
 
2%
Impact due to change in LAE reserving assumptions
$
2,822

 
$
5,644

In 2015, we did not change the key method through which we develop our assumptions on which we based our reserving calculations. In estimating our 2015 loss and loss settlement expense reserves, we did not anticipate future events or conditions that were inconsistent with past development patterns.
Certain of our lines of business are subject to the potential for greater loss and loss settlement expense development than others, which are discussed below:
Other Liability Reserves
Other liability is considered a long-tail line of business, as it can take a relatively long period of time to settle claims from prior accident years. This is partly due to the lag time between the date a loss or event occurs that triggers coverage and the date when the claim is actually reported. Defense costs are also a part of the insured expenses covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims. For the majority of our products, defense costs are outside of the policy limit, meaning that the amounts paid for defense costs are not subtracted from the available policy limit.
Factors that can cause reserve uncertainty in estimating reserves in this line include: reporting time lags; the number of parties involved in the underlying tort action; whether the "event" triggering coverage is confined to only one time period or is spread over multiple time periods; the potential dollars involved in the individual claim actions; whether such claims were reasonably foreseeable and intended to be covered at the time the contracts were written (i.e., coverage disputes); and the potential for mass claim actions.
Claims with longer reporting time lags may result in greater inherent risk. This is especially true for alleged claims with a latency feature, particularly where courts have ruled that coverage is spread over multiple policy years, hence involving multiple defendants (and their insurers and reinsurers) and multiple policies (thereby increasing the potential dollars involved and the underlying settlement complexity). Claims with long latencies also increase the potential time lag between writing a policy in a certain market and the recognition that such policy has potential mass tort and/or latent claim exposure.
Our reserve for other liability claims at December 31, 2015, was $495.9 million and consisted of 5,553 claims, compared with $474.4 million, consisting of 5,610 claims at December 31, 2014. Of the $495.9 million total reserve for other liability claims, $162.6 million is identified as defense costs and $33.6 million is identified as general overhead required in the settlement of claims.
Included in the other liability line of business are gross reserves for construction defect losses and loss settlement expenses. Construction defect is a liability allegation relating to defective work performed in the construction of structures such as commercial buildings, apartments, condominiums, single family dwellings or other housing, as


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well as the sale of defective building materials. These claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. At December 31, 2015, we had $28.8 million in construction defect loss and loss settlement expense reserves, excluding IBNR reserves that are calculated for the overall other liability commercial line, which consisted of 1,721 claims. At December 31, 2014, our reserves, excluding IBNR reserves, totaled $33.6 million, which consisted of 1,597 claims. The reporting of such claims can be delayed, as the statute of limitations can be up to 10 years. Court decisions in recent years have expanded insurers' exposure to construction defect claims. As a result, claims may be reported more than 10 years after a project has been completed, as litigation can proceed for several years before an insurance company is identified as a potential contributor. Claims have also emerged from parties claiming additional insured status on policies issued to other parties, such as contractors seeking coverage from a subcontractor's policy.
In addition to these issues, other variables also contribute to a high degree of uncertainty in establishing reserves for construction defect claims. These variables include: whether coverage exists; when losses occur; the size of each loss; expectations for future interpretive rulings concerning contract provisions; and the extent to which the assertion of these claims will expand geographically. In recent years, we have implemented various underwriting measures that we anticipate will mitigate the amount of construction defect losses experienced. These initiatives include increased care regarding additional insured endorsements; stricter underwriting guidelines on the writing of residential contractors; and an increased utilization of loss control.
Asbestos and Environmental Reserves
Included in the other liability and assumed reinsurance lines of business are reserves for asbestos and other environmental losses and loss settlement expenses. At December 31, 2015 and 2014, we had $4.8 million and $5.0 million, respectively, in direct and assumed asbestos and environmental loss reserves. The estimation of loss reserves for environmental claims and claims related to long-term exposure to asbestos and other substances is one of the most difficult aspects of establishing reserves, especially given the inherent uncertainties surrounding such claims. Although we record our best estimate of loss and loss settlement expense reserves, the ultimate amounts paid upon settlement of such claims may be more or less than the amount of the reserves, because of the significant uncertainties involved and the likelihood that these uncertainties will not be resolved for many years.
Workers' Compensation Reserves
Like the other liability line of business, workers' compensation losses and loss settlement expense reserves are based upon variables that create imprecision in estimating the ultimate reserve. Estimates for workers' compensation are particularly sensitive to assumptions about medical cost inflation, which has been steadily increasing over the past few years. Other variables that we consider and that contribute to the uncertainty in establishing reserves for workers' compensation claims include: state legislative and regulatory environments; trends in jury awards; and mortality rates. Because of these variables, the process of reserving for the ultimate loss and loss settlement expense to be incurred requires the use of informed judgment and is inherently uncertain. Consequently, actual loss and loss settlement expense reserves may deviate from our estimates. Such deviations may be significant. Our reserve for workers' compensation claims at December 31, 2015 was $192.9 million and consisted of 2,211 claims, compared with $196.1 million, consisting of 2,551 claims, at December 31, 2014.
Reserve Development

The following reserve development section should be read in conjunction with the "Consolidated Results of Operations" section of this Item 7.

In 2015, 2014 and 2013, we recognized a favorable development in our net reserves for prior accident years totaling $40.4 million, $56.7 million and $57.5 million, respectively.
The factors contributing to our year-to-year redundancy include: establishing reserves at their ultimate expected loss amount as soon as practicable after information becomes available, which produces, on average, prudently conservative case reserves; using claims negotiation to control the size of settlements; assuming that we have liability for all claims, even though the issue of liability may, in some cases, be resolved in our favor; promoting


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claims management services to encourage return-to-work programs; case management by nurses for serious injuries and management of medical provider services and billings; and using programs and services to help prevent fraud and to assist in favorably resolving cases.
Based upon our comparison of carried reserves to actual claims experience over the last several years, we believe that using our Company's historical premium and claims data to establish reserves for losses and loss settlement expenses results in adequate and reasonable reserves. Reserve development is discussed in more detail under the heading "Reserve Development" in the "Property and Casualty Insurance Segment" of the "Consolidated Results of Operations" section in this Item.

The following table details the pre-tax impact on our property and casualty insurance segment's financial results and financial condition of reasonably likely reserve development. Our lines of business that have historically been most susceptible to significant volatility in reserve development have been shown separately and utilize hypothetical levels of volatility of 5.0 percent and 10.0 percent. Our other, less volatile, lines of business have been aggregated and utilize hypothetical levels of volatility of 3.0 percent and 5.0 percent.
(In Thousands)
 
 
 
 
 
 
 
Hypothetical Reserve Development Volatility Levels
-10%
 
-5%
 
+5%
 
+10%
Impact on loss and loss settlement expenses
 
 
 
 
 
 
 
Other liability
$
(49,594
)
 
$
(24,797
)
 
$
24,797

 
$
49,594

Workers' compensation
(19,286
)
 
(9,643
)
 
9,643

 
19,286

Automobile
(18,661
)
 
(9,331
)
 
9,331

 
18,661

 
 
 
 
 
 
 
 
Hypothetical Reserve Development Volatility Levels
-5%
 
-3%
 
+3%
 
+5%
Impact on loss and loss settlement expenses
 
 
 
 
 
 
 
All other lines
$
(6,424
)
 
$
(3,854
)
 
$
3,584

 
$
6,424

Independent Actuary
We engage an independent actuarial firm to render an opinion as to the reasonableness of the statutory reserves internal management establishes. During 2015 and 2014, we engaged the services of Regnier Consulting Group, Inc. ("Regnier") as our independent actuarial firm for the property and casualty insurance segment. We anticipate that this engagement will continue in 2016.
It is management's policy to utilize staff adjusters to develop our estimate of case-basis loss reserves. IBNR and loss settlement expense reserves are established through various formulae that utilize pertinent, recent Company historical data. The calculations are supplemented with knowledge of current trends and events that could result in adjustments to the level of IBNR and loss settlement expense reserves. On a quarterly basis, we compare our estimate of total reserves to the estimates prepared by Regnier by line of business to ensure that our estimates are within the actuary's acceptable range. Regnier performs a review of loss and loss settlement expense reserves at each year end using generally accepted actuarial guidelines to ensure that the recorded reserves appear reasonable. Our net reserves for losses and loss settlement expenses as of December 31, 2015 and 2014 were $949.2 million and $905.7 million, respectively. In 2015 and 2014, after considering the independent actuary's range of reasonable estimates, management believes that carried reserves were reasonable and therefore did not adjust the recorded amount.
Regnier uses four projection methods in its actuarial analysis of our loss reserves and uses two projection methods in its actuarial analysis of our loss settlement expense reserves. Based on the results of the projection methods, the actuaries select an actuarial point estimate of the reserves, which is compared to our carried reserves to evaluate the reasonableness of the carried reserves. The four methods utilized by Regnier to project losses are: paid loss development; reported loss development; expected loss emergence based on paid losses; and expected loss emergence based on reported losses. The two methods utilized by Regnier to project loss expenses are: paid expenses-to-paid loss and paid expense-to-ultimate loss.


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Future Policy Benefits and Losses, Claims and Loss Settlement Expenses — Life Insurance Segment
We establish reserves for amounts that are payable under traditional insurance policies, including traditional life products, disability income and income annuities. Reserves are calculated as the present value of future benefits expected to be paid, reduced by the present value of future expected premiums. Our estimates use methods and underlying assumptions that are in accordance with GAAP and applicable actuarial standards. The key assumptions that we utilize in establishing reserves are mortality, morbidity, policy lapse, renewal, retirement, investment returns, inflation and expenses. Future investment return assumptions are determined based upon prevailing investment yields as well as estimated reinvestment yields. Mortality, morbidity and policy lapse assumptions are based on our experience. Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the premium-paying period. These assumptions are established at the time the policy is issued, are consistent with the assumptions for determining DAC amortization for these contracts, and are generally not changed during the policy coverage period. However, if actual experience emerges in a manner that is significantly adverse relative to the original assumptions, adjustments to reserves (or DAC) may be required resulting in a charge to earnings which could have a material adverse effect on our operating results and financial condition.
For limited pay traditional life products, we periodically determine if any profit occurs at the issuance of a contract that should be deferred over the life of that contract. To the extent that this occurs, we establish an unearned revenue liability at issuance that is amortized over the anticipated life of the contract.
We periodically review the adequacy of these reserves and recoverability of DAC for these contracts on an aggregate basis using actual experience. In the event that actual experience is significantly adverse compared to the original assumptions, any remaining unamortized DAC asset must be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required. The effects of changes in reserve estimates are reported in the results of operations in the period in which the changes are determined. We have made no changes in our methods in the past three years, other than minor changes in assumptions for new issues in each of the past three years, mostly relating to anticipated mortality rates and investment yields. We anticipate that changes in mortality, investment and reinvestment yields, and policy termination assumptions are the factors that would most likely require an adjustment to these reserves or related DAC asset.
Liabilities for future policy benefits for disability claims are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
Other reserves include claims that have been reported but not settled and IBNR reserves for claims on life and disability income insurance. We use our own historical experience and other assumptions such as any known or anticipated developments or trends to establish reserves for these unsettled or unreported claims. The effects of changes in our estimated reserves are included in our results of operations in the period in which the changes occur.
Our reserves for universal life and deferred annuity contracts are based upon the policyholders' current account value. Acquisition expenses are amortized in relation to expected gross profits forecasted based upon current best estimates of anticipated premium income, investment earnings, benefits and expenses. Annually, we review our estimates of reserves and the related DAC asset and compare them with actual experience. Differences between actual experience and the assumptions that we used in the pricing of these policies, guarantees and riders, and in the establishment of the related reserves will result in variances in profit for the underlying contract. The effects of the changes in such estimated reserves are included in our results of operations in the period in which the changes occur.
The following table reflects the estimated pre-tax impact to DAC, net of unearned revenue liabilities to our universal life and fixed annuity products that could occur in a twelve-month period because of an unlocking adjustment due to reasonably likely changes in significant assumptions. Changes in assumptions of the same magnitude in the opposite direction would have an impact of a similar magnitude but opposite direction of the examples provided.


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Assumption
Determination Methodology
Potential One-Time Effect on DAC Asset, Net of Unearned Revenue Liabilities
Mortality Experience
Based on our mortality experience with consideration given to industry experience and trends
A 10.0% increase in expected mortality experience for all future years would result in a reduction in DAC and an increase in current period amortization expense of $2.8 million.
Surrender Rates
Based on our policy surrender experience with consideration given to industry experience and trends
A 10.0% increase in expected surrender rates for all future years would result in a reduction in DAC and an increase in current period amortization expense of $1.9 million.
Interest Spreads
Based on our expected future investment returns and expected future crediting rates applied to policyholder account balances; future crediting rates include constraints imposed by policy guarantees
A 10-basis-point reduction in future interest rate spreads would result in a reduction in DAC and an increase in current period amortization expense of $1.5 million.
Maintenance Expenses
Based on our experience using an internal expense allocation methodology
A 10.0% increase in future maintenance expenses would result in a reduction in DAC and an increase in current period amortization expense of $0.6 million.
Independent Actuary
We engage an independent actuarial firm to assist us in establishing our future policy benefit reserves for statutory and GAAP reporting and our DAC asset and related amortization for GAAP reporting and to render an opinion as to the reasonableness of the statutory reserves we establish. Statutory reserves are established using prescribed assumptions which are considerably more conservative assumptions regarding future investment earnings and contractual benefit payments than are used for GAAP reserves. During 2015 and 2014, we engaged the services of Griffith, Ballard and Company as our independent actuarial firm for the life insurance segment. We anticipate that this engagement will continue in 2016.
Pension and Postretirement Benefit Obligations
The process of estimating our pension and postretirement benefit obligations and related benefit expense is inherently uncertain, and the actual cost of benefits may vary materially from the estimates recorded. These liabilities are particularly volatile due to their long-term nature and are based on several assumptions. The main assumptions used in the valuation of our benefit obligations are: estimated mortality of the employees and retirees eligible for benefits; estimated expected long-term rates of returns on investments; estimated compensation increases; estimated employee turnover; estimated medical trend rate; and estimated rate used to discount the ultimate estimated liability to a present value. We engage a consulting actuary from Principal Financial Group, an independent firm, to assist in evaluating and establishing assumptions used in the valuation of our benefit obligations.
A change in any one or more of these assumptions is likely to result in an ultimate liability different from the original actuarial estimate. Such changes in estimates may be material. For example, a 100 basis point decrease in our estimated discount rate would increase the pension and postretirement benefit obligation at December 31, 2015, by $28.0 million and $14.9 million, respectively, while a 100 basis point increase in the rate would decrease the benefit obligation at December 31, 2015, by $22.1 million and $11.6 million, respectively.
In addition, for the postretirement benefit plan, a 100 basis point decrease in the medical trend rate would decrease the postretirement benefit obligation at December 31, 2015, by $11.3 million, while a 100 basis point increase in the medical trend rate would increase the benefit obligation at December 31, 2015, by $14.2 million.
A 100 basis point decrease in our estimated long-term rate of return on pension plan assets would increase the benefit expense for the year ended December 31, 2015, by $1.1 million, while a 100 basis point increase in the rate would decrease benefit expense by $1.1 million, for the same period.


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For the postretirement benefit plan, an increase in our estimated medical trend rate would increase the benefit expense for the year ended December 31, 2015, by $1.6 million, while a 100 basis point decrease in the rate would decrease benefit expense by $1.2 million, for the same period.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2015

Troubled Debt Restructuring

In August 2014, the Financial Accounting Standards Board ("FASB") issued updated guidance on the accounting for creditors who are holding receivables with troubled debt restructuring, specifically related to the classification of certain government guaranteed mortgage loans that are in foreclosure. The objective of this update is to provide greater consistency and transparency by addressing the classification of certain foreclosed mortgage loans guaranteed through government programs. The guidance is effective for interim and annual periods beginning after December 15, 2014. The Company adopted the guidance on January 1, 2015. The adoption of the new guidance had no impact on the Company's financial position or results of operations.
Discontinued Operations
In April 2014, the FASB issued new guidance on reporting discontinued operations and disclosures of disposals of components of an entity. The new guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning after December 15, 2014. The Company adopted the guidance on January 1, 2015. The adoption of the new guidance had no impact on the Company's financial position or results of operations.
Pending Adoption of Accounting Standards
Income Taxes
In December 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. The new guidance eliminates the requirement to split deferred tax liabilities and assets between current and non-current in a classified balance sheet. The new guidance allows deferred tax liabilities and assets to be included in non-current accounts. The Company will adopt the new guidance on January 1, 2017 and is currently evaluating the impact on the Company's financial position and results of operations.
Short Duration Contracts

In May 2015, the FASB issued guidance on disclosure requirements for short-duration contracts. The new guidance requires additional disclosures about the liability for unpaid loss and loss adjustment expenses and requires disclosure of any information about significant changes in methodologies and assumptions used to calculate the liability. The new guidance is effective for annual periods beginning after December 15, 2015 and interim periods beginning the following year. The Company will include the new annual disclosures beginning with the December 31, 2016 annual financial statements. The adoption of the new guidance will change disclosures regarding short duration contracts, but management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

Other Internal Use Software

In April 2015, the FASB issued guidance which clarifies customers' accounting for fees paid for cloud computing arrangements. The new guidance provides guidance to customers about whether a cloud computing arrangement includes a software license or whether the arrangement is considered a service contract. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company will adopt the new guidance on January 1, 2016. Management currently does not expect the adoption of the new guidance to have an


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impact on the Company's financial position or results of operations.

Debt Issuance Costs

In April 2015, the FASB issued new guidance on the presentation of debt issuance costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company will adopt the new guidance on January 1, 2016. Management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

Consolidation

In February 2015, the FASB issued amendments to the consolidation analysis that a reporting entity performs to determine whether it should consolidate certain legal entities. Specifically, the new guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIE"), eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that have VIE's, particularly those with fee arrangements and related party relationships. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company will adopt the guidance on January 1, 2016. Management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

Going Concern

In August 2014, the FASB issued new guidance on the disclosure of uncertainties about an entity's ability to continue as a going concern. The new guidance requires management to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so, to disclose the fact and what the entity's plans are to alleviate that doubt. The guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The Company will adopt the guidance on January 1, 2016. Management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

Share Based Payments

In June 2014, the FASB issued new guidance on the accounting for share based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires a performance target that affects vesting and that could be achieved after the service period, be treated as a performance condition. The guidance is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively or retrospectively and early adoption is permitted. The Company will adopt the guidance on January 1, 2016. Management currently does not expect the adoption of the new guidance to have a material impact on the Company's financial position or results of operations.
Revenue Recognition
In May 2014, the FASB issued comprehensive new guidance on revenue recognition which supersedes nearly all existing revenue recognition guidance under GAAP. The new guidance requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. Insurance contracts are not within the scope of this new guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company will adopt the guidance on January 1, 2018 and is currently evaluating the impact on the Company's financial position and results of operations and considering which portions, of the guidance, if any, applies to the Company.


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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this Item 7A is incorporated by reference from Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Investments" and "Market Risk."




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

United Fire Group, Inc.
Consolidated Balance Sheets
 
December 31,
(In Thousands, Except Share Data)
2015
 
2014
 
 
 
 
Assets
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $675 in 2015 and $404 in 2014)
$
672

 
$
397

Available-for-sale, at fair value (amortized cost $2,793,069 in 2015 and $2,773,566 in 2014)
2,824,961

 
2,843,079

Trading securities, at fair value (amortized cost $11,475 in 2015 and $14,363 in 2014)
12,622


16,862

Equity securities
 
 
 
Available-for-sale, at fair value (cost $68,514 in 2015 and $71,651 in 2014)
236,247

 
245,843

Trading securities, at fair value (cost $4,443 in 2015 and $3,708 in 2014)
4,353

 
4,066

Mortgage loans
3,961

 
4,199

Policy loans
5,618

 
5,916

Other long-term investments
54,151

 
50,424

Short-term investments
175

 
175

 
3,142,760

 
3,170,961

Cash and cash equivalents
106,449

 
90,574

Accrued investment income
25,136

 
25,989

Premiums receivable (net of allowance for doubtful accounts of $867 in 2015 and $618 in 2014)
276,517

 
249,030

Deferred policy acquisition costs
168,264

 
139,719

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $46,590 in 2015 and $41,492 in 2014)
53,241

 
49,247

Reinsurance receivables and recoverables
73,527

 
86,810

Prepaid reinsurance premiums
3,790

 
3,632

Goodwill and net intangible assets
25,509

 
26,278

Other assets
15,183

 
14,449

Total assets
$
3,890,376

 
$
3,856,689

Liabilities and stockholders' equity
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
1,003,895

 
$
969,437

Life insurance
1,372,358

 
1,447,764

Unearned premiums
415,057

 
378,725

Accrued expenses and other liabilities
200,599

 
212,577

Income taxes payable
4,917

 
5,012

Deferred income taxes
14,653

 
25,759

Total liabilities
$
3,011,479

 
$
3,039,274

Stockholders' equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,151,428 and 25,019,415 shares issued and outstanding in 2015 and 2014, respectively
$
25

 
$
25

Additional paid-in capital
207,426

 
202,676

Retained earnings
591,009

 
523,541

Accumulated other comprehensive income, net of tax
80,437

 
91,173

Total stockholders' equity
$
878,897

 
$
817,415

Total liabilities and stockholders' equity
$
3,890,376

 
$
3,856,689

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


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

 
For the Years Ended December 31,
(In Thousands, Except Share Data)
2015
 
2014
 
2013
 
 
 
 
 
 
Revenues
 
 
 
 
 
Net premiums earned
$
930,890

 
$
828,330

 
$
754,846

Investment income, net of investment expenses
100,781

 
104,609

 
112,799

Net realized investment gains (losses)
 
 
 
 
 
Other-than-temporary impairment charges
(1,300
)
 

 
(139
)
All other net realized gains (includes reclassifications for net unrealized gains on available-for-sale securities of $4,513 in 2015; $5,085 in 2014; and $6,812 in 2013 previously included in accumulated other comprehensive income)
4,146

 
7,270

 
8,834

Total net realized investment gains
2,846

 
7,270

 
8,695

Other income
401

 
1,685

 
702

Total revenues
$
1,034,918

 
$
941,894

 
$
877,042

 
 
 
 
 
 
Benefits, losses and expenses
 
 
 
 
 
Losses and loss settlement expenses
$
549,088

 
$
536,243

 
$
458,814

Increase in liability for future policy benefits
50,945

 
36,623

 
37,625

Amortization of deferred policy acquisition costs
186,817

 
167,449

 
153,677

Other underwriting expenses (includes reclassifications for employee benefit costs of $7,468 in 2015; $3,072 in 2014; and $5,868 in 2013 previously included in accumulated other comprehensive income)
102,937

 
94,871

 
89,861

Interest on policyholders' accounts
23,680

 
30,245

 
35,163

Total benefits, losses and expenses
$
913,467

 
$
865,431

 
$
775,140

 
 
 
 
 
 
Income before income taxes
$
121,451

 
$
76,463

 
$
101,902

Federal income tax expense (includes reclassifications of $1,034 in 2015; ($704) in 2014; and ($331) in 2013 previously included in accumulated other comprehensive income)
32,325

 
17,326

 
25,762

Net income
$
89,126

 
$
59,137

 
$
76,140

 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
Change in net unrealized appreciation on investments
$
(28,185
)
 
$
55,888

 
$
(35,489
)
Change in liability for underfunded employee benefit plans
8,714

 
(47,685
)
 
24,066

Other comprehensive income (loss), before tax and reclassification adjustments
(19,471
)
 
8,203

 
(11,423
)
Income tax effect
6,814

 
(2,871
)
 
3,998

Other comprehensive income (loss), after tax, before reclassification adjustments
(12,657
)
 
5,332

 
(7,425
)
Reclassification adjustment for net realized gains included in income
(4,513
)
 
(5,085
)
 
(6,812
)
Reclassification adjustment for employee benefit costs included in expense
7,468

 
3,072

 
5,868

Total reclassification adjustments, before tax
2,955

 
(2,013
)
 
(944
)
Income tax effect
(1,034
)
 
704

 
331

Total reclassification adjustments, after tax
1,921

 
(1,309
)
 
(613
)
Comprehensive income
$
78,390

 
$
63,160

 
$
68,102

 
 
 
 
 
 
Weighted average common shares outstanding
25,047,405

 
25,230,854

 
25,325,695

Basic earnings per common share
$
3.56

 
$
2.34

 
$
3.01

Diluted earnings per common share
3.53

 
2.32

 
2.98

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


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United Fire Group, Inc.
Consolidated Statement of Stockholders' Equity

 
For the Years Ended December 31,
(In Thousands, Except Share Data)
2015
2014
2013
 
 
 
 
Common stock
 
 
 
Balance, beginning of year
$
25

$
25

$
25

Shares repurchased (79,396 in 2015; 461,835 in 2014; and 59,603 in 2013)



Shares issued for stock-based awards (202,882 in 2015; 108,679 in 2014; and 193,033 in 2013)



Balance, end of year
$
25

$
25

$
25

 
 
 
 
Additional paid-in capital
 
 
 
Balance, beginning of year
$
202,676

$
211,574

$
208,536

Compensation expense and related tax benefit for stock-based award grants
1,677

1,784

1,289

Shares repurchased
(2,423
)
(12,942
)
(1,644
)
Shares issued for stock-based awards
5,496

2,260

3,393

Balance, end of year
$
207,426

$
202,676

$
211,574

 
 
 
 
Retained earnings
 
 
 
Balance, beginning of year
$
523,541

$
484,084

$
425,428

Net income
89,126

59,137

76,140

Dividends on common stock ($0.86 per share in 2015; $0.78 per share in 2014; $0.69 per share in 2013)
(21,658
)
(19,680
)
(17,484
)
Balance, end of year
$
591,009

$
523,541

$
484,084

 
 
 
 
Accumulated other comprehensive income, net of tax
 
 
 
Balance, beginning of year
$
91,173

$
87,150

$
95,188

Change in net unrealized investment appreciation (1)
(21,254
)
33,022

(27,495
)
Change in liability for underfunded employee benefit plans (2)
10,518

(28,999
)
19,457

Balance, end of year
$
80,437

$
91,173

$
87,150

 
 
 
 
Summary of changes
 
 
 
Balance, beginning of year
$
817,415

$
782,833

$
729,177

Net income
89,126

59,137

76,140

All other changes in stockholders' equity accounts
(27,644
)
(24,555
)
(22,484
)
Balance, end of year
$
878,897

$
817,415

$
782,833

(1)
The change in net unrealized appreciation is net of reclassification adjustments and income taxes.
(2)
The change in liability for underfunded employee benefit plans is net of income taxes.

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



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United Fire Group, Inc.
Consolidated Statements of Cash Flows

For the Years Ended December 31,
(In Thousands)
2015
 
2014
 
2013
Cash Flows From Operating Activities
 
 
 
 
 
Net income
$
89,126

 
$
59,137

 
$
76,140

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
Net accretion of bond premium
13,745

 
14,434

 
15,291

Depreciation and amortization
6,473

 
6,891

 
5,603

Stock-based compensation expense
2,510

 
1,944

 
1,777

Net realized investment gains
(2,846
)
 
(7,270
)
 
(8,695
)
Net cash flows from trading investments
3,080

 
(6,855
)
 
3,852

Deferred income tax expense (benefit)
(4,496
)
 
1,926

 
(368
)
Changes in:
 
 
 
 
 
Accrued investment income
853

 
1,934

 
2,452

Premiums receivable
(27,487
)
 
(30,395
)
 
(30,346
)
Deferred policy acquisition costs
(17,165
)
 
(6,417
)
 
(2,690
)
Reinsurance receivables
13,283

 
641

 
26,948

Prepaid reinsurance premiums
(158
)
 
(472
)
 
(197
)
Income taxes receivable

 
1,786

 
14,750

Other assets
(734
)
 
581

 
(1,417
)
Future policy benefits and losses, claims and loss settlement expenses
77,471

 
47,928

 
21,251

Unearned premiums
36,332

 
38,261

 
28,814

Accrued expenses and other liabilities
4,095

 
25,287

 
8,499

Income taxes payable
(95
)
 
5,012

 

Deferred income taxes
(829
)
 
(249
)
 
6,983

Other, net
(3,160
)
 
(2,813
)
 
(7,156
)
Total adjustments
$
100,872

 
$
92,154

 
$
85,351

Net cash provided by operating activities
$
189,998

 
$
151,291

 
$
161,491

Cash Flows From Investing Activities
 
 
 
 
 
Proceeds from sale of available-for-sale investments
$
11,543

 
$
3,091

 
$
23,007

Proceeds from call and maturity of held-to-maturity investments
175

 
260

 
1,004

Proceeds from call and maturity of available-for-sale investments
658,728

 
561,434

 
477,071

Proceeds from short-term and other investments
4,421

 
2,883

 
7,170

Purchase of held-to-maturity investments
(450
)
 

 

Purchase of available-for-sale investments
(695,351
)
 
(614,044
)
 
(587,412
)
Purchase of short-term and other investments
(5,656
)
 
(4,351
)
 
(14,375
)
Net purchases and sales of property and equipment
(9,696
)
 
(8,151
)
 
(8,451
)
Net cash used in investing activities
$
(36,286
)
 
$
(58,878
)
 
$
(101,986
)
Cash Flows From Financing Activities
 
 
 
 
 
Policyholders' account balances
 
 
 
 
 
Deposits to investment and universal life contracts
$
99,486

 
$
180,487

 
$
150,272

Withdrawals from investment and universal life contracts
(217,905
)
 
(243,997
)
 
(208,827
)
Payment of cash dividends
(21,658
)
 
(19,680
)
 
(17,484
)
Repurchase of common stock
(2,423
)
 
(12,942
)
 
(1,644
)
Issuance of common stock
5,496

 
2,260

 
3,393

Tax impact from issuance of common stock
(833
)
 
(160
)
 
(488
)
Net cash used in financing activities
$
(137,837
)
 
$
(94,032
)
 
$
(74,778
)
Net Change in Cash and Cash Equivalents
$
15,875

 
$
(1,619
)
 
$
(15,273
)
Cash and Cash Equivalents at Beginning of Year
90,574

 
92,193

 
107,466

Cash and Cash Equivalents at End of Year
$
106,449

 
$
90,574

 
$
92,193

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


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Index of Notes to Consolidated Financial Statements
Page





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UNITED FIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise noted)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United Fire Group, Inc. ("UFG", "United Fire", the "Registrant", the "Company","we", "us", or "our") and its consolidated subsidiaries and affiliates 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. Our insurance company subsidiaries are licensed as a property and casualty insurer in 45 states, plus the District of Columbia, and as a life insurer in 37 states.
Principles of Consolidation
The accompanying Consolidated Financial Statements include United Fire and its wholly owned subsidiaries: United Fire & Casualty Company, United Real Estate Holdings Company, LLC, United Life Insurance Company ("United Life"), Addison Insurance Company, Lafayette Insurance Company, United Fire & Indemnity Company, United Fire Lloyds, UFG Specialty Insurance Company (formerly known as Texas General Indemnity Company), Financial Pacific Insurance Company, Franklin Insurance Company, Mercer Insurance Company, and Mercer Insurance Company of New Jersey, Inc.
United Fire Lloyds, an affiliate of United Fire & Indemnity Company, is organized as a Texas Lloyds plan, which is an aggregation of underwriters who, under a common name, engage in the business of insurance through a corporate attorney-in-fact. United Fire Lloyds is financially and operationally controlled by United Fire & Indemnity Company, its corporate attorney-in-fact, pursuant to three types of agreements: trust agreements between United Fire & Indemnity Company and certain individuals who agree to serve as trustees; articles of agreement among the trustees who agree to act as underwriters to establish how the Lloyds plan will be operated; and powers of attorney from each of the underwriters appointing a corporate attorney-in-fact, who is authorized to operate the Lloyds plan. Because United Fire & Indemnity Company can name the trustees, the Lloyds plan is perpetual, subject only to United Fire & Indemnity Company's desire to terminate it.
United Fire & Indemnity Company provides all of the statutory capital necessary for the formation of the Lloyds plan by contributing capital to each of the trustees. The trust agreements require the trustees to become underwriters of the Lloyds plan, to contribute the capital to the Lloyds plan, to sign the articles of agreement and to appoint the attorney-in-fact. The trust agreements also require the trustees to pay to United Fire & Indemnity Company all of the profits and benefits received by the trustees as underwriters of the Lloyds plan, which means that United Fire & Indemnity Company has the right to receive 100 percent of the gains and profits from the Lloyds plan. The trustees serve at the pleasure of United Fire & Indemnity Company, which may remove a trustee and replace that trustee at any time. Termination of a trustee must be accompanied by the resignation of the trustee as an underwriter, so that the trustee can obtain the capital contribution from the Lloyds plan to reimburse United Fire & Indemnity Company. By retaining the ability to terminate trustees, United Fire & Indemnity Company possesses the ability to name and remove the underwriters.
United Real Estate Holdings, LLC, formed in 2013, is a wholly owned subsidiary of United Fire & Casualty Company and is organized as an Iowa limited liability corporation, an unincorporated association formed for the purpose of holding United Fire & Casualty Company's ownership in commercial real estate.
In 2015, the Company dissolved three of its holding companies in order to flatten our organizational chart. The companies dissolved were American Indemnity Financial Corporation, Mercer Insurance Group, Inc. and Financial Pacific Insurance Group, Inc. In addition, Texas General Indemnity Company was renamed UFG Specialty Insurance Company on July 1, 2015.


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Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared on the basis of U.S. generally accepted accounting principles ("GAAP"), which differ in some respects from those followed in preparing our statutory reports to insurance regulatory authorities. Our stand-alone financial statements submitted to insurance regulatory authorities are presented on the basis of accounting practices prescribed or permitted by the insurance departments of the states in which we are domiciled ("statutory accounting principles").
Use of Estimates
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); future policy benefits and losses, claims and loss settlement expenses; and pension and postretirement benefit obligations.
Property and Casualty Insurance Business
Premiums written are deferred and recorded as earned premium on a daily pro rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the unexpired term of insurance policies in force. Premiums receivable are presented net of an estimated allowance for doubtful accounts, which is based on a periodic evaluation of the aging and collectability of amounts due from agents and policyholders.
To establish loss and loss settlement expense reserves, we make estimates and assumptions about the future development of claims. Actual results could differ materially from those estimates, which are subjective, complex and inherently uncertain. When we establish and adjust reserves, we do so given our knowledge at the time of the circumstances and facts of known claims. To the extent that we have overestimated or underestimated our loss and loss settlement expense reserves, we adjust the reserves in the period in which such adjustment is determined.
We record our best estimate of reserves for claim litigation that arises in the ordinary course of business. We consider all of our pending litigation as of December 31, 2015 to be ordinary, routine and incidental to our business.
Life Insurance Business
Our whole life and term insurance (i.e., traditional business) premiums are reported as earned when due and benefits and expenses are associated with premium income in order to result in the recognition of profits over the lives of the related contracts. Premiums receivable are presented net of an estimated allowance for doubtful accounts. Income annuities with life contingencies (single premium immediate annuities and supplementary contracts) have premium recorded and any related expense charge fees recorded as income and expense when the contract is issued. On universal life and deferred annuity policies (i.e., non-traditional business), income and expenses are reported when charged and credited to policyholder account balances in order to result in recognition of profits over the lives of the related contracts. We accomplish this by means of a provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs.
Liabilities for future policy benefits for traditional products are computed by the net level premium method, using interest assumptions ranging from 4.2 percent to 6.0 percent and withdrawal, mortality and morbidity assumptions appropriate at the time the policies were issued. Liabilities for non-traditional business are stated at policyholder account values before surrender charges. Liabilities for traditional immediate annuities are based primarily upon future anticipated cash flows using assumptions for mortality and interest rates. Liabilities for deferred annuities are carried at the account value.



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Reinsurance
Premiums earned and losses and loss settlement expenses incurred are reported net of reinsurance ceded. Ceded insurance business is accounted for on a basis consistent with the original policies issued and the terms of the reinsurance contracts. Refer to Note 4 "Reinsurance" for a discussion of our reinsurance activities.
Investments
Investments in fixed maturities include bonds and redeemable preferred stocks. Our investments in held-to-maturity fixed maturities are recorded at amortized cost. Our investments in available-for-sale fixed maturities and trading securities are recorded at fair value.
Investments in equity securities, which include common and non-redeemable preferred stocks, are classified as available-for-sale or trading and are recorded at fair value.
Changes in unrealized appreciation and depreciation, with respect to available-for-sale fixed maturities and equity securities, are reported as a component of accumulated other comprehensive income, net of applicable deferred income taxes, in stockholders' equity. Changes in unrealized appreciation and depreciation, with respect to trading securities, are reported as a component of income.
Other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. Mortgage loans are recorded at their unpaid principal balance. Policy loans are recorded at the outstanding loan amount due from policyholders. Included in investments at December 31, 2015 and 2014, are securities on deposit with, or available to, various regulatory authorities as required by law, with fair values of $1,515,193 and $1,643,369, respectively.
In 2015 we recorded a pre-tax realized loss of $1,300 as a result of the recognition of other-than-temporary impairment ("OTTI") charges on a certain holding in our investment portfolio. The OTTI charge does not have a noncredit related loss component. In 2014 we did not record any OTTI charges in our investment portfolio. In 2013, we recorded a pre-tax realized loss of $139 as a result of the recognition of OTTI charges on certain holdings in our investment portfolio. None of the OTTI charges were considered to have a noncredit related loss component. We review all of our investment holdings for appropriate valuation on an ongoing basis. Refer to Note 2 "Summary of Investments" for a discussion of our accounting policy for impairment recognition.
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.
In 2015, 2014, and 2013, we made payments for income taxes of $39,497, $9,626 and $13,628, respectively. In addition, we received federal tax refunds of $919, $615 and $8,744 in 2015, 2014 and 2013, respectively, that resulted from the utilization of our 2011 net operating losses and net capital losses in the carryback period. We made no interest payments in 2015, 2014 and 2013. These payments exclude interest credited to policyholders' accounts.
Deferred Policy Acquisition Costs ("DAC")

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC that are reported in the accompanying Consolidated Financial Statements.


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Property & Casualty Insurance
2015
 
2014
 
2013
Recorded asset at beginning of year
$
72,861

 
$
67,663

 
$
64,947

Underwriting costs deferred
197,869

 
166,508

 
149,891

Amortization of deferred policy acquisition costs
(180,183
)
 
(161,310
)
 
(147,175
)
Recorded asset at end of year
$
90,547

 
$
72,861

 
$
67,663

 
 
 
 
 
 
Life Insurance
 
 
 
 
 
Recorded asset at beginning of year
$
66,858

 
$
82,429

 
$
40,353

Underwriting costs deferred
6,113

 
7,357

 
6,476

Amortization of deferred policy acquisition costs
(6,634
)
 
(6,139
)
 
(6,502
)
 
$
66,337

 
$
83,647

 
$
40,327

Change in "shadow" deferred policy acquisition costs
11,380

 
(16,789
)
 
42,102

Recorded asset at end of year
$
77,717

 
$
66,858

 
$
82,429

 
 
 
 
 
 
Total
 
 
 
 
 
Recorded asset at beginning of year
$
139,719

 
$
150,092

 
$
105,300

Underwriting costs deferred
203,982

 
173,865

 
156,367

Amortization of deferred policy acquisition costs
(186,817
)
 
(167,449
)
 
(153,677
)
 
$
156,884

 
$
156,508

 
$
107,990

Change in "shadow" deferred policy acquisition costs
11,380

 
(16,789
)
 
42,102

Recorded asset at end of year
$
168,264

 
$
139,719

 
$
150,092


Property and casualty insurance policy acquisition costs deferred are amortized as premium revenue is recognized. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value. This takes into account the premium to be earned, losses and loss settlement expenses expected to be incurred and certain other costs expected to be incurred as the premium is earned. With the completion of the Mercer Insurance Group, Inc. integration, we determined it was the appropriate time to review our DAC models. After reviewing our DAC model at March 31, 2015, we enhanced our property & casualty insurance segment DAC model by updating our aggregation of certain lines of business in a manner consistent with how the policies are currently being marketed and managed. The impact of these updates to the model resulted in an increase to DAC amortization of $2,144 and an increase to the DAC asset of $3,830 for the period ended December 31, 2015 as compared to what we would have recognized had we not updated our model.

For traditional life insurance policies, DAC is amortized to income over the premium-paying period in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue. Expected premium revenue and gross profits are based on the same mortality and withdrawal assumptions used in determining future policy benefits. These assumptions are not revised after policy issuance unless the recorded DAC asset is deemed to be unrecoverable from future expected profits.

For non-traditional life insurance policies, DAC is amortized over the anticipated terms in proportion to the ratio of the expected annual gross profits to the total expected gross profits. Changes in the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs. The effect on amortization of DAC for revisions to estimated gross profits is reported in earnings in the period the estimated gross profits are revised.
 
The effect on DAC that results from the assumed realization of unrealized gains (losses) on investments allocated to non-traditional life insurance business is recognized with an offset, or "shadow" DAC, to net unrealized investment appreciation as of the balance sheet date. The “shadow" DAC adjustment decreased the DAC asset by $2,003 and decreased the DAC asset by $13,383 at December 31, 2015 and 2014, respectively.


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Property, Equipment and Depreciation
Property and equipment is presented at cost less accumulated depreciation. The following table is a summary of the components of the property and equipment that are reported in the accompanying Consolidated Financial Statements.
 
2015
2014
Real Estate:
 
 
Land
$
7,999

$
7,414

Buildings
37,451

32,004

Furniture and fixtures
3,954

3,308

Computer equipment and software
2,452

3,289

Airplane
1,385

3,232

Total property and equipment
$
53,241

$
49,247

Expenditures for maintenance and repairs on property and equipment are generally expensed as incurred. We periodically review these assets for impairment whenever events or changes in business circumstances indicate that the carrying value of the underlying asset may not be recoverable. A loss would be recognized if the estimated fair value of the asset were less than its carrying value.
Depreciation is computed primarily by the straight-line method over the following estimated useful lives:
 
Useful Life
Computer equipment and software
Three years
Furniture and fixtures
Seven years
Leasehold improvements
Shorter of the lease term or useful life of the asset
Real estate
Seven to thirty-nine years
Airplane
Five years
Depreciation expense totaled $5,704, $6,122 and $4,391 for 2015, 2014 and 2013, respectively.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise as a result of business combinations and consist of the excess of the fair value of consideration paid over the tangible assets acquired and liabilities assumed. All of our goodwill and the majority of our intangible assets relate to the Mercer acquisition in 2011. We evaluate goodwill and other intangible assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible assets may exceed its implied fair value. Goodwill is evaluated at the reporting unit level. Any impairment is charged to operations in the period that the impairment is identified. In 2015 we performed a quantitative assessment of our goodwill and in 2014 and 2013, we performed a qualitative assessment of our goodwill. As a result of these assessments, we did not recognize an impairment charge on our goodwill in 2015, 2014 or 2013.
Our other intangible assets, which consist primarily of agency relationships, trade names, licenses, and software, are being amortized by the straight-line method over periods ranging from 2 years to 15 years, with the exception of licenses, which are indefinite-lived and not amortized. We performed a qualitative assessment of our definite lived intangible assets and a quantitative assessment of our indefinite lived intangible assets. As a result of this assessment, we did not recognize an impairment charge on our intangible assets in 2015, 2014 and 2013. Amortization expense, which is allocated to the property and casualty insurance segment, totaled $769, $769 and $1,212 for 2015, 2014 and 2013, respectively.



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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.

The Company performs a quarterly review of its tax positions and makes a determination whether it is more likely than not that the tax position will be sustained upon examination. If based on this review, it appears not more likely than not that the position will be sustained, the Company will calculate any unrecognized tax benefits and calculate any interest and penalties. At December 31, 2015, 2014, and 2013 the Company did not recognize any liability for unrecognized tax benefits. 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 2009. The Internal Revenue Service is conducting a routine examination of our income tax return for the 2011 tax year.
Stock-Based Compensation
We currently have two equity compensation plans. One plan allows us to grant restricted and unrestricted stock, stock appreciation rights, incentive stock options, and non-qualified stock options to employees. The other plan allows us to grant restricted and non-qualified stock options to non-employee directors.
We utilize the Black-Scholes option pricing method to establish the fair value of non-qualified stock options granted under our equity compensation plans. Our determination of the fair value of stock options on the date of grant using this option-pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables, which include the expected volatility in our stock price, the expected term of the award, the expected dividends to be paid over the term of the award and the expected risk-free interest rate. Any changes in these assumptions may materially affect the estimated fair value of the award. For our restricted and unrestricted stock awards, we utilize the fair value of our common stock on the date of grant to establish the fair value of the award. Refer to Note 9 "Stock-Based Compensation" for further discussion.
Comprehensive Income
Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by and dividends to stockholders.
Subsequent Events
In the preparation of the accompanying financial statements, the Company has 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 the Company's financial statements.
On February 2, 2016, the Company, as borrower, entered into a Credit Agreement by and among the Company, with the lenders from time to time party thereto and KeyBank National Association, as administrative agent, swingline lender and letter of credit issuer. A more detailed discussion regarding this Credit Agreement is contained in Part II, Item 8, Note 14 "Credit Facility."





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Recently Issued Accounting Standards
Accounting Standards Adopted in 2015

Troubled Debt Restructuring

In August 2014, the Financial Accounting Standards Board ("FASB") issued updated guidance on the accounting for creditors who are holding receivables with troubled debt restructuring, specifically related to the classification of certain government guaranteed mortgage loans that are in foreclosure. The objective of this update is to provide greater consistency and transparency by addressing the classification of certain foreclosed mortgage loans guaranteed through government programs. The guidance is effective for interim and annual periods beginning after December 15, 2014. The Company adopted the guidance on January 1, 2015. The adoption of the new guidance had no impact on the Company's financial position or results of operations.
Discontinued Operations
In April 2014, the FASB issued new guidance on reporting discontinued operations and disclosures of disposals of components of an entity. The new guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning after December 15, 2014. The Company adopted the guidance on January 1, 2015. The adoption of the new guidance had no impact on the Company's financial position or results of operations.
Pending Adoption of Accounting Standards
Income Taxes
In December 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. The new guidance eliminates the requirement to split deferred tax liabilities and assets between current and non-current in a classified balance sheet. The new guidance allows deferred tax liabilities and assets to be included in non-current accounts. The Company will adopt the new guidance on January 1, 2017 and is currently evaluating the impact on the Company's financial position and results of operations.
Short Duration Contracts

In May 2015, the FASB issued guidance on disclosure requirements for short-duration contracts. The new guidance requires additional disclosures about the liability for unpaid loss and loss adjustment expenses and requires disclosure of any information about significant changes in methodologies and assumptions used to calculate the liability. The new guidance is effective for annual periods beginning after December 15, 2015 and interim periods beginning the following year. The Company will include the new annual disclosures beginning with the December 31, 2016 annual financial statements. The adoption of the new guidance will change disclosures regarding short duration contracts, but management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

Other Internal Use Software

In April 2015, the FASB issued guidance which clarifies customers' accounting for fees paid for cloud computing arrangements. The new guidance provides guidance to customers about whether a cloud computing arrangement includes a software license or whether the arrangement is considered a service contract. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company will adopt the new guidance on January 1, 2016. Management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.





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Debt Issuance Costs

In April 2015, the FASB issued new guidance on the presentation of debt issuance costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company will adopt the new guidance on January 1, 2016. Management does not currently expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

Consolidation

In February 2015, the FASB issued amendments to the consolidation analysis that a reporting entity performs to determine whether it should consolidate certain legal entities. Specifically, the new guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIE"), eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that have VIE's, particularly those with fee arrangements and related party relationships. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company will adopt the guidance on January 1, 2016. Management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

Going Concern

In August 2014, the FASB issued new guidance on the disclosure of uncertainties about an entity's ability to continue as a going concern. The new guidance requires management to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so, to disclose the fact and what the entity's plans are to alleviate that doubt. The guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The Company will adopt the guidance on January 1, 2016. Management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.

Share Based Payments

In June 2014, the FASB issued new guidance on the accounting for share based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires a performance target that affects vesting and that could be achieved after the service period, be treated as a performance condition. The guidance is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively or retrospectively and early adoption is permitted. The Company will adopt the guidance on January 1, 2016. Management currently does not expect the adoption of the new guidance to have a material impact on the Company's financial position or results of operations.
Revenue Recognition
In May 2014, the FASB issued comprehensive new guidance on revenue recognition which supersedes nearly all existing revenue recognition guidance under GAAP. The new guidance requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. Insurance contracts are not within the scope of this new guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company will adopt the guidance on January 1, 2018 and is currently evaluating the impact on the Company's financial position and results of operations and considering which portions of the guidance, if any, applies to the Company.




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NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments

The table that follows is 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 available-for-sale equity securities as of December 31, 2015 and 2014.

December 31, 2015
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
Technology, Media & Telecommunications
$
450

 
$
1

 
$

 
$
451

Financial services
150

 

 

 
150

Mortgage-backed securities
72

 
2

 

 
74

Total Held-to-Maturity Fixed Maturities
$
672

 
$
3

 
$

 
$
675

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
21,587

 
$
100

 
$
38

 
$
21,649

U.S. government agency
232,808

 
2,622

 
2,400

 
233,030

States, municipalities and political subdivisions
 
 
 
 
 
 
 
  General obligations:
 
 
 
 
 
 
 
     Midwest
160,484

 
4,990

 
18

 
165,456

     Northeast
56,449

 
1,996

 

 
58,445

     South
125,565

 
3,358

 
134

 
128,789

     West
103,721

 
3,160

 
67

 
106,814

   Special revenue:
 
 
 
 
 
 
 
     Midwest
152,780

 
4,956

 
30

 
157,706

     Northeast
23,892

 
919

 
212

 
24,599

     South
144,183

 
4,281

 
27

 
148,437

     West
78,935

 
3,150

 
44

 
82,041

Foreign bonds
82,580

 
2,405

 
2,457

 
82,528

Public utilities
213,233

 
3,701

 
1,251

 
215,683

Corporate bonds
 
 
 
 
 
 
 
Energy
116,800

 
1,032

 
4,713

 
113,119

Industrials
227,589

 
3,329

 
6,663

 
224,255

Consumer goods and services
172,529

 
2,844

 
776

 
174,597

Health care
92,132

 
2,168

 
791

 
93,509

Technology, media and telecommunications
142,431

 
1,972

 
2,003

 
142,400

Financial services
259,382

 
5,246

 
1,143

 
263,485



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Mortgage-backed securities
16,413

 
376

 
51

 
16,738

Collateralized mortgage obligations
364,115

 
6,168

 
4,268

 
366,015

Asset-backed securities
5,461

 
221

 
16

 
5,666

Total Available-For-Sale Fixed Maturities
$
2,793,069

 
$
58,994

 
$
27,102

 
$
2,824,961

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
7,231

 
$
12,022

 
$
193

 
$
19,060

Energy
6,103

 
5,374

 
266

 
11,211

Industrials
13,251

 
31,872

 
313

 
44,810

Consumer goods and services
10,301

 
13,017

 
3

 
23,315

Health care
7,763

 
20,454

 

 
28,217

Technology, media and telecommunications
5,931

 
7,538

 
105

 
13,364

Financial services
17,392

 
78,411

 
109

 
95,694

Nonredeemable preferred stocks
542

 
34

 

 
576

Total Available-for-Sale Equity Securities
$
68,514

 
$
168,722

 
$
989

 
$
236,247

Total Available-for-Sale Securities
$
2,861,583

 
$
227,716

 
$
28,091

 
$
3,061,208



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December 31, 2014
 
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
 
 
 
 
 
 
 
  Special revenue:
 
 
 
 
 
 
 
     Midwest
$
55

 
$

 
$

 
$
55

Corporate bonds - financial services
200

 

 

 
200

Mortgage-backed securities
142

 
7

 

 
149

Total Held-to-Maturity Fixed Maturities
$
397

 
$
7

 
$

 
$
404

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
25,856

 
$
168

 
$
52

 
$
25,972

U.S. government agency
349,747

 
4,347

 
2,422

 
351,672

States, municipalities and political subdivisions
 
 
 
 
 
 
 
   General obligations:
 
 
 
 
 
 
 
      Midwest
179,491

 
6,599

 
170

 
185,920

      Northeast
59,084

 
2,120

 
50

 
61,154

      South
122,055

 
4,453

 
288

 
126,220

      West
75,102

 
3,350

 
19

 
78,433

   Special revenue:
 
 
 
 
 
 
 
      Midwest
126,192

 
5,356

 
146

 
131,402

      Northeast
11,767

 
864

 

 
12,631

      South
106,917

 
4,368

 
63

 
111,222

      West
68,024

 
3,285

 
6

 
71,303

Foreign bonds
136,487

 
4,132

 
446

 
140,173

Public utilities
206,366

 
6,479

 
488

 
212,357

Corporate bonds
 
 
 
 
 
 
 
Energy
135,068

 
2,858

 
793

 
137,133

Industrials
211,256

 
6,373

 
2,154

 
215,475

Consumer goods and services
172,623

 
4,702

 
324

 
177,001

Health care
86,017

 
3,228

 
210

 
89,035

Technology, media and telecommunications
131,465

 
3,863

 
799

 
134,529

Financial services
215,095

 
8,574

 
87

 
223,582

Mortgage-backed securities
17,121

 
483

 
46

 
17,558

Collateralized mortgage obligations
335,092

 
7,003

 
4,806

 
337,289

Asset-backed securities
2,741

 
277

 

 
3,018

Total Available-For-Sale Fixed Maturities
$
2,773,566

 
$
82,882

 
$
13,369

 
$
2,843,079

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 


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Public utilities
$
7,231

 
$
13,103

 
$
44

 
$
20,290

Energy
5,094

 
8,623

 

 
13,717

Industrials
13,284

 
32,299

 
124

 
45,459

Consumer goods and services
10,294

 
13,295

 
275

 
23,314

Health care
7,920

 
22,436

 

 
30,356

Technology, media and telecommunications
6,207

 
7,846

 
58

 
13,995

Financial services
16,637

 
77,077

 
51

 
93,663

Nonredeemable preferred stocks
4,984

 
72

 
7

 
5,049

Total Available-for-Sale Equity Securities
$
71,651

 
$
174,751

 
$
559

 
$
245,843

Total Available-for-Sale Securities
$
2,845,217

 
$
257,633

 
$
13,928

 
$
3,088,922

Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at December 31, 2015, 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.
 
Held-To-Maturity
 
Available-For-Sale
 
Trading
December 31, 2015
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$

 
$

 
$
105,186

 
$
105,910

 
$
1,526

 
$
2,001

Due after one year through five years
600

 
601

 
819,617

 
840,292

 
7,596

 
7,676

Due after five years through 10 years

 

 
989,897

 
989,295

 
130

 
404

Due after 10 years

 

 
492,380

 
501,045

 
2,223

 
2,541

Asset-backed securities

 

 
5,461

 
5,666

 

 

Mortgage-backed securities
72

 
74

 
16,413

 
16,738

 

 

Collateralized mortgage obligations

 

 
364,115

 
366,015

 

 

 
$
672

 
$
675

 
$
2,793,069

 
$
2,824,961

 
$
11,475

 
$
12,622














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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) for 2015, 2014 and 2013, is as follows:
 
2015
 
2014
 
2013
Net realized investment gains (losses)
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
Held-to-maturity
$

 
$

 
$
1

Available-for-sale
3,294

 
3,353

 
3,211

Trading securities
 
 
 
 
 
Change in fair value
(1,353
)
 
609

 
1,183

Sales
1,381

 
1,339

 
788

Equity securities:
 
 
 
 
 
Available-for-sale
2,521

 
1,732

 
3,739

Trading securities
 
 
 
 
 
Change in fair value
(448
)
 
238

 
(126
)
Sales
66

 
(1
)
 
38

Other long-term investments
(1,315
)
 

 

Other-than-temporary-impairment charges:
 
 
 
 
 
Fixed maturities
(1,300
)
 

 
(139
)
Total net realized investment gains
$
2,846

 
$
7,270

 
$
8,695

The proceeds and gross realized gains (losses) on the sale of available-for-sale securities for 2015, 2014 and 2013, were as follows:
 
2015
 
2014
 
2013
Proceeds from sales
$
11,543

 
$
3,091

 
$
23,007

Gross realized gains
1,134

 
900

 
451

Gross realized losses

 
(56
)
 

There were no sales of held-to-maturity securities in 2015, 2014 and 2013.
Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily convertible securities which 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 $16,975 and $20,928 at December 31, 2015 and 2014, respectively.










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Net Investment Income
Net investment income for the years ended December 31, 2015, 2014 and 2013, is comprised of the following:
Years Ended December 31,
2015
 
2014
 
2013
Investment income
 
 
 
 
 
Interest on fixed maturities
$
92,777

 
$
97,969

 
$
101,950

Dividends on equity securities
7,208

 
6,602

 
5,806

Income on other long-term investments
 
 
 
 
 
Investment income
2,567

 
1,927

 
1,194

Change in value (1)
3,266

 
1,917

 
7,030

Interest on mortgage loans
237

 
252

 
266

Interest on short-term investments
6

 
5

 
6

Interest on cash and cash equivalents
305

 
255

 
239

Other
1,452

 
1,998

 
1,632

Total investment income
$
107,818

 
$
110,925

 
$
118,123

Less investment expenses
7,037

 
6,316

 
5,324

Net investment income
$
100,781

 
$
104,609

 
$
112,799

(1)
Represents the change in value of our interests in limited liability partnerships that are recorded on the equity method of accounting.
Funding Commitment
At December 31, 2015, pursuant to an agreement with our limited liability partnership investments, we are contractually committed to make capital contributions up to $10,307 upon request of the partnerships through December 31, 2023.
Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation for 2015, 2014 and 2013, is as follows:
 
2015
 
2014
 
2013
Change in net unrealized investment appreciation
 
 
 
 
 
Available-for-sale fixed maturities
$
(37,621
)
 
$
51,814

 
$
(132,579
)
Available-for-sale equity securities
(6,459
)
 
15,781

 
48,176

Deferred policy acquisition costs
11,380

 
(16,789
)
 
42,102

Income tax effect
11,446

 
(17,784
)
 
14,806

Total change in net unrealized investment appreciation, net of tax
$
(21,254
)
 
$
33,022


$
(27,495
)
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 or based on the value calculated using a discounted cash flow model. Credit-related impairments on fixed maturity securities that we do not plan to sell, and for which we are not more likely than not to be required to sell, are recognized in net income. Any non-credit related impairment is recognized as a component of other comprehensive income. 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 December 31, 2015 and 2014. The securities are presented by the length of time they have been


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continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at December 31, 2015 if future events or information cause us to determine that a decline in fair value is other-than-temporary.
We have evaluated the near-term prospects of the issuers of our fixed maturity securities in relation to the severity and duration of the unrealized loss which resulted in the recognition of a $1,300 credit loss OTTI on an energy sector fixed maturity security in our Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2015. There were no OTTI losses on fixed maturity securities recognized in 2014. In 2013, we recognized an OTTI credit loss of $139 in our Consolidated Statements of Income and Comprehensive Income. All fixed maturity securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. We believe the unrealized depreciation in value of other 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 intention to sell and it is more likely than not that we will not be required to sell these securities until the fair value recovers to at least equal to our cost basis or the securities mature.
We have evaluated the near-term prospects of the issuers of our equity securities in relation to the severity and duration of the unrealized loss unless otherwise noted, these losses do not warrant the recognition of an OTTI charge at December 31, 2015. There were no OTTI losses on equity securities recognized in 2015, 2014 or 2013. Our largest unrealized loss greater than 12 months on an individual equity security at December 31, 2015, 2014 and 2013 was $225, $54 and $58, respectively. 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.




















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Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
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
6

 
$
6,408

 
$
26

 
2

 
$
1,634

 
$
12

 
$
8,042

 
$
38

U.S. government agency
38

 
104,621

 
1,771

 
6

 
18,821

 
629

 
123,442

 
2,400

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      Midwest
4

 
2,417

 
12

 
1

 
528

 
6

 
2,945

 
18

      South
3

 
4,805

 
55

 
8

 
3,743

 
79

 
8,548

 
134

      West
4

 
8,927

 
23

 
2

 
2,274

 
44

 
11,201

 
67

   Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      Midwest

 

 

 
1

 
2,494

 
30

 
2,494

 
30

      Northeast
1

 
4,755

 
212

 

 

 

 
4,755

 
212

      South
4

 
7,445

 
26

 
2

 
1,851

 
1

 
9,296

 
27

      West
4

 
6,851

 
44

 

 

 

 
6,851

 
44

Foreign bonds
9

 
16,991

 
1,289

 
2

 
4,036

 
1,168

 
21,027

 
2,457

Public utilities
35

 
72,680

 
880

 
5

 
2,840

 
371

 
75,520

 
1,251

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
29

 
61,496

 
3,286

 
4

 
7,991

 
1,427

 
69,487

 
4,713

Industrials
38

 
78,588

 
3,631

 
3

 
6,649

 
3,032

 
85,237

 
6,663

Consumer goods and services
24

 
64,661

 
770

 
4

 
2,491

 
6

 
67,152

 
776

Health care
18

 
43,992

 
652

 
2

 
3,737

 
139

 
47,729

 
791

Technology, media and telecommunications
22

 
59,503

 
1,478

 
2

 
8,940

 
525

 
68,443

 
2,003

Financial services
49

 
92,814

 
1,143

 

 

 

 
92,814

 
1,143

Mortgage-backed securities
9

 
7,423

 
43

 
4

 
183

 
8

 
7,606

 
51

Collateralized mortgage obligations
52

 
97,912

 
1,605

 
31

 
71,876

 
2,663

 
169,788

 
4,268

Asset-backed securities
1

 
985

 
16

 

 

 

 
985

 
16

Total Available-for-Sale Fixed Maturities
350

 
$
743,274

 
$
16,962

 
79

 
$
140,088

 
$
10,140

 
$
883,362

 
$
27,102

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities

 
$

 
$

 
3

 
$
115

 
$
193

 
$
115

 
$
193

Energy
10

 
2,868

 
266

 

 

 

 
2,868

 
266

Industrials
3

 
177

 
44

 
5

 
193

 
269

 
370

 
313

Consumer goods and services

 

 

 
2

 
14

 
3

 
14

 
3

Technology, media and telecommunications
9

 
438

 
91

 
2

 
12

 
14

 
450

 
105

Financial services
6

 
326

 
51

 
1

 
136

 
58

 
462

 
109

Total Available-for-Sale Equity Securities
28

 
$
3,809

 
$
452

 
13

 
$
470

 
$
537

 
$
4,279

 
$
989

Total Available-for-Sale Securities
378

 
$
747,083

 
$
17,414

 
92

 
$
140,558

 
$
10,677

 
$
887,641

 
$
28,091



102

Table of Contents


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
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
4

 
$
2,343

 
$
6

 
4

 
$
5,069

 
$
46

 
$
7,412

 
$
52

U.S. government agency
11

 
41,064

 
70

 
35

 
95,198

 
2,352

 
136,262

 
2,422

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      Midwest
1

 
3,650

 
74

 
14

 
9,856

 
96

 
13,506

 
170

      Northeast

 

 

 
9

 
7,377

 
50

 
7,377

 
50

      South
1

 
3,085

 
58

 
19

 
13,475

 
230

 
16,560

 
288

      West
1

 
1,023

 
1

 
5

 
2,700

 
18

 
3,723

 
19

   Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      Midwest
9

 
10,219

 
41

 
8

 
11,631

 
105

 
21,850

 
146

      South
6

 
12,882

 
11

 
3

 
2,137

 
52

 
15,019

 
63

      West

 

 

 
4

 
3,671

 
6

 
3,671

 
6

Foreign bonds
6

 
17,158

 
446

 

 

 

 
17,158

 
446

Public utilities
10

 
21,839

 
194

 
4

 
3,611

 
294

 
25,450

 
488

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
8

 
17,416

 
420

 
3

 
7,061

 
373

 
24,477

 
793

Industrials
8

 
17,103

 
362

 
3

 
9,592

 
1,792

 
26,695

 
2,154

Consumer goods and services
11

 
28,344

 
258

 
7

 
10,064

 
66

 
38,408

 
324

Health care
3

 
8,244

 
36

 
3

 
7,104

 
174

 
15,348

 
210

Technology, media and telecommunications
4

 
8,860

 
68

 
4

 
15,742

 
731

 
24,602

 
799

Financial services
3

 
5,908

 
31

 
2

 
6,131

 
56

 
12,039

 
87

Mortgage-backed securities
9

 
425

 
21

 
2

 
1,991

 
25

 
2,416

 
46

Collateralized mortgage obligations
10

 
20,746

 
112

 
56

 
122,550

 
4,694

 
143,296

 
4,806

Total Available-for-Sale Fixed Maturities
105

 
$
220,309

 
$
2,209

 
185

 
$
334,960

 
$
11,160

 
$
555,269

 
$
13,369

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities
3

 
$
263

 
$
44

 

 
$

 
$

 
$
263

 
$
44

Industrials
3

 
280

 
70

 
2

 
58

 
54

 
338

 
124

Consumer goods and services
1

 
129

 
272

 
2

 
15

 
3

 
144

 
275

Technology, media and telecommunications
4

 
503

 
14

 
5

 
218

 
44

 
721

 
58

Financial services
1

 
186

 
51

 

 

 

 
186

 
51

Nonredeemable preferred stocks

 

 

 
1

 
700

 
7

 
700

 
7

Total Available-for-Sale Equity Securities
12

 
$
1,361

 
$
451

 
10

 
$
991

 
$
108

 
$
2,352

 
$
559

Total Available-for-Sale Securities
117

 
$
221,670

 
$
2,660

 
195

 
$
335,951

 
$
11,268

 
$
557,621

 
$
13,928



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NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

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.
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. 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.
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 accounting guidance on fair value measurements.
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.
When possible, 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 estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques 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. Our valuation techniques are discussed in more detail throughout this section.


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The fair value of our mortgage loans is determined by modeling performed by us based on the stated principal and coupon payments provided for in the loan agreements. 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 fair value of our policy loans is equivalent to carrying value, which is a reasonable estimate of fair value and is classified as Level 2. 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 our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.
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 pretax 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 December 31, 2015 and 2014 is as follows:
 
December 31, 2015
 
December 31, 2014
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
675

 
$
672

 
$
404

 
$
397

Available-for-sale securities
2,824,961

 
2,824,961

 
2,843,079

 
2,843,079

Trading securities
12,622

 
12,622

 
16,862

 
16,862

Equity securities:
 
 
 
 
 
 
 
Available-for-sale securities
236,247

 
236,247

 
245,843

 
245,843

Trading securities
4,353

 
4,353

 
4,066

 
4,066

Mortgage loans
4,237

 
3,961

 
4,559

 
4,199

Policy loans
5,618

 
5,618

 
5,916

 
5,916

Other long-term investments
54,151

 
54,151

 
50,424

 
50,424

Short-term investments
175

 
175

 
175

 
175

Cash and cash equivalents
106,449

 
106,449

 
90,574

 
90,574

Corporate-owned life insurance
1,716

 
1,716

 
918

 
918

Liabilities
 
 
 
 
 
 
 
Policy reserves
 
 
 
 
 
 
 
Annuity (accumulations) (1)
$
707,190

 
$
744,931

 
$
865,802

 
$
863,606

Annuity (benefit payments)
131,899

 
95,467

 
176,592

 
99,121

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





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The following tables present the categorization for our financial instruments measured at fair value on a recurring basis in our Consolidated Balance Sheets at December 31, 2015 and 2014:
 
 
 
Fair Value Measurements
Description
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
21,649

 
$

 
$
21,649

 
$

U.S. government agency
233,030

 

 
233,030

 

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
   Midwest
165,456

 

 
165,456

 

   Northeast
58,445

 

 
58,445

 

   South
128,789

 

 
128,789

 

   West
106,814

 

 
106,814

 

Special revenue
 
 
 
 
 
 
 
   Midwest
157,706

 

 
157,363

 
343

   Northeast
24,599

 

 
24,599

 

   South
148,437

 

 
148,437

 

   West
82,041

 

 
82,041

 

Foreign bonds
82,528

 

 
82,528

 

Public utilities
215,683

 

 
215,683

 

Corporate bonds
 
 
 
 
 
 
 
Energy
113,119

 

 
113,119

 

Industrials
224,255

 

 
224,255

 

Consumer goods and services
174,597

 

 
173,364

 
1,233

Health care
93,509

 

 
93,509

 

Technology, media and telecommunications
142,400

 

 
142,400

 

Financial services
263,485

 

 
253,823

 
9,662

Mortgage-backed securities
16,738

 

 
16,738

 

Collateralized mortgage obligations
366,015

 

 
366,015

 

Asset-backed securities
5,666

 

 
4,630

 
1,036

Total Available-For-Sale Fixed Maturities
$
2,824,961

 
$

 
$
2,812,687

 
$
12,274

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
19,060

 
$
19,060

 
$

 
$

Energy
11,211

 
11,211

 

 

Industrials
44,810

 
44,810

 

 

Consumer goods and services
23,315

 
23,315

 

 

Health care
28,217

 
28,217

 

 

Technology, media and telecommunications
13,364

 
13,364

 

 

Financial services
95,694

 
91,588

 
128

 
3,978

Nonredeemable preferred stocks
576

 
576

 

 

Total Available-for-Sale Equity Securities
$
236,247

 
$
232,141

 
$
128

 
$
3,978



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Total Available-for-Sale Securities
$
3,061,208

 
$
232,141

 
$
2,812,815

 
$
16,252

TRADING
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
Industrials
$
3,558

 
$

 
$
3,558

 
$

Consumer goods and services
118

 

 
118

 

Health care
2,032

 

 
2,032

 

Technology, media and telecommunications
335

 

 
335

 

Financial services
4,094

 

 
4,094

 

Redeemable preferred stocks
2,485

 
2,485

 

 

Equity securities
 
 
 
 
 
 
 
Energy
267

 
267

 

 

Industrials
986

 
986

 

 

Consumer goods and services
942

 
942

 

 

Health care
304

 
304

 

 

     Financial Services
229

 
229

 

 

Nonredeemable preferred stocks
1,625

 
1,625

 

 

Total Trading Securities
$
16,975

 
$
6,838

 
$
10,137

 
$

Short-Term Investments
$
175

 
$
175

 
$

 
$

Money Market Accounts
$
20,805

 
$
20,805

 
$

 
$

Corporate-Owned Life Insurance
$
1,716

 
$

 
$
1,716

 
$

Total Assets Measured at Fair Value
$
3,100,879

 
$
259,959

 
$
2,824,668

 
$
16,252




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Fair Value Measurements
Description
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
25,972

 
$

 
$
25,972

 
$

U.S. government agency
351,672

 

 
351,672

 

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
   Midwest
185,920

 

 
185,920

 

   Northeast
61,154

 

 
61,154

 

   South
126,220

 

 
126,220

 

   West
78,433

 

 
78,433

 

Special revenue
 
 
 
 
 
 
 
   Midwest
131,402

 

 
130,883

 
519

   Northeast
12,631

 

 
12,631

 

   South
111,222

 

 
111,222

 

   West
71,303

 

 
71,303

 

Foreign bonds
140,173

 

 
140,173

 

Public utilities
212,357

 

 
212,357

 

Corporate bonds
 
 
 
 
 
 
 
Energy
137,133

 

 
137,133

 

Industrials
215,475

 

 
215,475

 

Consumer goods and services
177,001

 

 
175,682

 
1,319

Health care
89,035

 

 
89,035

 

Technology, media and telecommunications
134,529

 

 
134,529

 

Financial services
223,582

 

 
212,589

 
10,993

Mortgage-backed securities
17,558

 

 
17,558

 

Collateralized mortgage obligations
337,289

 

 
337,289

 

Asset-backed securities
3,018

 

 
1,406

 
1,612

Total Available-For-Sale Fixed Maturities
$
2,843,079

 
$

 
$
2,828,636

 
$
14,443

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
20,290

 
$
20,290

 
$

 
$

Energy
13,717

 
13,717

 

 

Industrials
45,459

 
45,458

 
1

 

Consumer goods and services
23,314

 
23,314

 

 

Health care
30,356

 
30,356

 

 

Technology, media and telecommunications
13,995

 
13,995

 

 

Financial services
93,663

 
89,719

 
72

 
3,872

Nonredeemable preferred stocks
5,049

 
558

 
4,491

 

Total Available-for-Sale Equity Securities
$
245,843

 
$
237,407

 
$
4,564

 
$
3,872

Total Available-for-Sale Securities
$
3,088,922

 
$
237,407

 
$
2,833,200

 
$
18,315



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TRADING
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
Industrials
$
3,352

 
$

 
$
3,352

 
$

Health care
2,425

 

 
2,425

 

Technology, media and telecommunications
338

 

 
338

 

Financial services
5,997

 

 
5,997

 

Redeemable preferred stocks
4,750

 
4,750

 

 

Equity securities
 
 
 
 
 
 
 
Energy
411

 
411

 

 

Consumer goods and services
1,034

 
1,034

 

 

Health care
327

 
327

 

 

Technology, media and telecommunications
411

 
411

 

 

Nonredeemable preferred stocks
1,883

 
1,883

 

 

Total Trading Securities
$
20,928

 
$
8,816

 
$
12,112

 
$

Short-Term Investments
$
175

 
$
175

 
$

 
$

Money Market Accounts
$
28,095

 
$
28,095

 
$

 
$

Corporate-Owned Life Insurance
$
918

 
$

 
$
918

 
$

Total Assets Measured at Fair Value
$
3,139,038

 
$
274,493

 
$
2,846,230

 
$
18,315

The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities except for our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. In our opinion, the pricing obtained at December 31, 2015 and 2014 was reasonable. Unusual fluctuations outside of our expectations are independently corroborated with additional third-party sources that use similar valuation techniques as discussed above. In addition, we also randomly select securities and independently corroborate the valuations obtained from our third-party valuation service providers.



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For the year ended December 31, 2015, the change in our available-for-sale securities categorized as Level 1 and Level 2 was the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities. During the twelve month period ended December 31, 2015, there were no securities transferred between Level 1 and Level 2.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes. If pricing cannot be obtained from these sources, which occurs on a limited basis, management will perform a discounted cash flow analysis, using an appropriate risk-adjusted discount rate, on the underlying security to estimate fair value. During the twelve month period ended December 31, 2015, there were no securities transferred in or out of Level 3.

The following table provides a summary of the changes in fair value of our Level 3 securities for 2015:
 
States, municipalities and political subdivisions
 
Corporate bonds
 
Asset-backed securities
 
Equities
 
Total
Balance at January 1, 2015
$
519

 
$
12,312

 
$
1,612

 
$
3,872

 
$
18,315

Realized gains (losses) (1)

 
(142
)
 

 

 
(142
)
Unrealized gains (losses) (1)
(26
)
 

 
(39
)
 

 
(65
)
Purchases

 
100

 

 
121

 
221

Disposals
(150
)
 
(1,375
)
 
(537
)
 
(15
)
 
(2,077
)
Balance at December 31, 2015
$
343

 
$
10,895

 
$
1,036

 
$
3,978

 
$
16,252

(1) Realized gains (losses) are recorded as a component of earnings, whereas unrealized gains (losses) are recorded as a component of comprehensive income.

The following table provides a summary of the changes in fair value of our Level 3 securities for 2014:
 
States, municipalities and political subdivisions
 
Corporate bonds
 
Asset-backed securities
 
Equities
 
Total
Balance at January 1, 2014
$
698

 
$
13,480

 
$
2,029

 
$
3,781

 
$
19,988

Realized gains (losses) (1)

 
11

 

 
(56
)
 
(45
)
Unrealized gains (losses) (1)
(34
)
 
(85
)
 
50

 
47

 
(22
)
Purchases

 
4

 

 
144

 
148

Disposals
(145
)
 
(1,098
)
 
(467
)
 
(44
)
 
(1,754
)
Balance at December 31, 2014
$
519

 
$
12,312

 
$
1,612

 
$
3,872

 
$
18,315

(1) Realized gains (losses) are recorded as a component of earnings, whereas unrealized gains (losses) are recorded as a component of comprehensive income.
The fixed maturities reported as disposals relate to the receipt of principal on calls or sinking fund bonds, in accordance with the indentures.

Corporate-Owned Life Insurance

The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Non-qualified Deferred Compensation Plan and United Fire Group Supplemental Executive Retirement and Deferral Plan (collectively the "Executive Retirement Plans"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plans.


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The COLI policies invest in mutual funds, which are priced daily by independent sources. As of December 31, 2015, the cash surrender value of the COLI policies was $1,716, which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.

NOTE 4. REINSURANCE
Property and Casualty Insurance Segment
Ceded and Assumed Reinsurance
Reinsurance is a contract by which one insurer, called the reinsurer, agrees to cover, under certain defined circumstances, a portion of the losses incurred by a primary insurer if a claim is made under a policy issued by the primary insurer. Our property and casualty insurance companies follow the industry practice of reinsuring a portion of their exposure by ceding to reinsurers a portion of the premium received and a portion of the risk under the policies written. We purchase reinsurance to reduce the net liability on individual risks to predetermined limits and to protect us against catastrophic losses, such as a hurricane or tornado. We do not engage in any reinsurance transactions classified as finite risk reinsurance.
We account for premiums, written and earned, and losses incurred net of reinsurance ceded. The ceding of insurance does not legally discharge us from primary liability under our policies, and we must pay the loss if the reinsurer fails to meet its obligation. We periodically monitor the financial condition of our reinsurers to confirm that they are financially stable. We believe that all of our reinsurers are in an acceptable financial condition and there were no reinsurance balances at December 31, 2015 for which collection is at risk that would result in a material impact on our Consolidated Financial Statements. The amount of reinsurance recoverable on paid losses totaled $11,887 and $15,595 at December 31, 2015 and 2014, respectively.
We also assume both property and casualty insurance from other insurance or reinsurance companies. Most of the business we have assumed is property insurance, with an emphasis on catastrophe coverage.
Premiums and losses and loss settlement expenses related to our ceded and assumed business are as follows:
 
 
 
 
 
 
Years Ended December 31,
2015
 
2014
 
2013
Ceded Business
 
 
 
 
 
Ceded premiums written
$
56,916

 
$
50,290

 
$
50,711

Ceded premiums earned
56,758

 
49,818

 
50,514

Loss and loss settlement expenses ceded(1)
3,868

 
9,728

 
(8,552
)
 
 
 
 
 
 
Assumed Business
 
 
 
 
 
Assumed premiums written
$
18,290

 
$
16,421

 
$
18,938

Assumed premiums earned
18,396

 
16,265

 
185,485

Loss and loss settlement expenses assumed
14,415

 
7,727

 
8,268

(1) In 2013, a reduction in our direct IBNR reserves caused a corresponding reduction in ceded IBNR reserves.  This factor, coupled with a lack of significant large losses exceeding our reinsurance retentions resulted in negative loss and loss settlement expenses ceded for the year.  

In 2015, we renewed our participation in all of our assumed programs and added one new program to our portfolio. The new assumed program is for international catastrophes excluding the United States with the largest exposure to European wind perils. Loss and loss settlement expenses ceded decreased in 2015 as compared to 2014 primarily due to a decrease in significant large losses and catastrophe losses.



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In 2014, we renewed our participation in all but one of our assumed programs and added one new program to our portfolio. Loss and loss settlement expenses ceded increased in 2014 as compared to 2013 primarily due to an increase in catastrophe losses. We increased participation in one program in our assumed portfolio to replace lost premium from the program not renewed.

In 2013, we renewed our participation in all but one of our assumed programs and added two new programs to our portfolio. Loss and loss settlement expenses assumed decreased in 2013 as compared to 2012 primarily due to a decrease in catastrophe losses. We added two new programs to replace the lost premium from the program not renewed and to take advantage of areas where we had exposure capacity.  One of the new programs has worldwide exposure and the other has exposure in the United Kingdom and Japan. 
Refer to Note 5 "Reserves for Losses and Loss Settlement Expenses" for an analysis of changes in our overall property and casualty insurance reserves.
Reinsurance Programs and Retentions
We have several programs that provide reinsurance coverage. This reinsurance coverage limits the risk of loss that we retain by reinsuring direct risks in excess of our retention limits. The following table provides a summary of our primary reinsurance programs. Retention amounts reflect the accumulated retentions and co-participation of all layers within a program. In 2013, we added a $3,000 aggregate annual deductible to our core program multi-line (casualty excess and property excess) which was increased to $4,000 in 2014.
 
2015 Reinsurance Programs
Type of Reinsurance
Stated Retention
 
Limits
 
Coverage
Casualty excess of loss
$
2,000

 
$
40,000

 
100
%
of
$
38,000

Property excess of loss
2,000

 
25,000

 
100
%
of
$
23,000

Surety excess of loss
1,500

 
36,000

 
96
%
of
$
34,500

Property catastrophe, excess
20,000

 
200,000

 
100
%
of
$
180,000

Property catastrophe, excess
200,000

 
250,000

 
90.5
%
of
$
50,000

Boiler and machinery
N/A

 
50,000

 
100
%
of
$
50,000


 
2014 Reinsurance Programs
Type of Reinsurance
Stated Retention
 
Limits
 
Coverage
Casualty excess of loss
$
2,000

 
$
40,000

 
100
%
of
$
38,000

Property excess of loss
2,000

 
15,000

 
100
%
of
$
13,000

Surety excess of loss
1,500

 
28,000

 
91
%
of
$
26,500

Property catastrophe, excess
20,000

 
200,000

 
100
%
of
$
180,000

Property catastrophe, excess
200,000

 
250,000

 
90.5
%
of
$
50,000

Boiler and machinery
N/A

 
50,000

 
100
%
of
$
50,000


 
2013 Reinsurance Programs
Type of Reinsurance
Stated Retention
 
Limits
 
Coverage
Casualty excess of loss
$
2,000

 
$
40,000

 
100
%
of
$
38,000

Property excess of loss
2,000

 
15,000

 
100
%
of
$
13,000

Surety excess of loss
1,500

 
28,000

 
91
%
of
$
26,500

Property catastrophe, excess
20,000

 
200,000

 
95
%
of
$
180,000

Boiler and machinery
N/A

 
50,000

 
100
%
of
$
50,000



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If we incur catastrophe losses and loss settlement expenses that exceed the coverage limits of our reinsurance program, our property catastrophe program provides one guaranteed reinstatement. In such an instance, we are required to pay the reinsurers a reinstatement premium equal to the full amount of the original premium, which will reinstate the full amount of reinsurance available under the property catastrophe program.
Life Insurance Segment
Ceded and Assumed Reinsurance
United Life purchases reinsurance to limit the dollar amount of any one risk of loss. Our retention on standard individual life cases is $300. Our accidental death benefit rider on an individual policy is reinsured at 100 percent, up to a maximum benefit of $250. Our group coverage, both life and accidental death and dismemberment, is reinsured at 50.0 percent with a retention of $75 for United Fire internal group coverage. Catastrophe excess reinsurance coverage applies when three or more insureds die in a catastrophic accident. For catastrophe excess claims, we retain the first $1,000 of ultimate net loss and the reinsurer agrees to indemnify us for the excess up to a maximum of $5,000. We supplement this coverage when appropriate with "known concentration" coverage. Known concentration coverage is typically tied to a specific event and time period, with a threshold of a minimum number of lives involved in the event, minimum event deductible (stated retention limit) and a maximum payout.
Premiums and losses and loss settlement expenses related to our ceded business are as follows:
 
 
 
 
 
 
Years Ended December 31,
2015
 
2014
 
2013
Ceded Business
 
 
 
 
 
Ceded insurance in-force
$
1,165,868

 
$
1,130,059

 
$
1,112,688

Ceded premiums earned
3,161

 
2,959

 
2,792

Loss and loss settlement expenses ceded
2,113

 
3,467

 
1,971

The ceding of insurance does not legally discharge United Life from primary liability under its policies. United Life must pay the loss if the reinsurer fails to meet its obligations. We periodically monitor the financial condition of our reinsurers to confirm that they are financially stable and have strong credit ratings. We believe that all of our reinsurers are in an acceptable financial condition. Approximately 99.0 percent of ceded life insurance in force as of December 31, 2015 was ceded to five reinsurers.

NOTE 5. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES
Because property and casualty insurance reserves are estimates of the unpaid portions of incurred losses that have been reported to us, as well as losses that have been incurred but not reported ("IBNR"), the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses and related loss settlement expenses may vary materially from recorded amounts, which are based on management's best estimates. We regularly update our reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported as a component of losses and loss settlement expenses incurred in the period such changes are determined.







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The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves for 2015, 2014 and 2013 (net of reinsurance amounts):
 
 
 
 
 
 
Years Ended December 31,
2015
 
2014
 
2013
Gross liability for losses and loss settlement expenses
at beginning of year
$
969,437

 
$
960,651

 
$
971,911

Ceded losses and loss settlement expenses
(63,757
)
 
(75,150
)
 
(103,870
)
Net liability for losses and loss settlement expenses
at beginning of year
$
905,680

 
$
885,501

 
$
868,041

Losses and loss settlement expenses incurred
for claims occurring during
 
 
 
 
 
   Current year
$
560,482

 
$
566,555

 
$
494,841

   Prior years
(40,395
)
 
(56,744
)
 
(57,487
)
Total incurred
$
520,087

 
$
509,811

 
$
437,354

Losses and loss settlement expense payments
for claims occurring during
 
 
 
 
 
   Current year
$
225,022

 
$
247,651

 
$
203,868

   Prior years
251,503

 
241,981

 
216,026

Total paid
$
476,525

 
$
489,632

 
$
419,894

Net liability for losses and loss settlement expenses
at end of year
$
949,242

 
$
905,680

 
$
885,501

Ceded loss and loss settlement expenses
54,653

 
63,757

 
75,150

Gross liability for losses and loss settlement expenses
at end of year
$
1,003,895

 
$
969,437

 
$
960,651


There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific dollar impact of any individual factor on the development of reserves.

The significant drivers of the favorable reserve development in 2015 were our long-tail liability lines, workers compensation, and automobile (physical damage). The favorable development is attributable to reductions in reserves for reported claims as well as reductions in required reserves for IBNR claims combined with continued successful management of litigation expenses. These reserve decreases were more than sufficient to offset claim payments. The favorable development was partially offset by adverse development, the majority coming from three lines which included property, assumed reinsurance and commercial auto liability. No other single line of business contributed a significant portion of the total development.

The significant drivers of the favorable reserve development in 2014 were our long-tail liability lines, workers compensation, and automobile (both liability and physical damage). Much of the favorable long-tail liability development came from loss adjustment expense and is attributed to our litigation management initiative. Workers' compensation favorable development was due to the combination of claim reserve decreases along with favorable changes affecting loss adjustment expense. Changes in reserve development patterns have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial auto liability continues to benefit from loss control and re-underwriting initiatives over the past two years as well as favorable changes affecting loss adjustment expense as reserve development patterns also showed a redundancy in reserves along with less need for IBNR claim reserves.


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The favorable reserve development in 2013 on prior year reserves was primarily related to our long-tail lines of commercial business including other liability, workers' compensation and auto liability. The significant driver of the favorable reserve development in 2013 was the other liability line, primarily due to additional recognition of relatively recent changes in reserve development patterns which have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Also, contributing to the favorable development in 2013, only to a lesser extent than the other liability line of business, were workers' compensation, commercial auto liability and surety lines of business.
Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year. However, conditions and trends that have affected the reserve development for a given year do change. Therefore, such development cannot be used to project future reserve redundancies or deficiencies.
We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our underwriters are aware of these exposures and use riders or endorsements to limit exposure.
NOTE 6. STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDENDS AND RETAINED EARNINGS RESTRICTIONS
Statutory capital and surplus in regards to policyholders at December 31, 2015, 2014 and 2013 and statutory net income for the years then ended are as follows:
 
Statutory Capital and Surplus
 
Statutory Net Income
2015
 
 
 
Property and casualty (1)
$
722,404

 
$
75,554

Life, accident and health
138,855

 
(1,524
)
2014
 
 
 
Property and casualty (1)
$
685,866

 
$
54,233

Life, accident and health
155,667

 
3,517

2013
 
 
 
Property and casualty (1)
$
665,772

 
$
84,255

Life, accident and health
157,974

 
5,942

(1)
Because United Fire & Casualty Company owns United Life Insurance Company, the property and casualty statutory capital and surplus includes life, accident and health statutory capital and surplus, and therefore represents our total consolidated statutory capital and surplus.

State insurance holding company laws and regulations generally require approval from the insurer's domicile state insurance Commissioner for any material transaction or extraordinary dividend. For property and casualty insurers, a material transaction is defined as any sale, loan, exchange, transfer or guarantee with an affiliate where the aggregate value of the transaction exceeds 25 percent of the insurer's policyholders' surplus or three percent of its admitted assets (measured at December 31 of the preceding year), whichever is less. For life insurers, a material transaction with an affiliate is defined as a transaction with an aggregate value exceeding three percent of the life insurer's admitted assets (measured at December 31 of the preceding year).
State laws and regulations generally limit the amount of funds that an insurance company may distribute to a parent as a dividend without Commissioner approval. As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay


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dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2015, our insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $53,054 in dividend payments without prior approval. At December 31, 2015, we were in compliance with applicable state laws and regulations. These restrictions will not have a material impact in meeting our cash obligations. In addition, United Fire Group, Inc. maintains a credit agreement, as discussed in Part II, Note 14 "Credit Facility", which permits us to borrow up to an aggregate principal amount of $50,000 and allows the Company to increase the aggregate amount of the commitments thereunder by up to $100,000.
We paid dividends to our common shareholders of $21,658, $19,680 and $17,484 in 2015, 2014 and 2013, respectively. Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors, out of funds legally available, and subject to any other restrictions that may be applicable to us.
In 2015, 2014 and 2013, United Fire & Casualty Company received dividends from its wholly owned subsidiaries of $16,500, $13,500 and $26,335, respectively. In 2015, 2014 and 2013, United Fire & Casualty Company paid dividends to United Fire Group, Inc. totaling $22,500, $29,000 and $13,175, respectively. These intercompany dividend payments are eliminated for reporting in our Consolidated Financial Statements.
A majority of our custodial assets are subject to a tri-party agreement between one of our subsidiary companies, United Life Insurance Company ("United Life"), the custodian, and the Iowa Insurance Commissioner. Under this agreement, as long as United Life maintains the minimum aggregate value of securities in the account (based on its legal reserve requirements), it is free to invest, withdraw or loan these funds or pay dividends using these funds without approval from the Commissioner. Investment of these funds is subject to the same limitations on asset class and credit quality imposed by the Commissioner on all insurance company invested assets. Investment income derived from these custodied funds is available for general corporate purposes and to satisfy corporate obligations without approval from the Commissioner.
At December 31, 2015, United Life had net admitted assets, on a statutory basis, of $1,535,950, $195,380 in excess of its legal reserve requirement. Therefore, any restriction on funds deposited by United Life with the Iowa Insurance Commissioner would not materially affect its financial position or results of operations and its cash flows are sufficient to meet its operational requirements. Under the material transaction and dividend standards described above, United Life currently is not able to enter into an affiliate transaction and/or pay a dividend without approval from the Commissioner.
Our property and casualty and life insurance subsidiaries are required to prepare and file statutory-basis financial statements in conformity with the National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. The accounting principles used to prepare these statutory-basis financial statements follow prescribed or permitted accounting practices that differ from GAAP. Prescribed statutory accounting principles include state laws, regulations and general administrative rules issued by the state of domicile, as well as a variety of publications and manuals of the NAIC. Permitted accounting practices encompass all accounting practices not prescribed, but allowed by the state of domicile. No material permitted accounting practices were used to prepare our statutory-basis financial statements during 2015, 2014 and 2013. Statutory accounting principles primarily differ from GAAP in that policy acquisition and certain sales inducement costs are charged to expense as incurred, goodwill is amortized, life insurance reserves are established based on different actuarial assumptions and the values reported for investments, pension obligations and deferred taxes are established on a different basis.


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We are directed by the state insurance departments' solvency regulations to calculate a required minimum level of statutory capital and surplus based on insurance risk factors. The risk-based capital results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. Both United Life and United Fire & Casualty Company and its property and casualty insurance subsidiaries and affiliates had statutory capital and surplus in regards to policyholders well in excess of their required levels at December 31, 2015.

NOTE 7. FEDERAL INCOME TAX
Federal income tax expense (benefit) is composed of the following:
 
 
 
 
 
 
Years Ended December 31,
2015
 
2014
 
2013
Current
$
37,649

 
$
15,649

 
$
19,146

Deferred
(5,324
)
 
1,677

 
6,616

Total
$
32,325

 
$
17,326

 
$
25,762

A reconciliation of income tax expense computed at the applicable federal tax rate of 35.0 percent to the amount recorded in the accompanying Consolidated Statements of Income and Comprehensive Income is as follows:
 
 
 
 
 
 
Years Ended December 31,
2015
 
2014
 
2013
Computed expected income tax expense
$
42,508

 
$
26,762

 
$
35,666

Tax-exempt municipal bond interest income
(7,669
)
 
(7,417
)
 
(7,732
)
Nontaxable dividend income
(1,337
)
 
(1,232
)
 
(1,053
)
Valuation allowance reduction
(548
)
 
(548
)
 
(548
)
Other, net
(629
)
 
(239
)
 
(571
)
Federal income tax expense
$
32,325

 
$
17,326

 
$
25,762
















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The significant components of our net deferred tax liability at December 31, 2015 and 2014 are as follows:
 
 
 
 
December 31,
2015
 
2014
Deferred tax liabilities
 
 
 
Net unrealized appreciation on investment securities:
 
 
 
  Equity securities
$
58,674

 
$
60,952

  All other securities
11,159

 
24,308

Deferred policy acquisition costs
53,960

 
44,271

Prepaid pension cost
1,920

 
2,973

Net bond discount accretion
1,430

 
1,925

Depreciation
1,791

 
2,667

Revaluation of investment basis (1)
1,824

 
2,611

Identifiable intangible assets (1)
3,560

 
3,808

Other
7,627

 
8,152

Gross deferred tax liability
$
141,945

 
$
151,667

Deferred tax assets
 
 
 
Financial statement reserves in excess of income tax reserves
$
34,535

 
$
35,800

Unearned premium adjustment
28,679

 
26,146

Net operating loss carryforwards
1,265

 
1,813

Underfunded benefit plan obligation
25,810

 
31,473

Postretirement benefits other than pensions
17,838

 
14,374

Other-than-temporary impairment of investments
5,609

 
5,222

Contingent ceding commission accrual
3,342

 
3,573

Compensation expense related to stock options
4,627

 
4,582

Other
6,852

 
4,738

Gross deferred tax asset
$
128,557

 
$
127,721

Valuation allowance
(1,265
)
 
(1,813
)
Deferred tax asset
$
127,292

 
$
125,908

Net deferred tax liability
$
14,653

 
$
25,759

(1) Related to our acquisition of Mercer Insurance Group.
Due to our determination that we may not be able to fully realize the benefits of the net operating losses ("NOLs") acquired in the purchase of American Indemnity Financial Corporation in 1999, which are only available to offset the future taxable income of our property and casualty insurance operations and are further limited as to the amount that can be utilized in any given year, we have recorded a valuation allowance against these NOLs that totaled $1,265 and $1,813, respectively, at December 31, 2015 and 2014. Based on a yearly review, we determine whether the benefit of the NOLs can be realized, and, if so, the decrease in the valuation allowance is recorded as a reduction to current federal income tax expense. If NOLs expire during the year, the decrease in the valuation allowance is offset with a corresponding decrease to the deferred income tax asset. The valuation allowance was reduced by $548 during 2014 and 2015, respectively, due to the realization of $1,565 in NOLs. No portion of the NOLs expired in 2014 or 2015 or will expire in 2016. At December 31, 2015, we had no alternative minimum tax ("AMT") credit carryforwards.

NOTE 8. EMPLOYEE BENEFITS
We offer various benefits to our employees including a noncontributory defined benefit pension plan, an employee/retiree health and dental benefit plan, a profit-sharing plan and an employee stock ownership plan.




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Pension and Postretirement Benefit Plans
We offer a noncontributory defined benefit pension plan in which all of our employees are eligible to participate after they have completed one year of service, attained 21 years of age and have met the hourly service requirements. Retirement benefits under our pension plan are based on the number of years of service and level of compensation. Our policy to fund the pension plan on a current basis to not less than the minimum amounts required by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended, is to assure that plan assets will be adequate to provide retirement benefits. We estimate that we will contribute approximately $6,384 to the pension plan in 2016.
We also offer a health and dental benefit plan to all of our eligible employees and retirees that consists of two programs: (1) the self-funded employee health and dental benefit plan and (2) the self-funded (pre-65) and fully-funded (post-65) retiree health and dental benefit plan (the "postretirement benefit plan"). The postretirement benefit plan provides health and dental benefits to our retirees (and covered dependents) who have met the service and participation requirements stipulated by the postretirement benefit plan. The third party administrators for the postretirement benefit plan are responsible for making medical and dental care benefit payments. Participants are required to submit claims for reimbursement or payment to the claims administrator within twelve months after the end of the calendar year in which the charges were incurred. An unfunded benefit obligation is reported for the postretirement benefit plan in the accompanying Consolidated Balance Sheets.
Investment Policies and Strategies
Our investment policy and objective for the pension plan is to generate long-term capital growth and income by way of a diversified investment portfolio along with appropriate employer contributions, which will allow us to provide for the pension plan's benefit obligation.
The investments held by the pension plan at December 31, 2015 include the following asset categories:
Fixed income securities, which may include bonds, and convertible securities;
Equity securities, which may include various types of stock, such as large-cap, mid-cap, small-cap, and international stocks;
Pooled separate accounts, which includes two separate funds, a core plus bond separate account and a real estate separate account;
An arbitrage fund, which is a fund that takes advantage of price discrepancies, primarily equity securities, for the same asset in different markets;
A group annuity contract that is administered by United Life, a subsidiary of United Fire; and
Cash and cash equivalents, which include money market funds.
We have an internal investment/retirement committee, which includes our Chief Executive Officer, Chief Investment Officer, and Chief Operating Officer, all of whom receive monthly information on the value of the pension plan assets and their performance. Quarterly, the committee meets to review and discuss the performance of the pension plan assets as well as the allocation of investments within the pension plan.
As of December 31, 2015, we had six external investment managers that are allowed to exercise investment discretion, subject to limitations, if any, established by the investment/retirement committee. We utilize multiple investment managers in order to maximize the pension plan's investment return while mitigating risk. None of our investment managers uses leverage in managing the pension plan. Annually, the investment/retirement committee meets with each investment manager to review the investment manager's goals, objectives and the performance of the assets they manage. The decision to establish or terminate a relationship with an investment manager is at the discretion of our investment/retirement committee.


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We consider historical experience for comparable investments and the target allocations we have established for the various asset categories of the pension plan to determine the expected long-term rate of return, which is an assumption as to the average rate of earnings expected on the pension plan funds invested, or to be invested, by the pension plan, to provide for the settlement of benefits included in the projected pension benefit obligation. Investment securities, in general, are exposed to various risks, such as fluctuating interest rates, credit standing of the issuer of the security and overall market volatility. Annually, we perform an analysis of expected long-term rates of return based on the composition and allocation of our pension plan assets and recent economic conditions.
The following is a summary of the pension plan's actual and target asset allocations at December 31, 2015 and 2014 by asset category:
 
 
 
 
 
 
 
 
 
Target
Pension Plan Assets
2015
 
% of Total
 
2014
 
% of Total
 
Allocation
Fixed maturity securities - corporate bonds
$
6,894

 
6.5
%
 
$
9,035

 
8.8
%
 
0
%
-
15
%
Redeemable preferred stock
3,744

 
3.5

 
2,254

 
2.2

 
0
%
-
10
%
Equity securities
58,613

 
55.0

 
58,223

 
56.6

 
50
%
-
70
%
Pooled separate accounts
 
 
 
 
 
 
 
 
 
 
 
Core Plus Bond separate account fund
6,605

 
6.2

 
6,417

 
6.3

 
0
%
-
40
%
U.S. property separate account fund
11,252

 
10.5

 
9,895

 
9.6

 
0
%
-
25
%
Arbitrage fund
7,856

 
7.4

 
7,637

 
7.4

 
0
%
-
10
%
United Life annuity
8,931

 
8.4

 
8,506

 
8.3

 
5
%
-
10
%
Cash and cash equivalents
2,705

 
2.5

 
833

 
0.8

 
0
%
-
10
%
Total plan assets
$
106,600

 
100.0
%
 
$
102,800

 
100.0
%
 
 
 
 

The investment return expectations for the pension plan are used to develop the asset allocation based on the specific needs of the pension plan. Accordingly, equity securities comprise the largest portion of our pension plan assets, as they yield the highest rate of return. The United Life annuity, which is the third largest asset category and was originally written by our life insurance subsidiary in 1976, provides a guaranteed rate of return. The interest rate on the group annuity contract is determined annually.
The availability of assets held in cash and cash equivalents enables the pension plan to mitigate market risk that is associated with other types of investments and allows the pension plan to maintain liquidity both for the purpose of making future benefit payments to participants and their beneficiaries and for future investment opportunities.
Valuation of Investments
Fixed Maturity and Equity Securities
Investments in fixed maturity and equity securities are stated at fair value based upon quoted market prices reported on recognized securities exchanges on the last business day of the year. Purchases and sales of securities are recorded as of the trade date.
Pooled Separate Accounts
The pension plan invests in two pooled separate account funds, a core plus bond separate account fund and a U.S. property separate account fund. Investments in the core plus bond separate account fund are stated at fair value as provided by the administrator of the fund based on the fair value of the underlying assets owned by the fund. The fair value measurement is classified within Level 2 of the fair value hierarchy. The fair value of the investments in the U.S. property separate account fund is provided by the administrator of the fund based on the net asset value of the fund. The net asset value is based on the fair value of the underlying properties included in the fund. The fair value of the underlying properties are based on property appraisals conducted by an independent third party. The fair value measurement is classified within Level 3 of the fair value hierarchy. We have not adjusted the net asset value provided by the custodian.


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Arbitrage Fund
The fair value of the arbitrage fund is determined based on its net asset value, which is obtained from the custodian and determined monthly with issuances and redemptions of units of the fund made, based on the net asset value per unit as determined on the valuation date. We have not adjusted the net asset value provided by the custodian.
United Life Annuity
The United Life group annuity contract, which is a deposit administration contract, is stated at contract value as determined by United Life. Under the group annuity contract, the plan's investment account is credited with compound interest on the average account balance for the year. The interest rate is equivalent to the ratio of net investment income to mean assets of United Life, net of investment expenses.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of insured cash and money market funds held with various financial institutions. Interest is earned on a daily basis. The fair value of these funds approximates their cost basis due to their short-term nature.
Fair Value Measurement
The following tables present the categorization of the pension plan's assets measured at fair value on a recurring basis at December 31, 2015 and 2014:
 
 
 
Fair Value Measurements
Description
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
Fixed maturity securities - corporate bonds
$
6,894

 
$

 
$
6,894

 
$

Redeemable preferred stock
3,744

 
3,744

 

 

Equity securities
58,613

 
58,613

 

 

Pooled separate accounts
 
 
 
 
 
 
 
Core plus bond separate account fund
6,605

 

 
6,605

 

U.S. property separate account fund
11,252

 

 

 
11,252

Arbitrage fund
7,856

 

 
7,856

 

Money market funds
2,619

 
2,619

 

 

Total assets measured at fair value
$
97,583

 
$
64,976

 
$
21,355

 
$
11,252


 
 
 
Fair Value Measurements
Description
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
Fixed maturity securities - corporate bonds
$
9,035

 
$

 
$
9,035

 
$

Redeemable preferred stock
2,254

 
2,254

 

 

Equity securities
58,223

 
58,223

 

 

Pooled separate accounts
 
 
 
 
 
 
 
Core plus bond separate account fund
6,417

 

 
6,417

 

U.S. property separate account fund
9,895

 

 

 
9,895

Arbitrage fund
7,637

 

 
7,637

 

Money market funds
826

 
826

 

 

Total assets measured at fair value
$
94,287

 
$
61,303

 
$
23,089

 
$
9,895

There were no transfers of assets in or out of Level 1 or Level 2 during the period.


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The fair value of investments categorized as Level 1 is based on quoted market prices that are readily and regularly available.
The fair value of fixed maturity securities categorized as Level 2 is determined by management based on fair value information reported in the custodial statements, which is derived from recent trading activity of the underlying security in the financial markets. These securities represent various taxable bonds held by the pension plan. These securities categorized as Level 2 are valued in the same manner as described in Part II, Item 8, Note 3 and have the same controls in place.
The fair value of the arbitrage fund and bond and mortgage pooled separate account fund are categorized as Level 2 since there are no restrictions as to the pension plan's ability to redeem its investment at the net asset value of the fund as of the reporting date.  

The following tables provide a summary of the changes in fair value of the pension plan's Level 3 securities:
 
U.S. property separate account fund
Balance at January 1, 2015
$
9,895

Unrealized gains
1,357

Balance at December 31, 2015
$
11,252


 
U.S. property separate account fund
Balance at January 1, 2014
$
8,763

Unrealized gains
1,132

Balance at December 31, 2014
$
9,895

Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31. In estimating the discount rate, we look to rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of the respective plan's benefit obligations.

In October 2014, the Society of Actuaries finalized a new mortality table and a new mortality improvement scale. The mortality improvement scale was further refined by the Society of Actuaries in 2015. These updated tables reflect improved life expectancies and an expectation that the trend will continue. We have reviewed these updated tables and have updated the mortality assumptions based on this information and also based on research provided by our external actuaries. We will continue to monitor mortality assumptions and make changes as appropriate to reflect additional research and our resulting best estimate of future mortality rates.
Assumptions Used to Determine Benefit Obligations
The following actuarial assumptions were used to determine the reported plan benefit obligations at December 31:
Weighted-average assumptions as of
Pension Benefits
 
Postretirement Benefits
December 31,
2015
 
2014
 
2015
 
2014
Discount rate
4.21
%
 
3.86
%
 
4.21
%
 
3.86
%
Rate of compensation increase
3.00

 
3.00

 
N/A

 
N/A



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Increasing interest rates resulted in an increase in the discount rates we use to value our respective plan's benefit obligations at December 31, 2015 compared to December 31, 2014.
Assumptions Used to Determine Net Periodic Benefit Cost
The following actuarial assumptions were used at January 1 to determine our reported net periodic benefit costs for the year ended December 31:
Weighted-average assumptions as of
Pension Benefits
 
Postretirement Benefits
January 1,
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Discount rate
3.86
%
 
4.84
%
 
4.00
%
 
3.86
%
 
4.84
%
 
4.00
%
Expected long-term rate of return on plan assets
7.50

 
7.50

 
7.50

 
N/A

 
N/A

 
N/A

Rate of compensation increase
3.00

 
3.50

 
3.50

 
N/A

 
N/A

 
N/A

Assumed Health Care Cost Trend Rates
 
Health Care Benefits
 
Dental Claims
Years Ended December 31,
2015
 
2014
 
2015
 
2014
Health care cost trend rates assumed for next year
7.00
%
 
7.00
%
 
4.00
%
 
4.00
%
Rate to which the health care trend rate is assumed to decline (ultimate trend rate)
4.50
%
 
4.50
%
 
N/A

 
N/A

Year that the rate reaches the ultimate trend rate
2024

 
2023

 
N/A

 
N/A

Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement benefit plan. A 1.0 percent change in assumed health care cost trend rates would have the following effects:
 
 
1% Increase
 
1% Decrease
Effect on the net periodic postretirement health care benefit cost
 
$
1,595

 
$
(1,239
)
Effect on the accumulated postretirement benefit obligation
 
14,178

 
(11,270
)


























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Benefit Obligation and Funded Status
The following table provides a reconciliation of benefit obligations, plan assets and funded status of our plans:
 
Pension Benefits
 
Postretirement Benefits
Years Ended December 31,
2015
 
2014
 
2015
 
2014
Reconciliation of benefit obligation
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
157,600

 
$
123,352

 
$
74,552

 
$
48,954

Service cost
6,675

 
5,210

 
5,220

 
3,696

Interest cost
5,999

 
5,874

 
2,856

 
2,342

Actuarial (gain) loss
(5,678
)
 
26,590

 
(9,253
)
 
20,730

Benefit payments and adjustments
(4,206
)
 
(3,426
)
 
(1,200
)
 
(1,170
)
Benefit obligation at end of year (1)
$
160,390

 
$
157,600

 
$
72,175

 
$
74,552

Reconciliation of fair value of plan assets
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
$
102,800

 
$
92,219

 
$

 
$

Actual return on plan assets
1,654

 
6,591

 

 

Employer contributions
6,352

 
7,416

 
(1,200
)
 
(1,170
)
Benefit payments and adjustments
(4,206
)
 
(3,426
)
 
1,200

 
1,170

Fair value of plan assets at end of year
$
106,600

 
$
102,800

 
$

 
$

Funded status at end of year
$
(53,790
)
 
$
(54,800
)
 
$
(72,175
)
 
$
(74,552
)
(1)
For the pension plan, the benefit obligation is the projected benefit obligation. For the postretirement benefit plan, the benefit obligation is the accumulated postretirement benefit obligation.
Our accumulated pension benefit obligation was $141,550 and $138,180 at December 31, 2015 and 2014, respectively.
The following table displays the effect that the unrecognized prior service cost and unrecognized actuarial loss of our plans had on accumulated other comprehensive income ("AOCI"), as reported in the accompanying Consolidated Balance Sheets:
 
 
Pension Benefits
 
Postretirement Benefits
Years Ended December 31
 
2015
 
2014
 
2015
 
2014
Amounts recognized in AOCI
 
 
 
 
 
 
 
 
Unrecognized prior service cost
 
$

 
$

 
$

 
$

Unrecognized actuarial loss
 
52,936

 
56,943

 
20,806

 
32,979

Total amounts recognized in AOCI
 
$
52,936

 
$
56,943

 
$
20,806

 
$
32,979

We anticipate amortization of the net actuarial losses for our pension plan in 2016 to be $3,967. We anticipate amortization of the net actuarial losses for our postretirement benefit plan in 2016 to be $1,518.















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Net Periodic Benefit Cost

The components of the net periodic benefit cost for our pension and postretirement benefit plans are as follows:
 
Pension Plan
 
Postretirement Benefit Plan
Years Ended December 31,
2015
 
2014
 
2013
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
6,675

 
$
5,210

 
$
6,300

 
$
5,220

 
$
3,696

 
$
3,875

Interest cost
5,999

 
5,874

 
5,175

 
2,856

 
2,342

 
1,759

Expected return on plan assets
(7,800
)
 
(6,956
)
 
(5,772
)
 

 

 

Amortization of net loss
4,546

 
2,174

 
4,989

 
2,920

 
898

 
879

Net periodic benefit cost
$
9,420

 
$
6,302

 
$
10,692

 
$
10,996

 
$
6,936

 
$
6,513

Projected Benefit Payments
The following table summarizes the expected benefits to be paid from our plans over the next 10 years:
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
2021 - 2025
Pension benefits
 
$
4,680

 
$
5,060

 
$
5,420

 
$
5,930

 
$
6,500

 
$
43,200

Postretirement benefits
 
$
1,140

 
$
1,340

 
$
1,560

 
$
1,810

 
$
2,080

 
$
15,170

Profit-Sharing Plan and Employee Stock Ownership Plan
We have a profit-sharing plan in which employees who meet service requirements are eligible to participate. The amount of our contribution is discretionary and is determined annually, but cannot exceed the amount deductible for federal income tax purposes. Our contribution to the profit-sharing plan for 2015, 2014 and 2013, was $7,706, $3,847 and $6,029, respectively.
Prior to October 31, 2015 we had an employee stock ownership plan (the "ESOP") for the benefit of eligible employees and their beneficiaries. In June 2015, the plan administrator decided to merge the ESOP into the United Fire Group, Inc. 401K Plan effective October 31, 2015. Participant ESOP account balances were transferred to each participant’s 401K Plan.
All employees were eligible to participate in the ESOP upon completion of one year of service, meeting the hourly employment requirements and attaining 21 years of age. Contributions to the ESOP were made at our discretion. When made, these contributions were based upon a percentage of total payroll and are allocated to participants on the basis of compensation. We can make contributions in stock or cash, which the trustee uses to acquire shares of our stock to allocate to participants' accounts. Prior to merger of the plan into the United Fire Group, Inc. 401K Plan, the ESOP owned 214,614 shares of United Fire common stock. As of December 31, 2014, the ESOP owned 214,637 shares of United Fire common stock. Shares owned by the ESOP were included in shares issued and outstanding for purposes of calculating earnings per share, and dividends paid on the shares are charged to retained earnings. We made contributions to the ESOP of $150 and $250 in 2015 and 2014, respectively. We did not make any contributions to the ESOP in 2013.

NOTE 9. STOCK-BASED COMPENSATION
Non-Qualified Employee Stock Award Plan
The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of United Fire common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of United Fire common stock issuable at any time and from time to time pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc.


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Stock Plan, (as amended, the "Stock Plan"). At December 31, 2015, there were 1,394,578 authorized shares remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, 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 Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees who are in positions of substantial responsibility with United Fire.
Options granted pursuant to the Stock Plan are granted to buy shares of United Fire's 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 and unrestricted stock awards granted pursuant to the Stock Plan are granted at the market value of our common stock on the date of the grant. Restricted stock awards fully vest after 5 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. All 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 Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Year Ended December 31, 2015
 
From Inception to December 31, 2015
Beginning balance
1,646,947

 
1,900,000

Additional shares authorized

 
1,500,000

Number of awards granted
(366,419
)
 
(2,362,928
)
Number of awards forfeited or expired
114,050

 
357,506

Ending balance
1,394,578

 
1,394,578

Number of option awards exercised
182,956

 
650,519

Number of unrestricted stock awards granted
1,065

 
6,345

Number of restricted stock awards vested

 
18,576


Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan
The United Fire Group, Inc. 2005 Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan (the "Director Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of United Fire's common stock to non-employee directors. At December 31, 2015, we had 69,938 authorized shares available for future issuance.
The Board of Directors has the authority to determine which non-employee directors receive awards, 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 (subject to limits set forth in the plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Plan.











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The activity in the Director Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Year Ended December 31, 2015
 
From Inception to December 31, 2015
Beginning balance
87,194

 
300,000

Number of awards granted
(17,256
)
 
(236,065
)
Number of awards forfeited or expired

 
6,003

Ending balance
69,938

 
69,938

Number of option awards exercised
10,132

 
14,807

Number of restricted stock awards vested
8,729

 
20,171


Stock-Based Compensation Expense

In 2015, 2014 and 2013, we recognized stock-based compensation expense of $2,510, $1,944 and $1,777, respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.

As of December 31, 2015, we had $5,911 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized in 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.
2016
 
$
2,080

2017
 
1,851

2018
 
1,333

2019
 
584

2020
 
63

Total
 
$
5,911

Analysis of Award Activity
The analysis below details the award activity for 2015 and the awards outstanding at December 31, 2015, for both of our plans and ad hoc options, which were granted prior to the adoption of the other plans:
Options
Shares
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Life (in years)
 
Aggregate Intrinsic Value
Outstanding at January 1, 2015
1,358,289

 
$
28.70

 
 
 
 
Granted
332,729

 
29.17

 
 
 
 
Exercised
(193,088
)
 
27.96

 
 
 
 
Forfeited or expired
(114,050
)
 
31.84

 
 
 
 
Outstanding at December 31, 2015
1,383,880

 
$
28.66

 
5.84
 
$
13,435

Exercisable at December 31, 2015
667,106

 
$
29.76

 
3.44
 
$
5,785

Intrinsic value is the difference between our share price on the last day of trading (i.e., December 31, 2015) and the price of the options when granted and represents the value that would have been received by option holders had they exercised their options on that date. These values change based on the fair market value of our shares. The intrinsic value of options exercised totaled $1,546, $790 and $1,383 in 2015, 2014 and 2013, respectively.





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The analysis below details the award activity for the restricted stock awards outstanding at December 31, 2015:
Restricted stock awards
Shares
 
Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2015
114,313

 
$
25.67

Granted
49,881

 
32.16

Vested
(8,729
)
 
27.88

Forfeited
(10,702
)
 
25.20

Non-vested at December 31, 2015
144,763

 
$
27.81

In 2015, 2014 and 2013 we recognized $924, $588 and $407, respectively, in compensation expense related to the restricted stock awards. At December 31, 2015, we had $2,350 in compensation expense that has yet to be recognized through our results of operations related to the restricted stock awards. The intrinsic value of the non-vested restricted stock awards outstanding totaled $1,520, $459 and $358 at December 31, 2015, 2014 and 2013, respectively.
Assumptions
The weighted-average grant-date fair value of the options granted under our plans has been estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
December 31,
2015
 
2014
 
2013
Risk-free interest rate
1.94
%
 
2.19
%
 
1.37
%
Expected volatility
21.92
%
 
36.58
%
 
34.32
%
Expected option life (in years)
7

 
7

 
7

Expected dividends (in dollars)
$
0.80

 
$
0.78

 
$
0.69

Weighted-average grant-date fair value of options granted during the year (in dollars)
$
4.98

 
$
9.15

 
$
6.64


The following table summarizes information regarding the stock options outstanding and exercisable at December 31, 2015:
 
 
 
Options Outstanding
Options Exercisable
Range of Exercise Prices
Number Outstanding (in shares)
Weighted-Average Remaining Contractual Life (in years)
Weighted-Average Exercise Price
Number Exercisable (in shares)
Weighted-Average Exercise Price
$
15.01

-
21.00
194,832

5.23
$
20.21

129,536

$
19.96

21.01

-
28.00
234,221

6.49
23.38

117,226

22.98

28.01

-
35.00
745,327

7.23
30.16

213,344

32.31

35.01

-
41.00
209,500

0.75
37.10

207,000

37.11

$
15.01

-
41.00
1,383,880

5.84
$
28.66

667,106

$
29.76


NOTE 10. 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 seven domestic locations from which it conducts its business. 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. The accounting policies of the segments are the same as those described in Note 1 to our Consolidated Financial Statements. We analyze results based on profitability (i.e., loss ratios), expenses and return on equity.


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Property and Casualty Insurance Segment
We write both commercial and personal lines of property and casualty insurance. We focus on our commercial lines, which represented 91.9% of our property and casualty insurance premiums earned for 2015. Our personal lines represented 8.1% of our property and casualty insurance premiums earned for 2015.
Products
Our primary commercial policies are tailored business packages that include the following coverages: fire and allied lines, other liability, automobile, workers' compensation and surety. Our personal lines consist primarily of automobile and fire and allied lines coverage, including homeowners.
Pricing
Pricing levels for our property and casualty insurance products are influenced by many factors, including an estimation of expected losses, the expenses of producing, issuing and servicing business and managing claims, the time value of money associated with such loss and expense cash flows, and a reasonable allowance for profit. We have a disciplined approach to underwriting and risk management that emphasizes profitable growth rather than premium volume or market share. Our insurance company subsidiaries are subject to state laws and regulations regarding rate and policy form approvals. The applicable state laws and regulations establish standards in certain lines of business to ensure that rates are not excessive, inadequate, unfairly discriminatory, or used to engage in unfair price competition. Our ability to increase rates and the relative timing of the process are dependent upon each respective state's requirements, as well as the competitive market environment.
Seasonality
Our property and casualty insurance segment experiences some seasonality with regard to premiums written, which are generally highest in January and July and lowest during the fourth quarter. Although we experience some seasonality in our premiums written, premiums are earned ratably over the period of coverage. Losses and loss settlement expenses incurred tend to remain consistent throughout the year, with the exception of catastrophe losses which generally are highest in the second and third quarters. Catastrophes inherently are unpredictable and can occur at any time during the year from man-made or natural disaster events that include, but are not limited to, hail, tornadoes, hurricanes and windstorms.
Life Insurance Segment
Products
United Life Insurance Company underwrites all of our life insurance business and sells annuities. Our principal products are single premium annuities, universal life products and traditional life (primarily single premium whole life insurance) products. We also underwrite and market other traditional products, including term life insurance and whole life insurance. We do not write variable annuities or variable insurance products.
Life insurance in force, before ceded reinsurance, totaled $5,491,932 and $5,366,061 as of December 31, 2015 and 2014, respectively. Traditional life insurance products represented 68.5 percent and 67.7 percent of our insurance in-force at December 31, 2015 and 2014, respectively. Universal life insurance represented 26.3 percent and 27.3 percent of insurance in force at December 31, 2015 and 2014, respectively.
Pricing
Premiums for our life and health insurance products are based on assumptions with respect to mortality, morbidity, investment yields, expenses, and lapses and are also affected by state laws and regulations, as well as competition. Pricing assumptions are based on our experience, as well as the industry in general, depending upon the factor being considered. The actual profit or loss produced by a product will vary from the anticipated profit if the actual experience differs from the assumptions used in pricing the product.


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Premiums Earned by Segment
The following table sets forth our net premiums earned by segment before intersegment eliminations:
 
 
 
 
 
 
Years Ended December 31,
2015
 
2014
 
2013
Property and Casualty Insurance Segment
 
 
 
 
 
Net premiums earned
 
 
 
 
 
Other liability
$
261,303

 
$
228,426

 
$
199,548

Fire and allied lines
246,450

 
226,086

 
208,030

Automobile
210,090

 
187,813

 
169,211

Workers' compensation
95,672

 
88,522

 
81,616

Fidelity and surety
21,362

 
19,212

 
18,746

Reinsurance assumed
13,639

 
13,145

 
14,406

Other
3,179

 
3,735

 
2,635

Total net premiums earned
$
851,695

 
$
766,939

 
$
694,192

Life Insurance Segment
 
 
 
 
 
Net premiums earned
 
 
 
 
 
Ordinary life (excluding universal life)
$
53,114

 
$
35,557

 
$
38,875

Universal life policy fees
12,834

 
13,190

 
11,871

Immediate annuities with life contingencies
12,223

 
11,639

 
8,837

Accident and health
1,425

 
1,274

 
1,302

Other
388

 
261

 
261

Total net premiums earned
$
79,984

 
$
61,921

 
$
61,146

Total revenue by segment includes sales to external customers and intersegment sales that are eliminated to arrive at the total revenues as reported in the accompanying Consolidated Statements of Income and Comprehensive Income. We account for intersegment sales on the same basis as sales to external customers.
The following table sets forth certain data for each of our business segments and is reconciled to our Consolidated Financial Statements. Depreciation and amortization expense and property and equipment acquisitions for 2015, 2014 and 2013 are reported in the property and casualty insurance segment.



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2015
 
2014
 
2013
Property and Casualty Insurance:
 
 
 
 
 
Revenues:
 
 
 
 
 
Net premiums earned
$
851,695

 
$
766,939

 
$
694,192

Investment income, net of investment expenses
46,606

 
44,219

 
46,279

Net realized investment gains
1,124

 
4,177

 
6,260

Other income (loss)
(107
)
 
910

 
88

Total revenues before eliminations
$
899,318

 
$
816,245

 
$
746,819

Intersegment eliminations
(47
)
 
18

 
53

Total revenues
$
899,271

 
$
816,263

 
$
746,872

Net income before income taxes:
 
 
 
 
 
Revenues
$
899,318

 
$
816,245

 
$
746,819

Benefit, losses and expenses
784,691

 
750,768

 
658,645

Total net income before eliminations
$
114,627

 
$
65,477

 
$
88,174

Intersegment eliminations
743

 
548

 
545

Income before income taxes
$
115,370

 
$
66,025

 
$
88,719

Income tax expense
30,050

 
13,649

 
21,263

Net income
$
85,320

 
$
52,376

 
$
67,456

Assets
 
 
 
 
 
Total segment
$
2,490,138

 
$
2,360,764

 
$
2,218,464

Intersegment eliminations
(209,464
)
 
(233,141
)
 
(223,395
)
Total assets
$
2,280,674

 
$
2,127,623

 
$
1,995,069

 
 
 
 
 
 
Life Insurance:
 
 
 
 
 
Revenues:
 
 
 
 
 
Net premiums earned
$
79,984

 
$
61,921

 
$
61,146

Investment income, net of investment expenses
54,222

 
60,373

 
66,467

Net realized investment gains
1,722

 
3,093

 
2,434

Other income
508

 
774

 
614

Total revenues before eliminations
$
136,436

 
$
126,161

 
$
130,661

Intersegment eliminations
(789
)
 
(530
)
 
(491
)
Total revenues
$
135,647

 
$
125,631

 
$
130,170

Net income before income taxes:
 
 
 
 
 
Revenues
$
136,436

 
$
126,161

 
$
130,661

Benefit, losses and expenses
129,771

 
115,361

 
117,159

Total net income before eliminations
$
6,665

 
$
10,800

 
$
13,502

Intersegment eliminations
(584
)
 
(362
)
 
(319
)
Income before income taxes
$
6,081

 
$
10,438

 
$
13,183

Income tax expense
2,275

 
3,677

 
4,499

Net income
$
3,806

 
$
6,761

 
$
8,684

Assets
$
1,609,702

 
$
1,729,066

 
$
1,725,603

Consolidated Totals:
 
 
 
 
 
Total revenues
$
1,034,918

 
$
941,894

 
$
877,042

Total net income
$
89,126

 
$
59,137

 
$
76,140

Total assets
$
3,890,376

 
$
3,856,689

 
$
3,720,672





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NOTE 11. QUARTERLY SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth our selected unaudited quarterly financial information:
(In Thousands Except Share Data)
 
 
 
 
 
 
 
 
 
Quarters
First
 
Second
 
Third
 
Fourth
 
Total
Year Ended December 31, 2015
 
 
 
 
 
 
 
 
 
Total revenues
$
238,484

 
$
255,918

 
$
264,560

 
$
275,956

 
$
1,034,918

Income before income taxes
31,831

 
19,533

 
26,824

 
43,263

 
121,451

Net income
$
23,679

 
$
15,018

 
$
19,534

 
$
30,895

 
$
89,126

Basic earnings per share (1)
$
0.95

 
$
0.60

 
$
0.78

 
$
1.23

 
$
3.56

Diluted earnings per share (1)
0.94

 
0.59

 
0.77

 
1.21

 
3.53

Year Ended December 31, 2014
 
 
 
 
 
 
 
 
 
Total revenues
$
222,904

 
$
232,673

 
$
235,865

 
$
250,452

 
$
941,894

Income before income taxes
15,897

 
13,056

 
(2,845
)
 
50,355

 
76,463

Net income
$
13,331

 
$
10,685

 
$
325

 
$
34,796

 
$
59,137

Basic earnings per share (1)
$
0.53

 
$
0.42

 
$
0.01

 
$
1.39

 
$
2.34

Diluted earnings per share (1)
0.52

 
0.42

 
0.01

 
1.38

 
2.32

(1)
The sum of the quarterly reported amounts may not equal the full year, as each is computed independently.

NOTE 12. 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 outstanding stock options 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 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 market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.

The components of basic and diluted earnings per share were as follows:
 
Years Ended December 31,
 
2015
 
2014
 
2013
(In Thousands Except Share and Per Share Data)
Basic
 
Diluted
 
Basic
 
Diluted
 
Basic
 
Diluted
Net income
$
89,126

 
$
89,126

 
$
59,137

 
$
59,137

 
$
76,140

 
$
76,140

Weighted-average common shares outstanding
25,047,405

 
25,047,405

 
25,230,854

 
25,230,854

 
25,325,695

 
25,325,695

Add dilutive effect of restricted stock awards

 
122,840

 

 
114,313

 

 
59,849

Add dilutive effect of stock options

 
65,751

 

 
148,496

 

 
145,831

Weighted-average common shares
25,047,405

 
25,235,996

 
25,230,854

 
25,493,663

 
25,325,695

 
25,531,375

Earnings per common share
$
3.56

 
$
3.53

 
$
2.34

 
$
2.32

 
$
3.01

 
$
2.98

Awards excluded from diluted calculation(1)

 
343,390

 

 
835,610

 

 
638,478

(1)
Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.


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NOTE 13. LEASE COMMITMENTS
At December 31, 2015, we were obligated under noncancelable operating lease agreements for office space, vehicles, computer equipment and office equipment. Most of our leases include renewal options, purchase options or both. These provisions may be exercised by us upon the expiration of the related lease agreements. Rental expense under our operating lease agreements was $6,256, $7,040 and $6,521 for 2015, 2014 and 2013, respectively. Our most significant lease commitment is for office space for our regional office in Webster, Texas. This lease was signed in January of 2014 and is good for 7 years. The monthly lease payments for this office space is $88.
At December 31, 2015, our future minimum rental payments were as follows:
2016
$
5,935

2017
5,583

2018
4,776

2019
2,162

2020
1,487

Thereafter
154

Total
$
20,097


NOTE 14. CREDIT FACILITY
On February 2, 2016, the Company, as borrower, entered into a Credit Agreement (the "New Credit Agreement") by and among the Company, with the lenders from time to time party thereto and KeyBank National Association ("Key Bank"), as administrative agent, swingline lender and letter of credit issuer. The New Credit Agreement provides for a $50,000 four-year unsecured revolving credit facility that includes a $20,000 letter of credit subfacility and a swingline subfacility in the amount up to $5,000. The New Credit Agreement allows the Company to increase the aggregate amount of the commitments thereunder by up to $100,000, provided that no event of default has occurred and is continuing and certain other conditions are satisfied.
The New Credit Agreement is available for the Company's general corporate purposes, including liquidity, acquisitions and working capital. All unpaid principal and accrued interest under the New Credit Agreement is due and payable in full at maturity on February 2, 2020. Based on the type of loan, advances under the New Credit Agreement would bear interest on either the London interbank offered rate ("LIBOR") or a base rate plus, in each case, a calculated margin amount.
The unused commitments under the New Credit Agreement will be subject to a commitment fee that will be calculated at a per annum rate. The applicable margins for borrowings under the New Credit Agreement and the commitment fee thereunder will be determined by reference to a pricing grid based on the Company’s issuer credit rating by A.M. Best Company, Inc.
The New Credit Agreement contains customary representations, conditions to borrowing, covenants and events of default, including certain covenants that limit or restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to sell or transfer assets, enter into a merger or consolidate with another company, create liens, impose restrictions on subsidiary dividends, enter into sale-leaseback transactions, make investments or acquisitions, enter into certain reinsurance agreements, pay dividends during any period of default, enter into transactions with affiliates, change the nature of its business, or incur indebtedness. The New Credit Agreement also includes financial covenants that require the Company to (i) maintain a minimum consolidated net worth, (ii) maintain a minimum consolidated statutory surplus and (iii) not exceed a 0.35 to 1.0 debt to total capitalization ratio.
In December 2011, United Fire & Casualty Company entered into a credit agreement with a syndicate of financial institutions as lenders, which terminated by expiration on its stated termination date of December 22, 2015. KeyBank National Association was the administrative agent, lead arranger, sole book runner, swingline lender, and letter of credit issuer, and Bankers Trust Company was the syndication agent. The four-year credit agreement


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provided for a $100,000 unsecured revolving credit facility that included a $20,000 letter of credit subfacility and a swing line subfacility in the amount of up to $5,000.
On June 4, 2013, United Fire & Casualty Company, United Fire Group, Inc. and the syndicated lenders entered into an Assignment, Joinder, Assumption, and Release Agreement (the "Joinder Agreement") transferring the obligations under the credit agreement from United Fire & Casualty Company to United Fire Group, Inc. Effective with the execution of the Joinder Agreement, United Fire & Casualty Company was released from any further obligations under the credit agreement.
During the term of this credit agreement, we had the right to increase the total credit facility from $100,000 up to $125,000 if no event of default has occurred and is continuing and certain other conditions are satisfied. The credit facility was available for general corporate purposes, including working capital, acquisitions and liquidity purposes. Any principal outstanding under the credit facility was due in full at maturity, on December 22, 2015. The interest rate was based on our monthly choice of either a base rate or the LIBOR plus, in each case, a calculated margin amount. A commitment fee on each lender's unused commitment under the credit facility was also payable quarterly.
The credit agreement contained customary representations, covenants and events of default, including certain covenants that limit or restrict our ability to engage in certain activities. Subject to certain exceptions, those activities included restricting our ability to sell or transfer assets or enter into a merger or consolidate with another company, grant certain types of security interests, incur certain types of liens, impose restrictions on subsidiary dividends, enter into leaseback transactions, or incur certain indebtedness. The credit agreement contained certain financial covenants including covenants that required us to maintain a minimum consolidated net worth, a debt to capitalization ratio and minimum stockholders' equity.
There was no outstanding balance on the credit facility at December 31, 2015 or 2014. We did not incur any interest expense related to this credit facility in 2015, 2014 or 2013. We were in compliance with all covenants of the credit agreement until it terminated by expiration on its stated termination date of December 22, 2015.

NOTE 15. INTANGIBLE ASSETS
The carrying value of our goodwill was $15,091 at both December 31, 2015 and 2014, respectively. The goodwill is fully allocated to our property and casualty insurance segment.
Our major classes of intangible assets are presented in the following table:
 
Year Ended December 31,
 
2015
 
2014
Agency relationships
$
10,338

 
$
10,338

Accumulated amortization - agency relationships
(4,292
)
 
(3,654
)
 
$
6,046

 
$
6,684

 
 
 
 
Software
$
3,260

 
$
3,260

Accumulated amortization - software
(3,260
)
 
(3,260
)
 
$

 
$

 
 
 
 
Trade names
$
1,978

 
$
1,978

Accumulated amortization - trade names
(626
)
 
(495
)
 
$
1,352

 
$
1,483

 
 
 
 
Favorable contract
$
286

 
$
286

Accumulated amortization - favorable contract
(286
)
 
(286
)
 
$

 
$

 
 
 
 
State insurance licenses (1)
$
3,020

 
$
3,020

 
 
 
 
Net intangible assets
$
10,418

 
$
11,187

(1) The intangible asset for licenses has an indefinite life and therefore is not amortized.


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The estimated useful lives assigned to our major classes of amortizable intangible assets are as follows:
 
Useful Life
Agency relationships
Fifteen years
Software
Two years
Trade names
Fifteen years
Favorable contract
Two years
Our estimated aggregate amortization expense for each of the next five years is as follows:
2016
$
769

2017
769

2018
719

2019
709

2020
709



NOTE 16. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2015, 2014 and 2013:

 
 
 
Liability for
 
 
 
Net unrealized
 
underfunded
 
 
 
appreciation
 
employee
 
 
 
on investments
 
benefit costs
 
Total
Balance as of January 1, 2013
$
144,096

 
$
(48,908
)
 
$
95,188

Change in accumulated other comprehensive income before reclassifications
(23,068
)
 
15,643

 
(7,425
)
Reclassification adjustments from accumulated other comprehensive income
(4,427
)
 
3,814

 
(613
)
Balance as of December 31, 2013
$
116,601

 
$
(29,451
)
 
$
87,150

Change in accumulated other comprehensive income before reclassifications
36,328

 
(30,996
)
 
5,332

Reclassification adjustments from accumulated other comprehensive income
(3,306
)
 
1,997

 
(1,309
)
Balance as of December 31, 2014
$
149,623

 
$
(58,450
)
 
$
91,173

Change in accumulated other comprehensive income before reclassifications
(18,321
)
 
5,664

 
(12,657
)
Reclassification adjustments from accumulated other comprehensive income
(2,933
)
 
4,854

 
1,921

Balance as of December 31, 2015
$
128,369

 
$
(47,932
)
 
$
80,437





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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
United Fire Group, Inc.

We have audited the accompanying consolidated balance sheets of United Fire Group, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Fire Group, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), United Fire Group, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report, dated February 26, 2016, expressed an unqualified opinion thereon.


 
/s/ Ernst & Young LLP  
 
 
Ernst & Young LLP 
 

Des Moines, Iowa
February 26, 2016



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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) 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 or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control 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.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of United Fire Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. United Fire Group, Inc.'s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its Consolidated Financial Statements for external purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2015, United Fire Group, Inc.'s management assessed the effectiveness of United Fire Group Inc.'s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in "Internal Control — Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment, United Fire Group, Inc.'s management determined that effective internal control over financial reporting was maintained as of December 31, 2015, based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the Consolidated Financial Statements of United Fire Group, Inc. included in this Annual Report on Form 10-K, has audited the effectiveness of internal control over financial reporting as of December 31, 2015. Their attestation report, which expresses an unqualified opinion on the effectiveness of United Fire Group, Inc.'s internal control over financial reporting as of December 31, 2015, is included in this Item under the heading "Report of Independent Registered Public Accounting Firm."
Dated: February 26, 2016
/s/ Randy A. Ramlo
 
Randy A. Ramlo
 
Chief Executive Officer
 
 
 
 
/s/ Dawn M. Jaffray
 
Dawn M. Jaffray
 
Chief Financial Officer
 



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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
United Fire Group, Inc.
We have audited United Fire Group, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). United Fire Group, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, United Fire Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2015 and 2014 and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2015 of United Fire Group, Inc. and our report dated February 26, 2016 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
 
Ernst & Young LLP
 
 
 
 
Des Moines, Iowa
 
 
February 26, 2016
 
 


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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15 and 15d-15) that occurred during the fiscal quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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ITEM 9B. OTHER INFORMATION
None.

PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 regarding the Company’s executive officers is included in '"Executive Officers of the Company" under Part I, Item 1 of this report.
The information required by this Item regarding our directors and corporate governance matters is included under the captions "Board of Directors," subheading "Corporate Governance" and "Proposal One-Election of Directors," in our definitive Proxy Statement for our annual meeting of shareholders to be held on May 18, 2016 (the "2016 Proxy Statement") and is incorporated herein by reference.
The information required by this Item regarding our Code of Ethics is included under the caption "Board of Directors," subheading "Corporate Governance," subpart "Code of Ethics" in our 2016 Proxy Statement and is incorporated herein by reference.
The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is included under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in our 2016 Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item regarding our executive compensation and our Compensation Committee Report is included under the caption "Executive Compensation" and the subheading "Report of the Compensation Committee" in our 2016 Proxy Statement and is incorporated herein by reference. The information required by this Item regarding Compensation Committee interlocks and insider participation is included under the caption "Board of Directors," subheading "Committees of the Board," subheading "Compensation Committee," subpart "Compensation Committee Interlocks and Insider Participation" in our 2016 Proxy Statement and is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required under this Item is included under the captions "Security Ownership of Certain Beneficial Owners," "Security Ownership of Management" and "Securities Authorized for Issuance under Equity Compensation Plans" in our 2016 Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this Item is included under the captions "Board of Directors" and "Transactions with Related Persons" in our 2016 Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this Item is included under the caption "Proposal Three - Ratification of the Audit Committee's Appointment of Independent Registered Public Accounting Firm," subheading "Information About Our Independent Registered Public Accounting Firm" in our 2016 Proxy Statement and is incorporated herein by reference.


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PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
 
Page
 
 
 
 
All other schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Consolidated Financial Statements.
(a) 3. See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
 




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Schedule I. Summary of Investments — Other than Investments in Related Parties
December 31, 2015
(In thousands)
 
Cost or Amortized Cost
 
 
 
Amounts at Which Shown in Balance Sheet
Type of Investment
 
Fair Value
 
Fixed maturities
 
 
 
 
 
Bonds
 
 
 
 
 
United States Government and government agencies and authorities
$
254,395

 
$
254,679

 
$
254,679

States, municipalities and political subdivisions
846,009

 
872,287

 
872,287

Foreign governments
82,580

 
82,528

 
82,528

Public utilities
213,233

 
215,683

 
215,683

All other bonds
1,406,431

 
1,410,596

 
1,410,593

Redeemable preferred stock
2,568

 
2,485

 
2,485

Total fixed maturities
$
2,805,216

 
$
2,838,258

 
$
2,838,255

Equity securities
 
 
 
 
 
Common stocks
 
 
 
 
 
Public utilities
$
7,231

 
$
19,060

 
$
19,060

Banks, trusts and insurance companies
17,615

 
95,923

 
95,923

Industrial, miscellaneous and all other
46,031

 
123,416

 
123,416

Nonredeemable preferred stocks
2,080

 
2,201

 
2,201

Total equity securities
$
72,957

 
$
240,600

 
$
240,600

Mortgage loans on real estate
$
3,961

 
$
4,237

 
$
3,961

Policy loans
5,618

 
5,618

 
5,618

Other long-term investments
46,357

 
54,151

 
54,151

Short-term investments
175

 
175

 
175

Total investments
$
2,934,284

 
$
3,143,039

 
$
3,142,760





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Schedule II. Condensed Financial Statements of Parent Company

United Fire Group, Inc. (parent company only)
Condensed Balance Sheets
 
December 31,
(In thousands, except share data)
2015
2014
 
 
 
Assets
 
 
Fixed maturities, held-to-maturity, at amortized cost (fair value $150 in 2015 and $200 in 2014)
$
150

$
200

Investment in subsidiary
871,590

814,569

Cash and cash equivalents
6,565

2,263

Federal income tax receivable
591

383

Accrued investment income
1

1

Total assets
$
878,897

$
817,416

 
 
 
Liabilities and stockholders' equity
 
 
Liabilities
$

$
1

 
 
 
Stockholders' equity
 
 
Common stock, $0.001 par value, authorized 75,000,000 shares; 25,151,428 and 25,019,415 issued and outstanding in 2015 and 2014, respectively
$
25

$
25

Additional paid-in capital
207,426

202,676

Retained earnings
591,009

523,541

Accumulated other comprehensive income, net of tax
80,437

91,173

Total stockholders' equity
$
878,897

$
817,415

 
 
 
Total liabilities and stockholders' equity
$
878,897

$
817,416


This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K.























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Schedule II. Condensed Financial Statements of Parent Company (continued)

United Fire Group, Inc. (parent company only)
Condensed Statements of Income and Comprehensive Income

 
For the Years Ended December 31,
(In thousands)
2015
2014
2013
 
 
 
 
Revenues
 
 
 
Investment income
$
25

$
22

$
23

Total revenues
25

22

23

 
 
 
 
Expenses
 
 
 
Other operating expenses
$
116

$
297

$
172

Total expenses
116

297

172

 
 
 
 
Loss before income taxes and equity in net income of subsidiary
(91
)
(275
)
(149
)
Federal income tax benefit
(42
)
(107
)
(49
)
Net loss before equity in net income of subsidiary
$
(49
)
$
(168
)
$
(100
)
Equity in net income of subsidiary
89,175

59,305

76,240

Net income
$
89,126

$
59,137

$
76,140

 
 
 
 
Other comprehensive income (loss)
 
 
 
Change in unrealized appreciation on investments held by subsidiary
$
(28,185
)
$
55,888

$
(35,489
)
Change in liability for underfunded employee benefit plans of subsidiary
8,714

(47,685
)
24,066

Other comprehensive income (loss), before tax and reclassification adjustments
$
(19,471
)
$
8,203

$
(11,423
)
Income tax effect
6,814

(2,871
)
3,998

Other comprehensive income (loss), after tax, before reclassification adjustments
$
(12,657
)
$
5,332

$
(7,425
)
Reclassification adjustment for net realized gains of the subsidiary included in income
(4,513
)
(5,085
)
(6,812
)
Reclassification adjustment for employee benefit costs of the subsidiary included in expense
7,468

3,072

5,868

Total reclassification adjustments, before tax
$
2,955

$
(2,013
)
$
(944
)
Income tax effect
(1,034
)
704

331

Total reclassification adjustments, after tax
$
1,921

$
(1,309
)
$
(613
)
 
 
 
 
Comprehensive income
$
78,390

$
63,160

$
68,102


On February 1, 2012, we completed a holding company reorganization (the "Reorganization") of United Fire Group, Inc., United Fire & Casualty Company, and UFC MergeCo, Inc., an Iowa corporation formed for the purpose of facilitating the Reorganization. The Reorganization agreement was approved and adopted by United Fire & Casualty Company's shareholders at a special meeting held on January 24, 2012.

United Fire Group, Inc. and its subsidiaries file a consolidated federal income tax return. The federal income tax provision represents an allocation under it's tax allocation agreements.

This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K.



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Schedule II. Condensed Financial Statements of Parent Company (continued)

United Fire Group, Inc. (parent company only)
Condensed Statements of Cash Flows

 
For the Years Ended December 31,
(In thousands)
2015
2014
2013
 
 
 
 
Cash flows from operating activities
 
 
 
Net income
$
89,126

$
59,137

$
76,140

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Equity in net income of subsidiary
(89,175
)
(59,305
)
(76,240
)
Dividends received from subsidiary
22,500

29,000

13,175

Other, net
1,269

700

1,261

Total adjustments
$
(65,406
)
$
(29,605
)
$
(61,804
)
Net cash provided by operating activities
$
23,720

$
29,532

$
14,336

 
 
 
 
Cash flows from investing activities
 
 
 
Purchase of held-to-maturity investments
$

$

$

Net cash used in investing activities
$

$

$

 
 
 
 
Cash flows from financing activities
 
 
 
Repurchase of common stock
$
(2,423
)
$
(12,942
)
$
(1,644
)
Issuance of common stock
5,496

2,260

3,393

Tax impact from issuance of common stock
(833
)
(160
)
(488
)
Payment of cash dividends
(21,658
)
(19,680
)
(17,484
)
Net cash used in financing activities
$
(19,418
)
$
(30,522
)
$
(16,223
)
 
 
 
 
Net change in cash and cash equivalents
$
4,302

$
(990
)
$
(1,887
)
Cash and cash equivalents at beginning of period
2,263

3,253

5,140

Cash and cash equivalents at end of year
$
6,565

$
2,263

$
3,253


On February 1, 2012, we completed a holding company reorganization (the "Reorganization") of United Fire Group, Inc., United Fire & Casualty Company, and UFC MergeCo, Inc., an Iowa corporation formed for the purpose of facilitating the Reorganization. The Reorganization agreement was approved and adopted by United Fire & Casualty Company's shareholders at a special meeting held on January 24, 2012.

This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Form 10-K.



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Schedule III. Supplementary Insurance Information
(In thousands)
Deferred Policy Acquisition Costs
 
Future Policy Benefits, Losses, Claims and Loss Expenses
 
Unearned Premiums
 
Earned Premium Revenue
 
Investment Income, Net
 
Benefits, Claims, Losses and Settlement Expenses
 
Amortization of Deferred Policy Acquisition Costs (3)
 
Other Underwriting Expenses
 
Interest on Policyholders' Accounts
 
Premiums Written (2)
Year Ended December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and casualty
$
90,547

 
$
1,003,895

 
$
414,971

 
$
851,695

 
$
46,559

 
$
520,087

 
$
180,183

 
$
83,631

 
$

 
$
887,874

Life, accident and health (1)
77,717

 
1,372,358

 
86

 
79,195

 
54,222

 
79,946

 
6,634

 
19,306

 
23,680

 

Total
$
168,264

 
$
2,376,253

 
$
415,057

 
$
930,890

 
$
100,781

 
$
600,033

 
$
186,817

 
$
102,937

 
$
23,680

 
$
887,874

Year Ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and casualty
$
72,861

 
$
969,437

 
$
378,635

 
$
766,939

 
$
44,236

 
$
509,811

 
$
161,310

 
$
79,117

 
$

 
$
804,715

Life, accident and health (1)
66,858

 
1,447,764

 
90

 
61,391

 
60,373

 
63,055

 
6,139

 
15,754

 
30,245

 

Total
$
139,719

 
$
2,417,201

 
$
378,725

 
$
828,330

 
$
104,609

 
$
572,866

 
$
167,449

 
$
94,871

 
$
30,245

 
$
804,715

Year Ended December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and casualty
$
67,663

 
$
960,651

 
$
340,387

 
$
694,192

 
$
46,332

 
$
437,354

 
$
147,175

 
$
73,626

 
$

 
$
722,821

Life, accident and health (1)
82,429

 
1,472,132

 
77

 
60,654

 
66,467

 
59,085

 
6,502

 
16,235

 
35,163

 

Total
$
150,092

 
$
2,432,783

 
$
340,464

 
$
754,846

 
$
112,799

 
$
496,439

 
$
153,677

 
$
89,861

 
$
35,163

 
$
722,821

(1)
Annuity deposits are included in future policy benefits, losses, claims and loss expenses.
(2)
Pursuant to Regulation S-X, premiums written does not apply to life insurance companies.






146

Table of Contents

Schedule IV. Reinsurance
(In thousands)
Gross Amount
 
Ceded to Other Companies
 
Assumed From Other Companies
 
Net Amount
 
Percentage of Amount Assumed to Net Earned
Year Ended December 31, 2015
 

 
 

 
 

 
 

 
 
Life insurance in force
$
5,491,932

 
$
1,165,868

 
$

 
$
4,326,064

 
 
Premiums earned
 
 
 
 
 
 
 
 
 
Property and casualty insurance
$
890,057

 
$
56,758

 
$
18,396

 
$
851,695

 
2.16
%
Life, accident and health insurance
82,356

 
3,161

 

 
79,195

 
%
Total
$
972,413

 
$
59,919

 
$
18,396

 
$
930,890

 
1.98
%
Year Ended December 31, 2014
 
 
 
 
 
 
 
 
 
Life insurance in force
$
5,366,061

 
$
1,130,059

 
$

 
$
4,236,002

 
 
Premiums earned
 
 
 
 
 
 
 
 
 
Property and casualty insurance
$
800,492

 
$
49,818

 
$
16,265

 
$
766,939

 
2.12
%
Life, accident and health insurance
64,350

 
2,959

 

 
61,391

 
%
Total
$
864,842

 
$
52,777

 
$
16,265

 
$
828,330

 
1.96
%
Year Ended December 31, 2013
 
 
 
 
 
 
 
 
 
Life insurance in force
$
5,300,305

 
$
1,112,688

 
$
4

 
$
4,187,621

 
 
Premiums earned
 
 
 
 
 
 
 
 
 
Property and casualty insurance
$
726,221

 
$
50,514

 
$
18,485

 
$
694,192

 
2.66
%
Life, accident and health insurance
63,446

 
2,792

 

 
60,654

 
%
Total
$
789,667

 
$
53,306

 
$
18,485

 
$
754,846

 
2.45
%




147

Table of Contents

Schedule V. Valuation And Qualifying Accounts
(In thousands)
Balance at beginning of period
 
Charged to costs and expenses
 
Deductions
 
Balance at end of period
Description
 
 
 
Allowance for bad debts
 
 
 
 
 
 
 
Year Ended December 31, 2015
$
618

 
$
249

 
$

 
$
867

Year Ended December 31, 2014
896

 

 
278

 
618

Year Ended December 31, 2013
866

 
30

 

 
896

 
 
 
 
 
 
 
 
Deferred tax asset valuation allowance (1)
 
 
 
 
 
 
 
Year Ended December 31, 2015
$
1,813

 
$

 
$
548

 
$
1,265

Year Ended December 31, 2014
2,361

 

 
548

 
1,813

Year Ended December 31, 2013
2,909

 

 
548

 
2,361

(1)
Recorded in connection with the purchase of American Indemnity Financial Corporation in 1999.




148

Table of Contents

Schedule VI. Supplemental Information Concerning Property and Casualty Insurance Operations
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliation with Registrant: United Fire & Casualty Company and consolidated property and casualty subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
Claims and Claim Adjustment Expenses Incurred Related to:
 
Amortization of Deferred Policy Acquisition Costs (1)
 
 
 
 
 
 
Reserves for Unpaid Claims and Claim Adjustment Expenses
 
 
 
 
 
Net Realized Investment Gains
 
 
 
 
 
 
 
 
Deferred Policy Acquisition Costs
 
 
 
 
 
 
 
Net Investment Income
 
 
 
Paid Claims and Claim Adjustment Expenses
 
 
 
 
Unearned Premiums
 
Earned Premiums
 
 
 
Current Year
 
Prior Years
 
 
 
Premiums Written
2015
$
90,547

 
$
1,003,895

 
$
414,971

 
$
851,695

 
$
1,124

 
$
46,559

 
$
560,482

 
$
(40,395
)
 
$
180,183

 
$
476,525

 
$
887,874

2014
$
72,861

 
$
969,437

 
$
378,635

 
$
766,939

 
$
4,177

 
$
44,236

 
$
566,555

 
$
(56,744
)
 
$
161,310

 
$
489,631

 
$
804,715

2013
$
67,663

 
$
960,651

 
$
340,387

 
$
694,192

 
$
6,260

 
$
46,332

 
$
494,841

 
$
(57,487
)
 
$
147,175

 
$
419,894

 
$
722,821




149

Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED FIRE GROUP, INC.
By:
/s/ Randy A. Ramlo
 
Randy A. Ramlo, Chief Executive Officer, Director and Principal Executive Officer
 
 
Date:
2/26/2016
 
 
By:
/s/ Dawn M. Jaffray
 
Dawn M. Jaffray, Senior Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer
 
 
Date:
2/26/2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By
/s/ Jack B. Evans
 
By
/s/ John P. Besong
 
Jack B. Evans, Chairman and Director
 
 
John P. Besong, Director
Date
2/26/2016
 
Date
2/26/2016
 
 
 
 
 
By
/s/ Scott L. Carlton
 
By:
/s/ Christopher R. Drahozal
 
Scott L. Carlton, Director
 
 
Christopher R. Drahozal, Director
Date
2/26/2016
 
Date
2/26/2016
 
 
 
 
 
By
/s/ Douglas M. Hultquist
 
By
/s/ Casey D. Mahon
 
Douglas M. Hultquist, Director
 
 
Casey D. Mahon, Director
Date
2/26/2016
 
Date
2/26/2016
 
 
 
 
 
By
/s/ George D. Milligan
 
By
/s/ James W. Noyce
 
George D. Milligan, Director
 
 
James W. Noyce, Vice Chairman and Director
Date
2/26/2016
 
Date
2/26/2016
 
 
 
 
 
By
/s/ Mary K. Quass
 
By
/s/ Kyle D. Skogman
 
Mary K. Quass, Director
 
 
Kyle D. Skogman, Director
Date
2/26/2016
 
Date
2/26/2016
 
 
 
 
 
By
/s/ Susan E. Voss
 
 
 
 
Susan E. Voss, Director
 
 
 
Date
2/26/2016
 
 
 
 
 
 
 
 



150

Table of Contents

Exhibit Index
 
 
 
 
 
Incorporated by reference
Exhibit number
Exhibit description
Filed herewith
 
Form
 
Period ending
 
Exhibit
 
Filing date
2.1

 
Agreement and Plan of Reorganization among United Fire & Casualty Company, United Fire Group, Inc. and UFC MergeCo, Inc.
 
 
8-K
 
 
 
2.1

 
5/25/2011
3.1

 
Articles of Incorporation of United Fire Group, Inc.
 
 
S-4
 
 
 
Annex II

 
5/25/2011
3.2

 
Articles of Amendment to Articles of Incorporation of United Fire Group, Inc.
 
 
8-K
 
 
 
3.1

 
5/26/2015
3.3

 
Bylaws of United Fire Group, Inc.
 
 
S-4
 
 
 
Annex III

 
5/25/2011
10.1

 
Employee Stock Purchase Plan
 
 
10-K
 
12/31/2007
 
10.2

 
2/27/2008
10.2

*
2005 Non-qualified Non-employee Director Stock Option and Restricted Stock Plan (as amended)
 
 
DEF14A
 
 
 
Exhibit A

 
4/18/2011
10.4

*
United Fire Group, Inc. Amended and Restated Annual Incentive Plan (Amended February 24, 2012)
 
 
10-K
 
12/31/2011
 
10.4

 
3/15/2012
10.5

*
Non-qualified Deferred Compensation Plan
 
 
10-Q
 
9/30/2007
 
10.3

 
10/25/2007
10.6

*
United Fire Group, Inc. Stock Plan, amended as of February 21, 2014 (amending and restating the United Fire & Casualty Company 2008 Stock Plan) (the "Stock Plan")
 
 
DEF14A
 
 
 
App A

 
4/8/2014
10.7

*
Form of Non-qualified Employee Stock Option Agreement under the Stock Plan
 
 
10-K
 
12/31/2007
 
10.7

 
2/27/2008
10.8

*
Form of Option Issued Pursuant to the 2005 Non-qualified Non-employee Director Stock Option and Restricted Stock Plan
 
 
10-K
 
12/31/2007
 
10.8

 
2/27/2008
10.9

*
Form of Stock Award Agreement under the Stock Plan
 
 
8-K
 
 
 
99.2

 
5/22/2008
10.10

*
Form of Non-qualified Stock Option Agreement for the Purchase of Stock under the Stock Plan
 
 
8-K
 
 
 
99.3

 
5/22/2008
10.11

*
Form of Incentive Stock Option Agreement for the Purchase of Stock under the Stock Plan
 
 
8-K
 
 
 
99.4

 
5/22/2008
10.12

*
Amendment to Non-qualified Stock Option Agreements for John A. Rife
 
 
8-K/A
 
 
 
99.1

 
2/24/2009
10.13

*
Form of Restricted Stock Agreement under the 2005 Non-qualified Non-employee Director Stock Option and Restricted Stock Plan
 
 
10-K
 
12/31/2011
 
10.14

 
3/15/2012
10.14

*
United Fire Group, Inc. Plan for Allocation of Equity Compensation to Management Team
 
 
10-K
 
12/31/2011
 
10.15

 
3/15/2012
10.15

*
Deferred Compensation Plan for United Fire Group, Inc. Non-Employee Directors
 
 
8-K
 
 
 
10.1

 
11/19/2012
10.16

*
United Fire Group, Inc. Executive Nonqualified Excess Plan
 
 
8-K
 
 
 
0.0101

 
5/22/2014
10.17

*
United Fire & Casualty Company Executive Nonqualified Excess Plan Adoption Agreement
 
 
8-K
 
 
 
0.0102

 
5/22/2014
10.18

*
United Fire & Casualty Company Rabbi Directed Trust Agreement
 
 
8-K
 
 
 
0.0103

 
5/22/2014
10.19

*
United Fire Group, Inc. Template Change in Control Severance Agreement
 
 
8-K
 
 
 
0.0104

 
5/22/2014
10.20

*
Amendment Number One to United Fire & Casualty Company Nonqualified Deferred Compensation Plan
 
 
8-K
 
 
 
0.0105

 
5/22/2014
*Indicates a management contract or compensatory plan or arrangement.


151

Table of Contents

Exhibit Index
 
 
 
 
 
Incorporated by reference
Exhibit number
Exhibit description
Filed herewith
 
Form
 
Period ending
 
Exhibit
 
Filing date
10.21

*
Form of Non-Qualified Employee Stock Option Agreement under the United Fire Group, Inc. Stock Plan
 
 
10-Q
 
6/30/14
 
10.7

 
8/5/2014
10.22

*
Form of Stock Award Agreement under the United Fire Group, Inc. Stock Plan
 
 
10-Q
 
6/30/14
 
10.8

 
8/5/2014
10.23

*
Employment Release Agreement, dated December 26, 2014, between United Fire Group, Inc. and Dianne M. Lyons

 
 
10-K
 
12/31/14
 
10.28

 
3/2/2015
10.24

 
Credit Agreement between United Fire & Casualty Company and syndicated lenders
 
 
8-K
 
 
 
10.1

 
12/23/2011
10.25

 
First Amendment to Credit Agreement between United Fire & Casualty Company and syndicated lenders
 
 
8-K
 
 
 
10.1

 
1/30/2012
10.26

 
Second Amendment to Credit Agreement between United Fire & Casualty Company and syndicated lenders
 
 
8-K
 
 
 
10.1

 
12/21/2012
10.27

 
Assignment, Joinder, Assumption, and Release Agreement, between and among United Fire Group, Inc., United Fire & Casualty Company, a syndicate of financial institutions, as lenders party thereto, and KeyBank National Association, as Administrative Agent, Lead Arranger, Sole Book Runner, Swingline Lender, and Letter of Credit Issuer
 
 
8-K
 
 
 
10.1

 
6/5/2013
10.28

 
Credit Agreement dated as of February 2, 2016, by and among United Fire Group, Inc., as borrower, the lenders from time to time party thereto, and KeyBank National Association, as administrative agent, swingline lender and letter of credit issuer.
 
 
8-K
 
 
 
10.1

 
2/5/2016
11

 
Statement Re Computation of Per Share Earnings. All information required by Exhibit 11 is presented within Note 12 of the Notes to Consolidated Financial Statements
X
 
 
 
 
 
 

 
 
12

 
Statement Re Computation of Ratios
X
 
 
 
 
 
 
 
 
14

 
Code of Ethics
 
 
8-K/A
 
 
 
14.1

 
1/31/2013
21

 
Subsidiaries of the Registrant
X
 
 
 
 
 
 

 
 
23.1

 
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
X
 
 
 
 
 
 

 
 
23.2

 
Consent of Griffith, Ballard & Company, Independent Actuary
X
 
 
 
 
 
 

 
 
23.3

 
Consent of Regnier Consulting Group, Inc., Independent Actuary
X
 
 
 
 
 
 

 
 
31.1

 
Certification of Randy A. Ramlo Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
 
 
 
 
 
 

 
 
*Indicates a management contract or compensatory plan or arrangement.






152

Table of Contents

Exhibit Index
 

 
 
 
 
Incorporated by reference
Exhibit number
Exhibit description
Filed herewith
 
Form
 
Period ending
 
Exhibit
 
Filing date
31.2

 
Certification of Dawn M. Jaffray Pursuant to Section 302 of the Sarbanes-Oxley 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 Sarbanes-Oxley Act of 2002
X
 
 
 
 
 
 
 
 
32.2

 
Certification of Dawn M. Jaffray Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
 
 
 
 
 
 
 
 
101.1

 
The following financial information from United Fire Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2015 formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2015 and 2014; (ii) Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2015, 2014 and 2013; (iii) Consolidated Statement of Stockholders' Equity for the years ended December 31, 2015, 2014 and 2013; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013; and (v) Notes to Consolidated Financial Statements.
X
 
 
 
 
 
 
 
 



153