Document
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34257
ufglogo2017.jpg
________________________
 UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
____________________________
 
 
 
Iowa
 
45-2302834
 
 
 
 
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 

118 Second Avenue, S.E., Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO R
As of July 31, 2017, 25,028,746 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
June 30, 2017
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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" in our Annual Report on Form 10-K for the year ended December 31, 2016 and Part II, 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; changes in 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.




1

Table of Contents

PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $192 in 2017 and $199 in 2016)
$
192

 
$
198

Available-for-sale, at fair value (amortized cost $2,912,326 in 2017 and $2,887,505 in 2016)
2,955,079

 
2,898,126

Trading securities, at fair value (amortized cost $13,945 in 2017 and $13,054 in 2016)
15,828

 
14,390

Equity securities
 
 
 
Available-for-sale, at fair value (cost $62,533 in 2017 and $68,504 in 2016)
276,306

 
270,416

Trading securities, at fair value (cost $6,046 in 2017 and $5,434 in 2016)
6,612

 
5,644

Mortgage loans
3,573

 
3,706

Policy loans
5,499

 
5,366

Other long-term investments
65,664

 
67,639

Short-term investments
175

 
175

 
3,328,928

 
3,265,660

Cash and cash equivalents
130,421

 
110,853

Accrued investment income
25,530

 
25,056

Premiums receivable (net of allowance for doubtful accounts of $1,178 in 2017 and $1,255 in 2016)
361,866

 
306,202

Deferred policy acquisition costs
167,512

 
164,112

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $51,144 in 2017 and $50,925 in 2016)
57,726

 
55,524

Reinsurance receivables and recoverables
73,967

 
69,413

Prepaid reinsurance premiums
3,966

 
3,782

Income taxes receivable
8,288

 
15,061

Goodwill and intangible assets
24,355

 
24,740

Other assets
14,853

 
14,355

TOTAL ASSETS
$
4,197,412

 
$
4,054,758

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Future policy benefits and losses, claims and loss settlement expenses
 
 
 
Property and casualty insurance
$
1,180,478

 
$
1,123,896

Life insurance
1,329,855

 
1,350,503

Unearned premiums
502,415

 
443,873

Accrued expenses and other liabilities
173,610

 
159,014

Deferred income taxes
48,466

 
35,588

TOTAL LIABILITIES
$
3,234,824

 
$
3,112,874

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,028,037 and 25,429,769 shares issued and outstanding in 2017 and 2016, respectively
$
25

 
$
25

Additional paid-in capital
199,759

 
216,482

Retained earnings
625,836

 
616,322

Accumulated other comprehensive income, net of tax
136,968

 
109,055

TOTAL STOCKHOLDERS’ EQUITY
$
962,588

 
$
941,884

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
4,197,412

 
$
4,054,758

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


2

Table of Contents

United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands, Except Share Data)
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
259,563

 
$
253,487

 
$
513,435

 
$
494,785

Investment income, net of investment expenses
24,610

 
24,507

 
49,645

 
46,731

Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $1,975 and $5,380 in 2017 and $700 and $2,346 in 2016; previously included in accumulated other comprehensive income)
2,680


1,596

 
6,634

 
3,651

Other income
126

 
183

 
324

 
291

Total revenues
$
286,979

 
$
279,773

 
$
570,038

 
$
545,458

Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
197,698

 
$
180,412

 
$
365,321

 
$
322,540

Increase in liability for future policy benefits
5,281

 
16,002

 
13,860

 
28,554

Amortization of deferred policy acquisition costs
53,093

 
52,585

 
105,227

 
102,816

Other underwriting expenses (includes reclassifications for employee benefit costs of $1,352 and $2,704 in 2017 and $1,371 and $2,742 in 2016; previously included in accumulated other comprehensive income)
26,201

 
24,772

 
51,091

 
51,525

Interest on policyholders’ accounts
4,651

 
5,138

 
9,395

 
10,385

Total benefits, losses and expenses
$
286,924

 
$
278,909

 
$
544,894

 
$
515,820

Income before income taxes
$
55

 
$
864

 
$
25,144

 
$
29,638

Federal income tax expense (benefit) (includes reclassifications of $219 and $937 in 2017 and ($234) and ($138) in 2016; previously included in accumulated other comprehensive income)
(2,903
)
 
(2,250
)
 
2,250

 
4,097

Net income
$
2,958

 
$
3,114

 
$
22,894

 
$
25,541

Other comprehensive income
 
 
 
 
 
 
 
Change in net unrealized appreciation on investments
$
30,653

 
$
49,332

 
$
45,619

 
$
93,208

Change in liability for underfunded employee benefit plans

 

 

 

Other comprehensive income , before tax and reclassification adjustments
$
30,653

 
$
49,332

 
$
45,619

 
$
93,208

Income tax effect
(10,729
)
 
(17,267
)
 
(15,967
)
 
(32,624
)
Other comprehensive income, after tax, before reclassification adjustments
$
19,924

 
$
32,065

 
$
29,652

 
$
60,584

Reclassification adjustment for net realized investment gains included in income
$
(1,975
)
 
$
(700
)
 
$
(5,380
)
 
$
(2,346
)
Reclassification adjustment for employee benefit costs included in expense
1,352

 
1,371

 
2,704

 
2,742

Total reclassification adjustments, before tax
$
(623
)
 
$
671

 
$
(2,676
)
 
$
396

Income tax effect
219

 
(234
)
 
937

 
(138
)
Total reclassification adjustments, after tax
$
(404
)
 
$
437

 
$
(1,739
)
 
$
258

Comprehensive income
$
22,478

 
$
35,616

 
$
50,807

 
$
86,383

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
25,133,035

 
25,366,283

 
25,288,068

 
25,288,086

Basic earnings per common share
$
0.12

 
$
0.12

 
$
0.91

 
$
1.01

Diluted earnings per common share
0.12

 
0.12

 
0.89

 
1.00

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


3

Table of Contents

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

(In Thousands, Except Share Data)
Six Months Ended June 30, 2017
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (496,608 shares)

Shares issued for stock-based awards (104,634 shares)

Balance, end of period
$
25

 
 
Additional paid-in capital
 
Balance, beginning of year
$
216,482

Compensation expense and related tax benefit for stock-based award grants
2,254

Shares repurchased
(21,184
)
Shares issued for stock-based awards
2,207

Balance, end of period
$
199,759

 
 
Retained earnings
 
Balance, beginning of year
$
616,322

Net income
22,894

Dividends on common stock ($0.53 per share)
(13,380
)
Balance, end of period
$
625,836

 
 
Accumulated other comprehensive income, net of tax
 
Balance, beginning of year
$
109,055

Change in net unrealized investment appreciation(1)
26,156

Change in liability for underfunded employee benefit plans(2)
1,757

Balance, end of period
$
136,968

 
 
Summary of changes
 
Balance, beginning of year
$
941,884

Net income
22,894

All other changes in stockholders’ equity accounts
(2,190
)
Balance, end of period
$
962,588

(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 reclassification adjustments and income taxes.

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



4

Table of Contents

United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30,
(In Thousands)
2017
 
2016
Cash Flows From Operating Activities
 
 
 
Net income
$
22,894

 
$
25,541

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
7,857

 
7,076

Depreciation and amortization
2,333

 
3,179

Stock-based compensation expense
2,254

 
1,865

Net realized investment gains
(6,634
)
 
(3,651
)
Net cash flows from trading investments
(1,524
)
 
256

Deferred income tax benefit
(1,040
)
 
(1,761
)
Changes in:
 
 
 
Accrued investment income
(474
)
 
235

Premiums receivable
(55,664
)
 
(63,334
)
Deferred policy acquisition costs
(7,153
)
 
(11,007
)
Reinsurance receivables
(4,554
)
 
(7,413
)
Prepaid reinsurance premiums
(184
)
 
(363
)
Income taxes receivable
6,773

 
(12,341
)
Other assets
(498
)
 
47

Future policy benefits and losses, claims and loss settlement expenses
71,378

 
78,807

Unearned premiums
58,542

 
60,851

Accrued expenses and other liabilities
17,300

 
7,083

Income taxes payable

 
(4,917
)
Deferred income taxes
(1,112
)
 
(550
)
Other, net
1,640

 
1,474

Total adjustments
$
89,240

 
$
55,536

Net cash provided by operating activities
$
112,134

 
$
81,077

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
5,059

 
$
3,042

Proceeds from call and maturity of held-to-maturity investments
7

 
14

Proceeds from call and maturity of available-for-sale investments
147,717

 
311,478

Proceeds from short-term and other investments
3,320

 
1,412

Purchase of available-for-sale investments
(174,022
)
 
(338,213
)
Purchase of short-term and other investments
(2,985
)
 
(415
)
Net purchases and sales of property and equipment
(3,861
)
 
(2,825
)
Net cash used in investing activities
$
(24,765
)
 
$
(25,507
)
Cash Flows From Financing Activities
 
 
 
Policyholders’ account balances
 
 
 
Deposits to investment and universal life contracts
$
38,382

 
$
45,467

Withdrawals from investment and universal life contracts
(73,826
)
 
(81,672
)
Payment of cash dividends
(13,380
)
 
(11,898
)
Repurchase of common stock
(21,184
)
 

Issuance of common stock
2,207

 
6,138

Tax impact from issuance of common stock

 
(354
)
Net cash used in financing activities
$
(67,801
)
 
$
(42,319
)
Net Change in Cash and Cash Equivalents
$
19,568

 
$
13,251

Cash and Cash Equivalents at Beginning of Period
110,853

 
106,449

Cash and Cash Equivalents at End of Period
$
130,421

 
$
119,700

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


5

Table of Contents


UNITED FIRE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share amounts or as otherwise noted)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("UFG," 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 46 states and the District of Columbia, and as a life insurer in 37 states.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K, including certain financial statement footnote disclosures, are not required by the rules and regulations of the SEC for interim financial reporting and have been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; future policy benefits and losses, claims and loss settlement expenses; and pension and postretirement benefit obligations.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management of UFG believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016. The review report of Ernst & Young LLP as of June 30, 2017 and for the three- and six-month periods ended June 30, 2017 and 2016 accompanies the unaudited Consolidated Financial Statements included in Part I, Item 1 "Financial Statements."
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.
For the six-month periods ended June 30, 2017 and 2016, we made payments for income taxes totaling $7,628 and $24,017, respectively. We received a tax refund of $10,000 during the six-month period ended June 30, 2017. We did not receive a tax refund during the six-month period ended June 30, 2016.
For the six-month periods ended June 30, 2017 and 2016, we made no interest payments (excluding interest credited to policyholders’ accounts).



6

Table of Contents

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, including the related amortization recognized for the six-month period ended June 30, 2017.
 
 
 
 
 
Property & Casualty Insurance
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
93,362

 
$
70,750

 
$
164,112

Underwriting costs deferred
109,900

 
2,480

 
112,380

Amortization of deferred policy acquisition costs
(101,859
)
 
(3,368
)
 
(105,227
)
Ending unamortized deferred policy acquisition costs
$
101,403

 
$
69,862

 
$
171,265

Impact of unrealized gains and losses on available-for-sale securities

 
(3,753
)
 
(3,753
)
Recorded asset at June 30, 2017
$
101,403

 
$
66,109

 
$
167,512


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.

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 to net unrealized investment appreciation as of the balance sheet date. The impact of unrealized gains and losses on available-for-sale securities decreased the DAC asset by $10,166 and $6,413 at June 30, 2017 and December 31, 2016, respectively.
Income Taxes
Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders' equity and do not impact federal income tax expense.
We reported a federal income tax expense of $2,250 and $4,097 for the six-month periods ended June 30, 2017 and 2016, respectively. Our effective tax rate is different than the federal statutory rate of 35.0 percent due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.
The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If based on review, it appears not more likely than


7

Table of Contents

not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at June 30, 2017 or December 31, 2016. 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 or for the year 2012. The Internal Revenue Service is conducting routine examinations of our income tax return for the 2011 and 2015 tax years.

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. The Company concluded there are no material subsequent events or transactions that have occurred after the balance sheet date through the date on which the financial statements were issued.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2017
Share-Based Payments
In March 2016, the Financial Accounting Standards Board ("FASB") issued new guidance on the accounting for share-based payments. The new guidance was issued to simplify the accounting of share-based payments, specifically in the areas of income taxes, classification on the balance sheets as liabilities or equity and classification in the cash flow statement. The new guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those years. The Company adopted the new guidance prospectively as of January 1, 2017. The new guidance resulted in classification changes between the financing and operating section of the Statement of Cash Flow for stock based compensation expense. The adoption also resulted in a tax benefit of $354 and $484 during the three- and six-months ended June 30, 2017.
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 adopted the new guidance as of January 1, 2017. The adoption had no impact on the Company's financial position and results of operations since we do not currently report deferred taxes in classified balance sheets.
Pending Adoption of Accounting Standards
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 as of January 1, 2018. The adoption of the new guidance will have no impact on the Company's reporting and disclosure of net


8

Table of Contents

premiums earned, net investment income or net realized gains and losses, as these items are not within the scope of this new guidance. The Company is currently evaluating the impact on the Company's financial position and results of operations with other revenue streams under this new guidance. These other revenue streams, currently reported in other income in the Consolidated Statements of Income and Comprehensive Income, are not a material amount of the Company's total revenue.
Financial Instruments
In January 2016, the FASB issued guidance updating certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (for example, trading or available-for-sale) and require equity securities to be measured at fair value with changes in the fair value recognized through net income. The new guidance also simplifies the impairment process for equity investments without readily determinable fair values. The new guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2018 and is currently evaluating the impact on the Company's financial position, results of operations and key processes. If the new guidance were adopted as of March 31, 2017, there would be a reclassification from accumulated other comprehensive income to retained earnings equal to the amount of net unrealized gains and losses on available-for-sale equity securities at December 31, 2016 disclosed in Note 2 "Summary of Investments," of this section. The impact to net realized gains (losses) would equal the change in net unrealized gains and losses on available-for-sale equity securities between June 30, 2017 and December 31, 2016, in the same tables.
Statement of Cash Flows - Classification of Certain Cash Receipts and Payments
In August 2016, the FASB issued an update that clarifies the classification of certain cash receipts and payments in the Statement of Cash Flows. The update addresses eight existing cash flow issues by clarifying the correct classification to establish uniformity in practice. The updated guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2018 and is currently reviewing the updates to the eight existing cash flow issues. Currently, management believes that one existing cash flow issue will be impacted by these updates. Management believes the update will have no impact on the Company's financial position and results of operations but may effect the current classification of the cash flow in the Statement of Cash Flows.
Defined Benefit Retirement Plan Cost
In March 2017, the FASB issued guidance on the presentation of net periodic benefit costs of defined benefit retirement benefit plans in the Statements of Income. The new guidance requires the service cost component of net periodic benefit cost of defined benefit plans to be presented in the same line in the Statements of Income as other employee compensation expenses. Also, under the new guidance, the service cost component of the net periodic benefit costs will be the only portion of costs subject to be capitalized in assets. The new guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2018 and is currently evaluating the presentation of net periodic benefit costs in its financial statements and the impact on the Company's financial position and results of operations.
Leases
In February 2016, the FASB issued guidance on the accounting for leases. The new guidance requires lessees to place most leases on their balance sheets with expenses recognized on the income statement in a similar manner as previous methods. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2019. The Company has created an inventory of its leases and has calculated the current minimum future lease payment, which is disclosed in Note 13 "Lease Commitments" of our Annual Report on Form 10-K for the year ended December 31, 2016.



9

Table of Contents

Financial Instruments - Credit Losses
In June 2016, the FASB issued new guidance on the measurement of credit losses for most financial instruments. The new guidance replaces the current incurred loss model for recognizing credit losses with an expected loss model for instruments measured at amortized cost and requires allowances to be recorded for available-for-sale debt securities rather than reduce the carrying amount. These allowances will be remeasured each reporting period. The new guidance is effective for annual periods beginning after December 15, 2020 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2021 and is currently evaluating the impact on the Company's financial position, results of operations and key processes.
Income Taxes - Intra-entity Transfers
In October 2016, the FASB issued new guidance on the income tax treatment of intra-entity transfers. The new guidance replaces the current guidance which prohibits the recognition of current and deferred income taxes of intra-entity transfers until the asset is sold externally. Under the new guidance, the exemption is eliminated and income taxes will be recognized on transfers of intra-entity assets. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2019 and is currently evaluating the impact on the Company's financial position and results of operations.
Goodwill
In January 2017, the FASB issued new guidance which simplifies the test for goodwill impairment. The new guidance eliminates the implied fair value calculation when measuring a goodwill impairment charge. Under the new guidance, impairment charges will be based on the excess of the carrying value over fair value of goodwill. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020 and is currently evaluating the impact on the Company's financial position and results of operations.
Share-Based Payments
In May 2017, the FASB issued new guidance which clarifies and addresses the diversity in practice when there is a change in the terms of a share-based payment award. The updated guidance clarifies when to use modification accounting when there is a change in the terms of a share-based payment and provides three conditions where modification accounting should not be applied. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company will adopt the new guidance as of January 1, 2018 and is currently evaluating the impact on the Company's financial position and results of operations.





10

Table of Contents

NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities as of June 30, 2017 and December 31, 2016 is as follows:
June 30, 2017
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds - financial services
$
150

 
$

 
$

 
$
150

Mortgage-backed securities
42

 

 

 
42

Total Held-to-Maturity Fixed Maturities
$
192

 
$

 
$

 
$
192

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
22,068

 
$
56

 
$
80

 
$
22,044

U.S. government agency
79,643

 
1,574

 
424

 
80,793

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
128,921

 
2,588

 
555

 
130,954

Northeast
54,322

 
1,348

 
91

 
55,579

South
141,845

 
2,496

 
1,350

 
142,991

West
120,651

 
2,468

 
1,165

 
121,954

Special revenue:
 
 
 
 
 
 
 
Midwest
163,411

 
3,579

 
678

 
166,312

Northeast
80,282

 
926

 
1,229

 
79,979

South
258,666

 
3,871

 
3,547

 
258,990

West
152,224

 
2,614

 
2,377

 
152,461

Foreign bonds
55,503

 
1,987

 

 
57,490

Public utilities
207,437

 
4,474

 
240

 
211,671

Corporate bonds

 

 

 

Energy
99,416

 
2,249

 
200

 
101,465

Industrials
214,919

 
5,726

 
219

 
220,426

Consumer goods and services
179,992

 
4,927

 
157

 
184,762

Health care
75,863

 
2,469

 

 
78,332

Technology, media and telecommunications
143,209

 
3,224

 
175

 
146,258

Financial services
261,314

 
6,763

 
526

 
267,551

Mortgage-backed securities
15,515

 
178

 
195

 
15,498

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
155,129

 
2,228

 
1,490

 
155,867

Federal home loan mortgage corporation
194,556

 
2,566

 
2,894

 
194,228



11

Table of Contents

Federal national mortgage association
103,061

 
2,367

 
752

 
104,676

Asset-backed securities
4,379

 
419

 

 
4,798

Total Available-for-Sale Fixed Maturities
$
2,912,326

 
$
61,097

 
$
18,344

 
$
2,955,079

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
6,394

 
$
15,062

 
$
140

 
$
21,316

Energy
6,514

 
7,133

 
121

 
13,526

Industrials
13,116

 
44,356

 
181

 
57,291

Consumer goods and services
10,070

 
15,379

 
118

 
25,331

Health care
7,763

 
24,958

 

 
32,721

Technology, media and telecommunications
6,009

 
8,837

 
107

 
14,739

Financial services
11,630

 
98,733

 
51

 
110,312

Nonredeemable preferred stocks
1,037

 
33

 

 
1,070

Total Available-for-Sale Equity Securities
$
62,533

 
$
214,491

 
$
718

 
$
276,306

Total Available-for-Sale Securities
$
2,974,859

 
$
275,588

 
$
19,062

 
$
3,231,385






































12

Table of Contents

December 31, 2016
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds - financial services
$
150

 
$

 
$

 
$
150

Mortgage-backed securities
48

 
1

 

 
49

Total Held-to-Maturity Fixed Maturities
$
198

 
$
1

 
$

 
$
199

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
23,216

 
$
87

 
$
108

 
$
23,195

U.S. government agency
76,692

 
1,445

 
540

 
77,597

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
143,747

 
1,808

 
1,412

 
144,143

Northeast
57,731

 
909

 
231

 
58,409

South
129,475

 
1,249

 
2,355

 
128,369

West
114,524

 
1,380

 
2,173

 
113,731

Special revenue:
 
 
 
 
 
 
 
Midwest
167,430

 
2,313

 
1,433

 
168,310

Northeast
70,202

 
487

 
2,624

 
68,065

South
244,225

 
1,753

 
6,791

 
239,187

West
134,287

 
1,509

 
4,052

 
131,744

Foreign bonds
62,995

 
2,239

 

 
65,234

Public utilities
212,360

 
3,761

 
447

 
215,674

Corporate bonds

 


 

 

Energy
107,084

 
2,195

 
419

 
108,860

Industrials
225,526

 
5,359

 
982

 
229,903

Consumer goods and services
178,135

 
3,847

 
295

 
181,687

Health care
81,211

 
2,063

 
151

 
83,123

Technology, media and telecommunications
143,402

 
2,029

 
819

 
144,612

Financial services
269,981

 
5,328

 
1,358

 
273,951

Mortgage-backed securities
17,288

 
201

 
241

 
17,248

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
145,947

 
1,279

 
2,766

 
144,460

Federal home loan mortgage corporation
176,226

 
1,638

 
3,406

 
174,458

Federal national mortgage association
101,414

 
1,816

 
1,334

 
101,896

Asset-backed securities
4,407

 
145

 
282

 
4,270

Total Available-for-Sale Fixed Maturities
$
2,887,505

 
$
44,840

 
$
34,219

 
$
2,898,126

Equity securities:

 

 

 

Common stocks

 

 

 



13

Table of Contents

Public utilities
$
6,394

 
$
13,465

 
$
188

 
$
19,671

Energy
6,514

 
8,555

 
22

 
15,047

Industrials
13,252

 
38,715

 
173

 
51,794

Consumer goods and services
10,324

 
13,851

 
58

 
24,117

Health care
7,763

 
19,657

 

 
27,420

Technology, media and telecommunications
5,931

 
9,476

 
38

 
15,369

Financial services
17,289

 
98,728

 
67

 
115,950

Nonredeemable preferred stocks
1,037

 
11

 

 
1,048

Total Available-for-Sale Equity Securities
$
68,504

 
$
202,458

 
$
546

 
$
270,416

Total Available-for-Sale Securities
$
2,956,009

 
$
247,298

 
$
34,765

 
$
3,168,542

Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at June 30, 2017, 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
June 30, 2017
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
150

 
$
150

 
$
141,196

 
$
142,309

 
$
2,958

 
$
3,300

Due after one year through five years

 

 
787,370

 
808,996

 
7,532

 
8,733

Due after five years through 10 years

 

 
769,568

 
788,131

 
1,302

 
1,379

Due after 10 years

 

 
741,552

 
740,576

 
2,153

 
2,416

Asset-backed securities

 

 
4,379

 
4,798

 

 

Mortgage-backed securities
42

 
42

 
15,515

 
15,498

 

 

Collateralized mortgage obligations

 

 
452,746

 
454,771

 

 

 
$
192

 
$
192

 
$
2,912,326

 
$
2,955,079

 
$
13,945

 
$
15,828















14

Table of Contents

Net Realized Investment Gains and Losses
Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net realized investment gains (losses)
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale
$
676

 
$
846

 
$
2,671

 
$
1,362

Trading securities
 
 
 
 
 
 
 
Change in fair value
176

 
98

 
547

 
371

Sales
(11
)
 
461

 
46

 
461

Equity securities:
 
 
 
 
 
 
 
Available-for-sale
1,299

 

 
2,709

 
984

Trading securities
 
 
 
 
 
 
 
Change in fair value
245

 
237

 
356

 
330

Sales
6

 
(26
)
 
16

 
(26
)
Short-term investments

 
(43
)
 

 

Cash equivalents

 
23

 

 
169

Real estate
289

 

 
289

 

Total net realized investment gains
$
2,680

 
$
1,596

 
$
6,634

 
$
3,651

The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Proceeds from sales
$

 
$
1,074

 
$
5,059

 
$
3,042

Gross realized gains

 
54

 
2,300

 
975

Gross realized losses

 

 
(78
)
 

There were no sales of held-to-maturity securities during the three- and six-month periods ended June 30, 2017 and 2016.

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. Our portfolio of trading securities had a fair value of $22,440 and $20,034 at June 30, 2017 and December 31, 2016, respectively.

Funding Commitment

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through December 31, 2023 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $5,576 at June 30, 2017.







15

Table of Contents

Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Six Months Ended June 30,
 
2017
 
2016
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
32,132

 
$
98,381

Available-for-sale equity securities
11,861

 
12,700

Deferred policy acquisition costs
(3,753
)
 
(20,220
)
Income tax effect
(14,084
)
 
(31,802
)
Total change in net unrealized investment appreciation, net of tax
$
26,156

 
$
59,059

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 June 30, 2017 and December 31, 2016. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at June 30, 2017, 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 and determined that these losses did not warrant the recognition of an OTTI charge at June 30, 2017 or at June 30, 2016. We have no intent 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 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 and determined that these losses did not warrant the recognition of an OTTI charge at June 30, 2017 or at June 30, 2016. Our largest unrealized loss greater than 12 months on an individual equity security at June 30, 2017 was $173. 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.









16

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
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

 
$
10,159

 
$
78

 
2

 
$
1,604

 
$
2

 
$
11,763

 
$
80

U.S. government agency
8

 
33,669

 
424

 

 

 

 
33,669

 
424

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
5

 
17,233

 
381

 
1

 
5,254

 
174

 
22,487

 
555

Northeast
1

 
3,574

 
91

 

 

 

 
3,574

 
91

South
15

 
36,447

 
839

 
2

 
9,271

 
511

 
45,718

 
1,350

West
9

 
29,069

 
1,061

 
1

 
2,029

 
104

 
31,098

 
1,165

Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
12

 
28,702

 
678

 

 

 

 
28,702

 
678

Northeast
16

 
48,096

 
1,229

 

 

 

 
48,096

 
1,229

South
33

 
82,121

 
2,461

 
4

 
15,640

 
1,086

 
97,761

 
3,547

West
27

 
69,324

 
2,377

 

 

 

 
69,324

 
2,377

Public utilities
8

 
16,557

 
235

 
1

 
92

 
5

 
16,649

 
240

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 


 


Energy
5

 
12,755

 
200

 

 

 

 
12,755

 
200

Industrials
5

 
9,004

 
75

 
2

 
4,803

 
144

 
13,807

 
219

Consumer goods and services
8

 
13,832

 
157

 

 

 

 
13,832

 
157

Technology, media and telecommunications
7

 
20,121

 
62

 
2

 
10,584

 
113

 
30,705

 
175

Financial services
15

 
36,947

 
526

 

 

 

 
36,947

 
526

Mortgage-backed securities
14

 
8,927

 
152

 
2

 
996

 
43

 
9,923

 
195

Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government national mortgage association
18

 
56,024

 
945

 
8

 
18,631

 
545

 
74,655

 
1,490

Federal home loan mortgage corporation
26

 
107,586

 
2,693

 
3

 
4,814

 
201

 
112,400

 
2,894

Federal national mortgage association
12

 
33,550

 
480

 
5

 
8,327

 
272

 
41,877

 
752

Total Available-for-Sale Fixed Maturities
248

 
$
673,697

 
$
15,144

 
33

 
$
82,045

 
$
3,200

 
$
755,742

 
$
18,344

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities

 
$

 
$

 
1

 
$
168

 
$
140

 
$
168

 
$
140

Energy
2

 
553

 
95

 
1

 
160

 
26

 
713

 
121

Industrials

 

 

 
6

 
231

 
181

 
231

 
181

Consumer goods and services
1

 
22

 
1

 
4

 
215

 
117

 
237

 
118

Technology, media and telecommunications
3

 
544

 
55

 
1

 
14

 
52

 
558

 
107

Financial services
1

 
52

 
3

 
2

 
166

 
48

 
218

 
51

Total Available-for-Sale Equity Securities
7

 
$
1,171

 
$
154

 
15

 
$
954

 
$
564

 
$
2,125

 
$
718

Total Available-for-Sale Securities
255

 
$
674,868

 
$
15,298

 
48

 
$
82,999

 
$
3,764

 
$
757,867

 
$
19,062





17

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
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
9

 
$
10,800

 
$
108

 

 
$

 
$

 
$
10,800

 
$
108

U.S. government agency
10

 
36,593

 
540

 

 

 

 
36,593

 
540

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
27

 
40,545

 
1,412

 

 

 

 
40,545

 
1,412

Northeast
9

 
9,874

 
231

 

 

 

 
9,874

 
231

South
37

 
53,699

 
2,355

 

 

 

 
53,699

 
2,355

West
30

 
55,265

 
2,173

 

 

 

 
55,265

 
2,173

Special revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
41

 
62,937

 
1,433

 

 

 

 
62,937

 
1,433

Northeast
22

 
54,993

 
2,624

 

 

 

 
54,993

 
2,624

South
79

 
152,979

 
6,791

 

 

 

 
152,979

 
6,791

West
44

 
81,676

 
4,052

 

 

 

 
81,676

 
4,052

Public utilities
20

 
38,511

 
423

 
2

 
2,122

 
24

 
40,633

 
447

Corporate bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
8

 
15,938

 
313

 
3

 
8,232

 
106

 
24,170

 
419

Industrials
24

 
42,854

 
596

 
3

 
5,641

 
386

 
48,495

 
982

Consumer goods and services
11

 
21,059

 
295

 

 

 

 
21,059

 
295

Health care
9

 
20,918

 
151

 

 

 

 
20,918

 
151

Technology, media and telecommunications
16

 
41,230

 
516

 
3

 
10,241

 
303

 
51,471

 
819

Financial services
37

 
75,286

 
1,358

 

 

 

 
75,286

 
1,358

Mortgage-backed securities
16

 
9,611

 
187

 
5

 
1,198

 
54

 
10,809

 
241

Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government national mortgage association
36

 
82,430

 
2,261

 
9

 
13,603

 
505

 
96,033

 
2,766

Federal home loan mortgage corporation
41

 
105,775

 
3,165

 
3

 
5,141

 
241

 
110,916

 
3,406

Federal national mortgage association
27

 
46,633

 
1,091

 
4

 
4,341

 
243

 
50,974

 
1,334

Asset-backed securities
1

 
971

 
29

 
1

 
2,559

 
253

 
3,530

 
282

Total Available-for-Sale Fixed Maturities
554

 
$
1,060,577

 
$
32,104

 
33

 
$
53,078

 
$
2,115

 
$
1,113,655

 
$
34,219

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public utilities

 
$

 
$

 
3

 
$
120

 
$
188

 
$
120

 
$
188

Energy

 

 

 
1

 
163

 
22

 
163

 
22

Industrials

 

 

 
6

 
239

 
173

 
239

 
173

Consumer goods and services
3

 
282

 
55

 
2

 
15

 
3

 
297

 
58

Technology, media and telecommunications
7

 
26

 
5

 
8

 
33

 
33

 
59

 
38

Financial services
3

 
53

 
3

 
2

 
150

 
64

 
203

 
67

Total Available-for-Sale Equity Securities
13

 
$
361

 
$
63

 
22

 
$
720

 
$
483

 
$
1,081

 
$
546

Total Available-for-Sale Securities
567

 
$
1,060,938

 
$
32,167

 
55

 
$
53,798

 
$
2,598

 
$
1,114,736

 
$
34,765



18

Table of Contents

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.
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 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.


19

Table of Contents

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.

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. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of June 30, 2017, the cash surrender value of the COLI policies was $3,244, 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.

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 and 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.

























20

Table of Contents

A summary of the carrying value and estimated fair value of our financial instruments at June 30, 2017 and December 31, 2016 is as follows:
 
June 30, 2017
 
December 31, 2016
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Held-to-maturity securities
$
192

 
$
192

 
$
199

 
$
198

Available-for-sale securities
2,955,079

 
2,955,079

 
2,898,126

 
2,898,126

Trading securities
15,828

 
15,828

 
14,390

 
14,390

Equity securities:
 
 
 
 
 
 
 
Available-for-sale securities
276,306

 
276,306

 
270,416

 
270,416

Trading securities
6,612

 
6,612

 
5,644

 
5,644

Mortgage loans
3,765

 
3,573

 
3,895

 
3,706

Policy loans
5,499

 
5,499

 
5,366

 
5,366

Other long-term investments
65,664

 
65,664

 
67,639

 
67,639

Short-term investments
175

 
175

 
175

 
175

Cash and cash equivalents
130,421

 
130,421

 
110,853

 
110,853

Corporate-owned life insurance
3,244

 
3,244

 
2,592

 
2,592

Liabilities
 
 
 
 
 
 
 
Policy reserves
 
 
 
 
 
 
 
Annuity (accumulations) (1)
$
629,169

 
$
631,070

 
$
646,764

 
$
666,711

Annuity (benefit payments)
143,925

 
94,323

 
144,283

 
95,129

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































21

Table of Contents

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis in our Consolidated Balance Sheets at June 30, 2017 and December 31, 2016:
June 30, 2017
 
 
Fair Value Measurements
Description
Total
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
22,044

 
$

 
$
22,044

 
$

U.S. government agency
80,793

 

 
80,793

 

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
Midwest
130,954

 

 
130,954

 

Northeast
55,579

 

 
55,579

 

South
142,991

 

 
142,991

 

West
121,954

 

 
121,954

 

Special revenue
 
 
 
 
 
 
 
Midwest
166,312

 

 
166,235

 
77

Northeast
79,979

 

 
79,979

 

South
258,990

 

 
258,990

 

West
152,461

 

 
152,461

 

Foreign bonds
57,490

 

 
57,490

 

Public utilities
211,671

 

 
211,671

 

Corporate bonds
 
 
 
 
 
 
 
Energy
101,465

 

 
101,465

 

Industrials
220,426

 

 
220,426

 

Consumer goods and services
184,762

 

 
184,034

 
728

Health care
78,332

 

 
78,332

 

Technology, media and telecommunications
146,258

 

 
146,258

 

Financial services
267,551

 

 
259,223

 
8,328

Mortgage-backed securities
15,498

 

 
15,498

 

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
155,867

 

 
155,867

 

Federal home loan mortgage corporation
194,228

 

 
194,228

 

Federal national mortgage association
104,676

 

 
104,676

 

Asset-backed securities
4,798

 

 
4,176

 
622

Total Available-for-Sale Fixed Maturities
$
2,955,079

 
$

 
$
2,945,324

 
$
9,755

Equity securities:
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
21,316

 
$
21,316

 
$

 
$

Energy
13,526

 
13,526

 

 

Industrials
57,291

 
57,291

 

 

Consumer goods and services
25,331

 
25,331

 

 



22

Table of Contents

Health care
32,721

 
32,721

 

 

Technology, media and telecommunications
14,739

 
14,739

 

 

Financial services
110,312

 
110,312

 

 

Nonredeemable preferred stocks
1,070

 
475

 

 
595

Total Available-for-Sale Equity Securities
$
276,306

 
$
275,711

 
$

 
$
595

Total Available-for-Sale Securities
$
3,231,385

 
$
275,711

 
$
2,945,324

 
$
10,350

TRADING
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Corporate bonds


 


 


 


Industrials
$
3,724

 
$

 
$
3,724

 
$

Consumer goods and services
293

 

 
293

 

Health care
3,708

 

 
3,708

 

Technology, media and telecommunications
1,200

 

 
1,200

 

Financial services
4,262

 

 
4,262

 

Redeemable preferred stocks
2,641

 
2,641

 

 

Equity securities:
 
 
 
 
 
 
 
Public utilities
819

 
819

 

 

Energy
216

 
216

 

 

Industrials
947

 
947

 

 

Consumer goods and services
1,200

 
1,200

 

 

Health care
370

 
370

 

 

Financial services
232

 
232

 

 

Nonredeemable preferred stocks
2,828

 
2,828

 

 

Total Trading Securities
$
22,440

 
$
9,253

 
$
13,187

 
$

Short-Term Investments
$
175

 
$
175

 
$

 
$

Money Market Accounts
$
14,641

 
$
14,641

 
$

 
$

Corporate-Owned Life Insurance
$
3,244

 
$

 
$
3,244

 
$

Total Assets Measured at Fair Value
$
3,271,885

 
$
299,780

 
$
2,961,755

 
$
10,350




23

Table of Contents

December 31, 2016
 
 
Fair Value Measurements
Description
Total
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
23,195

 
$

 
$
23,195

 
$

U.S. government agency
77,597

 

 
77,597

 

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
Midwest
144,143

 

 
144,143

 

Northeast
58,409

 

 
58,409

 

South
128,369

 

 
128,369

 

West
113,731

 

 
113,731

 

Special revenue
 
 
 
 
 
 
 
Midwest
168,310

 

 
168,142

 
168

Northeast
68,065

 

 
68,065

 

South
239,187

 

 
239,187

 

West
131,744

 

 
131,744

 

Foreign bonds
65,234

 

 
65,234

 

Public utilities
215,674

 

 
215,674

 

Corporate bonds
 
 
 
 
 
 
 
Energy
108,860

 

 
108,860

 

Industrials
229,903

 

 
229,903

 

Consumer goods and services
181,687

 

 
180,590

 
1,097

Health care
83,123

 

 
83,123

 

Technology, media and telecommunications
144,612

 

 
144,612

 

Financial services
273,951

 

 
265,154

 
8,797

Mortgage-backed securities
17,248

 

 
17,248

 

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
144,460

 

 
144,460

 

Federal home loan mortgage corporation
174,458

 

 
174,458

 

Federal national mortgage association
101,896

 

 
101,896

 

Asset-backed securities
4,270

 

 
3,821

 
449

Total Available-for-Sale Fixed Maturities
$
2,898,126

 
$

 
$
2,887,615

 
$
10,511

Equity securities:
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
$
19,671

 
$
19,671

 
$

 
$

Energy
15,047

 
15,047

 

 

Industrials
51,794

 
51,794

 

 

Consumer goods and services
24,117

 
24,117

 

 

Health care
27,420

 
27,420

 

 

Technology, media and telecommunications
15,369

 
15,369

 

 

Financial services
115,950

 
111,958

 

 
3,992



24

Table of Contents

Nonredeemable preferred stocks
1,048

 
453

 

 
595

Total Available-for-Sale Equity Securities
$
270,416

 
$
265,829

 
$

 
$
4,587

Total Available-for-Sale Securities
$
3,168,542

 
$
265,829

 
$
2,887,615

 
$
15,098

TRADING
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds
 
 
 
 
 
 
 
Industrials
$
3,919

 
$

 
$
3,919

 
$

Consumer goods and services
127

 

 
127

 

Health care
3,410

 

 
3,410

 

Technology, media and telecommunications
787

 

 
787

 

Financial services
4,842

 

 
4,842

 

Redeemable preferred stocks
1,305

 
1,305

 

 

Equity securities:
 
 
 
 
 
 
 
Public utilities
613

 
613

 

 

Energy
286

 
286

 

 

Industrials
877

 
877

 

 

Consumer goods and services
1,202

 
1,202

 

 

Health care
339

 
339

 

 

Financial services
206

 
206

 

 

Nonredeemable preferred stocks
2,121

 
2,121

 

 

Total Trading Securities
$
20,034

 
$
6,949

 
$
13,085

 
$

Short-Term Investments
$
175

 
$
175

 
$

 
$

Money Market Accounts
$
16,802

 
$
16,802

 
$

 
$

Corporate-Owned Life Insurance
$
2,592

 
$

 
$
2,592

 
$

Total Assets Measured at Fair Value
$
3,208,145

 
$
289,755

 
$
2,903,292

 
$
15,098

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 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


25

Table of Contents

reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. 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. In our opinion, the pricing obtained at June 30, 2017 and December 31, 2016 was reasonable.
For the three- and six-month periods ended June 30, 2017, the change in our available-for-sale securities categorized as Level 1 and Level 2 is 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 three- and six-month periods ended June 30, 2017, 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 three- and six-month periods ended June 30, 2017, 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 the three-month period ended June 30, 2017:
 
States, municipalities and political subdivisions
 
Corporate bonds
 
Asset-backed securities
 
Equities
 
Total
Balance at March 31, 2017
$
168

 
$
9,494

 
$
456

 
$
4,718

 
$
14,836

Net unrealized gains (losses)(1)
(6
)
 
68

 
166

 

 
228

Disposals
(85
)
 
(506
)
 

 
(4,123
)
 
(4,714
)
Balance at June 30, 2017
$
77

 
$
9,056

 
$
622

 
$
595

 
$
10,350

(1) Net 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 the six-month period ended June 30, 2017:
 
States, municipalities and political subdivisions
 
Corporate bonds
 
Asset-backed securities
 
Equities
 
Total
Balance at January 1, 2017
$
168

 
$
9,894

 
$
449

 
$
4,587

 
$
15,098

Net unrealized gains (losses)(1)
(6
)
 
1

 
173

 

 
168

Purchases

 

 

 
145

 
145

Disposals
(85
)
 
(839
)
 

 
(4,137
)
 
(5,061
)
Balance at June 30, 2017
$
77

 
$
9,056

 
$
622

 
$
595

 
$
10,350

(1) Net 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.

NOTE 4. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES
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


26

Table of Contents

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 losses 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. 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, 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. 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.

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 reasonableness of our statutory reserves annually. The actuarial opinion is filed in those states where we are licensed.

On a quarterly basis, UFG'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. 



27

Table of Contents

The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves at June 30, 2017 and December 31, 2016 (net of reinsurance amounts):
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Gross liability for losses and loss settlement expenses
at beginning of year
$
1,123,896

 
$
1,003,895

Ceded losses and loss settlement expenses
(59,794
)
 
(54,653
)
Net liability for losses and loss settlement expenses
at beginning of year
$
1,064,102

 
$
949,242

Losses and loss settlement expenses incurred
for claims occurring during
 
 
 
   Current year
$
386,352

 
$
683,662

   Prior years
(41,202
)
 
(31,229
)
Total incurred
$
345,150

 
$
652,433

Losses and loss settlement expense payments
for claims occurring during
 
 
 
   Current year
$
116,808

 
$
277,053

   Prior years
175,126

 
260,520

Total paid
$
291,934

 
$
537,573

Net liability for losses and loss settlement expenses
at end of year
$
1,117,318

 
$
1,064,102

Ceded loss and loss settlement expenses
63,160

 
59,794

Gross liability for losses and loss settlement expenses
at end of period
$
1,180,478

 
$
1,123,896


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 2017 was in our commercial liability or long-tail liability line of business and workers' compensation line of business. Much of the favorable long-tail liability development continues to come from loss adjustment expense and is attributed to our continued litigation management efforts. There was also a reduction in reserves for incurred but not reported claims because our long tail liability has experienced fewer late reported claims than what was initially anticipated. The majority of the favorable workers compensation development is due to reductions in reserves for reported claims which were greater than what was necessary to offset claim payments. Commercial fire and allied lines and assumed reinsurance exhibited adverse development, which provided a partial offset to the much larger favorable development previously noted. Assumed reinsurance was adversely affected by increases in reserves for reported claims while commercial fire adverse development is attributable to loss payments which were greater than reductions in reported loss reserves and reserves for claims incurred but not reported. The majority of adverse commercial fire development resulted from claim payments that exceeded reductions in reserves for reported claims.

The significant drivers of the favorable reserve development in 2016 were our commercial liability and workers compensation. Much of the favorable commercial liability development came from loss adjustment expense and is attributed to our continued litigation management efforts. Workers compensation favorable development was due to the combined effects of decreases in claim reserves along with favorable changes affecting loss adjustment expense. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial property, commercial automobile and assumed reinsurance exhibited adverse development which provided a partial offset to the favorable development previously noted. The adverse development for all three lines is due to paid loss which was greater than reductions in reported loss reserves and reserves for claims incurred but not reported. No other single line of business contributed a significant portion of the total development.


28

Table of Contents


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 5. EMPLOYEE BENEFITS

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
Three Months Ended June 30,
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
1,714

 
$
1,623

 
$
505

 
$
932

Interest cost
1,765

 
1,663

 
482

 
754

Expected return on plan assets
(2,412
)
 
(1,988
)
 

 

Amortization of prior service credit

 

 
(1,352
)
 

Amortization of net loss
891

 
992

 
461

 
379

Net periodic benefit cost
$
1,958

 
$
2,290

 
$
96

 
$
2,065


 
Pension Plan
 
Postretirement Benefit Plan
Six Months Ended June 30,
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
3,427

 
$
3,246

 
$
1,010

 
$
1,864

Interest cost
3,530

 
3,326

 
964

 
1,508

Expected return on plan assets
(4,824
)
 
(3,976
)
 

 

Amortization of prior service credit

 

 
(2,704
)
 

Amortization of net loss
1,782

 
1,984

 
922

 
758

Net periodic benefit cost
$
3,915

 
$
4,580

 
$
192

 
$
4,130


Employer Contributions

We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 that we expected to contribute $6,400 to the pension plan in 2017. For the six-month period ended June 30, 2017, we contributed $3,196 to the pension plan.

NOTE 6. 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, restricted stock units, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of UFG common stock to employees. In May 2014, the Registrant's


29

Table of Contents

shareholders approved an additional 1,500,000 shares of UFG 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. Stock Plan (as amended, the "Stock Plan"). At June 30, 2017, there were 997,259 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 UFG.
Options granted pursuant to the Stock Plan are granted to buy shares of UFG's common stock at the market value of the stock on the date of grant. All outstanding option awards have graded vesting over 3 years or 5 years from the grant date, unless the Board of Directors authorizes acceleration of vesting. Performance stock units cliff-vest after 3 years and the certification of performance results by UFG’s Compensation Committee. 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 UFG's common stock on the date of the grant. Restricted stock units fully vest after 3 years or 5 years from the date of issuance, unless accelerated upon the approval of the Board of Directors, at which time UFG common stock will be issued to the awardee.
The activity in the Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Six Months Ended June 30, 2017
 
From Inception to June 30, 2017
Beginning balance
1,248,651

 
1,900,000

Additional shares authorized

 
1,500,000

Number of awards granted
(254,620
)
 
(2,867,186
)
Number of awards forfeited or expired
3,228

 
464,445

Ending balance
997,259

 
997,259

Number of option awards exercised
74,466

 
1,023,534

Number of unrestricted stock awards granted
725

 
8,050

Number of restricted stock awards vested

 
36,970


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 UFG's common stock to non-employee directors. At June 30, 2017, we had 61,813 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.











30

Table of Contents

The activity in the Director Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Six Months Ended June 30, 2017
 
From Inception to June 30, 2017
Beginning balance
74,771

 
300,000

Number of awards granted
(12,958
)
 
(262,190
)
Number of awards forfeited or expired

 
24,003

Ending balance
61,813

 
61,813

Number of option awards exercised
6,727

 
59,200

Number of restricted stock awards vested
22,716

 
54,272


Stock-Based Compensation Expense

For the three-month periods ended June 30, 2017 and 2016, we recognized stock-based compensation expense of $1,210 and $889, respectively. For the six-month periods ended June 30, 2017 and 2016, we recognized stock-based compensation expense of $2,254 and $1,865, respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.

As of June 30, 2017, we had $10,614 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized over the remainder of 2017 and subsequent years according to the table below, 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.
2017
 
$
2,371

2018
 
3,981

2019
 
2,718

2020
 
1,111

2021
 
393

2022
 
40

Total
 
$
10,614


NOTE 7. 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 six domestic locations from which it conducts its business. The life insurance segment operates from our home office in Cedar Rapids, Iowa. Because all of our insurance is sold domestically, we have no revenues from foreign operations.

We evaluate the two segments on the basis of both statutory accounting principles prescribed or permitted by our states of domicile and GAAP. We analyze results based on profitability (i.e., loss ratios), expenses, and return on equity. The basis we use to determine and analyze segments and to measure segment profit or loss have not changed from that reported in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
We have reconciled the amounts in the following table for the three-month periods ended June 30, 2017 and 2016 to the amounts reported in our unaudited Consolidated Financial Statements, adjusting for intersegment eliminations.


31

Table of Contents

 
Property and Casualty Insurance
 
Life Insurance
 
Total
As of and for the Three Months Ended June 30, 2017
 
 
 
 
Net premiums earned
$
245,222

 
$
14,341

 
$
259,563

Investment income, net of investment expenses
12,208

 
12,426

 
24,634

Net realized investment gains
1,081

 
1,599

 
2,680

Other income

 
126

 
126

Total reportable segment
$
258,511

 
$
28,492

 
$
287,003

Intersegment eliminations
(24
)
 

 
(24
)
Total revenues
$
258,487

 
$
28,492

 
$
286,979

Net income
$
109

 
$
2,849

 
$
2,958

Assets
$
2,595,147

 
$
1,602,265

 
$
4,197,412

Invested assets
$
1,836,736

 
$
1,492,192

 
$
3,328,928

 
 
 
 
 
 
As of and for the Three Months Ended June 30, 2016
 
 
 
 
Net premiums earned
$
232,282

 
$
21,205

 
$
253,487

Investment income, net of investment expenses
11,655

 
12,889

 
24,544

Net realized investment gains
966

 
630

 
1,596

Other income

 
183

 
183

Total reportable segment
$
244,903

 
$
34,907

 
$
279,810

Intersegment eliminations
(37
)
 

 
(37
)
Total revenues
$
244,866

 
$
34,907

 
$
279,773

Net income (loss)
$
3,434

 
$
(320
)
 
$
3,114

Assets
$
2,459,526

 
$
1,646,312

 
$
4,105,838

Invested assets
$
1,723,641

 
$
1,547,765

 
$
3,271,406


We have reconciled the amounts in the following table for the six-month periods ended June 30, 2017 and 2016 to the amounts reported in our unaudited Consolidated Financial Statements, adjusting for intersegment eliminations.
 
Property and Casualty Insurance
 
Life Insurance
 
Total
As of and for the Six Months Ended June 30, 2017
 
 
 
 
Net premiums earned
$
481,666

 
$
31,769

 
$
513,435

Investment income, net of investment expenses
24,813

 
24,876

 
49,689

Net realized investment gains
3,330

 
3,304

 
6,634

Other income

 
324

 
324

Total reportable segment
$
509,809

 
$
60,273

 
$
570,082

Intersegment eliminations
(44
)
 

 
(44
)
Total revenues
$
509,765

 
$
60,273

 
$
570,038

Net income
$
18,693

 
$
4,201

 
$
22,894

Assets
$
2,595,147

 
$
1,602,265

 
$
4,197,412

Invested assets
$
1,836,736

 
$
1,492,192

 
$
3,328,928

 
 
 
 
 
 
As of and for the Six Months Ended June 30, 2016
 
 
 
 
Net premiums earned
$
452,507

 
$
42,278

 
$
494,785

Investment income, net of investment expenses
21,064

 
25,741

 
46,805

Net realized investment gains
2,703

 
948

 
3,651

Other income

 
291

 
291

Total reportable segment
$
476,274

 
$
69,258

 
$
545,532

Intersegment eliminations
(74
)
 

 
(74
)
Total revenues
$
476,200

 
$
69,258

 
$
545,458

Net income
$
25,454

 
$
87

 
$
25,541

Assets
$
2,459,526

 
$
1,646,312

 
$
4,105,838

Invested assets
$
1,723,641

 
$
1,547,765

 
$
3,271,406




32

Table of Contents


NOTE 8. 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, restricted stock awards and restricted stock unit 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 for the three-month periods ended June 30, 2017 and 2016:
 
Three Months Ended June 30,
(In Thousands, Except Share Data)
2017
 
2016
 
Basic
 
Diluted
 
Basic
 
Diluted
Net income
$
2,958

 
$
2,958

 
$
3,114

 
$
3,114

Weighted-average common shares outstanding
25,133,035

 
25,133,035

 
25,366,283

 
25,366,283

Add dilutive effect of restricted stock unit awards

 
248,717

 

 
155,270

Add dilutive effect of stock options

 
242,934

 

 
273,923

Weighted-average common shares
25,133,035

 
25,624,686

 
25,366,283

 
25,795,476

Earnings per common share
$
0.12

 
$
0.12

 
$
0.12

 
$
0.12

Awards excluded from diluted earnings per share calculation(1)

 

 

 

(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.

The components of basic and diluted earnings per share were as follows for the six-month periods ended June 30, 2017 and 2016:
 
Six Months Ended June 30,
(In Thousands, Except Share Data)
2017
 
2016
 
Basic
 
Diluted
 
Basic
 
Diluted
Net income
$
22,894

 
$
22,894

 
$
25,541

 
$
25,541

Weighted-average common shares outstanding
25,288,068

 
25,288,068

 
25,288,086

 
25,288,086

Add dilutive effect of restricted stock unit awards

 
248,717

 

 
155,270

Add dilutive effect of stock options

 
215,740

 

 
186,221

Weighted-average common shares
25,288,068

 
25,752,525

 
25,288,086

 
25,629,577

Earnings per common share
$
0.91

 
$
0.89

 
$
1.01

 
$
1.00

Awards excluded from diluted earnings per share calculation(1)

 

 

 

(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.

NOTE 9. CREDIT FACILITY

On February 2, 2016, the Company, as borrower, entered into a Credit Agreement (the "Credit Agreement") by and among the Company, with the lenders from time to time party thereto and KeyBank National Association ("Key


33

Table of Contents

Bank"), as administrative agent, swingline lender and letter of credit issuer. The 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 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 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 Credit Agreement is due and payable in full at maturity on February 2, 2020. Based on the type of loan, advances under the 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 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 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 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 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.
There was no outstanding balance on the Credit Agreement at June 30, 2017 and 2016, respectively. For the six-month periods ended June 30, 2017 and 2016, we did not incur any interest expense related to either credit facility. We were in compliance with all covenants of the Credit Agreement at June 30, 2017.

NOTE 10. 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 three-month period ended June 30, 2017:
 
 
 
Liability for
 
 
 
Net unrealized
 
underfunded
 
 
 
appreciation
 
employee
 
 
 
on investments
 
benefit costs(1)
 
Total
Balance as of March 31, 2017
$
141,407

 
$
(23,959
)
 
$
117,448

Change in accumulated other comprehensive income before reclassifications
19,924

 

 
19,924

Reclassification adjustments from accumulated other comprehensive income (loss)
(1,283
)
 
879

 
(404
)
Balance as of June 30, 2017
$
160,048

 
$
(23,080
)
 
$
136,968

(1) 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.





34

Table of Contents

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the six-month period ended June 30, 2017:
 
 
 
Liability for
 
 
 
Net unrealized
 
underfunded
 
 
 
appreciation
 
employee
 
 
 
on investments
 
benefit costs(1)
 
Total
Balance as of January 1, 2017
$
133,892

 
$
(24,837
)
 
$
109,055

Change in accumulated other comprehensive income before reclassifications
29,652

 

 
29,652

Reclassification adjustments from accumulated other comprehensive income (loss)
(3,496
)
 
1,757

 
(1,739
)
Balance as of June 30, 2017
$
160,048

 
$
(23,080
)
 
$
136,968

(1) 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.


35

Table of Contents

Review Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
United Fire Group, Inc.

We have reviewed the consolidated balance sheet of United Fire Group, Inc. (the "Company") as of June 30, 2017, and the related consolidated statements of income and comprehensive income for the three- and six-month periods ended June 30, 2017 and 2016, the consolidated statements of cash flows for the six-month periods ended June 30, 2017 and 2016, and the consolidated statement of stockholders' equity for the six-month period ended June 30, 2017. These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of United Fire Group, Inc. as of December 31, 2016, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 28, 2017. In our opinion, the accompanying consolidated balance sheet of United Fire Group, Inc. as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 
/s/ Ernst & Young LLP  
 
 
Ernst & Young LLP 
 

Des Moines, Iowa
August 2, 2017



36

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Part I, Item 1 "Financial Statements."

CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our results of operations and financial condition on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are more fully described in our Management's Discussion and Analysis of Financial Condition and Results of Operations presented in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no changes in our critical accounting policies from December 31, 2016.

INTRODUCTION

The purpose of this Management's Discussion and Analysis is to provide an understanding of our results of operations and consolidated financial position. Our Management's Discussion and Analysis should be read in conjunction with our consolidated financial statements and related notes, including those in our Annual Report on Form 10-K for the year ended December 31, 2016. 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.
When we provide information on a statutory or other basis, we label it as such, otherwise all other data is presented in accordance with GAAP.

OUR BUSINESS

Founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our") and its consolidated insurance subsidiaries provide insurance protection for individuals and businesses through several regional offices. 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 1,500 independent agencies.

Segments

We operate two business segments, each with a wide range of products:

property and casualty insurance, which includes commercial lines insurance, personal lines 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 each has different products, pricing, and expense structures.



37

Table of Contents

For the six-month period ended June 30, 2017, property and casualty insurance business accounted for approximately 93.8 percent of our net premiums earned, of which 92.7 percent was generated from commercial lines. Life insurance business accounted for approximately 6.2 percent of our net premiums earned, of which 66.2 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. 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 the six-month period ended June 30, 2017, approximately 48.1 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri and Minnesota; approximately 65.4 percent of our life insurance premiums were written in Iowa, Wisconsin, Minnesota, Illinois and Nebraska.

Segment 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 this Management's Discussion and Analysis is reported on a pre-tax basis. Additional segment information is presented in Part I, Item 1, Note 7 "Segment Information" to the unaudited 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, effective use of ceded reinsurance and effective and efficient use of technology.




















38

Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
2017
 
2016
 
%
 
2017
 
2016
 
%
Revenues
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
259,563

 
$
253,487

 
2.4
 %
 
$
513,435

 
$
494,785

 
3.8
 %
Investment income, net of investment expenses
24,610

 
24,507

 
0.4

 
49,645

 
46,731

 
6.2

Net realized investment gains
2,680

 
1,596

 
67.9

 
6,634

 
3,651

 
81.7

Other income
126

 
183

 
(31.1
)
 
324

 
291

 
11.3

Total revenues
$
286,979

 
$
279,773

 
2.6
 %
 
$
570,038

 
$
545,458

 
4.5
 %
 

 
 
 
 
 
 
 
 
 
 
Benefits, Losses and Expenses

 
 
 
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
197,698

 
$
180,412

 
9.6
 %
 
$
365,321

 
$
322,540

 
13.3
 %
Increase in liability for future policy benefits
5,281

 
16,002

 
(67.0
)
 
13,860

 
28,554

 
(51.5
)
Amortization of deferred policy acquisition costs
53,093

 
52,585

 
1.0

 
105,227

 
102,816

 
2.3

Other underwriting expenses
26,201

 
24,772

 
5.8

 
51,091

 
51,525

 
(0.8
)
Interest on policyholders' accounts
4,651

 
5,138

 
(9.5
)
 
9,395

 
10,385

 
(9.5
)
Total benefits, losses and expenses
$
286,924

 
$
278,909

 
2.9
 %
 
$
544,894

 
$
515,820

 
5.6
 %
 


 
 
 
 
 
 
 
 
 
 
Income before income taxes
$
55

 
$
864

 
(93.6
)%
 
$
25,144

 
$
29,638

 
(15.2
)%
Federal income tax expense (benefit)
(2,903
)
 
(2,250
)
 
29.0

 
2,250

 
4,097

 
(45.1
)
Net income
$
2,958

 
$
3,114

 
(5.0
)%
 
$
22,894

 
$
25,541

 
(10.4
)%


The following is a summary of our financial performance for the three- and six-month periods ended June 30, 2017:

Consolidated Results of Operations

For the three-month period ended June 30, 2017, net income was $3.0 million compared to $3.1 million for the same period of 2016. The decrease in net income was driven by an increase in losses and loss settlement expenses from a deterioration in our core loss ratio; partially offset by an increase in net premiums earned from organic growth and a smaller increase in liability for future policy benefits from a decrease in sales of single premium whole life products. Consolidated net premiums earned increased to $259.6 million compared to $253.5 million for the same period of 2016.

For the six-month period ended June 30, 2017, net income was $22.9 million compared to $25.5 million for the same period of 2016. The decrease in net income was driven by an increase in losses and loss settlement expenses from a deterioration in our core loss ratio; partially offset by an increase in net premiums earned from organic growth and a smaller increase in liability for future policy benefits from a decrease in sales of single premium whole life products. Consolidated net premiums earned increased to $513.4 million compared to $494.8 million for the same period of 2016.

Losses and loss settlement expenses increased by $17.3 million during the three-month period ended June 30, 2017 compared to the same period of 2016, and the net loss ratio increased by 2.4 percentage points during the three-month period ended June 30, 2017 compared to the same period of 2016. The increase was primarily due to the deterioration in our core loss ratio. This deterioration was primarily due to an increase in frequency and severity of losses in our commercial automobile line of business offset slightly by a decrease in catastrophe losses. Pre-tax catastrophe losses for the three-month period ended June 30, 2017 were $28.3 million compared to $35.5 million in the same period of 2016.


39

Table of Contents

Losses and loss settlement expenses increased by $42.8 million during the six-month period ended June 30, 2017 compared to the same period of 2016, and the net loss ratio increased by 4.0 percentage points during the six-month period ended June 30, 2017 compared to the same period of 2016. The increase was primarily due to the deterioration in our core loss ratio. This deterioration was primarily due to an increase in frequency and severity in losses in our commercial automobile line of business offset slightly by a decrease in catastrophe losses. Pre-tax catastrophe losses for the six-month period ended June 30, 2017 were $38.1 million compared to $39.9 million in the same period of 2016.

Investment income increased by $0.1 million and $2.9 million during the three- and six-month periods ended June 30, 2017, respectively, compared to the same periods of 2016. The increase in the six-month period ended June 30, 2017 was primarily due to the $2.2 million increase in the change in value of our investments in limited liability partnerships as compared to the same period in 2016.

Consolidated Financial Condition

Our stockholders' equity increased to $962.6 million at June 30, 2017, from $941.9 million at December 31, 2016. The increase was attributable to net income of $22.9 million and an increase in net unrealized investment gains of $26.2 million, net of tax, partially offset by stockholder dividends of $13.4 million and share repurchases of $21.2 million.

Net unrealized investment gains totaled $160.0 million as of June 30, 2017, an increase of $26.2 million, net of tax, or 19.5 percent, since December 31, 2016. The increase in net unrealized investment gains is primarily the result of a decrease in interest rates, which positively impacted the valuation of our fixed maturity security portfolio during 2017 and, to a lesser extent, an increase in the fair value of our equity security portfolio.

At June 30, 2017, the book value per share of our common stock was $38.46. During the six-month period ended June 30, 2017, 361,627 shares of common stock were repurchased under our share repurchase program at a total cost of $21.2 million and an average share price of $42.68. Under our share repurchase program, which is scheduled to expire on August 31, 2018, we were authorized to repurchase an additional 2,441,863 shares of our common stock as of June 30, 2017.


























40

Table of Contents

RESULTS OF OPERATIONS

Property and Casualty Insurance Segment Results
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands, Except Ratios)
2017
 
2016
 
2017
 
2016
Net premiums earned
$
245,222

 
$
232,282

 
$
481,666

 
$
452,507

Losses and loss settlement expenses
(188,596
)
 
(173,128
)
 
(345,148
)
 
(306,265
)
Amortization of deferred policy acquisition costs
(51,398
)
 
(50,563
)
 
(101,859
)
 
(98,976
)
Other underwriting expenses
(22,824
)
 
(19,803
)
 
(44,083
)
 
(41,422
)
Underwriting gain (loss)
$
(17,596
)
 
$
(11,212
)
 
$
(9,424
)
 
$
5,844

 
 
 
 

 
 
 
 
Investment income, net of investment expenses
12,184

 
11,618

 
24,769

 
20,990

Net realized investment gains
1,081

 
966

 
3,330

 
2,703

Income (loss) before income taxes
$
(4,331
)
 
$
1,372

 
$
18,675

 
$
29,537

 
 
 
 

 
 
 
 
GAAP Ratios:
 
 
 

 
 
 
 
Net loss ratio (without catastrophes)
65.3
%
 
59.2
%
 
63.8
%
 
58.9
%
Catastrophes - effect on net loss ratio
11.6

 
15.3

 
7.9

 
8.8

Net loss ratio(1)
76.9
%
 
74.5
%
 
71.7
%
 
67.7
%
Expense ratio(2)
30.3

 
30.3

 
30.3

 
31.0

Combined ratio(3)
107.2
%
 
104.8
%
 
102.0
%
 
98.7
%
(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 unaudited Consolidated Financial Statements.
(2) The 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.
(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 three- and six-month periods ended June 30, 2017, our property and casualty segment reported a loss before income taxes of $4.3 million and income before income taxes of $18.7 million, a decrease of $5.7 million and $10.9 million, respectively, compared to the same periods of 2016. The decrease in the three- and six-month periods ended June 30, 2017 was driven by an increase in losses and loss settlement expenses from a deterioration in our core loss ratio; partially offset by an increase in net premiums earned from organic growth and an increase in investment income.

Net premiums earned increased 5.6 percent to $245.2 million in the three-month period ended June 30, 2017, compared to $232.3 million in the same period of 2016. Net premiums earned increased 6.4 percent to $481.7 million in the six-month period ended June 30, 2017, compared to $452.5 million in the same period of 2016. This increase is the result of organic growth.

The combined ratio increased 2.4 percentage points to 107.2 percent, for the three-month period ended June 30, 2017, compared to 104.8 percent for the same period of 2016. The combined ratio increased 3.3 percentage points to 102.0 percent, for the six-month period ended June 30, 2017, compared to 98.7 percent for the same period of 2016. The increase in the combined ratio in the three- and six-month periods ended June 30, 2017, as compared to the same periods of 2016, was primarily attributable to an increase in the net loss ratio. The increase in net loss ratio was primarily driven by a deterioration in our core loss ratio, primarily in our commercial automobile line of business, which experienced an increase in frequency and severity of losses.



41

Table of Contents

The net loss ratio, a component of the combined ratio, increased by 2.4 percentage points to 76.9 percent and 4.0 percentage points to 71.7 in the three- and six-month periods ended June 30, 2017, respectively, as compared to the same periods of 2016, due to a deterioration in our core loss ratio offset slightly by a decrease in catastrophe losses. The deterioration in our core loss ratio was primarily due to an increase in frequency and severity of losses in our commercial automobile lines of business. Pre-tax catastrophe losses totaled $28.3 million and $38.1 million and for the three- and six-month periods ended June 30, 2017, as compared to $35.5 million and $39.9 million in the same periods of 2016.

The expense ratio, a component of the combined ratio, was 30.3 percent, respectively, for both the three- and six-month periods ended June 30, 2017, a 0.0 percentage point and 0.7 percentage point decrease as compared with the same periods of 2016. The decrease in the six-month period ended June 30, 2017 was primarily due to a decrease in post-retirement benefit expenses and contingent commission expenses; partially offset by a deterioration in the profitability of the commercial and personal auto lines of business that has limited the amount of underwriting expenses eligible for deferral in our deferred acquisition costs calculation.

For a detailed discussion of our consolidated investment results, refer to the "Investment Portfolio" section below.
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.

2017 Development

The property and casualty insurance segment experienced $16.3 million and $41.2 million of favorable development in our net reserves for prior accident years for the three- and six-month periods ended June 30, 2017, respectively. For the three-month period ended June 30, 2017 the majority of favorable development came from two lines, commercial liability with $15.8 million favorable development and workers compensation with $6.0 million favorable development, which was partially offset by unfavorable development from two other lines, commercial fire and allied lines with $3.8 million unfavorable development and commercial auto with $2.1 million unfavorable development. During the three-month period ended June 30, 2017 all other lines combined contributed $0.4 million favorable development. For the six-month period ended June 30, 2017 the majority of favorable development came from two lines, commercial liability with $41.5 million favorable development and workers compensation with $10.0 million favorable development, which was partially offset


42

Table of Contents

by unfavorable development from two other lines, commercial fire and allied lines with $6.3 million unfavorable development and assumed reinsurance with $5.4 million unfavorable development. During the six-month period ended June 30, 2017 all other lines combined contributed $1.4 million favorable development. Much of the favorable long-tail liability development continues to come from loss adjustment expense and is attributed to our continued litigation management efforts. There was also a reduction in reserves for incurred but not reported claims because our long tail liability has experienced fewer late reported claims than what was initially anticipated. The majority of the favorable workers compensation development is due to reductions in reserves for reported claims which were greater than what was necessary to offset claim payments.

2016 Development

The property and casualty insurance segment experienced $2.5 million and $26.4 million of favorable development in our net reserves for prior accident years for the three- and six-month periods ended June 30, 2016, respectively. For the three-month period ended June 30, 2016 the majority of favorable development was from commercial automobile with $3.3 million favorable development, commercial fire and allied lines with $2.5 million favorable development and workers compensation with $1.7 million favorable development, all partially offset with unfavorable development of $6.0 million in commercial liability; no other single line contributed a significant portion of the total development. For the six-month period ended June 30, 2016 the majority of favorable development was from commercial liability with $13.8 million favorable development, workers compensation with $7.2 million favorable development and commercial automobile with $6.2 million favorable development, all partially offset by commercial fire and allied lines with $4.4 million unfavorable development; no other single line contributed a significant portion of the total development. 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.

Development amounts can vary significantly from quarter-to-quarter and 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. At June 30, 2017, our total reserves were within our actuarial estimates.



























43

Table of Contents

The following table displays our net premiums earned, net losses and loss settlement expenses and net loss ratio by line of business:
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
2017

2016
 
 

Net Losses

 

 

Net Losses

 
 
 

and Loss

 

 

and Loss

 
 
Net

Settlement

Net

Net

Settlement

Net
(In Thousands, Except Ratios)
Premiums

Expenses

Loss

Premiums

Expenses

Loss
Unaudited
Earned

Incurred

Ratio

Earned

Incurred

Ratio
Commercial lines
 

 

 

 

 

 
Other liability
$
76,215


$
10,711


14.1
%

$
71,454


$
35,303


49.4
 %
Fire and allied lines
54,419


64,335


118.2


56,012


52,758


94.2

Automobile
61,497


72,778


118.3


52,544


44,848


85.4

Workers' compensation
27,222


15,583


57.2


25,660


19,690


76.7

Fidelity and surety
5,714


376


6.6


5,316


(423
)

(8.0
)
Miscellaneous
537


120


22.3


450


113


25.1

Total commercial lines
$
225,604


$
163,903


72.7
%

$
211,436


$
152,289


72.0
 %
 
 

 

 






 
Personal lines
 

 

 






 
Fire and allied lines
$
10,782


$
15,639


145.0
%

$
11,090


$
12,531


113.0
 %
Automobile
6,674


8,141


122.0


6,216


6,335


101.9

Miscellaneous
287


17


5.9


270


412


152.6

Total personal lines
$
17,743


$
23,797


134.1
%

$
17,576


$
19,278


109.7
 %
Reinsurance assumed
$
1,875


$
896


47.8
%

$
3,270


$
1,561


47.7
 %
Total
$
245,222


$
188,596


76.9
%

$
232,282


$
173,128


74.5
 %

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
2017
 
2016
 
 
 
Net Losses
 
 
 
 
 
Net Losses
 
 
 
 
 
and Loss
 
 
 
 
 
and Loss
 
 
 
Net
 
Settlement
 
Net
 
Net
 
Settlement
 
Net
(In Thousands, Except Ratios)
Premiums
 
Expenses
 
Loss
 
Premiums
 
Expenses
 
Loss
Unaudited
Earned
 
Incurred
 
Ratio
 
Earned
 
Incurred
 
Ratio
Commercial lines
 
 
 
 
 
 
 
 
 
 
 
Other liability
$
150,295

 
$
22,761

 
15.1
 %
 
$
140,788

 
$
68,664

 
48.8
 %
Fire and allied lines
109,938

 
110,893

 
100.9

 
108,052

 
86,737

 
80.3

Automobile
119,218

 
134,185

 
112.6

 
101,995

 
87,067

 
85.4

Workers' compensation
51,705

 
32,212

 
62.3

 
50,243

 
31,334

 
62.4

Fidelity and surety
11,611

 
692

 
6.0

 
10,510

 
(476
)
 
(4.5
)
Miscellaneous
915

 
167

 
18.3

 
839

 
318

 
37.9

Total commercial lines
$
443,682

 
$
300,910

 
67.8
 %
 
$
412,427

 
$
273,644

 
66.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Personal lines
 
 
 
 
 
 
 
 
 
 
 
Fire and allied lines
$
21,570

 
$
22,284

 
103.3
 %
 
$
21,808

 
$
18,836

 
86.4
 %
Automobile
13,153

 
14,659

 
111.4

 
12,300

 
10,544

 
85.7

Miscellaneous
566

 
(70
)
 
(12.4
)
 
531

 
595

 
112.1

Total personal lines
$
35,289

 
$
36,873

 
104.5
 %
 
$
34,639

 
$
29,975

 
86.5
 %
Reinsurance assumed
$
2,695

 
$
7,365

 
NM

 
$
5,441

 
$
2,646

 
48.6
 %
Total
$
481,666

 
$
345,148

 
71.7
 %
 
$
452,507

 
$
306,265

 
67.7
 %
NM = Not meaningful






44

Table of Contents

Below are explanations regarding significant changes in the net loss ratios by line of business;
 
Other liability - The net loss ratio improved 35.3 percentage points and 33.7 percentage points in the three- and six-month periods ended June 30, 2017, respectively, compared to the same periods of 2016. Several individual items, each with favorable changes, underlie the overall favorable change of 2017 as compared to 2016. Much of the favorable long-tail liability development continues to come from loss adjustment expense and is attributed to our continued litigation management efforts. There was also a reduction in reserves for incurred but not reported claims because our long tail liability has experienced fewer late reported claims than what was initially anticipated.

Commercial fire and allied lines - The net loss ratio deteriorated 24.0 percentage points and 20.6 percentage points in the three- and six-month periods ended June 30, 2017, respectively, compared to the same periods of 2016. The change results from an increase in frequency, with the number of claims increasing in 2017 as compared to the same periods of 2016, along with an increase in paid loss and paid loss adjustment expenses.

Commercial automobile - The net loss ratio deteriorated 32.9 percentage points and 27.2 percentage points in the three- and six-month periods ended June 30, 2017, respectively, compared to the same periods of 2016. The change was due to an increase in frequency and severity of losses in 2017 as compared to the same periods of 2016 primarily due to strengthening of reserves on prior accident years and only partially due to an increase in direct paid losses in the current accident year. We are implementing many initiatives to improve the profitability of this line of business, which include pricing increases, stricter underwriting guidelines, new analytical tools and more rigorous loss control requirements.

Personal fire and allied lines - The net loss ratio deteriorated 32.0 percentage points and 16.9 percentage points in the three- and six-month periods ended June 30, 2017, respectively, compared to the same periods of 2016. The change results from an increase in frequency, with the number of claims increasing in 2017 as compared to the same periods of 2016, along with an increase in loss and loss adjustment expense reserves for incurred but not reported claims.

Personal automobile - The net loss ratio deteriorated 20.1 percentage points and 25.7 percentage points in the three- and six-month periods ended June 30, 2017, respectively, compared to the same periods of 2016. The change is primarily attributable to an increase in claim frequency in 2017 as compared to the same periods 2016 which resulted in increased paid loss and increased reserves for reported claims.

Reinsurance assumed - The net loss ratio deteriorated in the six-month period ended June 30, 2017 compared to the same period of 2016. The increase in losses is primarily attributable to the emergence of prior year losses in the programs in which we participate, which are reported on a lag basis.


45

Table of Contents

Life Insurance Segment Results
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
14,341

 
$
21,205

 
$
31,769

 
$
42,278

Investment income, net of investment expenses
12,426

 
12,889

 
24,876

 
25,741

Net realized investment gains
1,599

 
630

 
3,304

 
948

Other income
126

 
183

 
324

 
291

Total revenues
$
28,492

 
$
34,907

 
$
60,273

 
$
69,258

 
 
 
 
 
 
 
 
Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
9,102

 
$
7,284

 
$
20,173

 
$
16,275

Increase in liability for future policy benefits
5,281

 
16,002

 
13,860

 
28,554

Amortization of deferred policy acquisition costs
1,695

 
2,022

 
3,368

 
3,840

Other underwriting expenses
3,377

 
4,969

 
7,008

 
10,103

Interest on policyholders' accounts
4,651

 
5,138

 
9,395

 
10,385

Total benefits, losses and expenses
$
24,106

 
$
35,415

 
$
53,804

 
$
69,157

 
 
 
 
 
 
 
 
Income (loss) before income taxes
$
4,386

 
$
(508
)
 
$
6,469

 
$
101


Income before income taxes increased $4.9 million in the three-month period ended June 30, 2017, as compared to the same period of 2016. The increase in net income was due to an increase in net realized investment gains, a decrease in other underwriting expenses and a smaller increase in liability for future policy benefits. These were offset by a decrease in net premiums earned from lower sales of single premium whole life policies ("SPWL") and an increase in losses and loss settlement expenses.

Income before income taxes increased $6.4 million in the six-month period ended June 30, 2017, as compared to the same period of 2016. The increase in net income was due to an increase in net realized investment gains, a decrease in other underwriting expenses and a smaller increase in liability for future policy benefits. These were offset by a decrease in net premiums earned from lower sales of SPWL and an increase in losses and loss settlement expenses.

Net premiums earned decreased 32.4 percent to $14.3 million for the three-month period ended June 30, 2017, compared to $21.2 million in the same period of 2016. Net premiums earned decreased 24.9 percent to $31.8 million for the six-month period ended June 30, 2017, compared to $42.3 million in the same period of 2016. The decrease in net premiums earned was primarily due to lower sales of SPWL policies. Effective January 1, 2017, we began to execute our strategy to improve profitability in our life segment by implementing pricing changes and restructuring our commission structure. As expected, these changes resulted in a decrease in sales of our SPWL products.

Net investment income decreased 3.6 percent to $12.4 million for the three-month period ended June 30, 2017, compared to $12.9 million for the same period of 2016. Net investment income decreased 3.4 percent to $24.9 million for the six-month period ended June 30, 2017, compared to $25.7 million for the same period of 2016. The decrease is primarily due to declining reinvestment interest rates and a decrease in the size of the investment portfolio.

The increase in liability for future policy benefits decreased in the three- and six-month periods ended June 30, 2017, compared to the same period of 2016, due to a decrease in sales of SPWL policies as previously mentioned.



46

Table of Contents

Deferred annuity deposits decreased 16.4 percent and 21.2 percent for the three- and six-month periods ended June 30, 2017, respectively, compared to the same periods of 2016. We continue to execute our strategy to maintain profitability rather than market share and to maintain our targeted spreads on our annuity block of business.

Net cash outflow related to our annuity business was $19.4 million and $39.0 million, respectively, in the three- and six-month periods ended June 30, 2017, compared to a net cash outflow of $20.1 million and $39.7 million, respectively, in the same periods of 2016. We attribute this to our strategy to maintain profitability on annuity products as previously described.

For a detailed discussion of our consolidated investment results, refer to the "Investment Portfolio" section of this item.

Investment Portfolio

Our invested assets totaled $3.3 billion at June 30, 2017, compared to $3.3 billion at December 31, 2016, an increase of $63.3 million. At June 30, 2017, fixed maturity securities and equity securities made up 89.2 percent and 8.5 percent of the value of our investment portfolio, respectively. Because the primary purpose of our investment portfolio is to fund future claims payments, we use a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to keep our cash on hand low in the current interest rate environment. If additional cash is needed, we can borrow funds available under our revolving credit facility.

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, regulatory requirements, interest rates and credit quality of assets. We administer our investment portfolio based on investment guidelines approved by management and the investment committee of our Board of Directors that comply with applicable statutory regulations.

The composition of our investment portfolio at June 30, 2017 is presented at carrying value in the following table:
 
Property & Casualty Insurance Segment
 
Life Insurance Segment
 
Total
 
 
 
Percent

 
 
 
Percent

 
 
 
Percent

(In Thousands, Except Ratios)
 
 
of Total

 
 
 
of Total

 
 
 
of Total

Fixed maturities (1)
 
 
 
 
 
 


 


 


Held-to-maturity
$
150

 
%
 
$
42

 
%
 
$
192

 
%
Available-for-sale
1,509,374

 
82.1

 
1,445,705

 
96.9

 
2,955,079

 
88.7

Trading securities
15,828

 
0.9

 

 

 
15,828

 
0.5

Equity securities
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
254,828

 
13.9

 
21,478

 
1.4

 
276,306

 
8.3

Trading securities
6,612

 
0.4

 

 

 
6,612

 
0.2

Mortgage loans

 

 
3,573

 
0.2

 
3,573

 
0.1

Policy loans

 

 
5,499

 
0.4

 
5,499

 
0.2

Other long-term investments
49,769

 
2.7

 
15,895

 
1.1

 
65,664

 
2.0

Short-term investments
175

 

 

 

 
175

 

Total
$
1,836,736

 
100.0
%
 
$
1,492,192

 
100.0
%
 
$
3,328,928

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

At both June 30, 2017 and December 31, 2016, we classified $3.0 billion, or 99.5 percent, of our fixed maturities portfolio as available-for-sale. We classify our remaining fixed maturities as held-to-maturity or trading. We record held-to-maturity securities at amortized cost. We record available-for-sale securities at fair value, with any changes


47

Table of Contents

in fair value recognized in accumulated other comprehensive income. We record trading securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings.

As of June 30, 2017 and December 31, 2016, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.

Credit Quality

The table below shows the composition of fixed maturity securities held in our available-for-sale, held-to-maturity and trading security portfolios, by credit rating at June 30, 2017 and December 31, 2016. Information contained in the table is generally based upon the issued credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain credit ratings from Standard & Poor's.
(In Thousands, Except Ratios)
June 30, 2017
 
December 31, 2016
Rating
Carrying Value
 
% of Total
 
Carrying Value
 
% of Total
AAA
$
851,796

 
28.7
%
 
$
782,329

 
26.9
%
AA
876,335

 
29.5

 
857,946

 
29.4

A
633,692

 
21.3

 
651,696

 
22.4

Baa/BBB
553,491

 
18.6

 
554,475

 
19.0

Other/Not Rated
55,785

 
1.9

 
66,268

 
2.3

 
$
2,971,099

 
100.0
%
 
$
2,912,714

 
100.0
%

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.

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, 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. Our net investment income increased by 0.4 percent and 6.2 percent, respectively, in the three- and six-month periods ended June 30, 2017, compared with the same periods of 2016. The increase in the three- and six-month periods ended June 30, 2017 was primarily due to the change in value of our investments in limited liability partnerships as compared to the same periods in 2016. We are maintaining our investment philosophy of purchasing fixed income investments rated investment grade or better.
We hold certain investments in limited liability partnerships that are recorded on the equity method of accounting, with changes in value of these investments recorded in investment income. In the three- and six-month periods ended June 30, 2017, the change in value of our investments in limited liability partnerships resulted in investment income of $0.9 million and $2.0 million, respectively, as compared to an increase of $1.2 million and a decrease of $0.3 million in investment income, respectively, in the same periods of 2016. This resulted in an increase of $0.3 million and an increase of $2.2 million in investment income in the three- and six-month periods ended June 30, 2017, respectively.


48

Table of Contents

Our net realized investment gains were $2.7 million and $6.6 million, respectively, during the three- and six-month periods ended June 30, 2017, as compared with $1.6 million and $3.7 million, respectively, in the same periods of 2016.
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. 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 June 30, 2017 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 June 30, 2017 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. In the three- and six-month periods ended June 30, 2017 and 2016, there were no other-than-temporary impairment write-downs.

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.




49

Table of Contents

The following table displays a summary of cash sources and uses in 2017 and 2016:
Cash Flow Summary
Six Months Ended June 30,
(In Thousands)
2017
 
2016
Cash provided by (used in)
 
 
 
Operating activities
$
112,134

 
$
81,077

Investing activities
(24,765
)
 
(25,507
)
Financing activities
(67,801
)
 
(42,319
)
Net increase in cash and cash equivalents
$
19,568

 
$
13,251

Operating Activities
Net cash flows provided by operating activities totaled $112.1 million and $81.1 million for the six-month periods ended June 30, 2017 and 2016, respectively. Our cash flows from operations were sufficient to meet our liquidity needs for the six-month periods ended June 30, 2017 and 2016.
Investing Activities
Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturities 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 our strategy for our portfolio, see the "Investment Portfolio" section of this item.
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 30.7 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 June 30, 2017, our cash and cash equivalents included $14.6 million related to these money market accounts, compared to $16.8 million at December 31, 2016.
Net cash flows used in investing activities were $24.8 million for the six-month period ended June 30, 2017 compared to net cash flows provided of $25.5 million for the six-month period ended June 30, 2016. For the six-month periods ended June 30, 2017 and 2016, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $156.1 million and $315.9 million, respectively.
Our cash outflows for investment purchases were $177.0 million for the six-month period ended June 30, 2017, compared to $338.6 million for the same period of 2016.
Financing Activities
Net cash flows used in financing activities were $67.8 million and $42.3 million for the six-month periods ended June 30, 2017 and 2016, respectively. The increase is due to repurchases of common stock, an increase in the payment of cash dividends and a decrease in the issuance of common stock in the six-month period ended June 30, 2017, compared to the same period of 2016.
Credit Facilities
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. As of June 30, 2017, there were no balances outstanding under this credit agreement. For further discussion of our credit agreement, refer to Part I, Item 1, Note 9 "Credit Facility" to the unaudited Consolidated Financial Statements.



50

Table of Contents

Dividends
Dividends paid to shareholders totaled $13.4 million and $11.9 million in the six-month periods ended June 30, 2017 and 2016, 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, and if applicable, commercially 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 June 30, 2017, United Fire Group, Inc.'s sole direct insurance company subsidiary, United Fire & Casualty Company, was able to make a maximum of $31.1 million in dividend payments without prior regulatory approval. These restrictions will not have a material impact in meeting the cash obligations of United Fire Group, Inc.
Stockholders' Equity
Stockholders' equity increased 2.2 percent to $962.6 million at June 30, 2017, from $941.9 million at December 31, 2016. The increase was primarily attributable to net income of $22.9 million and an increase in net unrealized investment gains of $26.2 million, net of tax, during the first six months of 2017, partially offset by shareholder dividends of $13.4 million. At June 30, 2017, the book value per share of our common stock was $38.46 compared to $37.04 at December 31, 2016.

Funding Commitments

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through December 31, 2023, to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $5.6 million at June 30, 2017.

MEASUREMENT OF RESULTS
Management evaluates our operations by monitoring key measures of growth and profitability. The following section provides further explanation of the key measures management uses to evaluate our results.

Catastrophe losses is a commonly used financial measure that uses 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


51

Table of Contents

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.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
2017
 
2016
 
2017
 
2016
ISO catastrophes
$
26,804

 
$
35,232

 
$
36,542

 
$
39,169

Non-ISO catastrophes (1)
1,532

 
292

 
1,519

 
697

Total catastrophes
$
28,336

 
$
35,524

 
$
38,061

 
$
39,866

(1) This number includes international assumed losses.


52

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have exposure to market risk arising from potential losses in our investment portfolio due to adverse changes in interest rates and market prices. However, we have the ability to hold fixed maturity investments to maturity. Our investment guidelines define the overall framework for managing our market and other investment risks, including accountability and controls. In addition, each of our subsidiaries has specific investment policies that delineate the investment limits and strategies that are appropriate given each entity's liquidity, surplus, product, and regulatory requirements. We respond to market risk by managing the character of investment purchases.

It is our philosophy that we do not utilize financial hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but attempt to mitigate our exposure through active portfolio management. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer. At June 30, 2017, we did not have direct exposure to investments in sub-prime mortgages or other credit-enhancement exposures.

While our primary market risk exposure is to changes in interest rates, we do have limited exposure to changes in equity prices and limited exposure to foreign currency exchange rates.

There have been no material changes in our market risk or market risk factors from what we reported in our Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, 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 is 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.

Changes in Internal Control Over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, no such change in our internal control over financial reporting occurred during the fiscal quarter to which this report relates.



53

Table of Contents

PART II - OTHER INFORMATION

ITEM 1. 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 June 30, 2017 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 1A. RISK FACTORS

Our business is subject to a number of risks, including those identified in Part I, Item 1A "Risk Factors" in our 2016 Annual Report on Form 10-K filed with the SEC on February 28, 2017, that could have a material effect on our business, results of operations, financial condition, and/or liquidity and that could cause our operating results to vary significantly from period to period. The risks described in the above mentioned report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also have a material effect on our business, results of operations, financial condition and/or liquidity.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Under our share repurchase program, first announced in August 2007, we may purchase UFG 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.

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 three-month period ended June 30, 2017:
 
 
 
 
 
Total Number of Shares
 
Maximum Number of
 
Total
 
 
 
Purchased as a Part of
 
Shares that may yet be
 
Number of
 
Average Price
 
Publicly Announced
 
Purchased Under the
Period
Shares Purchased
 
Paid per Share
 
Plans or Programs
 
Plans or Programs(1)
4/1/2017 - 4/30/2017
140,821

 
$
42.50

 
140,821

 
2,662,669

5/1/2017 - 5/31/2017
200,624

 
42.78

 
200,624

 
2,462,045

6/1/2017 - 6/30/2017
20,182

 
42.94

 
20,182

 
2,441,863

Total
361,627

 
$
42.68

 
361,627

 
 
(1) Our share repurchase program was originally announced in August 2007. In August 2016, our Board of Directors authorized the repurchase of up to an additional 1,500,000 shares of common stock through the end of August 2018. This is in addition to the 1,528,886 shares of common stock remaining under its previous authorizations. As of June 30, 2017 we remained authorized to repurchase 2,441,863 shares of common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.


54

Table of Contents

ITEM 6. EXHIBITS
Exhibit number
 
Exhibit description
 
Furnished herewith
Filed herewith
31.1
 
Certification of Randy A. Ramlo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
X
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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 formatted in XBRL: (i) Consolidated Balance Sheets at June 30, 2017 (unaudited) and December 31, 2016; (ii) Consolidated Statements of Income and Comprehensive Income (unaudited) for the three and six months ended June 30, 2017 and 2016; (iii) Consolidated Statement of Stockholders’ Equity (unaudited) for the six months ended June 30, 2017; (iv) Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2017 and 2016; and (v) Notes to Unaudited Consolidated Financial Statements, tagged as a block of text.

 
 
X
* Indicates management contract or compensatory plan or arrangement.


55

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED FIRE GROUP, INC.
 
 
(Registrant)
 
 
 
 
 
/s/ Randy A. Ramlo
 
/s/ Dawn M. Jaffray
Randy A. Ramlo
 
Dawn M. Jaffray
President, Chief Executive Officer,
 
Senior Vice President, Chief Financial Officer and
Director and Principal Executive Officer
 
Principal Accounting Officer
 
 
 
August 2, 2017
 
August 2, 2017
(Date)
 
(Date)
 



56