Edgar Filing: UNITED FIRE & CASUALTY CO

Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, 2010

Commission File Number 001-34257

UNITED FIRE & CASUALTY COMPANY

(Exact name of registrant as specified in its charter)


Iowa		42-0644327
(State of Incorporation)		(IRS Employer Identification No.)

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

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

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

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

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


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

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

As of April 28, 2010, 26,367,819 shares of common stock were outstanding.

United Fire & Casualty Company and Subsidiaries
Index to Quarterly Report on Form 10-Q
March 31, 2010


	Page

Forward-Looking Information		2

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009		3

Consolidated Statements of Income (unaudited) for the three month periods ended March 31, 2010 and 2009		4

Consolidated Statement of Stockholders’ Equity (unaudited) for the three month period ended March 31, 2010		5

Consolidated Statements of Cash Flows (unaudited) for the three month periods ended March 31, 2010 and 2009		6

Notes to Unaudited Consolidated Financial Statements		7

Report of Independent Registered Public Accounting Firm		25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3. Quantitative and Qualitative Disclosures about Market Risk		38

Item 4. Controls and Procedures		38

Part II. Other Information

Item 1. Legal Proceedings		39

Item 1A. Risk Factors		39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39

Item 3. Defaults Upon Senior Securities		39

Item 4. (Removed and Reserved)		39

Item 5. Other Information		39

Item 6. Exhibits		40

Signatures and Certifications		41

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

FORWARD-LOOKING INFORMATION

It is important to note that our actual results could differ materially from those projected in our forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A “Risk Factors.”

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

United Fire & Casualty Company and Subsidiaries

Consolidated Balance Sheets


	March 31,		December 31,
(In Thousands, Except Per Share Data and Number of Shares)	2010		2009
	(unaudited)
ASSETS
Investments
Fixed maturities (including $76,704, at fair value, pledged as collateral for securities lending in 2010)
Held-to-maturity, at amortized cost (fair value $8,707 in 2010 and $9,720 in 2009)	$	8,629	$	9,605
Available-for-sale, at fair value (amortized cost $2,162,256 in 2010 and $2,075,733 in 2009)		2,259,822		2,158,391
Equity securities, at fair value (cost $52,905 in 2010 and $53,306 in 2009)		143,396		132,718
Trading securities, at fair value (amortized cost $11,090 in 2010 and $11,724 in 2009)		11,693		12,613
Mortgage loans		7,199		7,328
Policy loans		7,699		7,947
Other long-term investments		16,110		15,880
Short-term investments		1,100		7,359

	$	2,455,648	$	2,351,841

Cash and cash equivalents	$	144,220	$	190,852
Accrued investment income		30,086		28,697
Securities lending collateral		78,769		—
Premiums receivable		131,609		127,456
Deferred policy acquisition costs		88,633		92,505
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $31,495 in 2010 and $30,812 in 2009)		22,187		22,278
Reinsurance receivables and recoverables		39,584		40,936
Prepaid reinsurance premiums		1,731		1,673
Income taxes receivable		10,762		28,197
Other assets		16,467		18,109

TOTAL ASSETS	$	3,019,696	$	2,902,544


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Future policy benefits and losses, claims and loss settlement expenses
Property and casualty insurance	$	602,139	$	606,045
Life insurance		1,336,843		1,321,600
Unearned premiums		211,196		206,010
Securities lending payable		78,769		—
Accrued expenses and other liabilities		73,357		84,934
Deferred income taxes		18,929		11,220

TOTAL LIABILITIES	$	2,321,233	$	2,229,809

Stockholders’ Equity
Common stock, $3.33 1/3 par value; authorized 75,000,000 shares; 26,366,814 and 26,533,040 shares issued and outstanding in 2010 and 2009, respectively	$	87,889	$	88,443
Additional paid-in capital		137,647		139,403
Retained earnings		399,679		384,242
Accumulated other comprehensive income, net of tax		73,248		60,647

TOTAL STOCKHOLDERS’ EQUITY	$	698,463	$	672,735

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,019,696	$	2,902,544

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

United Fire & Casualty Company and Subsidiaries

Consolidated Statements of Income (Unaudited)


	Three Months Ended March 31,
(In Thousands, Except Per Share Data and Number of Shares)	2010			2009

Revenues
Net premiums earned	$	114,308		$	118,321
Investment income, net of investment expenses		27,968			23,271
Realized investment gains (losses)
Other-than-temporary impairment charges		(342	)		(4,556	)
All other realized gains		3,068			1,068

Total realized investment gains (losses)		2,726			(3,488	)
Other income		123			159

	$	145,125		$	138,263


Benefits, Losses and Expenses
Losses and loss settlement expenses	$	68,363		$	86,078
Future policy benefits		6,390			3,388
Amortization of deferred policy acquisition costs		26,516			29,406
Other underwriting expenses		8,784			8,128
Interest on policyholders’ accounts		10,801			9,772

	$	120,854		$	136,772

Income before income taxes	$	24,271		$	1,491
Federal income tax expense (benefit)		4,879			(1,779	)

Net Income	$	19,392		$	3,270

Weighted average common shares outstanding		26,435,269			26,613,378
Basic earnings per common share	$	0.73		$	0.12
Diluted earnings per common share	$	0.73		$	0.12
Cash dividends declared per common share	$	0.15		$	0.15

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

United Fire & Casualty Company and Subsidiaries

Consolidated Statement of Stockholders’ Equity (Unaudited)


	Three
	Months Ended
(In Thousands, Except Per Share Data and Number of Shares)	March 31, 2010

Common stock
Balance, beginning of year	$	88,443
Shares repurchased (166,276 shares)		(554	)
Shares issued for stock-based awards (50 shares)		—

Balance, end of period	$	87,889


Additional paid-in capital
Balance, beginning of year	$	139,403
Compensation expense and related tax benefit for stock-based award grants		448
Shares repurchased		(2,204	)
Shares issued for stock-based awards		—

Balance, end of period	$	137,647


Retained earnings
Balance, beginning of year	$	384,242
Net income		19,392
Dividends on common stock ($0.15 per share)		(3,955	)

Balance, end of period	$	399,679


Accumulated other comprehensive income, net of tax
Balance, beginning of year	$	60,647
Change in net unrealized appreciation ⁽¹⁾		12,201
Change in underfunded status of employee benefit plans		400

Balance, end of period	$	73,248


Summary of changes
Balance, beginning of year	$	672,735
Net income		19,392
All other changes in stockholders’ equity accounts		6,336

Balance, end of period	$	698,463


(1)		The change in net unrealized appreciation is net of reclassification adjustments.

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

United Fire & Casualty Company and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended March 31,
(In Thousands)	2010			2009
Cash Flows From Operating Activities
Net income	$	19,392		$	3,270
Adjustments to reconcile net income to net cash provided by operating activities
Net accretion of bond premium		834			705
Depreciation and amortization		735			899
Stock-based compensation expense		447			858
Realized investment (gains) losses		(2,726	)		3,488
Net cash flows from trading investments		752			(2,068	)
Deferred income tax expense (benefit)		2,313			(3,208	)
Changes in:
Accrued investment income		(1,389	)		(1,012	)
Premiums receivable		(4,153	)		(7,540	)
Deferred policy acquisition costs		(3,364	)		(1,927	)
Reinsurance receivables		1,352			9,419
Prepaid reinsurance premiums		(58	)		(224	)
Income taxes receivable		17,435			1,674
Other assets		1,642			47
Future policy benefits and losses, claims and loss settlement expenses		3,480			(6,489	)
Unearned premiums		5,186			5,595
Accrued expenses and other liabilities		(10,969	)		4,157
Deferred income taxes		(1,387	)		—
Other, net		194			1,545

Total adjustments	$	10,324		$	5,919

Net cash provided by operating activities	$	29,716		$	9,189

Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	603		$	8,049
Proceeds from call and maturity of held-to-maturity investments		984			2,156
Proceeds from call and maturity of available-for-sale investments		86,868			83,586
Proceeds from short-term and other investments		2,781			5,234
Purchase of available-for-sale investments		(165,250	)		(129,264	)
Purchase of short-term and other investments		(2,850	)		(2,046	)
Change in securities lending collateral		(78,769	)		(80,424	)
Net purchases and sales of property and equipment		(629	)		(3,094	)

Net cash used in investing activities	$	(156,262	)	$	(115,803	)

Cash Flows From Financing Activities
Policyholders’ account balances
Deposits to investment and universal life contracts	$	34,378		$	75,338
Withdrawals from investment and universal life contracts		(26,521	)		(48,064	)
Change in securities lending payable		78,769			80,424
Payment of cash dividends		(3,955	)		(3,994	)
Repurchase of common stock		(2,758	)		(538	)
Issuance of common stock		1			7
Tax benefit from issuance of common stock		—			5

Net cash provided by financing activities	$	79,914		$	103,178

Net Change in Cash and Cash Equivalents	$	(46,632	)	$	(3,436	)
Cash and Cash Equivalents at Beginning of Period		190,852			109,582

Cash and Cash Equivalents at End of Period	$	144,220		$	106,146

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

United Fire & Casualty Company and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

The terms “United Fire,” “we,” “us,” or “our” refer to United Fire & Casualty Company or United Fire & Casualty Company and its consolidated subsidiaries and affiliate, as the context requires. In the opinion of the management of United Fire, the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009. The review report of Ernst & Young LLP as of and for the three-month period ended March 31, 2010, accompanies the unaudited Consolidated Financial Statements included in Item 1 of Part I.

We maintain our records in conformity with the accounting practices prescribed or permitted by the insurance departments of the states in which we are domiciled. To the extent that certain of these practices differ from U.S. generally accepted accounting principles (“GAAP”), we have made adjustments to present the accompanying unaudited Consolidated Financial Statements in conformity with GAAP.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include investments, deferred policy acquisition costs, and future policy benefits and losses, claims and loss settlement expenses.

In the preparation of the accompanying unaudited Consolidated Financial Statements, we have evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure in our unaudited Consolidated Financial Statements.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts and non-negotiable certificates of deposit with original maturities of three months or less. We made no payments for income taxes for the three-month periods ended March 31, 2010 and 2009, respectively. We received tax refunds totaling $13.5 million and $.3 million in the three-month periods ended March 31, 2010 and 2009, respectively, due to overpayment of prior year tax and operating loss carrybacks. We made no significant payments of interest for the three-month periods ended March 31, 2010 and 2009, other than interest credited to policyholders’ accounts.

Income Taxes

We reported a federal income tax expense of $4.9 million and a federal income tax benefit of $1.8 million for the three-month periods ended March 31, 2010 and 2009, respectively. Our effective tax rate is less than the federal statutory rate of 35.0 percent due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.

We have recognized no liability for unrecognized tax benefits for the three-month periods ended March 31, 2010 and 2009. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal income tax examination for years before 2004 and state income tax examination for years before 2004. There are no ongoing examinations of income tax returns by federal or state tax authorities.

Legal Proceedings

We have been named as a defendant in various lawsuits, including actions seeking certification from the court to proceed as a class action suit and actions filed by individual policyholders, relating to disputes arising from damages that occurred as a result of Hurricane Katrina in 2005. As of March 31, 2010, there were approximately 165 individual policyholder cases pending, and an additional seven class action cases pending. These cases have been filed in Louisiana state courts and federal district courts and involve, among other claims, disputes as to the amount of reimbursable claims in particular cases, as well as the scope of insurance coverage under homeowners and commercial property policies due to flooding, civil authority actions, loss of use and business interruption. Certain of these cases also claim a breach of duty of good faith or violations of Louisiana insurance claims-handling laws or regulations and involve claims for punitive or exemplary damages. Other cases claim that under Louisiana’s so-called “Valued Policy Law,” the insurers must pay the total insured value of a home that is totally destroyed if any portion of such damage was caused by a covered peril, even if the principal cause of the loss was an excluded peril. Other cases challenge the scope or enforceability of the water damage exclusion in the policies.

Several actions pending against various insurers, including us, were consolidated for purposes of pretrial discovery and motion practice under the caption In re Katrina Canal Breaches Consolidated Litigation, Civil Action No. 05-4182 in the United States District Court, Eastern District of Louisiana. In August 2009, the Federal trial court ruled in that case that certification of policyholder claims as a class would be inappropriate. This ruling has been appealed by the plaintiff policyholders. Federal court rulings in that case are not binding on state courts, which do not have to follow the federal court ruling on class certification.

Following an April 2008 Louisiana Supreme Court decision finding that flood damage was clearly excluded from coverage, both state and federal courts have been reviewing pending lawsuits seeking class certification and other pending lawsuits in order to expedite pre-trial discovery and to move the cases towards trial. In the three-month period ended March 31, 2010, we concluded approximately 50 of the lawsuits that were pending at December 31, 2009.

In July 2008, Lafayette Insurance Company participated in a hearing in St Bernard Parish, Louisiana after which the court entered an order certifying a class defined as all Lafayette Insurance Company personal lines policyholders within an eight parish area in and around New Orleans who sustained wind damage as a result of Hurricane Katrina and whose claims were at least partially denied or allegedly misadjusted. We appealed this order as we feel it was not supported by the evidence. On October 14, 2009, we were notified that our appeal to the Louisiana Fourth Circuit Court of Appeals was denied. We are seeking review of this decision by the Louisiana Supreme Court. Our petition for review remains pending at March 31, 2010. We have reserved each case included in this class action based on the estimated exposure attributable to our policy. However, if our request for relief is denied, we will review recorded reserves and adjust them if we believe adjustment to be necessary.

We intend to continue to defend the cases related to losses incurred as a consequence of Hurricane Katrina. We have established our loss and loss settlement expense reserves on the assumption that the application of the Valued Policy Law will not result in our having to pay damages for perils not otherwise covered. We believe that, in the aggregate, these reserves are adequate. However, our evaluation of these claims and the adequacy of recorded reserves may change if we encounter adverse developments in the further defense of these claims.

We consider all of our other litigation pending as of March 31, 2010 to be ordinary, routine, and incidental to our business.

Securities Lending

We participate in a securities lending program administered by The Northern Trust Company (“Northern Trust”). The program generates investment income and we receive discounts from Northern Trust on unrelated investment fees. Pursuant to the lending agreement, Northern Trust, as our agent, loans certain of our fixed maturity securities to other institutions for short periods of time. Borrowers of these securities must deposit collateral, generally in the form of cash, with Northern Trust that is equal to at least 102% of the market value of the loaned securities, plus accrued interest. Northern Trust marks the loaned securities to market daily at an aggregate level per borrower. As the market value of the loaned securities fluctuates, the borrower either deposits additional collateral or Northern Trust refunds collateral to the borrower in order to maintain the collateral level at 102%. We retain the right to terminate the loan at any time, whereupon the borrower must return the loaned securities to Northern Trust. If the borrower defaults and does not return the securities, Northern Trust will use the deposited collateral to purchase equivalent securities for us. If Northern Trust is unable to purchase equivalent securities, we would receive the deposited collateral in place of the borrowed securities.

Under the accounting guidance for secured borrowing transactions, the collateral deposited by the borrower and our obligation to return that collateral to the borrower is reported in the accompanying Consolidated Balance Sheets as an asset (“securities lending collateral”) and a corresponding liability (“securities lending payable”) at March 31, 2010. There were no securities on loan under the program at December 31, 2009. At March 31, 2010, we had securities totaling $76.7 million on loan under the program. At March 31, 2010, collateral received with a fair value of $78.8 million has been reinvested in short-term highly liquid investments.

Recently Issued Accounting Standards

Adopted Accounting Standards

Fair Value Measurements

In January 2010, the FASB issued revised accounting guidance that clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The guidance requires separate disclosures for the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the transfers. Additionally, a separate disclosure is required for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements. The guidance also provides additional clarification for both the level of disaggregation reported for each class of assets or liabilities and disclosures of inputs and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3.

The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. Refer to Note 3 for the information required to be disclosed upon our adoption of the guidance effective January 1, 2010. We are currently evaluating the impact the adoption of the guidance effective January 1, 2011 will have on the disclosures made in our Consolidated Financial Statements.

NOTE 2. SUMMARY OF INVESTMENTS

Fair Value of Investments

A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities as of March 31, 2010 and December 31, 2009, is as follows:

(Dollars in Thousands)

Cost or

Gross Unrealized

March 31, 2010

Amortized Cost

Appreciation

Depreciation

Fair Value

HELD-TO-MATURITY

Fixed maturities

Bonds

United States government

Collateralized mortgage obligations

713

—

725

Mortgage-backed securities

518

—

591

States, municipalities and political subdivisions

General obligations

1,354

—

1,374

Special revenue

6,044

121

148

6,017

Total Held-to-Maturity Fixed Maturities

8,629

226

148

8,707

AVAILABLE-FOR-SALE

Fixed maturities

Bonds

United States government

Collateralized mortgage obligations

17,477

1,745

—

19,222

Mortgage-backed securities

—

US Treasury

43,956

537

117

44,376

Agency

107,000

262

264

106,998

States, municipalities and political subdivisions

General obligations

371,747

19,486

192

391,041

Special revenue

220,089

8,956

1,015

228,030

Foreign bonds

Canadian

66,336

3,697

70,020

Other foreign

85,051

4,303

89,262

Public utilities

Electric

215,757

12,577

127

228,207

Natural gas

61,044

3,200

64,186

Other

3,537

191

—

3,728

Corporate bonds

Bank, trust and insurance companies

272,315

11,981

4,662

279,634

Transportation

29,426

1,435

30,851

Energy

150,460

7,293

189

157,564

Technology

103,872

5,829

144

109,557

Basic industry

115,567

5,097

220

120,444

Credit cyclicals

61,427

3,534

—

64,961

Other

237,193

15,106

560

251,739

Total Available-For-Sale Fixed Maturities

2,162,256

105,229

7,663

2,259,822

Equity securities

Common stocks

Public utilities

Electric

6,319

3,819

10,111

Natural gas

838

839

—

1,677

Bank, trust and insurance companies

Banks

6,478

34,348

40,760

Insurance

3,129

10,161

13,225

Other

1,505

976

—

2,481

All other common stocks

Energy

4,903

4,635

9,532

Technology

8,100

7,670

155

15,615

Basic industry

7,135

8,379

15,435

Credit cyclicals

1,402

1,802

—

3,204

Other

11,635

18,580

30,200

Nonredeemable preferred stocks

1,461

—

305

1,156

Total Available-for-Sale Equity Securities

52,905

91,209

718

143,396

Total Available-for-Sale Securities

2,215,161

196,438

8,381

2,403,218


	(Dollars in Thousands)
	Cost or		Gross Unrealized		Gross Unrealized
December 31, 2009	Amortized Cost		Appreciation		Depreciation		Fair Value
HELD-TO-MATURITY
Fixed maturities
Bonds
United States government
Collateralized mortgage obligations	$	955	$	21	$	—	$	976
Mortgage-backed securities		534		73		—		607
States, municipalities and political subdivisions
General obligations		1,478		21		5		1,494
Special revenue		6,638		163		158		6,643

Total Held-to-Maturity Fixed Maturities	$	9,605	$	278	$	163	$	9,720

AVAILABLE-FOR-SALE
Fixed maturities
Bonds
United States government
Collateralized mortgage obligations	$	17,452	$	1,500	$	—	$	18,952
Mortgage-backed securities		2		—		—		2
US Treasury		35,278		564		192		35,650
Agency		71,667		6		1,048		70,625
States, municipalities and political subdivisions
General obligations		371,098		19,408		128		390,378
Special revenue		219,991		8,605		1,234		227,362
Foreign bonds
Canadian		55,979		2,847		—		58,826
Other		79,115		3,571		272		82,414
Public utilities
Electric		212,699		11,603		298		224,004
Natural gas		54,936		2,870		—		57,806
Other		3,597		181		—		3,778
Corporate bonds
Banks, trusts and insurance companies		287,409		10,061		8,261		289,209
Transportation		30,427		1,775		15		32,187
Energy		145,933		6,653		247		152,339
Technology		84,123		5,180		131		89,172
Basic industry		105,631		4,266		330		109,567
Credit cyclicals		69,686		2,912		13		72,585
Other		230,710		13,874		1,049		243,535

Total Available-For-Sale Fixed Maturities	$	2,075,733	$	95,876	$	13,218	$	2,158,391

Equity securities
Common stocks
Public utilities
Electric	$	6,646	$	3,649	$	262	$	10,033
Natural gas		838		846		—		1,684
Banks, trusts and insurance companies
Banks		6,517		29,503		131		35,889
Insurance		3,129		8,634		111		11,652
Other		1,505		437		—		1,942
All other common stocks
Transportation		38		1,555		—		1,593
Energy		4,903		4,650		24		9,529
Technology		8,100		5,995		185		13,910
Basic industry		7,156		6,403		110		13,449
Credit cyclicals		1,402		1,774		—		3,176
Other		11,611		17,241		20		28,832
Nonredeemable preferred stocks		1,461		—		432		1,029

Total Available-for-Sale Equity Securities	$	53,306	$	80,687	$	1,275	$	132,718

Total Available-for-Sale Securities	$	2,129,039	$	176,563	$	14,493	$	2,291,109

Maturities

The amortized cost and fair value of held-to-maturity, available-for-sale and trading securities at March 31, 2010, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.


	Held-To-Maturity				Available-For-Sale				Trading
(Dollars in Thousands)	Amortized		Fair		Amortized		Fair		Amortized		Fair
March 31, 2010	Cost		Value		Cost		Value		Cost		Value
Due in one year or less	$	556	$	568	$	194,173	$	198,634	$	—	$	—
Due after one year through five years		6,523		6,500		1,057,241		1,117,949		4,812		4,870
Due after five years through 10 years		319		323		767,860		795,673		—		—
Due after 10 years		—		—		125,503		128,342		6,278		6,823
Mortgage-backed securities		518		591		2		2		—		—
Collateralized mortgage obligations		713		725		17,477		19,222		—		—

	$	8,629	$	8,707	$	2,162,256	$	2,259,822	$	11,090	$	11,693

Realized Investment Gains and Losses

We determine the cost of investments sold by the specific identification method. A summary of realized investment gains (losses) resulting from investment sales, calls and other-than-temporary impairment (“OTTI”) charges, is as follows:


	Three Months Ended March 31,
(In Thousands)	2010			2009
Realized investment gains (losses)
Fixed maturities	$	489		$	(3,276	)
Equity securities		2,344			(509	)
Trading securities		(92	)		297
Other long-term investments		(15	)		—

Total realized investment gains (losses)	$	2,726		$	(3,488	)

For the three-month periods ended March 31, 2010 and 2009, the proceeds and gross realized gains and losses on the sale of available-for-sale securities were as follows:


(In Thousands)	Three Months Ended March 31,
Years Ended December 31	2010		2009
Proceeds from sales	$	602	$	8,049
Gross realized gains		402		—
Gross realized losses		—		80

There were no sales of held-to-maturity securities during the three-months ended March 31, 2010 and 2009.

Our investment portfolio includes trading securities with embedded derivatives. These securities, which are primarily convertible redeemable preferred debt securities, are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of realized investment gains and losses. Our portfolio of trading securities had a fair value of $11.7 million and $12.6 million at March 31, 2010 and December 31, 2009, respectively.

The realized gains (losses) attributable to the change in fair value of trading securities still held at March 31, 2010 and 2009 were $(.3) million and $.3 million, respectively.

Off-Balance Sheet Arrangements

Pursuant to an agreement with one of our limited liability partnership holdings, we are contractually committed to make capital contributions up to $15.0 million, upon request by the partnership, through December 31, 2017. As of March 31, 2010, our remaining potential contractual obligation was $12.6 million.

Unrealized Appreciation and Depreciation

A summary of changes in net unrealized investment appreciation is as follows:


	Three Months Ended March 31,
(In Thousands)	2010			2009
Change in net unrealized investment appreciation
Available-for-sale fixed maturities and equity securities	$	25,987		$	(1,025	)
Deferred policy acquisition costs		(7,236	)		(9,589	)
Income tax effect		(6,550	)		4,319

Total change in net unrealized appreciation, net of tax	$	12,201		$	(6,295	)

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires OTTI charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.

The tables on the following pages present a summary of fixed maturity and equity securities that were in an unrealized loss position at March 31, 2010 and December 31, 2009. It is possible that we could recognize OTTI charges in future periods on securities held at March 31, 2010, if future events or information cause us to determine that a decline in fair value is other-than-temporary.

We believe the unrealized depreciation in value of our fixed maturity portfolio is primarily attributable to changes in market interest rates and not the credit quality of the issuer. We have no intent to sell and it is more likely than not that we will not be required to sell the securities until such time as the value recovers or the securities mature.

We have evaluated the unrealized losses reported for all of our equity securities at March 31, 2010, and have concluded that the duration and severity of these losses do not warrant the recognition of an OTTI charge at March 31, 2010. Our largest unrealized loss greater than 12 months on an individual equity security at March 31, 2010 was $.1 million. We have no intention to sell any of these securities prior to a recovery in value, but will continue to monitor the fair value reported for these securities as part of our overall process to evaluate investments for OTTI recognition.


	Less than 12 months						12 months or longer						Total
(Dollars in Thousands)					Gross						Gross				Gross
March 31, 2010	Number		Fair		Unrealized		Number		Fair		Unrealized		Fair		Unrealized
Type of Investment	of Issues		Value		Depreciation		of Issues		Value		Depreciation		Value		Depreciation
HELD-TO-MATURITY
Fixed maturities
Bonds
States, municipalities and political subdivisions
Special revenue		—	$	—	$	—		1	$	690	$	148	$	690	$	148

Total Held-to-Maturity Fixed Maturities		—	$	—	$	—		1	$	690	$	148	$	690	$	148

AVAILABLE-FOR-SALE
Fixed maturities
Bonds
United States government
US Treasury		9	$	15,847	$	117		1	$	1,995	$	—	$	17,842	$	117
Agency		2		6,988		12		13		32,748		252		39,736		264
States, municipalities and political subdivisions
General obligations		3		2,497		92		3		2,123		100		4,620		192
Special revenue		19		20,418		337		9		8,782		678		29,200		1,015
Foreign bonds
Canadian		1		2,075		5		2		4,063		8		6,138		13
Other foreign		2		2,445		13		4		8,583		79		11,028		92
Public utilities
Electric		4		7,447		89		3		5,641		38		13,088		127
Natural gas		1		3,838		51		1		2,234		7		6,072		58
Corporate bonds
Bank, trust and insurance		2		3,325		33		42		58,898		4,629		62,223		4,662
Transportation		—		—		—		2		3,662		10		3,662		10
Energy		3		8,297		35		5		13,968		154		22,265		189
Technology		3		9,646		52		3		7,484		92		17,130		144
Basic industry		2		4,990		13		4		9,749		207		14,739		220
Other		5		16,741		269		6		11,355		291		28,096		560

Total Available-For-Sale Fixed Maturities		56	$	104,554	$	1,118		98	$	171,285	$	6,545	$	275,839	$	7,663

Equity securities
Common stocks
Public utilities
Electric		—	$	—	$	—		5	$	424	$	27	$	424	$	27
Bank, trust and insurance companies
Banks		—		—		—		1		490		66		490		66
Insurance		2		329		16		3		408		49		737		65
All other common stock
Energy		—		—		—		2		207		6		207		6
Technology		—		—		—		3		941		155		941		155
Basic industry		—		—		—		2		182		79		182		79
Other		—		—		—		3		262		15		262		15
Nonredeemable preferred stocks		—		—		—		5		1,156		305		1,156		305

Total Available-for-Sale Equity Securities		2	$	329	$	16		24	$	4,070	$	702	$	4,399	$	718

Total Available-for-Sale Securities		58	$	104,883	$	1,134		122	$	175,355	$	7,247	$	280,238	$	8,381

Total		58	$	104,883	$	1,134		123	$	176,045	$	7,395	$	280,928	$	8,529


	Less than 12 months						12 months or longer						Total
(In Thousands)					Gross						Gross				Gross
December 31, 2009	Number		Fair		Unrealized		Number		Fair		Unrealized		Fair		Unrealized
Type of Investment	of Issues		Value		Depreciation		of Issues		Value		Depreciation		Value		Depreciation
HELD-TO-MATURITY
Fixed maturities
Bonds
States, municipalities and political subdivisions
General obligations		1	$	300	$	5		—	$	—	$	—	$	300	$	5
Special revenue		—		—		—		1		679		158		679		158

Total Held-to-Maturity Fixed Maturities		1	$	300	$	5		1	$	679	$	158	$	979	$	163

AVAILABLE-FOR-SALE
Fixed maturities
Bonds
United States government
All other government
US Treasury		5	$	11,772	$	192		—	$	—	$	—	$	11,772	$	192
Agency		5		24,755		246		10		42,198		802		66,953		1,048
States, municipalities and political subdivisions
General obligations		2		966		23		3		2,118		105		3,084		128
Special revenue		21		22,892		463		10		9,401		771		32,293		1,234
Foreign bonds
Other		2		1,329		19		4		10,492		253		11,821		272
Public utilities
Electric		1		4,958		99		6		7,761		199		12,719		298
Corporate bonds
All other corporate bonds
Banks, trusts and insurance companies		13		20,789		813		46		70,871		7,448		91,660		8,261
Transportation		—		—		—		1		1,997		15		1,997		15
Energy		1		3,189		37		5		9,710		210		12,899		247
Technology		4		8,263		65		1		952		66		9,215		131
Basic industry		6		15,843		136		2		4,806		194		20,649		330
Credit cyclicals		3		5,217		13		—		—		—		5,217		13
Other		1		3,270		72		7		16,892		977		20,162		1,049

Total Available-For-Sale Fixed Maturities		64	$	123,243	$	2,178		95	$	177,198	$	11,040	$	300,441	$	13,218

Equity securities
Common stocks
Public utilities
Electric		—	$	—	$	—		12	$	2,074	$	262	$	2,074	$	262
Banks, trusts and insurance companies
Banks		—		—		—		1		425		131		425		131
Insurance		2		299		46		3		391		65		690		111
All other common stock
Energy		—		—		—		2		188		24		188		24
Technology		—		—		—		5		2,235		185		2,235		185
Basic industry		—		—		—		2		151		110		151		110
Other		—		—		—		3		258		20		258		20
Nonredeemable preferred stocks		—		—		—		5		1,030		432		1,030		432

Total Available-for-Sale Equity Securities		2	$	299	$	46		33	$	6,752	$	1,229	$	7,051	$	1,275

Total Available-for-Sale Securities		66	$	123,542	$	2,224		128	$	183,950	$	12,269	$	307,492	$	14,493

Total		67	$	123,842	$	2,229		129	$	184,629	$	12,427	$	308,471	$	14,656

NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the particular asset or liability shown.

In most cases, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. Where quoted market prices do not exist, we base fair values on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.

We base the estimated fair value of mortgage loans on discounted cash flows, utilizing the market rate of interest for similar loans in effect at the valuation date.

The estimated fair value of policy loans is equivalent to carrying value. We do not make policy loans for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders’ account balance for interest-sensitive policies.

Our other long-term investments consist primarily of holdings in limited liability partnership funds that are valued by the various fund managers and are recorded on the equity method of accounting. In management’s opinion, these values represent fair value.

For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value, due to its short-term nature.

We calculate the fair value of the liabilities for all annuity products based upon the estimated value of the business, using current market rates and forecast assumptions and risk-adjusted discount rates, when relevant observable market data does not exist.

A summary of the carrying value and estimated fair value of our financial instruments at March 31, 2010 and December 31, 2009 is as follows:


	March 31, 2010				December 31, 2009
(In Thousands)	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Held-to-maturity fixed maturities	$	8,707	$	8,629	$	9,720	$	9,605
Available-for-sale fixed maturities		2,259,822		2,259,822		2,158,391		2,158,391
Trading securities		11,693		11,693		12,613		12,613
Equity securities		143,396		143,396		132,718		132,718
Mortgage loans		8,050		7,199		8,229		7,328
Policy loans		7,699		7,699		7,947		7,947
Other long-term investments		16,110		16,110		15,880		15,880
Short-term investments		1,100		1,100		7,359		7,359
Cash and cash equivalents		144,220		144,220		190,852		190,852
Accrued investment income		30,086		30,086		28,697		28,697
Liabilities
Policy reserves
Annuity (accumulations)	$	963,438	$	921,701	$	1,087,457	$	914,003
Annuity (benefit payments)		79,568		78,749		85,336		77,025

FASB guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments are categorized into a three level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:

Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments.

Level 2: Valuations are based on quoted prices, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.

Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.

Transfers between levels, if any, are recorded as of the beginning of the period.

To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers that we have had several years’ experience with and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.

We validate the prices obtained from pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. In our opinion, the pricing obtained at March 31, 2010, was reasonable.

In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors’ pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, and credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable FASB guidance on fair value measurements.

We review our fair value hierarchy categorizations on a quarterly basis, at which time the classification of certain financial instruments may change if the input observations have changed.

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis in our Consolidated Balance Sheets at March 31, 2010 and December 31, 2009:


(In Thousands)			Fair Value Measurements
Description	March 31, 2010		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
United States government
Collateralized mortgage obligations	$	19,222	$	—	$	19,222	$	—
Mortgage-backed securities		2		—		2		—
US Treasury		44,376		—		44,376		—
Agency		106,998		—		106,998		—
States, municipalities and political subdivisions
General obligations		391,041		—		391,041		—
Special revenue		228,030		—		226,920		1,110
Foreign bonds
Canadian		70,020		—		70,020		—
Other		89,262		—		87,868		1,394
Public utilities
Electric		228,207		—		228,172		35
Natural gas		64,186		—		64,186		—
Other		3,728		—		3,728		—
Corporate bonds
Banks, trusts and insurance companies		279,634		—		267,437		12,197
Transportation		30,851		—		30,851		—
Energy		157,564		—		157,564		—
Technology		109,557		—		109,557		—
Basic industry		120,444		—		115,638		4,806
Credit cyclicals		64,961		—		62,311		2,650
Other		251,739		—		245,579		6,160

Total Available-For-Sale Fixed Maturities	$	2,259,822	$	—	$	2,231,470	$	28,352

Equity securities
Common stocks
Public utilities
Electric	$	10,111	$	10,111	$	—	$	—
Natural gas		1,677		1,677		—		—
Banks, trusts and insurance companies
Banks		40,760		40,760		—		—
Insurance		13,225		13,225		—		—
Other		2,481		2,481		—		—
All other common stocks
Transportation		—		—		—		—
Energy		9,532		9,532		—		—
Technology		15,615		15,586		29		—
Basic industry		15,435		15,435		—		—
Credit cyclicals		3,204		3,204		—		—
Other		30,200		29,938		262		—
Nonredeemable preferred stocks		1,156		934		222		—

Total Available-for-Sale Equity Securities	$	143,396	$	142,883	$	513	$	—

Total Available-for-Sale Securities	$	2,403,218	$	142,883	$	2,231,983	$	28,352

TRADING
Fixed maturities
Bonds
Foreign bonds	$	2,755	$	—	$	2,755	$	—
Public utilities		1,422		—		1,422		—
Corporate bonds
Energy		2,710		—		2,710		—
Technology		2,883		—		2,883		—
Other		370		—		370		—
Redeemable Preferred Stock		1,553		1,553		—		—

Total Trading Securities	$	11,693	$	1,553	$	10,140	$	—

Short-Term Investments	$	1,100	$	1,100	$	—	$	—

Money Market Accounts	$	15,987	$	15,987	$	—	$	—

Total	$	2,431,998	$	161,523	$	2,242,123	$	28,352


(In Thousands)			Fair Value Measurements
Description	December 31, 2009		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
United States government
Collateralized mortgage obligations	$	18,952	$	—	$	18,952	$	—
Mortgage-backed securities		2		—		2		—
US Treasury		35,650		—		35,650		—
Agency		70,625		—		70,625		—
States, municipalities and political subdivisions
General obligations		390,378		—		390,378		—
Special revenue		227,362		—		226,252		1,110
Foreign bonds
Canadian		58,826		—		58,826		—
Other		82,414		—		81,020		1,394
Public utilities
Electric		224,004		—		223,934		70
Natural gas		57,806		—		57,806		—
Other		3,778		—		3,778		—
Corporate bonds
Banks, trusts and insurance companies		289,209		—		275,181		14,028
Transportation		32,187		—		32,187		—
Energy		152,339		—		152,339		—
Technology		89,172		—		89,172		—
Basic industry		109,567		—		104,761		4,806
Credit cyclicals		72,585		—		69,737		2,848
Other		243,535		—		237,332		6,203

Total Available-For-Sale Fixed Maturities	$	2,158,391	$	—	$	2,127,932	$	30,459

Equity securities
Common stocks
Public utilities
Electric	$	10,033	$	10,033	$	—	$	—
Natural gas		1,684		1,684		—		—
Banks		35,889		35,889		—		—
Insurance		11,652		11,652		—		—
Other		1,942		1,942		—		—
All other common stocks
Transportation		1,593		1,593		—		—
Energy		9,529		9,529		—		—
Technology		13,910		13,879		31		—
Basic industry		13,449		13,449		—		—
Credit cyclicals		3,176		3,176		—		—
Other		28,832		28,573		259		—
Nonredeemable preferred stocks		1,029		1,029		—		—

Total Available-for-Sale Equity Securities	$	132,718	$	132,428	$	290	$	—

Total Available-for-Sale Securities	$	2,291,109	$	132,428	$	2,128,222	$	30,459

TRADING
Fixed maturities
Bonds
Foreign bonds	$	2,689	$	—	$	2,689	$	—
Public utilities		1,460		—		1,460		—
Corporate bonds
Energy		2,310		—		2,310		—
Technology		4,314		—		4,314		—
Other		532		211		321		—
Redeemable Preferred Stock		1,308		1,308		—		—

Total Trading Securities	$	12,613	$	1,519	$	11,094	$	—

Short-Term Investments	$	7,359	$	1,100	$	6,005	$	254

Money Market Accounts	$	96,163	$	96,163	$	—	$	—

Total	$	2,407,244	$	231,210	$	2,145,321	$	30,713

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

The fair value of securities that are categorized as Level 2 is determined by management after reviewing market prices obtained from independent pricing services and brokers. Such estimated fair values do not necessarily represent the values for which these securities could have been sold at the reporting date. Our independent pricing services and brokers obtain prices from reputable pricing vendors in the marketplace. They continually monitor and review the external pricing sources, while actively participating to resolve any pricing issues that may arise.

For the three-month period ended March 31, 2010, the change in our securities categorized as Level 1 and Level 2 is the result of investment purchases made during the period and an increase in the unrealized appreciation on available-for-sale securities since December 31, 2009. There were no significant transfers of securities in or out of Level 1 or Level 2 during the period.

The securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities and certain securities that were determined to be other-than-temporarily impaired in a prior period for which there is not an active market. The fair value of our Level 3 private placement securities is determined by management in reliance on pricing received from our independent pricing services and brokers consistent with the estimation of fair value for Level 2 securities.

The fair value of our Level 3 impaired securities was determined primarily based upon management’s assumptions regarding the timing and amount of future cash inflows. If a security has been written down or the issuer is in bankruptcy, management relies in part on outside opinions from rating agencies, our lien position on the security, general economic conditions and management’s expertise to determine fair value. We have the ability and the positive intent to hold securities until such time that we are able to recover all or a portion of our original investment. If a security does not have a market at the balance sheet date, management will estimate the security’s fair value based on other securities in the market. Management will continue to monitor securities after the balance sheet date to confirm that their estimated fair value is reasonable.

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended March 31, 2010:


	States,
	municipalities
	and political		Foreign		Public			Corporate			Short-term
(In Thousands)	subdivisions		bonds		utilities			bonds			investments			Total
Balance at December 31, 2009	$	1,110	$	1,394	$	70		$	27,885		$	254		$	30,713
Realized losses ⁽¹⁾		—		—		(1	)		—			—			(1	)
Unrealized gains ⁽¹⁾									55			—			55
Amortization									1			—			1
Purchases		—		—		—			—			—			—
Disposals		—		—		(34	)		(2,382	)		—			(2,416	)
Transfers in									254			—			254
Transfers out									—			(254	)		(254	)

Balance at March 31, 2010	$	1,110	$	1,394	$	35		$	25,813		$	—		$	28,352


(1)		Realized gains are recorded as a component of current operations whereas unrealized gains (losses) are recorded as a component of comprehensive income (loss).

The amount reported in the previous table as “disposals” under the column “corporate bonds,” included $2.1 million of corporate bonds that were disposed of due to issuer debt restructuring. The securities disposed of included $.3 million of securities previously classified as short-term investments that were transferred to corporate bonds as a result of this debt restructuring.

NOTE 4. EMPLOYEE BENEFITS

Our pension and postretirement benefit expense for the three-month periods ended March 31, 2010 and 2009 is as follows:


	Three Months Ended March 31,
(In Thousands)	2010		2009
Pension expense	$	1,362	$	757
Other postretirement benefit expense		629		570

We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009 that we expected to contribute $3.0 million to the pension plan in 2010. For the three-month period ended March 31, 2010, we have contributed $1.0 million to the pension plan. We anticipate that the total contribution for the 2010 plan year will not vary significantly from the expected contribution.

NOTE 5. STOCK-BASED COMPENSATION

Nonqualified Employee Stock Award Plan

The United Fire & Casualty Company 2008 Stock Plan (the “2008 Stock Plan”) authorizes the issuance of restricted stock awards, stock appreciation rights, incentive stock options, and nonqualified stock options for up to 1,900,000 shares of United Fire common stock to employees, with 860,310 authorized shares available for future issuance at March 31, 2010. The 2008 Stock Plan is administered by the Board of Directors, which determines those employees that will receive awards under the 2008 Stock Plan, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the 2008 Stock Plan. Pursuant to the 2008 Stock Plan, the Board of Directors may, in its sole discretion, grant awards to employees of United Fire or any of its affiliated companies who are in positions of substantial responsibility with United Fire.

Option awards granted pursuant to the 2008 Stock Plan are granted to buy shares of United Fire’s common stock at the market value of the stock on the date of grant. All outstanding option awards vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted stock awards granted pursuant to the 2008 Stock Plan fully vest after five years from the date of issuance, unless accelerated upon the approval of the Board of Directors, at which time United Fire common stock will be issued to the awardee. Restricted stock awards are generally granted free of charge to the eligible employees of United Fire as designated by the Board of Directors.

The activity in the 2008 Stock Plan is displayed in the following table.


	Three
	Months Ended			Inception
Authorized Shares Available for Future Award Grants	March 31, 2010			to Date
Beginning balance		919,525			1,900,000
Number of awards granted		(74,065	)		(1,099,040	)
Number of awards forfeited or expired		14,850			59,350

Ending balance		860,310			860,310
Number of option awards exercised		50			167,092
Number of restricted stock awards vested		—			—

Nonqualified Nonemployee Director Stock Option and Restricted Stock Plan

We have a nonemployee director stock option and restricted stock plan that authorizes United Fire to grant restricted stock and nonqualified stock options to purchase 150,000 shares of United Fire’s common stock, with 70,003 options available for future issuance at March 31, 2010. The Board of Directors has the authority to determine which nonemployee directors receive awards under the plan, when options and restricted stock shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the plan.

The activity in our nonemployee director stock option and restricted stock plan is displayed in the following table.


	Three
	Months Ended		Inception
Authorized Shares Available for Future Award Grants	March 31, 2010		to Date
Beginning balance		70,003		150,000
Number of awards granted		—		(86,000	)
Number of awards forfeited or expired		—		6,003

Ending balance		70,003		70,003
Number of awards exercised		—		400

Stock-Based Compensation Expense

For the three-month periods ended March 31, 2010 and 2009, we recognized stock-based compensation expense of $.4 million, and $.9 million respectively. As of March 31, 2010, we have $3.8 million in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized over a term of five years, 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.

NOTE 6. SEGMENT INFORMATION

We have two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance segment has three domestic locations from which it conducts its business. All offices target a similar customer base, market the same products and use the same marketing strategies and are therefore aggregated. The life insurance segment operates from our home office. Because all of our insurance is sold domestically, we have no revenues allocable to foreign operations.

We evaluate the two segments on the basis of both statutory accounting practices prescribed by our states of domicile and GAAP. We analyze results based on profitability (i.e., loss ratios), investment results, expenses, and return on equity. The basis we use to determine and analyze segments and to measure segment profit or loss have not changed from that reported in our Annual Report on Form 10-K for the year ended December 31, 2009.

The following analyses for the three-month periods ended March 31, 2010 and 2009 have been reconciled to the amounts reported in our unaudited Consolidated Financial Statements to adjust for inter-segment eliminations.


	Property and
(In Thousands)	Casualty Insurance			Life Insurance			Total
Three Months Ended March 31, 2010
Net premiums earned	$	101,979		$	12,408		$	114,387
Investment income, net of investment expenses		8,682			19,331			28,013
Realized investment gains		2,176			550			2,726
Other income (loss)		(58	)		181			123

Revenues	$	112,779		$	32,470		$	145,249

Inter-segment Eliminations		(45	)		(79	)		(124	)

Total Revenues	$	112,734		$	32,391		$	145,125

Net Income	$	16,076		$	3,316		$	19,392

Assets	$	1,326,707		$	1,692,989		$	3,019,696

Invested Assets	$	953,963		$	1,501,685		$	2,455,648


Three Months Ended March 31, 2009
Net premiums earned	$	109,214		$	9,185		$	118,399
Investment income, net of investment expenses		6,091			17,223			23,314
Realized investment losses		(717	)		(2,771	)		(3,488	)
Other income		28			131			159

Revenues	$	114,616		$	23,768		$	138,384

Inter-segment Eliminations		(43	)		(78	)		(121	)

Total Revenues	$	114,573		$	23,690		$	138,263

Net Income	$	1,864		$	1,406		$	3,270

Assets	$	1,289,833		$	1,501,460		$	2,791,293

Invested Assets	$	877,965		$	1,245,992		$	2,123,957

NOTE 7. EARNINGS PER COMMON SHARE

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options and restricted stock awards.

We determine the dilutive effect of our stock options outstanding using the “treasury stock” method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average fair market value of our common stock during the reporting period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average fair market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represent the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.

The components of basic and diluted earnings per share are as follows for the three-month periods ended March 31, 2010 and 2009:


	Three Months Ended March 31,
	2010				2009
(In Thousands Except Per Share Data)	Basic		Diluted		Basic		Diluted
Net income	$	19,392	$	19,392	$	3,270	$	3,270
Weighted-average common shares outstanding		26,435		26,435		26,613		26,613
Add dilutive effect of restricted stock awards		—		19		—		19
Add dilutive effect of stock options		—		—		—		10

Weighted-average common shares for EPS calculation		26,435		26,454		26,613		26,642

Earnings per common share	$	0.73	$	0.73	$	0.12	$	0.12

Awards excluded from diluted EPS calculation⁽¹⁾		—		972		—		681


(1)		Outstanding awards were excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.

NOTE 8. COMPREHENSIVE INCOME

Comprehensive income includes all changes in stockholders’ equity during the reporting period except those resulting from investments by stockholders and dividends to stockholders.

The following table sets forth the components of our comprehensive income (loss) and the related tax effects for the three-month periods ended March 31, 2010 and 2009.


	Three Months Ended March 31,
(In Thousands)	2010			2009
Net income	$	19,392		$	3,270

Other comprehensive income (loss)
Change in net unrealized appreciation on investments		21,477			(13,173	)
Adjustment for net realized (gains) losses included in income		(2,726	)		3,488
Adjustment for costs included in employee benefit expense		615			316

Other comprehensive income (loss), before tax		19,366			(9,369	)
Income tax effect		(6,765	)		3,279

Other comprehensive income (loss), after tax		12,601			(6,090	)


Comprehensive income (loss)	$	31,993		$	(2,820	)

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders of
United Fire & Casualty Company

We have reviewed the consolidated balance sheet of United Fire & Casualty Company as of March 31, 2010, and the related consolidated statements of income and cash flows for the three-month periods ended March 31, 2010 and 2009 and the consolidated statement of stockholders’ equity for the three-month period ended March 31, 2010. 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, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of United Fire & Casualty Company as of December 31, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended, not presented herein, and in our report dated March 1, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


		/s/ Ernst & Young LLP Ernst & Young LLP

Chicago, Illinois
May 3, 2010

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

FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about our company, the industry in which we operate, and beliefs and assumptions made by management. Words such as “expect(s),” “anticipate(s),” “intend(s),” “plan(s),” “believe(s),” “continue(s),” “seek(s),” “estimate(s),” “goal(s),” “target(s),” “forecast(s),” “project(s),” “predict(s),” “should,” “could,” “may,” “will continue,” “might,” “hope,” “can” and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Part II Item 1A “Risk Factors” of this document. Among the factors that could cause our actual outcomes and results to differ are:

•		The adequacy of our loss and loss settlement reserves established for Hurricane Katrina, which are based on management estimates.

•		The resolution of regulatory issues and litigation pertaining to and arising out of Hurricane Katrina.

•		The frequency and severity of claims, including those related to catastrophe losses, and the impact those claims have on our loss reserve adequacy.

•		Developments in the domestic and global financial markets that could affect our investment portfolio and financing plans.

•		The valuation of invested assets.

•		The calculation and recovery of deferred policy acquisition costs (“DAC”).

•		The valuation of pension and other postretirement benefit obligations.

•		The absolute and relative performance of our products or services.

•		Our relationship with our agents.

•		Our relationship with our reinsurers.

•		The financial strength rating of our reinsurers.

•		The increased costs and risk associated with the security of our data.

•		Changes in industry trends and significant industry developments.

•		Governmental actions, policies or regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions.

•		NASDAQ policies or regulations relating to corporate governance, and the cost to comply.

These are representative of the risks, uncertainties and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING ESTIMATES

Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. Our discussion and analysis of our results of operations and financial condition is based upon our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting estimates are: the valuation of investments; the valuation of reserves for losses, claims, and loss settlement expenses; the valuation of reserves for future policy benefits; and the calculation of the deferred policy acquisition costs asset. These critical accounting estimates are more fully described in our Management’s Discussion and Analysis of Results of Operations and Financial Condition presented in our Annual Report on Form 10-K for the year ended December 31, 2009.

OUR BUSINESS

We operate property and casualty and life insurance businesses, marketing our products through independent agents. Although we maintain a broad geographic presence that includes most of the United States, more than half of our property and casualty premiums were written in Iowa, Texas, Missouri, Louisiana and Illinois for the three-month period ended March 31, 2010. Over three-fourths of our life insurance premiums were written in Iowa, Nebraska, Wisconsin, Minnesota, Illinois and Colorado for the three-month period ended March 31, 2010.

We conduct our operations through two distinct segments: property and casualty insurance and life insurance. We manage these segments separately because they generally do not share the same customer base, and they each have different pricing and expense structures. We evaluate segment profit or loss based upon operating and investment results. Segment profit or loss described in the following sections of the Management’s Discussion and Analysis is reported on a pre-tax basis.

Our revenue is primarily composed of premiums and investment income. Major categories of expenses include losses and loss settlement expenses, changes in reserves for future policy benefits, operating expenses and interest on policyholders’ accounts. Through disciplined underwriting and strong agency relationships, we have traditionally emphasized writing good business at an adequate price, preferring quality to volume. Our goal of consistent profitability is supported by these business strategies.

Our premium written is cyclical in nature and is influenced by many factors, including price competition, economic conditions, interest rates, weather-related events and other catastrophes such as natural disasters (e.g., hurricanes and tornados) and man-made disasters, state regulations, court decisions and changes in the law.

Over the past three years, our commercial lines of business have accounted for over 90.0 percent of our premium revenue. We anticipate that our current composition of commercial lines and personal lines business will not change materially during the coming year.

RESULTS OF OPERATIONS

Consolidated Financial Highlights


	Three Months Ended March 31,
(In Thousands)	2010			2009			%

Revenues
Net premiums earned	$	114,308		$	118,321			(3.4	)%
Investment income, net of investment expenses		27,968			23,271			20.2
Realized investment gains (losses)
Other-than-temporary impairment charges		(342	)		(4,556	)		92.5
All other realized gains		3,068			1,068			187.3

Total realized investment gains (losses)		2,726			(3,488	)		178.2
Other income		123			159			(22.6	)

	$	145,125		$	138,263			5.0	%


Benefits, Losses and Expenses
Losses and loss settlement expenses	$	68,363		$	86,078			(20.6	)%
Increase in liability for future policy benefits		6,390			3,388			88.6
Amortization of deferred policy acquisition costs		26,516			29,406			(9.8	)
Other underwriting expenses		8,784			8,128			8.1
Interest on policyholders’ accounts		10,801			9,772			10.5

	$	120,854		$	136,772			(11.6	)%

Income before income taxes	$	24,271		$	1,491			1,527.8	%
Federal income tax expense (benefit)		4,879			(1,779	)		374.3

Net Income	$	19,392		$	3,270			493.0	%

The following is a summary of our financial performance for the three-month period ended March 31, 2010.

Consolidated Results of Operations

	•		Net income increased from $3.3 million for the three-month period ended March 31, 2009 to $19.4 million for the three-month period ended March 31, 2010, as a result of (i) an increase in net investment income due to an increase in our invested assets quarter over quarter; (ii) an increase in realized gains, as OTTI charges on investments were minimal in the first quarter of 2010; (iii) a decrease in losses and loss settlement expenses due to a reduction in losses incurred from Hurricane Katrina claims litigation and an improvement in our non-catastrophe claims experience; and (iv) a decrease in the amortization of deferred policy acquisition costs.

	•		Our property and casualty segment’s premium writings decreased 6.6 percent for the three-month period ended March 31, 2010 as compared to the same period of 2009, due to the affect the weakened economy continues to have on businesses, as they reduce staff and vehicle fleets, and in some cases, go out of business and competition.

	•		Annuity deposits decreased to $17.2 million for the three-month period ended March 31, 2010 from $63.5 million for the three-month period ended March 31, 2009, as annuitants seek other products as the economy continues to recover and money is reinvested into products with greater risk that yield a higher return. We do not record annuity deposits as a component of net premiums written or net premiums earned; however, they do generate investment income.

	•		Our combined ratio improved from 105.8 percent for the three-month period ended March 31, 2009 to 91.8 percent for the three-month period ended March 31, 2010.

	•		Pre-tax catastrophe losses and loss settlement expenses, excluding Hurricane Katrina, totaled $3.2 million for the three-month period ended March 31, 2010, compared to $3.0 million for the three-month period ended March 31, 2009.

	•		Adverse development from Hurricane Katrina claims litigation decreased from $11.9 million for the three-month period ended March 31, 2009 to $5.4 million for the three-month period ended March 31, 2010.

Consolidated Financial Condition

	•		The decline in annuity deposits along with annuitant withdrawals contributed to a net cash outflow related to our annuity business of $1.1 million in the three-month period ended March 31, 2010, compared to a net cash inflow of $19.4 million in the three-month period ended March 31, 2009.

	•		For the three-month period ended March 31, 2010, we repurchased 166,276 shares of our common stock at an average cost of $16.59. As of March 31, 2010, we are authorized to purchase an additional 349,878 shares of common stock under our Share Repurchase Program, which expires in August 2011.

	•		Unrealized investment gains, net of tax, were $94.7 million at March 31, 2010, which is a 14.8 percent increase from December 31, 2009. This is reflective of the appreciation in market values of our equity securities and increases in the prices of our fixed maturity securities, as interest rates declined.

	•		Our stockholders’ equity increased to $698.5 million at March 31, 2010 from $672.7 million at December 31, 2009.

	•		Our book value per share increased by $1.14 per share to $26.49 as of March 31, 2010 from $25.35 at December 31, 2009. The change in 2010 is attributable to our net income and an increase in our net unrealized investment gains, net of tax.

Property and Casualty Insurance Segment Results


	Three Months Ended March 31,
(In Thousands)	2010			2009
Net premiums written ⁽¹⁾	$	107,124		$	114,649

Net premiums earned	$	101,979		$	109,214
Losses and loss settlement expenses		(63,628	)		(82,279	)
Amortization of deferred policy acquisition costs		(24,043	)		(26,898	)
Other underwriting expenses		(5,931	)		(6,093	)

Underwriting gain (loss) ⁽¹⁾	$	8,377		$	(6,056	)

Investment income, net of underwriting expenses		8,637			6,048
Realized investment gains (losses)
Other-than-temporary impairment charges		(36	)		(1,810	)
All other realized gains		2,212			1,093

Total realized investment gains (losses)		2,176			(717	)
Other income (loss)		(58	)		28

Income (loss) before income taxes	$	19,132		$	(697	)


GAAP Ratios:
Net loss ratio (without catastrophes)		54.1	%		61.7	%
Hurricane Katrina litigation — effect on net loss ratio		5.2			10.9
Other catastrophes — effect on net loss ratio		3.1			2.7

Net loss ratio		62.4	%		75.3	%

Expense ratio ^{(2) (3)}		29.4			30.5

Combined ratio		91.8	%		105.8	%


(1)		The Statutory Financial Measures section of this report defines data prepared in accordance with statutory accounting practices, which is a comprehensive basis of accounting other than U.S. GAAP.

(2)		Includes policyholder dividends.

(3)		The GAAP expense ratio does not include disaster charges and other related expenses, net of recoveries, which totaled $(23) and $(358) for the three-months ended March 31, 2010 and 2009, respectively.

Net premiums written decreased by $7.5 million, or 6.6 percent, for the three-month period ended March 31, 2010, as compared to the same period of 2009. Our premium writings continued to be affected by the weak economy, as businesses reduce staff and vehicle fleets, and in some cases, go out of business. We have been successful at writing new business; however, the insurance marketplace remains competitive. Accordingly, our pricing level remains relatively flat, with personal lines up slightly and commercial lines flat to slightly lower. We were successful in increasing pricing on a small percentage of our commercial renewals. Our aggregate policy retention rate for personal and commercial lines of business remained at approximately 80 percent for the three-month periods ended March 31, 2010 and 2009, as our underwriters continue to focus on writing good business at an adequate price, preferring quality over volume.

Losses and loss settlement expenses improved 22.7 percent for the three-months ended March 31, 2010, as compared with the same period in 2009, due to a reduction in losses incurred from Hurricane Katrina claims litigation and improvement in our non-catastrophe claims experience. Hurricane Katrina losses and loss settlement expenses contributed $5.4 million to the losses incurred in the three-month period ended March 31, 2010, compared to $11.9 million in the same period of 2009. Excluding Hurricane Katrina development, we incurred $3.2 million in pre-tax catastrophe losses and loss settlement expenses in the three-month period ended March 31, 2010, compared to $3.0 million the same period of 2009.

Overall claims frequency decreased in the three-month period ended March 31, 2010, as compared to the same period of 2009, which is a trend we have seen for several quarters. Claims severity remained stable during the three-month period ended March 31, 2010.

Amortization of deferred policy acquisition costs decreased 10.6 percent in the three-month period ended March 31, 2010, as compared to the same period of 2009. The decrease in net premiums written have resulted in a reduction of the deferred acquisition costs asset and related amortization.

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

The following tables display our premiums earned, losses and loss settlement expenses and loss ratio by line of business for the three-month periods ended March 31, 2010 and 2009.


			Losses								Losses
			and Loss								and Loss
			Settlement								Settlement
(In Thousands)	Premiums		Expenses			Loss			Premiums		Expenses		Loss
Unaudited	Earned		Incurred			Ratio			Earned		Incurred		Ratio
Commercial lines
Other liability ⁽¹⁾	$	28,214	$	18,841			66.8	%	$	31,052	$	20,105		64.7	%
Fire and allied lines ⁽²⁾		24,384		19,799			81.2			25,400		27,073		106.6
Automobile		23,010		13,830			60.1			24,386		15,210		62.4
Workers’ compensation		11,218		4,278			38.1			13,211		11,776		89.1
Fidelity and surety		4,679		209			4.5			5,413		273		5.0
Miscellaneous		202		36			17.8			210		51		24.3

Total commercial lines	$	91,707	$	56,993			62.1	%	$	99,672	$	74,488		74.7	%


Personal lines
Fire and allied lines ⁽³⁾	$	5,979	$	2,067			34.6	%	$	5,339	$	3,808		71.3	%
Automobile		3,467		2,881			83.1			3,086		2,351		76.2
Miscellaneous		87		(27	)		N/A			84		294		N/A

Total personal lines	$	9,533	$	4,921			51.6	%	$	8,509	$	6,453		75.8	%

Reinsurance assumed		739		1,714			231.9	%		1,033		1,338		129.5	%

Total	$	101,979	$	63,628			62.4	%	$	109,214	$	82,279		75.3	%


(1)		“Other liability” is business insurance covering bodily injury and property damage arising from general business operations, accidents on the insured’s premises and products manufactured or sold.

(2)		“Fire and allied lines” includes fire, allied lines, commercial multiple peril and inland marine.

(3)		“Fire and allied lines” includes fire, allied lines, homeowners and inland marine.

Commercial Lines

For the three months ended March 31, 2010, the loss ratio for our fire and allied lines improved to 81.2 percent compared to 106.6 percent for the same period of 2009. The change in this line was due to improvement in our non-catastrophe claims experience, as well as a reduction in losses incurred for Hurricane Katrina claims litigation in the three-months ended March 31, 2010, compared to the same period of 2009.

In the workers’ compensation line of business, our loss ratio was 38.1 percent for the three months ended March 31, 2010, as compared to 89.1 percent for the same period of 2009. The improvement in this line was due to the normal fluctuations that generally occur in this line of business.

Personal Lines

For the three months ended March 31, 2010, the loss ratio for our fire and allied lines was 34.6 percent compared to 71.3 percent for the same period of 2009, due to the improvement in our non-catastrophe claims experience.

Life Insurance Segment Results


	Three Months Ended March 31,
(In Thousands)	2010			2009
Revenues
Net premiums written ⁽¹⁾	$	12,312		$	6,197

Net premiums earned	$	12,329		$	9,107
Investment income, net		19,331			17,223
Realized investment gains (losses)
Other-than-temporary impairment charges		(306	)		(2,746	)
All other realized gains		856			(25	)

Total realized investment gains (losses)		550			(2,771	)
Other income		181			131

Total Revenues	$	32,391		$	23,690

Benefits, Losses and Expenses
Losses and loss settlement expenses	$	4,735		$	3,799
Increase in liability for future policy benefits		6,390			3,388
Amortization of deferred policy acquisition costs		2,473			2,508
Other underwriting expenses		2,853			2,035
Interest on policyholders’ accounts		10,801			9,772

Total Benefits, Losses and Expenses	$	27,252		$	21,502


Income Before Income Taxes	$	5,139		$	2,188


(1)		The Statutory Financial Measures section of this report defines data prepared in accordance with statutory accounting practices, which is a comprehensive basis of accounting other than U.S. GAAP.

Net premiums earned increased $3.2 million, or 35.4 percent, in the three-months ended March 31, 2010, as compared with the same period of 2009, due to an increase in sales of our single premium whole life products.

For the three-month period ended March 31, 2010, annuity deposits were $17.2 million compared to $63.5 million for the same period of 2009. The significant decrease in our annuity deposits in 2010 is attributable to annuitants seeking other products, as the economy continues to recover and money is reinvested into products with greater risk that yield a higher return. Annuity deposits are not recorded as a component of net premiums written or net premiums earned; however, the money is invested to generate investment income.

The decline in annuity deposits along with annuitant withdrawals contributed to a net cash outflow related to our annuity business of $1.1 million in the three-month period ended March 31, 2010, compared to a net cash inflow of $19.4 million in the three-month period ended March 31, 2009.

Losses and loss settlement expenses increased $.9 million or 24.6 percent in the three-month period ended March 31, 2010 as compared to the same period of 2009. The increase is attributable to both an increase in the amount of death benefits paid as the sales of our life insurance products have increased in recent years, and a slight increase in surrender benefits.

Liability for future policy benefits increased $3.0 million, or 88.6 percent, in the three-month period ended March 31, 2010 as compared to the same period of 2009. The increase is primarily attributable to an increase in the sale of single premium whole life insurance, as well as an increase in long-term disability claims due to a longer than anticipated duration of claim payments.

Interest on policyholders’ accounts increased 10.5 percent in the three-month period ended March 31, 2010 as compared to the same period of 2009, due to the growth in our deferred annuity account balances over the last year.

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

Investment Portfolio

Our invested assets at March 31, 2010 totaled $2,455.6 million, compared to $2,351.8 million at December 31, 2009. At March 31, 2010, 92.4 percent of the value of our investment portfolio was fixed maturity securities and 5.8 percent was equity securities. Because the primary purpose of our investment portfolio is to fund future claims payments, we follow a conservative investment philosophy and invest in a diversified portfolio of high quality, intermediate-term taxable corporate bonds, taxable U.S. government bonds and tax-exempt U.S. municipal bonds.

Composition

We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax obligation, general economic conditions, expected rates of inflation and regulatory requirements. We administer our investment portfolio based on investment guidelines approved by management and the Investment Committee of our Board of Directors that comply with applicable statutory regulations.

The composition of our investment portfolio at March 31, 2010 is presented at carrying value in the following table:


	Property & Casualty					Life
	Insurance Segment					Insurance Segment					Total
			Percent					Percent					Percent
(Dollars in Thousands)			of Total					of Total					of Total
Fixed maturities ⁽¹⁾	$	801,170		84.0	%	$	1,467,281		97.7	%	$	2,268,451		92.4	%
Equity securities		126,411		13.3			16,985		1.1			143,396		5.8
Trading securities		11,693		1.2			—		—			11,693		0.5
Mortgage loans		—		—			7,199		0.5			7,199		0.3
Policy loans		—		—			7,699		0.5			7,699		0.3
Other long-term investments		13,589		1.4			2,521		0.2			16,110		0.7
Short-term investments		1,100		0.1			—		—			1,100		—


Total	$	953,963		100.0	%	$	1,501,685		100.0	%	$	2,455,648		100.0	%


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

At March 31, 2010, we classified $2,259.8 million, or 99.6 percent, of our fixed maturities portfolio as available-for-sale, compared to $2,158.4 million, or 99.6 percent, at December 31, 2009. We classify our remaining fixed maturity securities as held-to-maturity securities (which are reported at amortized cost) or trading securities. We record trading securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings. As of March 31, 2010 and December 31, 2009, we did not have direct exposure to investments in sub-prime mortgages, derivative securities or other credit enhancement vehicles.

Credit Quality

The following table displays a breakdown for all of our fixed maturity securities by credit rating at March 31, 2010 and December 31, 2009. Information contained in the table is generally based upon the issue credit ratings provided by Moody’s. If credit ratings from Moody’s were unavailable, we obtained them from Standard & Poor’s.


(In Thousands)	March 31, 2010					December 31, 2009
Rating	Carrying Value		% of Total			Carrying Value		% of Total
AAA	$	245,716		10.8	%	$	207,199		9.5	%
AA		398,607		17.5			397,380		18.2
A		553,814		24.3			562,795		25.8
Baa/BBB		935,174		41.0			869,465		39.9
Other/Not Rated		146,833		6.4			143,770		6.6

	$	2,280,144		100.0	%	$	2,180,609		100.0	%

The credit ratings of our fixed maturity securities portfolio at March 31, 2010 has not changed significantly since December 31, 2009, as the financial markets continue to recover.

Duration

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

Group

The maximum weighted average duration of our fixed maturity available-for-sale, held-to-maturity and trading security portfolios, including convertible bonds, at March 31, 2010 is 5.6 years compared to 6.0 years at December 31, 2009.

Property and Casualty Insurance Segment

For our property and casualty insurance segment, the maximum weighted average duration of our fixed maturity available-for-sale, held-to-maturity and trading security portfolios, including convertible bonds, at March 31, 2010 is 7.0 years compared to 7.3 years at December 31, 2009.

Life Insurance Segment

For our life insurance segment, the maximum weighted average duration of our fixed maturity available-for-sale, held-to-maturity and trading security portfolios, at March 31, 2010 is 4.0 years compared to 4.3 years at December 31, 2009.

Investment Results

We recorded net investment income of $28.0 million and $23.3 million for the three-month periods ended March 31, 2010 and 2009, respectively. The improvement in the three-month period ended March 31, 2010 was the result of our invested assets increasing from $2.1 billion at March 31, 2009 to $2.5 billion at March 31, 2010, which allowed us to generate more investment income.

Realized investment gains were $2.7 million in the three-month period ended March 31, 2010, compared to realized investment losses of $3.5 million in the same period of 2009. For the three-month period ended March 31, 2010, we incurred OTTI charges of $.3 million attributable to our equity securities, compared to $4.6 million in the three-month period ended March 31, 2009, attributable to our fixed maturity and equity securities.

Changes in unrealized gains on available-for-sale securities do not affect net income and earnings per share but do impact comprehensive income, stockholders’ equity and book value per share. We believe that any unrealized losses on our available-for-sale securities at March 31, 2010 are temporary based upon our current analysis of the issuers of the securities that we hold and current market events. It is possible that we could recognize OTTI charges in future periods on securities that we own at March 31, 2010, if future events and information cause us to determine that a decline in value is other-than-temporary. However, we endeavor to invest in high quality assets to provide protection from future credit quality issues and corresponding impairment write-downs.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations. Our cash inflows are primarily a result of premiums, annuity deposits, reinsurance recoveries, sales or maturities of investments, and investment income. Historically, we have generated substantial cash inflows from operations because cash from premium payments is usually received in advance of cash payments made to settle losses. When investing the cash generated from operations, we invest in securities with maturities that correlate to the anticipated timing of payments for losses and loss settlement expenses of the underlying insurance policies. The majority of our assets are invested in available-for-sale fixed maturity securities.

Our cash outflows are a result of losses and loss settlement expenses, commissions, premium taxes, income taxes, operating expenses, dividends, annuity withdrawals, and investment purchases. Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity requirements.

The following table displays a summary of cash sources and uses in 2010 and 2009.


Cash Flow Summary	Three Months Ended March 31,
(In Thousands)	2010			2009
Cash provided provided by (used in)
Operating activities	$	29,716		$	9,189
Investing activities		(156,262	)		(115,803	)
Financing activities		79,914			103,178

Net decrease in cash and cash equivalents	$	(46,632	)	$	(3,436	)

Net cash flows provided by operating activities for the three-month periods ended March 31, 2010 and 2009 totaled $29.7 million and $9.2 million, respectively. Our operating cash flows increased in the three-month period ended March 31, 2010, as compared with the three-month period ended March 31, 2009, due to an increase in operating income and the receipt of an income tax refund for an overpayment of prior year tax and operating loss carrybacks. This was somewhat offset by payments made for accrued expenses and other liabilities.

Net cash flows used in investing activities for the three-month periods ended March 31, 2010 and 2009 totaled $156.3 million and $115.8 million, respectively. In the three-month period ended March 31, 2010, we had cash inflows from sales of investments, scheduled and unscheduled investment maturities, redemptions and prepayments that totaled $91.2 million compared to $99.0 million for the three-month period ended March 31, 2009. Our cash outflows for investment purchases totaled $168.1 million for the three-month period ended March 31, 2010 compared to $131.3 million for the three-month period ended March 31, 2009.

Net cash flows provided by financing activities for the three-month periods ended March 31, 2010 and 2009 totaled $79.9 million and $103.2 million, respectively. In the three-month period ended March 31, 2010, net cash flows from our life insurance segment’s annuity and universal life deposits totaled $7.9 million compared to $27.3 million for the same period of 2009. Additionally, in the three-month period ended March 31, 2010, our common stock repurchases totaled $2.8 million compared to $.5 million in the three-month period ended March 31, 2009.

If our operating and investing cash flows are not sufficient to support our operations, we may also borrow up to $50.0 million on a bank line of credit. Under the terms of our credit agreement, interest on outstanding notes is payable at the lender’s prevailing prime rate, minus 1.0 percent. We did not utilize our line of credit during the first three months of 2010.

Stockholders’ Equity

Stockholders’ equity increased 3.8 percent from $672.7 million at December 31, 2009 to $698.5 million at March 31, 2010. The primary increases to stockholders’ equity were net income of $19.4 million and net unrealized appreciation of $12.2 million, net of tax. This was partially offset by stockholder dividends of $4.0 million and stock repurchases of $2.8 million. At March 31, 2010, book value per share was $26.49 compared to $25.35 at December 31, 2009.

Off-Balance Sheet Arrangements

STATUTORY FINANCIAL MEASURES

United Fire and its subsidiaries are required to file financial statements based on statutory accounting principles in each of the states where our insurance companies are domiciled or licensed to conduct business. Management analyzes financial data and statements that are prepared in accordance with statutory accounting principles rather than U.S. GAAP.

The following definitions of key statutory measures are provided for our readers’ convenience. United Fire does not reconcile data prepared under statutory accounting principles to those prepared under U.S. GAAP because Regulation G does not require reconciliation to U.S. GAAP of data prepared under a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant.

Premiums written is a measure of our overall business volume. Net premiums written comprises direct and assumed premiums written, less ceded premiums written. Direct premiums written is the amount of premiums charged for policies issued during the period. Assumed premiums written is consideration or payment we receive in exchange for insurance we provide to other insurance companies. We report these premiums as revenue as they are earned over the underlying policy period. Ceded premiums written is the portion of direct premiums written that we cede to our reinsurers under our reinsurance contracts. Premiums written is an important measure of business production for the period under review.


	Three Months Ended March 31,
(In Thousands)	2010			2009
Net premiums written	$	119,436		$	120,846
Net change in unearned premium		(5,186	)		(2,749	)
Net change in prepaid reinsurance premium		58			224

Net premiums earned	$	114,308		$	118,321

Combined ratio is a commonly used financial measure of underwriting performance. A combined ratio below 100 percent generally indicates a profitable book of business. The combined ratio is the sum of two separately calculated ratios, the loss and loss settlement expense ratio (referred to as the “net loss ratio”) and the underwriting expense ratio (the “expense ratio”).

When prepared in accordance with U.S. GAAP, the net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. The expense ratio is calculated by dividing nondeferred underwriting expenses and amortization of DAC by net premiums earned.

When prepared in accordance with statutory accounting principles, the net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premium earned and the expense ratio is calculated by dividing underwriting expenses by net premiums written.

Underwriting income (loss) is the gain or loss by an insurance company from the business of insurance. Underwriting income is equal to net premiums earned less incurred losses and loss settlement expenses, amortization of deferred policy acquisition costs, and other underwriting expenses. We use this financial measure in evaluating the results of our operations and to analyze the profitability of our property and casualty segment separately from our investment results.

NON-GAAP FINANCIAL MEASURES

We believe that disclosure of certain Non-GAAP financial measures enhances investor understanding of our financial performance. The following Non-GAAP financial measure is utilized in this filing:

Catastrophe losses utilize the designations of the Insurance Services Office (“ISO”) and are reported with loss and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is a single unpredictable incident or series of closely related incidents causing severe insured losses that cause $25.0 million or more in industry-wide direct insured losses to property and that affect a significant number of insureds and insurers. We also include as catastrophes those events we believe are, or will be, material to our operations, either in amount or in number of claims made. Management at times may determine for comparison purposes that it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation, such as Hurricane Katrina. The frequency and severity of catastrophic losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance segment, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in periodic earnings.


	Three Months Ended March 31,
(In Thousands)	2010			2009
ISO catastrophes	$	8,378		$	14,013
Less Hurricane Katrina loss development		(5,351	)		(11,944	)

ISO catastrophes without Hurricane Katrina	$	3,027		$	2,069
Non-ISO catastrophes		129			908

Total catastrophes	$	3,156		$	2,977

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have exposure to market risk arising from potential losses 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.

We do not utilize financial instrument hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but attempt to mitigate our exposure through active portfolio management. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer. At March 31, 2010, we did not hold investments in sub-prime mortgages, derivative securities, credit default swaps or other credit-enhancement exposures.

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

There have been no material changes in our market risk or market risk factors from that reported in our Annual Report on Form 10-K for the year ended December 31, 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control Over Financial Reporting

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

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a detailed discussion of legal proceedings of the Company, refer to Note 1—Legal Proceedings in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q.

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks, including those identified in Part I, Item 1A of our 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010, that could have a material effect on our business, results of operations, financial condition, and/or liquidity and that could cause our operating results to vary significantly from period to period. The risks described in the above mentioned document are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also have a material effect on our business, results of operations, financial condition and/or liquidity.

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

Under our Share Repurchase Program, first announced in August 2007, we may purchase common stock from time to time on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at our discretion and will depend upon a number of factors, including the share price, economic and general market conditions, and corporate and regulatory requirements. We will generally consider repurchasing company stock on the open market if (i) the trading price on NASDAQ drops below 130 percent of its book value, (ii) sufficient excess capital is available to purchase the stock, and (iii) we are optimistic about future market trends and the performance of our company. Our Share Repurchase Program may be modified or discontinued at any time. It is currently set to expire in August 2011.

The following table provides information with respect to purchases of shares of common stock made by or on our behalf or by any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, during the three-month period ended March 31, 2010.


					Total Number of Shares		Maximum Number of
	Total				Purchased as a Part of		Shares that may be
	Number of		Average Price		Publicly Announced		Purchased Under the
Period	Shares Purchased		Paid per Share		Plans or Programs		Plans or Programs
1/1/10 – 1/31/10		76,476	$	16.93		76,476		439,678
2/1/10 – 2/28/10		89,800		16.29		89,800		349,878
3/1/10 – 3/31/10		—		—		—		349,878

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit			Filed
number		Exhibit description	herewith
	11	Statement Re Computation of Per Share Earnings. All information required by Exhibit 11 is presented within Note 7 of the Notes to Unaudited Consolidated Financial Statements, in accordance with the FASB guidance on Earnings per Share	X
	31.1	Certification of Randy A. Ramlo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
	31.2	Certification of Dianne M. Lyons 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 Dianne M. Lyons pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

SIGNATURES

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


UNITED FIRE & CASUALTY COMPANY

(Registrant)

/s/ Randy A. Ramlo		/s/ Dianne M. Lyons

Randy A. Ramlo		Dianne M. Lyons
President, Chief Executive Officer, Director and Principal Executive Officer		Vice President, Chief Financial Officer and Principal Accounting Officer

May 3, 2010		May 3, 2010

(Date)		(Date)