UNITED FIRE GR OU P, INC .
2016 YEAR IN R EVI EW
T H E B U S I N E S S O F
im
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Annual Meeting
The United Fire Group, Inc. (UFG) annual meeting of shareholders will be held
at 10 a.m. CT on Wednesday, May 17, 2017, at our corporate headquarters
in Cedar Rapids, Iowa. The usual notices and proxy material will be mailed to
shareholders in advance of the meeting.
Our 2016 Form 10-K is filed with the Securities and Exchange Commission
and is available to shareholders upon request to:
Investor Relations
United Fire Group, Inc.
118 Second Avenue SE
Cedar Rapids, Iowa 52401
Telephone: 319-399-5700
OR
Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 30170
College Station, Texas 77842-3170
Disclosure of Forward-Looking Statements
This release 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 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),”
“remain optimistic,” “target(s),” “forecast(s),” “project(s),” “predict(s),” “should,” “could,”
“may,” “will,” “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 outcomes and results to differ
materially from those expressed in the forward-looking statements is contained in Part
I, Item 1A “Risk Factors” of our Form 10-K for the year ended December 31, 2016,
filed with the Securities and Exchange Commission (“SEC”) on February 28, 2017.
The risks identified in our Form 10-K are representative of the risks, uncertainties, and
assumptions that could cause actual outcomes and results to differ materially from
what is expressed in the 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 release or as of the date they are made. Except as required under the
federal securities laws and the rules and regulations of the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements, whether as
a result of new information, future events, or otherwise.
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T H E B U S I N E S S O F
im
Insurance is the business of promises. In the insurance world, policyholders
promise to pay their premiums now, and the insurance carrier promises to pay
money in the future should an unfortunate event occur. At UFG, we always
strive to deliver on our promises. And that includes a promise to our investors
too—a promise to make prudent business decisions and seek avenues to
profitability and growth.
Our philosophy is this: we believe that by being a trusted partner for our
insurance agents, a secure insurer for our policyholders and a great employer
for our people, we, in turn, can be a solid investment for our shareholders.
Guided by our 2020 Vision, UFG is committed to achieving consistent
profitability despite our challenges in the insurance industry: difficult insurance
cycles, tough investment markets and destructive weather-related losses. To
accomplish this, we focus on profit, service, growth and people.
And, in every decision we make and every interaction we have, we simply do
what’s right. That’s our promise to you.
About UFG
UFG has been protecting the simple—and complex—things in life since 1946.
We offer commercial insurance, personal insurance, surety bonds, life insurance
and annuities through approximately 1,200 independent property and casualty
agents and 1,350 independent life insurance agents across the country.
To serve our customers, we employ more than 1,100 people at our corporate
headquarters in Cedar Rapids, Iowa, and five regional offices in Los Angeles,
California; Rocklin, California; Westminster, Colorado; Pennington, New Jersey;
and Webster, Texas.
A publicly traded multibillion-dollar-asset company, UFG’s property and
casualty subsidiaries hold a financial strength rating of “A” (Excellent) and our
life subsidiary, United Life Insurance Company, holds a financial strength rating
of “A-” (Excellent) from A.M. Best Company, as of September 2016. UFG was
named to Forbes’ “America’s 50 Most Trustworthy Financial Companies” for the
third consecutive year in 2016.
For more information about UFG, visit www.ufgInsurance.com.
OUR VISION
To be the company
of choice for
independent agents.
OUR MISSION
We are committed
to our promise of
exceptional insurance
protection and service
for businesses, families
and individuals. By
balancing technology
with personal relation-
ships and offering a
diverse selection of
products and services,
we are the clear
company of choice for
independent agents
and their customers.
OUR MOTTO
Simple solutions
for complex times®
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L E T T E R T O S H A R E H O L D E R S
I
t was a year of progress and milestones at UFG, as 2016 marked our 70th year in business, our
45th year as a publicly held company and our 30th year of being listed on the Nasdaq. In 2016,
we produced earnings per share of $1.93, a combined ratio of 100.3 percent and a return
on equity (ROE) of 5.5 percent. Our book value at year end was $37.04 per share, which is an
improvement of 6.0 percent from 2015, and our stock price was in a major uptrend, closing at
$49.17 per share.
Also, for the first time in our history, we reached $1.0 billion in property and casualty direct written
premiums—a significant milestone for our company and a positive follow-up to our 2015 achievement
of $1.0 billion in total revenues, which includes revenue from both our property and casualty and life
insurance segments.
At UFG, we value true underwriting, which means evaluating and pricing risks on an individual basis.
This requires extreme discipline and expertise on the part of our underwriters, who have done an
outstanding job of passing on business that is unfavorable or underpriced. This approach will help
guide us through the current softening market cycle, as we are expecting our premium growth to
slow moderately in 2017 as competition rises.
Flood of 2016
For the second time in our history, UFG found ourselves in the path of rising floodwaters at our
corporate headquarters in downtown Cedar Rapids in late September. However, this time around,
both our company and our city were much more prepared, with effective disaster recovery plans in
place. In the end, our corporate headquarters was closed for exactly one week, but it was business
as usual for our customers, with the majority of our Cedar Rapids employees working remotely.
We owe a huge thanks to Garling Construction Inc. for assisting us in moving office furniture
and computer equipment out of the lower levels of our buildings and onto eight semi-trailers for
safekeeping. In the near future, we will be converting our lower levels to underground parking for
employees, which will lessen the impact of any future flooding.
After the flood, our post-mortem list of lessons learned included such things as using a different
type of tape to label employee computers, which tells me we had all our big-ticket items
squared away.
Getting analytical
Though we view our company as an underwriting company and our business as a people business,
in recent years, we’ve recognized the need to have a more sophisticated approach to gathering
and analyzing data—in both our property and casualty and life insurance segments. So, we started
off 2017 with three new analytics professionals on board: an analytics director, a data scientist and
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continued
L E T T E R T O S H A R E H O L D E R S
Every day in our business,
we make and fulfill promises.
Some are simple and some are
complex. But, in every promise,
is our sincere commitment to
deliver—on our good word for
our policyholders, insurance
agents and shareholders.
At UFG, we spend our days
purposefully underwriting
business, renewing policies,
inspecting properties,
servicing accounts
and adjusting claims.
And, through it all, we
remain mindful of the
important promises we
make as an insurance
company—that’s why
we chose “The Business
of Promises” as our
theme for this year’s
annual report.
xFIN2025_AnnualReport2016.indd 5
Randy A. Ramlo
President and CEO
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2016201620162016 a life actuary. We’re excited about the impact analytics could have on
our performance, helping us make more accurate decisions related to
selecting and pricing risks, identifying problematic claims, entering new
markets and partnering with new agents.
Analytics are a tool that definitely would have benefited UFG in the years
before and after Hurricane Katrina, which remains the largest loss in our
history. It’s been more than 11 years since Hurricane Katrina made landfall
in New Orleans on August 29, 2005, and on January 1, 2017, we finally
stopped publishing daily claim reports related to this storm. Although
Hurricane Katrina hasn’t had any financial materiality for years, after
countless hours of litigation, we’re thankful to have 99.8 percent of the
claims from this storm behind us.
Looking ahead
All in all, 2016 was, as I said, a year full of progress and milestones—as
well as clarity, on the areas we’re excelling in and the areas we need
to improve on. In the upcoming year, our emphasis will be primarily on
enhancing our profitability as part of our 2020 Vision.
Specifically, we’ll be focused on addressing the deterioration in our core
loss ratio, which impacted our profitability in 2016. A portion of this
deterioration was driven by large losses in our commercial auto and
commercial property lines of business, which we are addressing with
the implementation of more rigorous loss control requirements, stricter
underwriting guidelines, pricing increases and new analytical tools.
With our outstanding team of employees, who show relentless
determination and drive in fulfilling our insurance promises, and our
supportive team of insurance agents, who share our commitment for
offering insurance protection that people can trust in, I am confident we
will succeed in achieving all of our 2020 Vision goals.
Randy A. Ramlo
President and CEO
Once complete, two UFG buildings will
stand connected on First Avenue—one
brand new and one more than 100
years old—a nod to both our history
and our future in Cedar Rapids.
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Construction
Update on expansion of
corporate headquarters
UFG has passed the demolition phase
of our expansion project in downtown
Cedar Rapids, Iowa, which will add
approximately 110,000 square feet of
office space for future growth. The project
includes the complete renovation of
the historic American Building and the
adjacent construction of a brand-new
10-story building, both of which will stand
prominently on First Avenue, the main
thoroughfare of Cedar Rapids. After a
year of tearing down and clearing out,
2017 will be a year of building up. The
expansion project is tentatively slated for
completion in 2018.
“With our strong growth comes the need
for more hiring,” said UFG President and
CEO Randy Ramlo. “Our workforce is
currently growing at a pace of nearly
4 percent, with more than 160 new people
hired in 2016. Providing exceptional
service to our customers of insurance
agents and policyholders is a top priority
at UFG, which is why we are taking steps
to ensure that our workforce is poised to
continue to meet their needs by having
the right people with the right skills at the
right time.”
It’s interesting to note that UFG first
opened our doors for business on
First Avenue back in 1946, occupying
space in a two-story house on the
outskirts of downtown Cedar Rapids.
Approximately 70 years later, we’ll be back
on First Avenue, just a few blocks from
where we started.
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Earning business by earning trust
We know that trust is a deciding factor for insurance agents
and consumers when choosing an insurance company. In a
third-party research study conducted by Vernon Research Group
in 2016, 99 percent of UFG insurance agents surveyed said that
an insurer’s trustworthiness is important and the agents rated
UFG as a trustworthy insurance company.
A promise to our customers
UFG was named one of “America’s 50 Most Trustworthy Financial Companies” by
Forbes for the third consecutive year in 2016. It recognizes us for our transparent
accounting practices and solid corporate governance, reinforcing to our
customers of insurance agents and policyholders that they can trust us to make
good on our promise of protection.
A promise to our communities
UFG created the Scotty McIntyre Jr. “Go
Beyond” award as a promise to give back
to our communities. Named after our past
leader, a quiet philanthropist, our “Go Beyond”
award is given annually to two of our insurance
agency employees and one UFG employee,
recognizing individuals for their exemplary
community service efforts.
Jackie
Wicks
Mike
Hagerty
Kirstin
Anderson
2016 Winners
n UFG agency employee, Jackie Wicks of CSB Insurance in Johnston, Iowa, is involved
with Tori’s Angels, an organization that provides support to central Iowa children battling
life-threatening illnesses or diseases.
n United Life agency employee, Mike Hagerty of EOI Management/Investment Center in
Muscatine, Iowa, is involved with the Kids First Fund, an organization that helps children
in the Muscatine Community School District in Iowa participate in school activities they
could not otherwise afford.
n UFG employee, Kirstin Anderson, helped establish the Deaf Can! Coffee Social
Enterprise program in Jamaica, which exists to inspire deaf youth to believe in their
talents and abilities, engage their passions and interests and foster creative, positive
thought in a healthy community.
“While our primary goal is to grow a financially profitable company, we believe making
an investment in the social and educational aspects of our communities also pays
great dividends,” said UFG President and CEO Randy Ramlo. “A healthy community
contributes to the well-being of both people and businesses. We steward the belief
that everyone deserves a good life, and we are committed to charitable giving and
community service.”
8
S C O T T Y M C I N T Y R E , J R .
A W A R D
In the spirit of community
service and in the name
of each award recipient,
UFG proudly contributed
$5,000 to these three
community service
organzations: Tori’s
Angels, Kids First Fund
and Deaf Can! Coffee Social
Enterprise program.
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
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UFG celebrated 30 years on Nasdaq
In April 2016, UFG celebrated our 30-year anniversary on the Nasdaq stock market—an important milestone for
our company. Members of our leadership team traveled to Times Square in New York City on April 25 to ring the
Nasdaq opening bell, which was broadcast to millions of viewers worldwide.
As part of the bell ceremony, UFG had access to one hour of advertising on the Nasdaq MarketSite Tower, which
stands seven stories tall in the heart of Times Square. We created a video promoting UFG as the financially strong
and trustworthy insurance company that we are—noting our 70 years in business, 45 years publicly traded and 30
years on the Nasdaq. In other words: a solid investment.
“UFG was beyond honored to participate in the opening bell ceremony last April, which commemorated our 30-year
anniversary on the Nasdaq stock market,” said UFG President and CEO Randy Ramlo. “I also had the opportunity
to attend our bell ceremony 10 years ago when UFG celebrated our 20-year anniversary on the Nasdaq. Though
both experiences were incredibly positive and rewarding, I must admit that my first time at the Nasdaq was much
less stressful, as all I was expected to do was smile, wave and clap. This time around, I was responsible for giving
an opening speech, followed by a Facebook Live interview—and the one thing that kept going through my head
was: thousands of people are watching this.”
A solid investment—our UFCS stock performance
over 30 years spans these four pages . . .
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
xFIN2025_AnnualReport2016.indd 9
2001
9
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F I N A N C I A L H I G H L I G H T S
F I N A N C I A L H I G H L I G H T S
(Dollars in Thousands Except Per Share Data)
Years Ended December 31
2016
2015
2014
2013
2012
Total assets
$ 4,054,758
$ 3,890,376
$ 3,856,689
$ 3,720,672
$ 3,694,653
Total stockholders’ equity
$ 941,884
$ 878,897
$ 817,415
$ 782,833
$ 729,177
Book value per share
Closing stock price
Revenues:
$
$
37.04
49.17
$
$
34.94
$
32.67
38.31 $
29.73
$
$
30.87
28.66
$
$
28.90
21.84
Net premiums earned
$ 1,023,401
$ 930,890
$ 828,330
$ 754,846
$ 694,994
Investment income, net of
investment expenses
Total realized investment gains
Other income
106,822
100,781
104,609
112,799
111,905
6,103
621
2,846
401
7,270
1,685
8,695
702
5,453
891
Total revenues
$ 1,136,947
$ 1,034,918
$ 941,894
$ 877,042
$ 813,243
Net income
Basic earnings per common share
Diluted earnings per common share
$
$
$
Cash dividends paid per common share $
49,904
1.97
1.93
0.97
$
$
$
$
89,126
3.56
3.53
0.86
$
$
$
$
59,137
2.34
2.32
0.78
$
$
$
$
76,140
3.01
2.98
0.69
$
$
$
$
40,212
1.58
1.58
0.60
Combined ratio
100.3%
92.0%
97.8%
94.8%
101.2%
. . . from a closing price of $4.89 at year-end 1986
to a closing price of $49.17 at year-end 2016
10
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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F I N A N C I A L H I G H L I G H T S
F I N A N C I A L H I G H L I G H T S
$1,137
$1,035
$3,695 $3,721
$3,857 $3,890
$4,055
$942
$877
$813
’12
’13
’15
’16
’14
TOTAL REVENUES
(in millions)
’12
’15
’13
’14
TOTAL ASSETS
(in millions)
’16
$3.53
$2.98
$2.32
$1.93
$1.58
$0.60
$0.69
$0.78
$0.86
$0.97
Diluted earnings
per common share
Cash dividends paid
per common share
’14
EARNINGS AND DIVIDENDS PER COMMON SHARE
’12
’13
’15
’16
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
xFIN2025_AnnualReport2016.indd 11
2016
11
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M E S S A G E F R O M T H E C H A I R M A N
I
n the same way that UFG always strives to deliver on its insurance promises, our board of directors always
strives to deliver on our commitment to shareholders, making decisions that will contribute to the overall
success of UFG.
With the introduction of its 2020 Vision, UFG has positioned itself to achieve long-term strength and
stability through various sustainability measures—including taking advantage of analytics for effective risk
management and introducing progressive new benefits to recruit and retain talented employees. UFG is
strategically focused with a management team and staff working every day to meet their 2020 Vision goals.
As chairman of the board of directors for UFG, I am privileged to serve with a diverse and respected group
of individuals whose careers span multiple industries, with experience in insurance, finance, accounting, law,
information technology, academia, broadcasting, marketing, branding, construction and real estate. They
offer their valuable insight and individual expertise at every meeting.
Over the past five years, we’ve had four new members join our board: John-Paul Besong, formerly of
Rockwell Collins; Scott Carlton of SGL Carbon LLC; Sarah Fisher Gardial of the University of Iowa Tippie
College of Business; and Susan Voss, former Iowa insurance commissioner and currently with American
Enterprise Group, Inc. Additionally, we’re excited to have Brenda Clancy, formerly the global chief technology
officer for AEGON N.V., stand for election to our board in 2017, bringing her vast knowledge and fresh
perspective to UFG.
Our longtime board member, Casey Mahon, announced in 2016 that she will not stand for re-election to our
board after serving for more than 20 years. Casey contributed greatly over the years, as her legal experience
proved to be invaluable to UFG, particularly in dealing with mergers and acquisitions. We thank her for her
years of dedicated service.
I speak for our entire board when I say we are proud to represent the shareholders of a company with such
vigor and integrity. The board and management team endeavor jointly to build an organization that serves all
stakeholders and we take this responsibility seriously.
I encourage you to attend the UFG annual meeting on May 17, 2017, and hear directly from our leadership.
Thank you, as shareholders, for the confidence you have placed in us. We will continue to earn your trust.
Jack Evans
Chairman of the Board
JACK B. EVANS
CHAIRMAN
JOHN-PAUL E.
BESONG
BRENDA K.
CLANCY
GEORGE D.
MILLIGAN
SARAH F.
GARDIAL
KYLE D.
SKOGMAN
CASEY D.
MAHON
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2 0 2 0 V I S I O N U P D A T E
Maximize our return on equity (ROE)
n We strive to produce double-digit ROEs, which we did not achieve in 2016,
producing an ROE of 5.5 percent for the year. This is due primarily to commercial
auto and commercial property losses; however, UFG is already executing plans of
action to improve these lines of business.
n The insurance market remained competitive in 2016, impacting the pricing of
both our renewal business and new business. Overall, we experienced low
single-digit pricing increases on both commercial and personal lines renewal
business. Despite increased competition in pricing, our premium retention and
policy retention rates remained strong. In addition, we continued to non-renew or
increase pricing on marginally performing accounts.
Provide exceptional service for agents and policyholders
n To enhance our position as a small business partner for agents, UFG launched
a new Small Business Unit (SBU) at the end of 2016, with a dedicated team of
specialists providing competitive insurance solutions for small-sized businesses.
Through our SBU, we offer a broadened class appetite and streamlined quoting
process, providing ease and speed of doing business for our agents and their
small business customers.
n For increased efficiency and effectiveness, we created a new Claims Customer
Service Center, which is comprised of a dedicated team of employees handling
all claims-related administrative functions for UFG, from the first notice of loss
to the final payment of the claim. This has allowed us to elevate the customer
experience for our policyholders, with faster response times, adjuster assignments
and payment of claims—all without the automated messages or menu options
normally associated with customer service centers.
Throughout 2016, UFG
continued to set our sights
on our 2020 Vision,
progressing toward our
goals related to profit,
service, growth and people:
PROFIT
Maximize our return on equity
SERVICE
Provide exceptional service
for agents and policyholders
GROWTH
Increase our
written premiums
PEOPLE
Be the best place to work
by enhancing employee
recruitment and retention
CASEY D.
MAHON
SCOTT L.
CARLTON
MARY K.
QUASS
SUSAN E.
VOSS
RANDY A.
RAMLO
CHRISTOPHER R.
DRAHOZAL
JAMES W. NOYCE
VICE CHAIRMAN
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2 0 2 0 V I S I O N U P D A T E
Increase our written premiums
n We produced property and casualty direct premiums written of $1.0 billion at year-end 2016, an increase of
8.6 percent from year-end 2015, indicative of our strategy to increase written premiums by focusing primarily
on organic growth, boosting our market share in the regions where we currently operate through increases in
new business premiums, renewal prices and policy retention rates.
n UFG appointed 53 new agencies in 2016 and six of our 10 target growth states—Alabama, Arizona,
Mississippi, Nevada, North Dakota and Tennessee—have now met their premium growth goals. In addition,
we continue to expand our presence in our new state of Ohio, which we entered in September 2015.
We currently have 25 insurance agencies appointed throughout the state, and produced over
$7 million in written premiums in Ohio during 2016.
n In early 2014, UFG launched our specialty division, UFG Specialty Insurance Company, offering excess and
surplus lines of insurance for commercial risks through wholesale brokers. Located in Los Angeles,
our specialty division is currently doing business in the states of Arizona, California, Colorado, Nevada,
New Mexico, Oregon and Utah, with plans to expand into Idaho and Washington in early 2017.
n Our surety segment, UFG Surety, continues to grow and expand, providing new opportunities for profitable
business. In 2016, the division increased its bond limits for contractors and expanded into five new states:
Hawaii, Maine, Massachusetts, New York and Vermont.
n Our life insurance segment experienced a 10.2-percent increase in premiums in 2016, driven by record sales
of our single premium whole life policies, as well as growth in sales of our single premium immediate annuity
and long-term care rider, which can be added to several of our life insurance products. In the fourth quarter,
United Life launched an E-App for deferred annuities, which allows our life insurance agents to quickly and
easily complete and submit annuity applications electronically. While our life insurance segment focused
on increasing business in its noncore states in 2016, which resulted in an overall 10-percent increase in
premium in those states, our primary focus for 2017 is to improve profitability in our life insurance segment.
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2 0 2 0 V I S I O N U P D A T E
2 0 2 0 V I S I O N U P D A T E
Be the best place to work
n In 2016, UFG was named a Top Workplace in Iowa by The Des Moines Register for the
third time, ranking 12th out of 20 companies in the large employer category. This award is
based solely on the results of employee surveys, reflecting our initiatives to offer jobs that
are rewarding and fulfilling, a work environment that is positive and productive, training
opportunities to learn and grow, and a work-life balance that works with flexible schedules.
n In support of the communities where we live and work, UFG began offering community
service hours in 2015, which provides our employees with paid leave for participating
in community service activities during work hours. In 2016, more than 200 employees
volunteered close to 1,400 hours at various organizations. We are proud to offer this benefit
to our employees and we expect the number of participants to grow substantially in
coming years.
n “Great attitudes at peak altitudes” is the tagline for our newly named Rocky Mountain
Regional Office in Colorado, which was formerly known as the Denver Regional Office. This
new name is more all-encompassing of the region, allowing us the opportunity to develop a
strong brand identity that our employees can connect with and commit to.
n UFG has long valued the contributions of women to our business and is proud of
the fact that women currently make up approximately 60 percent of our employee
workforce and 50 percent of our managerial and supervisory positions, as well
as one third of the seats on our board of directors. To show our support for
women in the workforce, UFG joined the EPIC Corporate Challenge in 2016, which brings
together Iowa businesses to formally commit to growing and retaining women at all levels of
company leadership. As a company, we are excelling in the majority of the EPIC goals and will
maintain our strong commitment to recruiting and retaining women at UFG and monitoring
and addressing any gender-based pay differences. Our main focus area is to increase the
percentage of women among the top 10 percent of our senior positions.
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Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31,
2016
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______
to ______
Commission File Number 001-34257
UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of
incorporation or organization)
45-2302834
(I.R.S Employer Identification No.)
118 Second Avenue SE
Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 399-5700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO
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 NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). YES NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2016 was approximately $1.0 billion. For
purposes of this calculation, all directors and executive officers of the registrant are considered affiliates. As of February 24, 2017, 25,459,017
shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, for its annual
shareholder meeting to be held on May 17, 2017.
Table of Contents
FORM 10-K TABLE OF CONTENTS
Forward-Looking Information
PART I:
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II:
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III:
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV:
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
Exhibit 12
Exhibit 21
Exhibit 23.1
Exhibit 23.2
Exhibit 23.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
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FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of
1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-
looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that
could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based
on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant,"
the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by
management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s),"
"estimate(s)," "goal(s)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will
continue," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a
discussion of future operations, financial performance or financial condition, are intended to identify forward-
looking statements. See Part I, Item 1A "Risk Factors" of this report for more information concerning factors that
could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include but are not
limited to the following:
• The frequency and severity of claims, including those related to catastrophe losses and the impact those claims
have on our loss reserve adequacy; the occurrence of catastrophic events, including international events,
significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics;
• The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses and our
life insurance reserve for future policy benefits;
• Geographic concentration risk in both property and casualty insurance and life insurance segments;
• The potential disruption of our operations and reputation due to unauthorized data access, cyber-attacks or
cyber-terrorism and other security breaches;
• Developments in general economic conditions, domestic and global financial markets, interest rates and other-
than-temporary impairment losses that could affect the performance of our investment portfolio;
• Our ability to effectively underwrite and adequately price insured risks;
• Changes in industry trends, an increase in competition and significant industry developments;
• Litigation or regulatory actions that could require us to pay significant damages, fines or penalties or change the
way we do business;
• Lowering of one or more of the financial strength ratings of our operating subsidiaries or our issuer credit
ratings and the adverse impact such action may have on our premium writings, policy retention, profitability
and liquidity;
• Governmental actions, policies and regulations, including, but not limited to, domestic health care reform,
financial services regulatory reform, corporate governance, new laws or regulations or court decisions
interpreting existing laws and regulations or policy provisions; laws, regulations and stock exchange
requirements relating to corporate governance and the cost of compliance;
• Our relationship with and the financial strength of our reinsurers; and
• Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products
through our independent agent/agency distribution network.
These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to
differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are
made. Except as required under the federal securities laws and the rules and regulations of the Securities and
Exchange Commission ("SEC"), we do not have any intention or obligation to update publicly any forward-looking
statements, whether as a result of new information, future events, or otherwise.
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PART I.
ITEM 1. BUSINESS
GENERAL DESCRIPTION
United Fire Group, Inc. ("UFG", "United Fire", the "Registrant", the "Company", "we", "us", or "our") and its
consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance and
life insurance and selling annuities through a network of independent agencies. Our insurance company subsidiaries
are currently licensed as a property and casualty insurer in 46 states, plus the District of Columbia and as a life
insurer in 37 states. United Fire & Casualty Company was incorporated in Iowa in January 1946. Our principal
executive office is located at 118 Second Avenue SE, Cedar Rapids, Iowa 52401; telephone: 319-399-5700.
United Fire Group, Inc. owns 100 percent of one subsidiary, United Fire & Casualty Company. United Fire &
Casualty Company owns 100 percent of eight subsidiaries: (1) United Life Insurance Company; (2) Addison
Insurance Company; (3) Lafayette Insurance Company; (4) United Fire & Indemnity Company; (5) Mercer
Insurance Company; (6) Financial Pacific Insurance Company; (7) UFG Specialty Insurance Company; and (8)
United Real Estate Holdings Company, LLC. Mercer Insurance Company owns 100 percent of two subsidiaries: (1)
Franklin Insurance Company; and (2) Mercer Insurance Company of New Jersey, Inc. United Fire Lloyds is an
affiliate of United Fire & Indemnity Company.
In 2015, the Company dissolved three of its holding companies in order to flatten our organizational chart. The
companies dissolved were American Indemnity Financial Corporation, Mercer Insurance Group, Inc. and Financial
Pacific Insurance Group, Inc. In addition, Texas General Indemnity Company was renamed to UFG Specialty
Insurance Company on July 1, 2015.
Holding Company Reorganization
On February 1, 2012, we completed a holding company reorganization (the "Reorganization") of United Fire Group,
Inc., United Fire & Casualty Company, and UFC MergeCo, Inc., an Iowa corporation formed for the purpose of
facilitating the Reorganization. The Reorganization agreement was approved and adopted by United Fire & Casualty
Company shareholders at a special meeting of shareholders held on January 24, 2012.
The Reorganization agreement provided for the merger of United Fire & Casualty Company with UFC MergeCo,
Inc., with United Fire & Casualty Company surviving the merger as a wholly owned subsidiary of United Fire
Group, Inc. Each share of common stock, par value $3.33 1/3 per share, of United Fire & Casualty Company issued
and outstanding immediately prior to the effective time of the merger, converted into one duly issued, fully paid and
nonassessable share of common stock, par value $0.001 per share, of United Fire Group, Inc. In addition, each
outstanding option to purchase or right to acquire shares of United Fire & Casualty Company common stock was
automatically converted into an option to purchase or right to acquire, upon the same terms and conditions, an
identical number of shares of United Fire Group, Inc. common stock.
Upon completion of the Reorganization, United Fire Group, Inc., an Iowa corporation, replaced United Fire &
Casualty Company, an Iowa corporation, as the publicly held corporation, and the holders of United Fire & Casualty
Company common stock then held the same number of shares at the same ownership percentage of United Fire
Group, Inc. as they held of United Fire & Casualty Company immediately prior to the Reorganization. On February
2, 2012, shares of United Fire Group, Inc. common stock commenced trading on the NASDAQ Global Select
Market under the ticker symbol "UFCS."
Employees
As of December 31, 2016, we employed 1,091 full-time employees and 21 part-time employees. We are not a party
to any collective bargaining agreement.
Reportable Segments
We report our operations in two business segments: property and casualty insurance and life insurance. Our property
and casualty insurance segment is comprised of commercial lines insurance, including surety bonds, personal lines
insurance and assumed reinsurance. Our life insurance segment is comprised of deferred and immediate fixed
annuities, universal life insurance products and traditional life insurance products. A table reflecting revenues, net
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income and assets attributable to our operating segments is included in Part II, Item 8, Note 10 "Segment
Information." All intercompany transactions have been eliminated in consolidation.
All of our property and casualty insurance subsidiaries and our affiliate belong to an intercompany reinsurance
pooling arrangement. On July 1, 2015, UFG Specialty Insurance Company entered the pooling arrangement. Pooling
arrangements permit the participating companies to rely on the capacity of the entire pool's capital and surplus,
rather than being limited to policy exposures of a size commensurate with each participant's own surplus level.
Under such arrangements, the members share substantially all of the insurance business that is written and allocate
the combined premiums, losses and expenses based on percentages defined in the arrangement.
Our life insurance segment consists solely of the operations of United Life Insurance Company.
Available Information
We provide free and timely access to all our reports filed with the SEC in the Investor Relations section of our
website at www.unitedfiregroup.com. Under the "Investor Relations" tab, select "Financial Information" and then,
under the "Investor Relations" tab, select "SEC Filings" to view the list of our SEC filings, which includes annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, beneficial
ownership reports on Forms 3, 4 and 5 and amendments to reports filed or furnished pursuant to Section 13(a), 15(d)
or 16(a) of the Exchange Act. Such reports are made available as soon as reasonably practicable after they are filed
with or furnished to the SEC.
Our Code of Ethics and Business Conduct is also available at www.unitedfiregroup.com in the Investor Relations
section. To view it, under the "Investor Relations" tab, select "Corporate Governance" and then "Code of Ethics and
Business Conduct."
Free paper copies of any materials that we file with or furnish to the SEC can also be obtained by writing to Investor
Relations, United Fire Group, Inc., 118 Second Avenue SE, Cedar Rapids, Iowa 52401.
MARKETING AND DISTRIBUTION
We market our products through our home office in Cedar Rapids, Iowa, and five regional offices: (1) Westminster,
Colorado, a suburb of Denver; (2) Webster, Texas, a suburb of Houston; (3) Pennington, New Jersey; (4) Los
Angeles, California; and (5) Rocklin, California. We are represented through approximately 1,200 independent
property and casualty agencies and by approximately 1,350 independent life agencies.
Property and Casualty Insurance Segment
In 2016, 2015 and 2014 the direct statutory premiums written by our property and casualty insurance operations
were distributed as follows:
(In Thousands)
2016
2015
2014
2016
2015
2014
Years Ended December 31,
% of Total
$
156,926 $
142,485 $
122,559
15.6%
15.4%
14.6%
Texas
California
Iowa
Missouri
New Jersey
Minnesota
Colorado
Illinois
Louisiana
117,669
105,948
58,964
52,232
51,033
47,678
43,666
38,219
109,420
99,949
53,867
50,979
44,993
45,805
43,381
36,594
92,754
97,790
50,704
51,436
39,844
40,291
41,760
36,733
264,712
838,583
11.7
10.5
5.9
5.2
5.1
4.7
4.3
3.8
11.8
10.8
5.8
5.5
4.9
4.9
4.7
3.9
11.1
11.7
6.0
6.1
4.8
4.8
5.0
4.4
33.2
32.3
31.5
100.0%
100.0%
100.0%
All Other States
333,788
299,027
Direct Statutory Premiums Written
$
1,006,123 $
926,500 $
We staff our regional offices with underwriting, claims and marketing representatives and administrative
technicians, all of whom provide support and assistance to the independent agencies. Also, home office staff
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technicians and specialists provide support to our subsidiaries, regional offices and independent agencies. We use
management reports to monitor subsidiary and regional offices for overall results and conformity to our business
policies.
Competition
The property and casualty insurance industry is highly competitive. We compete with numerous property and
casualty insurance companies in the regional and national market, many of which are substantially larger and have
considerably greater financial and other resources. Except for regulatory considerations, there are limited barriers to
entry into the insurance industry. Our competitors may be domestic or foreign, as well as licensed or unlicensed. The
exact number of competitors within the industry is not known. Insurers compete on the basis of reliability, financial
strength and stability, ratings, underwriting consistency, service, business ethics, price, performance, capacity, policy
terms and coverage conditions.
In addition, because our products are marketed exclusively through independent insurance agencies, most of which
represent more than one company, we face competition within each agency and competition to retain qualified
independent agents. Our competitors include companies that market their products through agents, as well as
companies that sell insurance directly to their customers.
Because we rely solely on independent agencies, we offer a competitive commissions program and a rewarding
profit-sharing plan as incentives for agents to place high-quality property and casualty insurance business with us.
Property and casualty insurance agencies will receive profit-sharing payments of $16.1 million in 2017, based on
profitable business produced by the agencies in 2016. In 2016 for 2015 business, agencies received $21.2 million in
profit-sharing payments and in 2015 for 2014 business, agencies received $17.6 million in payments.
Our competitive advantages include our commitment to:
•
Strong agency relationships —
A stable workforce, with an average duration of employment of approximately 10.2 years, allows
our agents to work with the same, highly-experienced personnel each day.
Our organization is relatively flat, allowing our agents to be close to the highest levels of
management and ensuring that our agents will receive answers quickly to their questions.
• Exceptional service — our agents and policyholders always have the option to speak with a real person.
•
Fair and prompt claims handling — we view claims as an opportunity to prove to our customers that they
have chosen the right insurance company.
• Disciplined underwriting — we empower our underwriters with the knowledge and tools needed to make
good decisions for the Company.
•
Superior loss control services — our loss control representatives make multiple visits to businesses and job
sites each year to ensure safety.
• Effective and efficient use of technology — we use technology to provide enhanced service to our agents
and policyholders, not to replace our personal relationships, but to reinforce them.
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Life Insurance Segment
Our life insurance subsidiary markets its products primarily in the Midwest, East Coast and West. In 2016, 2015 and
2014 the direct statutory premiums written by our life insurance operations were distributed as follows:
(In Thousands)
2016
2015
2014
2016
2015
2014
Years Ended December 31,
% of Total
Iowa
Minnesota
Wisconsin
Illinois
Nebraska
All Other States
$
41,559 $
47,616 $
14,289
12,578
12,481
10,351
47,014
13,269
12,513
16,128
9,334
47,236
69,543
20,325
22,411
19,428
11,382
58,887
30.1%
10.3
9.1
9.0
7.5
34.0
32.6%
34.4%
9.1
8.6
11.0
6.4
32.3
10.1
11.1
9.6
5.6
29.2
Direct Statutory Premiums Written
$
138,272 $
146,096 $
201,976
100.0%
100.0%
100.0%
Competition
We encounter significant competition in all lines of our life and fixed annuity business from other life insurance
companies and other providers of financial services. Since our products are marketed exclusively through
independent life insurance agencies that typically represent more than one company, we face competition within our
agencies. Competitors include companies that market their products through agents, as well as companies that sell
directly to their customers. The exact number of competitors within the industry is not known.
To attract and maintain relationships with our independent life insurance agencies, we offer competitive commission
rates and other sales incentives. Our life insurance segment achieves a competitive advantage by offering products
that are simple and straightforward, by providing outstanding customer service, by being accessible to our agents
and customers, and by using technology in a variety of ways to assist our agents and improve the delivery of service
to our policyholders.
OPERATING SEGMENTS
Information specific to the reportable business segments in our operations, including products, pricing and
seasonality of premiums written is incorporated by reference from Note 10 "Segment Information" contained in
Part II, Item 8, "Financial Statements and Supplementary Data." Additionally, for a detailed discussion of our
operating results by segment, refer to the "Consolidated Results of Operations" section in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations."
REINSURANCE
Incorporated by reference from Note 4 "Reinsurance" contained in Part II, Item 8, "Financial Statements and
Supplementary Data."
RESERVES
Property and Casualty Insurance Segment
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such
property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to
property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates
the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.
Liabilities for loss and loss settlement expenses reflect management's best estimates at a given point in time of what
we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"),
based on known facts, circumstances, and historical trends.
The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag
in claim reporting) requires significant work to reasonably project expected future claim reporting and payment
patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written
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are incurring higher than expected losses, we will take action that may include, among other things, increasing the
related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we
make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc. ("Regnier"), to render
an opinion as to the reasonableness of our statutory reserves annually. The actuarial opinion is filed in those states
where we are licensed.
On a quarterly basis, United Fire's internal actuary performs a detailed actuarial review of IBNR reserves. This
review includes a comparison of results from the most recent analysis of reserves completed by both our internal and
external actuaries. Senior management meets with our internal actuary to review, on a quarterly basis, the adequacy
of carried reserves based on results from this actuarial analysis. There are two fundamental types or sources of IBNR
reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique
circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific
IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate.
We do not discount loss reserves based on the time value of money.
For a more detailed discussion of our loss reserves, refer to the "Critical Accounting Policies" section in Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 5
"Reserves for Losses and Loss Settlement Expenses" contained in Part II, Item 8, "Financial Statements and
Supplementary Data."
Life Insurance Segment
We calculate the policy reserves reported in our Consolidated Financial Statements in accordance with GAAP. For
our fixed annuities and universal life policies, we establish a benefit reserve at the time of policy issuance in an
amount equal to the deposits received. Subsequently, we adjust the benefit reserve for any additional deposits,
interest credited and partial or complete withdrawals, as well as insurance and other expense charges. We base
policy reserves for other life products on the projected contractual benefits and expenses and interest rates
appropriate to those products. We base reserves for accident and health products, which are a minor portion of our
reserves, on appropriate morbidity tables.
We determine reserves for statutory purposes based upon mortality rates and interest rates specified by Iowa state
law. Our life insurance subsidiary's reserves meet or exceed the minimum statutory requirements. Griffith, Ballard &
Company, an independent actuary, assists us in developing and analyzing our reserves on both a GAAP and statutory
basis.
For further discussion of our life insurance segment's reserves, refer to the "Critical Accounting Policies" section in
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
INVESTMENTS
Incorporated by reference from Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," under the headings "Investments," "Market Risk" and "Critical Accounting Policies"; and
Note 1 "Significant Accounting Policies" under the headings "Investments," Note 2 "Summary of Investments," and
Note 3 "Fair Value of Financial Instruments," contained in Part II, Item 8, "Financial Statements and Supplementary
Data."
REGULATION
The insurance industry is subject to comprehensive and detailed regulation and supervision. Each jurisdiction in
which we operate has established supervisory agencies with broad administrative powers. While we are not aware of
any currently proposed or recently enacted state or federal regulation that would have a material impact on our
operations, we cannot predict the effect that future regulatory changes might have on us.
State Regulation
We are subject to extensive regulation, primarily at the state level. The method, extent and substance of such
regulation varies by state, but generally has its source in National Association of Insurance Commissioners
("NAIC") model laws and regulations that establish standards and requirements for conducting the business of
insurance and that delegate regulatory authority to a state regulatory agency. Moreover, the NAIC Accreditation
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Program requires state regulatory agencies to meet baseline standards of solvency regulation, particularly with
respect to regulation of multi-state insurers. In general, such regulation is intended for the protection of those who
purchase or use our insurance products, and not our shareholders. These rules have a substantial effect on our
business and relate to a wide variety of matters including: insurance company licensing and examination; the
licensing of insurance agents and adjusters; price setting or premium rates; trade practices; approval of policy forms;
claims practices; restrictions on transactions between our subsidiaries and their affiliates, including the payment of
dividends; investments; underwriting standards; advertising and marketing practices; capital adequacy; and the
collection, remittance and reporting of certain taxes, licenses and fees.
The state laws and regulations that have the most significant effect on our insurance operations and financial
reporting are discussed below.
Insurance Holding Company Regulation
We are regulated as an insurance holding company system in the states of domicile of our property and casualty
insurance companies and life insurance subsidiary: Iowa (United Fire & Casualty Company, United Life Insurance
Company, UFG Specialty Insurance Company and Addison Insurance Company), California (Financial Pacific
Insurance Company), Louisiana (Lafayette Insurance Company), New Jersey (Mercer Insurance Company of New
Jersey, Inc.), Pennsylvania (Mercer Insurance Company and Franklin Insurance Company) and Texas (United Fire &
Indemnity Company and United Fire Lloyds). These regulations require that we annually furnish financial and other
information about the operations of the individual companies within our holding company system. Generally, the
insurance laws of these states provide that notice to the state insurance commissioner is required before finalizing
any transaction affecting the ownership or control of an insurer and before finalizing certain material transactions
between an insurer and any person or entity within its holding company system. In addition, some of those
transactions cannot be finalized without the commissioner's prior approval.
Most states have now adopted the version of the Model Insurance Holding Company System Regulation Act and
Regulation as amended by the NAIC in December 2010 (the "Amended Model Act") to introduce the concept of
"enterprise risk" within an insurance company holding system. Enterprise risk is defined as any activity,
circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly,
is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance
holding company system as a whole. The Amended Model Act imposes more extensive informational requirements
on us, including requiring us to prepare an annual enterprise risk report that identifies the material risks within our
insurance company holding system that could pose enterprise risk to our licensed insurers. Compliance with new
reporting requirements under the Amended Model Act began for us in 2014 for the 2013 fiscal year.
Restrictions on Shareholder Dividends
As an insurance holding company with no independent operations or source of revenue, our capacity to pay
dividends to our shareholders is based on the ability of our insurance company subsidiaries to pay dividends to us.
The ability of our subsidiaries to pay dividends to us is regulated by the laws of their state of domicile. Under these
laws, insurance companies must provide advance informational notice to the domicile state insurance regulatory
authority prior to payment of any dividend or distribution to its shareholders. Prior approval from the state insurance
regulatory authority must be obtained before payment of an "extraordinary dividend" as defined under the state's
insurance code. The amount of ordinary dividends that may be paid to us is subject to certain limitations, the
amounts of which change each year. In all cases, we may pay dividends only from our earned surplus. Refer to the
"Market Information" section of Part II, Item 5, "Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities," and Note 6 "Statutory Reporting, Capital Requirements and
Dividends and Retained Earnings Restrictions," contained in Part II, Item 8, "Financial Statements and
Supplementary Data" for additional information about the dividends we paid during 2016.
Price Regulation
Nearly all states have insurance laws requiring us to file rate schedules, policy or coverage forms, and other
information with the state's regulatory authority. In certain states, rate schedules, policy forms, or both, must be
approved prior to use. While insurance laws vary from state to state, their objectives are generally the same: an
insurance rate cannot be excessive, inadequate or unfairly discriminatory. The speed with which we can change our
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rates in response to competition or in response to increasing costs depends, in part, on the willingness of state
regulators to allow adequate rates for the business we write.
Investment Regulation
We are subject to various state regulations requiring investment portfolio diversification and limiting the
concentration of investments we may maintain in certain asset categories. Failure to comply with these regulations
leads to the treatment of nonconforming investments as nonadmitted assets for purposes of measuring statutory
surplus. Further, in some instances, state regulations require us to sell certain nonconforming investments.
Exiting Geographic Markets; Canceling and Nonrenewing Policies
Most states regulate our ability to exit a market. For example, states limit, to varying degrees, our ability to cancel
and nonrenew insurance policies. Some states prohibit us from withdrawing one or more types of insurance business
from the state, except upon prior regulatory approval. Regulations that limit policy cancellation and nonrenewal may
restrict our ability to exit unprofitable markets.
Insurance Guaranty Associations
Each state has insurance guaranty association laws. Membership in a state's insurance guaranty association is
generally mandatory for insurers wishing to do business in that state. Under these laws, associations may assess their
members for certain obligations that insolvent insurance companies have incurred with regard to their policyholders
and claimants.
Typically, states assess each solvent association member with an amount related to that member's proportionate
share of business written by all association members within the state. Most state guaranty associations allow solvent
insurers to recoup the assessments they are charged through future rate increases, surcharges or premium tax credits.
However, there is no assurance that we will ultimately recover these assessments. We cannot predict the amount and
timing of any future assessments or refunds under these laws.
Shared Market and Joint Underwriting Plans
State insurance regulations often require insurers to participate in assigned risk plans, reinsurance facilities and joint
underwriting associations. These are mechanisms that generally provide applicants with various types of basic
insurance coverage that may not otherwise be available to them through voluntary markets. Such mechanisms are
most commonly instituted for automobile and workers' compensation insurance, but many states also mandate
participation in Fair Access to Insurance Requirements ("FAIR") Plans or Windstorm Plans, which provide basic
property coverage. Participation is based upon the amount of a company's voluntary market share in a particular
state for the classes of insurance involved. Policies written through these mechanisms may require different
underwriting standards and may pose greater risk than those written through our voluntary application process.
Statutory Accounting Rules
For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, state
laws require us to calculate and report certain data according to statutory accounting rules as defined in the NAIC
Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance,
statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate
comparisons of the performance of insurance companies.
Insurance Reserves
State insurance laws require that insurance companies analyze the adequacy of their reserves annually. Our
appointed actuaries must submit an opinion that our statutory reserves are adequate to meet policy claims-paying
obligations and related expenses.
Financial Solvency Ratios
The NAIC annually calculates 13 financial ratios to assist state insurance regulators in monitoring the financial
condition of insurance companies. A "usual range" of results for each of these ratios is used by insurance regulators
as a benchmark. Departure from the usual range on four or more of the ratios could lead to inquiries from individual
state insurance departments as to certain aspects of a company's business. In addition to the financial ratios, states
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also require us to calculate a minimum capital requirement for each of our insurance companies based on individual
company insurance risk factors. These "risk-based capital" results are used by state insurance regulators to identify
companies that require regulatory attention or the initiation of regulatory action. At December 31, 2016, all of our
insurance companies had capital in excess of the required levels.
Federal Regulation
Although the federal government and its regulatory agencies generally do not directly regulate the business of
insurance, federal initiatives and legislation often have an impact on our business. These initiatives and legislation
include tort reform proposals, proposals addressing natural catastrophe exposures, terrorism risk mechanisms,
federal financial services reforms, various tax proposals affecting insurance companies, and possible regulatory
limitations, impositions and restrictions arising from the Dodd-Frank Wall Street Reform and Consumer Protection
Act ("Dodd-Frank"), and the Patient Protection and Affordable Care Act.
Various legislative and regulatory efforts to reform the tort liability system have impacted and will continue to
impact our industry. Although there has been some tort reform with positive impact to the insurance industry, new
causes of action and theories of damages continue to be proposed in state court actions or by federal or state
legislatures that continue to expand liability for insurers and their policyholders. For example, some state
legislatures have from time to time considered legislation addressing direct actions against insurers related to bad
faith claims. As a result of this unpredictability in the law, insurance underwriting is expected to continue to be
difficult in commercial lines, professional liability and other specialty coverages.
Dodd-Frank expanded the federal presence in insurance oversight and may increase regulatory requirements that are
applicable to us. Dodd-Frank's requirements include streamlining the state-based regulation of reinsurance and non-
admitted insurance (property or casualty insurance placed with insurers that are eligible to accept insurance, but are
not licensed to write insurance in a particular state). Dodd-Frank also established the Federal Insurance Office
within the U.S. Department of the Treasury that is authorized to, among other things, gather data and information to
monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters, and
preempt state insurance measures under certain circumstances.
Dodd-Frank also contains a number of provisions related to corporate governance and disclosure matters. In
response to Dodd-Frank, the SEC has adopted or proposed rules regarding director independence, director and
officer hedging activities, executive compensation clawback policies, compensation advisor independence, pay
versus performance disclosures, internal pay equity disclosures, and shareholder proxy access. We continue to
monitor developments under Dodd-Frank and their impact on us, insurers of similar size and the insurance industry
as a whole.
The Patient Protection and Affordable Care Act and the related amendments in the Health Care and Education
Reconciliation Act may increase our operating costs and underwriting losses. This landmark legislation continues to
result in numerous changes within the health care industry that could create additional operating costs for us,
particularly with respect to our workers' compensation products.
FINANCIAL STRENGTH AND ISSUER CREDIT RATING
Our financial strength, as measured by statutory accounting principles, is regularly reviewed by an independent
rating agency that assigns a rating based upon criteria such as results of operations, capital resources and minimum
policyholders' surplus requirements. An insurer's financial strength rating is one of the primary factors evaluated by
those in the market to purchase insurance. A poor rating indicates that there is an increased likelihood that the
insurer could become insolvent and therefore not able to fulfill its obligations under the insurance policies it issues.
This rating can also affect an insurer's level of premium writings, the lines of business it can write and, for insurers
like us that are also public registrants, the market value of its securities.
Our property and casualty insurers are rated by A.M. Best Company ("A.M. Best") on a group basis. Our pooled
property and casualty insurers have all received an "A" (Excellent) financial strength rating from A.M. Best. Our life
insurance subsidiary has received an "A-" (Excellent) financial strength rating from A.M. Best. According to A.M.
Best, companies rated "A" and "A-" have "an excellent ability to meet their ongoing obligations to policyholders."
A.M. Best also assigns issuer credit ratings based on a company's ability to repay its debts. All of our property and
casualty insurers have received an issuer credit rating of "a" from A.M. Best. Our life insurance subsidiary has
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received an issuer credit rating of "a-" from A.M. Best. Beginning in 2012, our holding company parent was also
rated by A.M. Best, receiving an issuer credit rating of "bbb."
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information concerning the following executive officers:
Name
Age
Position
Randy A. Ramlo
Michael T. Wilkins
Dawn M. Jaffray
Barrie W. Ernst
Neal R. Scharmer
Michael J. Sheeley
55
53
50
62
60
56
President and Chief Executive Officer
Executive Vice President and Chief Operating Officer
Senior Vice President and Chief Financial Officer
Vice President and Chief Investment Officer
Vice President, General Counsel and Corporate Secretary
Vice President and Chief Operating Officer, United Life Insurance Company
A brief description of the business experience of these officers follows:
Randy A. Ramlo became our President and Chief Executive Officer in May 2007. He previously served as our Chief
Operating Officer from May 2006 until May 2007, as Executive Vice President from May 2004 until May 2007, and
as Vice President, Fidelity and Surety, from November 2001 until May 2004. He also worked as an underwriting
manager in our Great Lakes region. Mr. Ramlo began his employment with us as an underwriter in 1984.
Michael T. Wilkins became our Executive Vice President and Chief Operating Officer in May 2014. He served as
our Executive Vice President, Corporate Administration, from May 2007 to May 2014. He was our Senior Vice
President, Corporate Administration, from May 2004 until May 2007, our Vice President, Corporate Administration,
from August 2002 until May 2004 and the resident Vice President in our Lincoln regional office from 1998 until
2002. Prior to 1998, Mr. Wilkins held various other positions within the Company since joining us in 1985.
Dawn M. Jaffray became our Senior Vice President and Chief Financial Officer in May 2015. Ms. Jaffray previously
served as Chief Financial Officer of Soleil Advisory Group, a consulting firm specializing in operational consulting,
mergers and acquisitions, investment and strategy from 2009 to 2015. Prior to her service with Soleil Advisory
Group, Ms. Jaffray held numerous positions in insurance operations and mergers/acquisition activities, primarily in
the role of principal financial officer. Ms. Jaffray's business experience has been focused in particular on insurance,
finance and capital management.
Barrie W. Ernst is our Vice President and Chief Investment Officer. He joined us in August 2002. Previously, Mr.
Ernst served as Senior Vice President of SCI Financial Group in Cedar Rapids, Iowa, where he worked from 1980 to
2002. SCI Financial Group was a regional financial services firm providing brokerage, insurance and related
services to its clients.
Neal R. Scharmer was appointed our Vice President and General Counsel in May 2001 and Corporate Secretary in
May 2006. He joined us in 1995.
Michael J. Sheeley was appointed Vice President and Chief Operating Officer of United Life Insurance Company in
March 2011. Prior to assuming leadership of United Life Insurance Company, Mr. Sheeley served us as personal
lines underwriting manager from 1991 to 2011. He has also served in various capacities including commercial
underwriting and claims since joining us in 1985.
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ITEM 1A. RISK FACTORS
We provide readers with the following discussion of risks and uncertainties relevant to our business. These are
factors that we believe could cause our actual results to differ materially from our historic or anticipated results. We
could also be adversely affected by other factors, in addition to those listed here. Additional information concerning
factors that could cause actual results to differ materially from those contained in the forward-looking statements is
set forth in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Relating to Our Business
The occurrence, frequency and severity of catastrophe losses are unpredictable and may adversely affect our
results of operations, liquidity and financial condition.
Our property and casualty insurance operations expose us to claims arising from catastrophic events affecting
multiple policyholders. Such catastrophic events consist of various natural disasters, including, but not limited to,
hurricanes, tornadoes, windstorms, hailstorms, fires and wildfires, earthquakes, severe winter weather, tropical
storms, volcanic eruptions and man-made disasters such as terrorist acts (including biological, chemical or
radiological events), explosions, infrastructure failures and results from political instability. We have exposure to
tropical storms and hurricanes along the Gulf Coast, Eastern and Southeastern coasts of the United States. We have
exposure to tornadoes, windstorms and hail storms throughout the United States. We have exposure to earthquakes
along the West Coast and the New Madrid Fault area. Our automobile and inland marine business also exposes us to
losses arising from floods and other perils.
Property damage resulting from catastrophes is the greatest risk of loss we face in the ordinary course of our
business. We have exposure to catastrophe losses under both our commercial insurance policies and our personal
insurance policies. The losses from catastrophic events are a function of both the extent of our exposure, the
frequency and severity of the events themselves and the level of reinsurance assumed and ceded. For example, the
losses experienced from a tornado will vary on whether the location of the tornado was in a highly populated or
unpopulated area, the concentration of insureds in that area and the severity of the tornado. Increases in the value
and geographic concentration of insured property and the effects of inflation could increase the severity of claims
from a catastrophic event.
Long-term weather trends may be changing and new types of catastrophe losses may be developing due to climate
change, which is a phenomenon that has been associated with extreme weather events linked to rising temperatures,
including effects on global weather patterns, greenhouse gases, sea, land and air temperature, sea levels, rain and
snow. While the emerging science regarding climate change and its connection to extreme weather events continues
to be debated, in recent years there has been an increase in frequency and severity of tornadoes and hailstorms, and
hurricanes are now impacting areas further inland than experienced in the recent past. Such changes in climate
conditions could cause our underlying modeling data to be less accurate, limiting our ability to evaluate and manage
our risk.
In addition, as with catastrophe losses generally, it can take a long time for us to determine our ultimate losses
associated with a particular catastrophic event. The inability to access portions of the impacted area, the complexity
of the losses, legal and regulatory uncertainty and the nature of the information available for certain catastrophic
events may affect our ability to estimate the claims and claim adjustment expense reserves. Such complex factors
include, but are not limited to: determining the cause of the damage, evaluating general liability exposures,
estimating additional living expenses, the impact of demand surge, infrastructure disruption, fraud, business
interruption costs and reinsurance collectability.
The timing of a catastrophic occurrence at the end or near the end of a reporting period may also affect the
information available to us when estimating claims and claim adjustment expense reserves for the reporting period.
As our claims experience for a particular catastrophe develops, we may be required to adjust our reserves to reflect
our revised estimates of the total cost of claims. However, because the occurrence and severity of catastrophes are
inherently unpredictable and may vary significantly from year to year and region to region, historical results of
operations may not be indicative of future results of operations.
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Catastrophes may reduce our net income, cause substantial volatility in our financial results for any fiscal quarter or
year or otherwise adversely affect our financial condition, liquidity or results of operations. Catastrophes may also
negatively affect our ability to write new business.
Following catastrophes there are also sometimes legislative, administrative and judicial decisions that seek to
expand insurance coverage for claims beyond the original intent of the policies or seek to prevent the application of
deductibles. Our ability to manage catastrophic exposure may be limited by public policy considerations, the
political environment, changes in the general economic climate and/or social responsibilities.
Our reserves for property and casualty insurance losses and loss settlement expenses and our life insurance
reserves for future policy benefits are based on estimates and may be inadequate, adversely impacting our
financial results.
We maintain insurance reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment
expenses, including the estimated cost of the claims adjustment process, for reported and unreported claims and for
future policy benefits. Our reserves may prove to be inadequate, which may result in future charges to earnings and/
or a downgrade of our financial strength rating or the financial strength ratings of our insurance company
subsidiaries.
Insurance reserves represent our best estimate at a given point in time. They are not an exact calculation of liability
but instead are complex estimates, which are a product of actuarial expertise and projection techniques from a
number of assumptions and expectations about future events, many of which are highly uncertain.
The process of estimating claims and claims adjustment expense reserves involves a high degree of judgment. These
estimates are based on historical data and the impact of various factors such as:
•
•
•
•
•
•
•
actuarial and statistical projections of the cost of settlement and administration of claims reflecting facts
and circumstances then known;
historical claims information and loss emergence patterns;
assessments of currently available data;
estimates of future trends in claims severity and frequency;
judicial theories of liability;
economic factors such as inflation;
estimates and assumptions regarding social, judicial and legislative trends, and actions such as class action
lawsuits and judicial interpretation of coverages or policy exclusions; and
•
the level of insurance fraud.
Many of these factors are not quantifiable. The inherent uncertainties of estimating reserves are greater for certain
types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to
change and in which long periods of time may elapse before a definitive determination of liability is made. Reserve
estimates are continually refined in a regular and ongoing process as experience develops and further claims are
reported and settled.
Along with other insurers, we use internal and external models in assessing our exposure to catastrophe losses that
assume various conditions and probability scenarios; however, these models do not necessarily accurately predict
future losses or accurately measure losses currently incurred. Models for catastrophes use historical information
about various catastrophes and details about our in-force business. While we use this information in our pricing and
risk managements, there are limitations with respect to their usefulness in predicting losses in any reporting period.
Such limitations lead to questionable predictive capability and post-event measurements that have not been well
understood or proven to be sufficiently reliable. In addition, the models are not necessarily reflective of our state-
specific policy language, demand surge for labor and materials or loss settlement expenses, all of which are subject
to wide variation.
For our life insurance business, we calculate life insurance product reserves based on our assumptions, including
estimated premiums we will receive over the assumed life of the policy, the timing of the event covered by the
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insurance policy and the amount of benefits or claims to be paid. The premiums that we charge and the liabilities
that we hold for future policy benefits are based on assumptions reflecting a number of factors, including the amount
of premiums that we will receive in the future, the rate of return on assets we purchase with premiums received,
expected claims, mortality, morbidity, expenses and persistency, which is the measurement of the percentage of
insurance policies remaining in force from year to year. However, due to the nature of the underlying risks and the
high degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims,
we cannot determine precisely the amounts we will ultimately pay to settle these liabilities. To the extent that actual
experience is less favorable than our underlying assumptions, we could be required to increase our liabilities, which
may harm our financial strength and reduce our profitability.
For example, if mortality rates are higher than our pricing assumptions, we will be required to make greater claims
payments on our life insurance policies than we had projected. Our results of operations may also be adversely
impacted by an increase in morbidity rates.
Actual loss and loss settlement expenses paid might exceed our reserves. If our loss reserves are insufficient, or if
we believe our loss reserves are insufficient to cover our actual loss and loss settlement expenses, we will have to
increase our loss reserves and incur charges to our earnings, which could indicate that premium levels were
insufficient. As such, deviations from one or more of these assumptions could result in a material adverse impact on
our Consolidated Financial Statements and our financial strength rating or the financial strength ratings of our
insurance company subsidiaries could be downgraded.
For a detailed discussion of our reserving process and the factors we consider in estimating reserves, refer to the
"Critical Accounting Policies" section in Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Our geographic concentration in both our property and casualty insurance and life insurance segments ties our
performance to the business, economic and regulatory conditions of certain states.
The following states provided 48.9 percent of the direct statutory premiums written for the property and casualty
insurance segment in 2016: Texas (15.6 percent), California (11.7 percent), Iowa (10.5 percent), Missouri (5.9
percent) and New Jersey (5.2 percent). The following states provided 66.0 percent of the direct statutory premiums
written for the life insurance segment in 2016: Iowa (30.1 percent), Minnesota (10.3 percent), Wisconsin (9.1
percent), Illinois (9.0 percent) and Nebraska (7.5 percent).
Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, demographic,
competitive, weather and other conditions in the principal states in which we do business. With respect to regulatory
conditions, the NAIC and state legislators continually reexamine existing laws and regulations, specifically focusing
on modifications to holding company regulations, interpretations of existing laws and the development of new laws
and regulations. In a time of financial uncertainty or a prolonged economic downturn, regulators may choose to
adopt more restrictive insurance laws and regulations. Changes in regulatory or any other of these conditions could
make it less attractive for us to do business in such states and would have a more pronounced effect on us compared
to companies that are more geographically diversified. In addition, our exposure to severe losses from localized
natural perils, such as hurricanes or hailstorms, is increased in those areas where we have written a significant
amount of property insurance policies.
Unauthorized data access, cyber attacks and other security breaches could have an adverse impact on our
business and reputation.
We rely on computer systems to conduct our business for our customer service, marketing and sales activities,
customer relationship management and producing financial statements. Our business and operations rely on secure
and efficient processing, storage and transmission of customer and Company data, including personally identifiable
information. Our ability to effectively operate our business depends upon our ability, and the ability of certain third
party vendors and business partners, to access our computer systems to perform necessary business functions, such
as providing quotes and product pricing, billing and processing premiums, administering claims, and reporting our
financial results.
We retain confidential information on our computer systems, including customer information and proprietary
business information belonging to us and our policyholders. Our business and operations depend upon our ability to
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safeguard this personally identifiable information. Our systems may be vulnerable to unauthorized access and
hackers, computer viruses, and other scenarios in which our data may be compromised.
Cyber attacks involving these systems, or those of our third party vendors, could be carried out remotely and from
multiple sources and could interrupt, damage, or otherwise adversely affect the operations of these critical systems.
Cyber attacks could result in the modification or theft of data, the distribution of false information, or the denial of
service to users. Threats to data security can emerge from a variety of sources and change rapidly, resulting in the
ongoing need to expend resources to secure our data in accordance with customer expectations and statutory and
regulatory requirements.
Any compromise of the security of our data could expose us to liability and harm our reputation, which could affect
our business and results of operations. We continually enhance our operating procedures and internal controls to
effectively support our business and comply with our regulatory and financial reporting requirements, but there can
be no assurances that we will be able to implement security measures adequate to prevent every security breach.
Although, to date, we do not believe we have experienced any material cyber attacks, the occurrence, scope and
effect of any cyber attack may remain undetected for a period of time. We maintain cyber liability insurance
coverage that provides both third-party liability and first-party insurance coverages; however, our insurance may be
insufficient to cover all losses and expenses related to a cyber attack.
Conditions in the global capital markets and the economy generally may weaken materially and adversely affect
our business and results of operations.
Our results of operations, financial position and liquidity are materially affected by conditions in the global capital
markets and the economy generally, both in the U.S. and elsewhere around the world. Recently, concerns over the
depth and breadth of the economic recovery, overall level of U.S. national debt, extraordinary monetary
accommodation by central banks, energy costs and geopolitical issues have contributed to increased uncertainty.
These factors, combined with a lack of fiscal policy leadership, reduced business and consumer confidence and
continued high unemployment, have negatively impacted the U.S. economy. Although conditions have gradually
improved since the financial crisis of 2008-2009, a meaningful deterioration in economic activity and/or capital
market liquidity could have an adverse impact on our results of operations.
Factors such as consumer spending, business investment, government spending, the volatility and strength of the
capital markets, investor and consumer confidence and inflation levels all affect the business and economic
environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized
by higher unemployment, lower family income, lower corporate earnings, lower business investment, negative
investor sentiment and lower consumer spending, the demand for our insurance products could be adversely
affected. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums
altogether. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies
causing a change in our exposure.
We are subject to certain risks related to our investment portfolio that could negatively affect our profitability.
Investment income is an important component of our net income and overall profitability. We invest premiums
received from policyholders and other available cash to generate investment income and capital appreciation, while
also maintaining sufficient liquidity to pay covered claims, operating expenses and dividends. As discussed in detail
below, general economic conditions, changes in financial markets and many other factors beyond our control can
adversely affect the value of our investments and the realization of investment income.
We primarily manage our investment portfolio internally under required statutory guidelines and investment
guidelines approved by our Board of Directors and the boards of directors of our subsidiaries. Although these
guidelines stress diversification and capital preservation, our investments are subject to a variety of risks, including:
• Credit Risk - The value of our investment in marketable securities is subject to impairment as a result of
deterioration in the creditworthiness of the issuer. Such impairments could reduce our net investment
income and result in realized investment losses. The vast majority of our investments (97.8% at
December 31, 2016) are made in investment-grade securities. Although we try to manage this risk by
diversifying our portfolio and emphasizing credit quality, our investments are subject to losses as a result of
a general downturn in the economy.
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•
Interest Rate Risk - A significant portion of our investment portfolio (89.2 percent at December 31, 2016)
consists of fixed income securities, primarily corporate and municipal bonds (71.7 percent at December 31,
2016). These securities are sensitive to changes in interest rates. An increase in interest rates typically
reduces the fair value of fixed income securities, while a decline in interest rates reduces the investment
income earned from future investments in fixed income securities. In recent periods, interest rates have
been at or near historic lows. It is possible that this trend may continue for a prolonged period of time. We
generally hold our fixed income securities to maturity, so our interest rate exposure does not usually result
in realized losses. However, rising interest rates could result in a significant reduction of the book value of
our fixed maturity investments. Low interest rates, and low investable yields, could adversely impact our
net earnings as reinvested funds produce lower investment income.
Fluctuations in interest rates may cause increased surrenders and withdrawals from our life insurance and
annuity products. In periods of rising interest rates, or if long-term interest rates rise dramatically within a
very short time period, certain segments of our life insurance and annuities businesses may be exposed to
disintermediation risk, which refers to the risk that surrenders and withdrawals of life insurance policies
and annuity contracts, along with policy loans, may increase as policyholders seek to buy products with
perceived higher rates of return. This may require us to liquidate assets in an unrealized loss position. Due
to the long-term nature of the liabilities associated with certain segments of our life insurance business,
sustained declines in long-term interest rates may subject us to reinvestment risks and increased hedging
costs. In other situations, a sudden change in interest rates may result in an unexpected change in the
duration of certain life insurance liabilities, creating asset and liability duration mismatches.
Interest rates are highly sensitive to many factors beyond our control including general economic
conditions, changes in governmental regulations and monetary policy, and national and international
political conditions.
•
Liquidity Risk - We seek to match the maturities of our investment portfolio with the estimated payment
date of our loss and loss adjustment expense reserves to ensure strong liquidity and avoid having to
liquidate securities to fund claims. Risk such as inadequate loss and loss adjustment reserves or unfavorable
trends in litigation could potentially result in the need to sell investments to fund these liabilities. This
could result in significant realized losses depending on the conditions of the general market, interest rates
and credit profile of individual securities.
Further, our investment portfolio is subject to increased valuation uncertainties when investment markets
are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing
the risk that the estimated fair value (i.e., the carrying amount) of the portion of the investment portfolio
that is carried at fair value as reflected in our financial statements is not reflective of prices at which actual
transactions could occur.
• Market Risk - Our investments are subject to risks inherent in the global financial system and capital
markets. The value and risks of our investments may be adversely affected if the functioning of those
markets is disrupted or otherwise affected by local, national or international events, such as: changes in
regulation or tax policy; changes in legislation relating to bankruptcy or other proceedings; infrastructure
failures; wars or terrorist attacks; the overall health of global economies; a significant change in inflation
expectations; a significant devaluation of government or private sector credit and/or currency values; and
other factors or events not specifically attributable to changes in interest rates, credit losses, and liquidity
needs.
• Credit Spread Risk - Our exposure to credit spreads primarily relates to market price variability and
reinvestment risk associated with changes in credit spreads. Valuations may include assumptions or
estimates that may have significant period-to-period changes from market volatility, which could have a
material adverse effect on our results of operations or financial condition.
Our fixed maturity investment portfolio is invested substantially in state, municipal and political subdivision
bonds. Our fixed maturity investment portfolio could be subject to default or impairment, in particular:
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• Due to the impact of the financial crisis that occurred in 2008 and 2009, many states and local governments
have been operating under deficits or projected deficits which may have an impact on the valuation of our
municipal bond portfolio.
• There is a risk of widespread defaults which may increase if some issuers chose to voluntarily default
instead of implementing fiscal measures such as increasing tax rates or reducing spending. Such risk may
also increase if there are changes in legislation permitting states, municipalities and political subdivisions to
file for bankruptcy protection where they were not permitted to before. Judicial interpretations in such
bankruptcy proceedings may also adversely affect the collectability of principal and interest, and/or
valuation of our bonds. Changes in tax laws impacting marginal tax rates, exemptions, deductions, credits
and/or the preferred tax treatment of municipal obligations could also adversely affect the market value of
municipal obligations. Since a large portion of our investment portfolio (30.8 percent at December 31,
2016) is invested in tax-exempt municipal obligations, any such changes in tax law could adversely affect
the value of our investment portfolio.
We exercise prudence and significant judgment in analyzing and validating fair values, which are primarily provided
by third parties, for securities in our investment portfolio, including those that are not regularly traded in active
markets. We also exercise prudence and significant judgment in determining whether the impairment of particular
investments is temporary or other-than-temporary. Due to the inherent uncertainties involved in these judgments, we
may incur unrealized losses and subsequently conclude that other-than-temporary write downs of our investments
are required.
Our success depends primarily on our ability to underwrite risks effectively and adequately price the risks we
underwrite.
The results of our operations and our financial condition depend on our ability to underwrite and set premium rates
accurately for a wide variety of determinable and indeterminable risks based on available information. Adequate
rates are necessary to generate premiums sufficient to pay losses, loss settlement expenses and underwriting
expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial
amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely recognize
changes in trends; and project both severity and frequency of losses with reasonable accuracy. We could under price
risks which would adversely affect our profit margins. Conversely, we could overprice risks which could reduce our
sales volume and competitiveness. Our ability to undertake these efforts successfully, and to price our products
accurately, is subject to a number of risks and uncertainties, including but not limited to:
•
the availability of sufficient reliable data and our ability to properly analyze available data;
• market and competitive conditions;
•
•
•
changes in medical care expenses and restoration costs;
our selection and application of appropriate pricing techniques; and
changes in the regulatory market, applicable legal liability standards and in the civil litigation system
generally.
The cyclical nature of the property and casualty insurance industry may affect our financial performance.
The property and casualty insurance industry is cyclical in nature and has historically been characterized by soft
markets (periods of relatively high levels of price competition, less restrictive underwriting standards and generally
low premium rates) followed by hard markets (periods of capital shortages resulting in a lack of insurance
availability, relatively low levels of price competition, more selective underwriting of risks and relatively high
premium rates). During soft markets, we may lose business to competitors offering competitive insurance at lower
prices. We may reduce our premiums or limit premium increases leading to a reduction in our profit margins and
revenues. We expect these cycles to continue.
The demand for property and casualty insurance can also vary significantly, rising as the overall level of economic
activity increases and falling as that activity decreases. Fluctuations in demand and competition could produce
underwriting results that would have a negative impact on the results of our operations and financial condition.
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The effects of emerging claim and coverage issues and class action litigation on our business are uncertain.
We are subject to certain effects of emerging or potential claims and coverage issues that arise as industry practices
and legal, judicial, social, economic and other environmental conditions change, including unexpected and
unintended issues related to claims and coverage. These issues may adversely affect our business by either extending
coverage beyond our underwriting intent or by increasing the number and/or size of claims, resulting in further
increases in our reserves. The effects of these and other unforeseen emerging claim and coverage issues are
extremely hard to predict. Examples of these issues include:
•
•
judicial expansion of policy coverage and the impact of new theories of liability;
an increase of plaintiffs targeting property and casualty insurers, including us, in purported class action
litigation regarding claims handling and other practices;
• medical developments that link health issues to particular causes, resulting in liability or workers'
compensation (for example, cumulative trauma);
•
•
•
•
claims relating to unanticipated consequences of current or new technologies;
an increase in the variety, number and size of claims relating to liability losses, which often present
complex coverage and damage valuation questions;
claims relating to potentially changing climate conditions, including higher frequency and severity of
weather-related events; and
adverse changes in loss cost trends, including inflationary pressure in medical cost and auto and home
repair costs.
A downgrade or a potential downgrade in our financial strength or issuer credit ratings could result in a loss of
business and could have a material adverse effect on our financial condition and results of operations.
Ratings are an important factor in establishing the competitive position of insurance companies. Third-party rating
agencies assess and rate the claims-paying ability, capital strength and creditworthiness of insurers and reinsurers
based on criteria established by the agencies. A.M. Best rates our property and casualty insurance companies on a
group basis. Our life insurance subsidiary receives a separate rating. Since 2012, A.M. Best has also given an issuer
credit rating to our parent holding company. The table below shows the current ratings assigned to our companies by
A.M. Best.
Property and Casualty Insurers
Life Insurer
United Fire Group, Inc.
Financial Strength Rating
A
A-
N/A
Issuer Credit Rating
a
a-
bbb
Rating Held Since
1994
1998
2012
Financial strength and issuer credit ratings are used by policyholders, insurers, reinsurers and insurance and
reinsurance intermediaries as an important means of assessing the financial strength, creditworthiness and quality of
insurers and reinsurers. These ratings are not evaluations directed to potential purchasers of our common stock and
are not recommendations to buy, sell or hold our common stock. These ratings are subject to change at any time and
could be revised downward or revoked at the sole discretion of the rating agency. Downgrades in our financial
strength ratings could adversely affect our ability to access the capital markets or could lead to increased borrowing
costs in the future. Perceptions of the Company by investors, producers, other businesses and consumers could also
be significantly impaired.
We believe that the ratings assigned by A.M. Best are an important factor in marketing our products. Our ability to
retain our existing business and to attract new business in our insurance operations depends on our ratings by this
agency. Our failure to maintain our ratings, or any other adverse development with respect to our ratings, could
cause our current and future independent agents and policyholders to choose to transact their business with more
highly rated competitors. If A.M. Best downgrades our ratings or publicly indicates that our ratings are under review,
it is likely that we will not be able to compete as effectively with our competitors and our ability to sell insurance
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policies could decline, leading to a decrease in our premium revenue and earnings. For example, many of our
agencies and policyholders have guidelines that require us to have an A.M. Best financial strength rating of "A-" or
higher. A reduction of our A.M. Best ratings below "A-" would prevent us from issuing policies to a portion of our
current policyholders or other potential policyholders with ratings requirements. Additionally, a ratings downgrade
could materially increase the number of surrenders for all or a portion of the net cash values by the owners of
policies and contracts we have issued, and materially increase the number of withdrawals by policyholders of cash
values from their policies.
A reduction in our issuer credit rating could limit our ability to access capital markets or significantly increase the
cost to us of raising capital. The failure of our insurance company subsidiaries to maintain their current ratings could
dissuade a lender or reinsurance company from conducting business with us. A ratings downgrade could also cause
some of our existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or
creation of additional financial obligations. It might also increase our interest or reinsurance costs.
We are exposed to credit risk in certain areas of our operations.
In addition to exposure to credit risk related to our investment portfolio, we are exposed to credit risk in several
other areas of our business operations, including from:
•
•
•
•
our reinsurers, who are obligated to us under our reinsurance agreements. See the risk factor titled "Market
conditions may affect our access to and the cost of reinsurance and our reinsurers may not pay losses in a
timely manner, or at all," for a discussion of the credit risk associated with our reinsurance program;
some of our independent agents, who collect premiums from policyholders on our behalf and are required
to remit the collected premiums to us;
some of our policyholders, which may be significant; and
our surety insurance operations, where we guarantee to a third party that our bonded principal will satisfy
certain performance obligations (for example, as in a construction contract) or certain financial obligations.
If our policyholder defaults, we may suffer losses and be unable to be reimbursed by our policyholder.
To a large degree, the credit risk we face is a function of the economy; accordingly, we face a greater risk during
periods of economic downturn. While we attempt to manage these risks through underwriting and investment
guidelines, collateral requirements and other oversight mechanisms, our efforts may not be successful. For example,
collateral obtained may subsequently have little or no value. As a result, our exposure to credit risk could materially
and adversely affect our results of operation and financial condition.
We are subject to comprehensive laws and regulations, changes to which may have an adverse effect on our
financial condition and results of operations.
Insurance is a highly regulated industry. We are subject to extensive supervision and regulation by the states in
which we operate. As a public company, we are also subject to increased regulation at the federal level. Our ability
to comply with these laws and regulations and obtain necessary and timely regulatory action is, and will continue to
be, critical to our success and ability to earn profits.
Examples of regulations that pose particular risks to our ability to earn profits include the following:
• Required licensing. Our insurance company subsidiaries operate under licenses issued by various state
insurance departments. If a regulatory authority were to revoke an existing license or deny or delay
granting a new license, our ability to continue to sell insurance or to enter or offer new insurance products
in that market would be substantially impaired.
• Regulation of insurance rates, fees and approval of policy forms. The insurance laws of most states in
which we operate require insurance companies to file insurance premium rate schedules and policy forms
for review and approval. When our loss ratio compares favorably to that of the industry, state regulatory
authorities may resist or delay our efforts to raise premium rates, even if the property and casualty industry
generally is not experiencing regulatory resistance to premium rate increases. If premium rate increases we
deem necessary are not approved, we may not be able to respond to market developments and increased
costs in that state. State regulatory authorities may even impose premium rate rollbacks or require us to pay
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premium refunds to policyholders, affecting our profitability. If insurance policy forms we seek to use are
not approved by state insurance departments, our ability to offer new products and grow our business in
that state could be substantially impaired.
• Restrictions on cancellation, nonrenewal or withdrawal. Many states have laws and regulations restricting
an insurance company's ability to cease or significantly reduce its sales of certain types of insurance in that
state, except pursuant to a plan that is approved by the state insurance departments. These laws and
regulations could limit our ability to exit or reduce our business in unprofitable markets or discontinue
unprofitable products. For example, the State of Louisiana has a law prohibiting the nonrenewal of
homeowners policies written for longer than three years except under certain circumstances, such as for
nonpayment of premium or fraud committed by the insured. Additionally, our ability to adjust terms or
increase pricing requires approval of regulatory authorities in certain states.
• Risk-based capital and capital adequacy requirements. Our insurance company subsidiaries and affiliate
are subject to risk-based capital requirements that require us to report our results of risk-based capital
calculations to state insurance departments and the NAIC. These standards apply specified risk factors to
various asset, premium and reserve components of statutory capital and surplus reported in our statutory
basis of accounting financial statements. Any failure to meet applicable risk-based capital requirements or
minimum statutory capital requirements could subject us or our subsidiaries and affiliate to further
examination or corrective action by state regulators, including limitations on our writing of additional
business, state supervision or liquidation.
•
Transactions between insurance companies and their affiliates. Transactions between us, our insurance
company subsidiaries and our affiliates generally must be disclosed to, and in some cases approved by, state
insurance departments. State insurance departments may refuse to approve or delay their approval of a
transaction, which may impact our ability to innovate or operate efficiently.
• Required participation in guaranty funds and assigned risk pools. Certain states have enacted laws that
require a property and casualty insurer conducting business in that state to participate in assigned risk plans,
reinsurance facilities, and joint underwriting associations where participating insurers are required to
provide coverage for assigned risks. The number of risks assigned to us by these plans is based on our share
of total premiums written in the voluntary insurance market for that state. Pricing is controlled by the plan,
often restricting our ability to charge the premium rate we might otherwise charge. Wherever possible, we
utilize a designated servicing carrier to fulfill our obligations under these plans. Designated servicing
carriers charge us fees to issue policies, adjust and settle claims and handle administrative reporting on our
behalf. In these markets, we may be compelled to underwrite significant amounts of business at lower than
desired premium rates, possibly leading to an unacceptable return on equity. While these facilities are
generally designed so that the ultimate cost is borne by policyholders, the exposure to assessments and our
ability to recoup these assessments through adequate premium rate increases may not offset each other in
our financial statements. Moreover, even if they do offset each other, they may not offset each other in our
financial statements for the same fiscal period, due to the ultimate timing of the assessments and
recoupments or premium rate increases. Additionally, certain states require insurers to participate in
guaranty funds to bear a portion of the unfunded obligations of impaired or insolvent insurance companies.
These state funds periodically assess losses against all insurance companies doing business in the state. Our
operating results and financial condition could be adversely affected by any of these factors.
• Restrictions on the amount, type, nature, quality and concentration of investments. The various states in
which we are domiciled have certain restrictions on the amount, type, nature, quality and concentration of
our investments. Generally speaking, these regulations require us to be conservative in the nature and
quality of our investments and restrict our ability to invest in riskier, but often higher yield investments.
These restrictions may make it more difficult for us to obtain our desired investment results.
•
State and federal tax laws. Current federal income tax laws generally permit the tax-deferred accumulation
of earnings on the premiums paid by the holders of annuities and life insurance products. Taxes, if any, are
payable on income attributable to a distribution under the contract for the year in which the distribution is
made. The U.S. Congress has, from time to time, considered legislation that would reduce or eliminate the
benefit of such deferral of taxation on the accretion of value within life insurance and nonqualified annuity
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contracts. Enactment of this legislation, including a simplified "flat tax" income structure with an
exemption from taxation for investment income, could result in fewer sales of our insurance, annuity and
investment products.
In addition, changes in the federal estate tax laws could negatively affect the demand for the types of life
insurance used in estate planning. In addition, we benefit from certain tax items, including but not limited
to, tax-exempt bond interest, dividends-received deductions, tax credits (such as foreign tax credits) and
insurance reserve deductions. From time to time, the U.S. Congress, as well as foreign, state and local
governments, considers legislation that could reduce or eliminate the benefits associated with these tax
items. If such legislation is adopted, our profitability could be negatively impacted. We continue to evaluate
the impact that potential tax reform, which lacks sufficient detail and is relatively uncertain, may have on
our future results of operations and financial condition.
•
Terrorism Risk Insurance. The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed
into law on December 27, 2007. In January 2015, The Terrorism Risk Insurance Program Reauthorization
Act of 2015 ("TRIPRA") was signed into law. TRIPRA extends the Terrorism Risk Insurance Program until
December 31, 2020; gradually increases the coverage trigger for shared terrorism losses between the
federal government and the insurance industry to $200 billion per year (up from $100 billion); and
gradually increases the industry-wide retention to $37.5 billion per year (up from $27.5 billion). For further
information about TRIPRA and its effect on our operations, refer to the information in the "Consolidated
Results of Operations" section in Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations.
• Accounting standards. We prepare our consolidated financial statements in conformity with GAAP, which
is periodically revised and/or expanded by recognized authoritative bodies, including the Financial
Accounting Standards Board ("FASB"). These principles are subject to interpretation by the SEC and
various other bodies formed to interpret and create appropriate accounting principles and guidance. The
FASB is currently working on several joint projects in conjunction with the International Accounting
Standards Board ("IASB") that could result in a convergence of GAAP with International Financial
Reporting Standards. These projects may result in significant changes to GAAP. Changes in GAAP and
financial reporting requirements, or the interpretation of GAAP or those requirements, may have an impact
on the content and presentation of our financial results and could have adverse consequences on our
financial results, including lower reported results of operations and shareholders' equity and increased
volatility and decreased comparability of our reported results with our historic results and with the results
of other insurers. In addition, the required adoption of new accounting standards may result in significant
incremental costs associated with initial implementation of and ongoing compliance with those standards.
Additional information regarding recently proposed and adopted accounting standards and their potential
impact on us is set forth in Note 1 “Summary of Significant Accounting Policies” to Part II, Item 8,
“Financial Statements and Supplementary Data.”
• Corporate Governance and Public Disclosure Regulation. Changing laws, regulations and standards
relating to corporate governance and public disclosure, including Dodd-Frank, the Sarbanes-Oxley Act of
2002 and related SEC regulations, as well as the listing standards of the NASDAQ Stock Market, have
created and are continuing to create uncertainty for public companies. While the federal government has
not historically regulated the insurance business, in 2010 Dodd-Frank established a Federal Insurance
Office within the U.S. Department of the Treasury. The Federal Insurance Office has limited regulatory
authority and is empowered to gather data and information regarding the insurance industry and insurers,
monitor aspects of the insurance industry, identify issues with regulation of insurers that could contribute to
a systemic crisis in the insurance industry or the overall financial system, coordinate federal policy on
international insurance matters and preempt state insurance measures under certain circumstances. While
certain details and much of the impact of Dodd-Frank will not be known for some time, Dodd-Frank and
other federal regulation adopted in the future may impose burdens on us, including impacting the ways we
conduct our business, increasing compliance costs and duplicating state regulation. Additional regulation
under these laws in the area of compensation disclosure, particularly regarding internal pay equity, officer
and director hedging activities and compensation clawback policies is still expected.
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• U.S. Social Security Administration's Death Master File. We have received regulatory inquiries from
certain state insurance regulators relating to compliance with unclaimed property laws and the use of data
available on the U.S. Social Security Administration's Death Master File (or a similar database) to identify
instances where benefits under life insurance policies, annuities and retained asset accounts are payable. It
is possible that other jurisdictions may pursue similar inquiries and that such inquiries may result in
payments to beneficiaries, escheatment of funds deemed abandoned under state laws and changes to
procedures for the identification and escheatment of abandoned property.
Compliance with these laws and regulations requires us to incur administrative costs that decrease our profits. These
laws and regulations may also prevent or limit our ability to underwrite and price risks accurately, obtain timely
premium rate increases necessary to cover increased costs, discontinue unprofitable relationships or exit unprofitable
markets and otherwise continue to operate our business profitably. In addition, our failure to comply with these laws
and regulations could result in actions by state or federal regulators, including the imposition of fines and penalties
or, in an extreme case, revocation of our ability to do business in one or more states. Finally, we could face
individual, group and class action lawsuits by our policyholders and others for alleged violations of certain state
laws and regulations. Each of these regulatory risks could have a negative effect on our profitability.
Market conditions may affect our access to and the cost of reinsurance and our reinsurers may not pay losses in
a timely manner, or at all.
As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of the
risk that we and our insurance company subsidiaries and affiliates underwrite, by transferring (or ceding) part of the
risk we have assumed to a reinsurance company in exchange for part of the premium we receive in connection with
the risk. These reinsurance arrangements diversify our business and reduce our exposure to large losses or from
hazards of an unusual nature. As of December 31, 2016, we ceded premium written of $58.0 million to our
reinsurers.
Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, it does not eliminate our
liability to our policyholders because we remain liable as the direct insurer on all of the reinsured risks. As a result
we are subject to credit risk relating to our ability to recover amounts due from our reinsurers.
Our ability to collect reinsurance recoverables may be subject to uncertainty. Our losses must meet the qualifying
conditions of the reinsurance agreement. Our reinsurance agreements are subject to specified limits and we would
not have reinsurance coverage to the extent that it exceeds those limits. We are also subject to the risk that reinsurers
may dispute their obligations to pay our claims. Reinsurers must have the financial capacity and willingness to make
payments under the terms of a reinsurance agreement or program. Reinsurers may dispute amounts we believe are
due to us. Particularly, following a major catastrophic event, our inability to collect a material recovery from a
reinsurer on a timely basis, or at all, could have a material adverse effect on our liquidity, operating results and
financial condition.
Market conditions determine the availability and cost of the reinsurance protection we purchase, which affects the
level of our business profitability, as well as the level and types of risk we retain. Although we purposely work with
several reinsurance intermediaries and reinsurers, we may be unable to maintain our current reinsurance facilities or
obtain other reinsurance facilities in adequate amounts and at favorable premium rates. Moreover, there may be a
situation in which we have more than two catastrophic events within one policy year. Because our current
catastrophe reinsurance program only allows for one automatic reinstatement at an additional reinstatement
premium, we would be required to obtain a new catastrophe reinsurance policy to maintain our current level of
catastrophe reinsurance coverage. Such coverage may be difficult to obtain, particularly if it is necessary to do so
during hurricane season following the second catastrophe. If we are unable to renew our expiring facilities or to
obtain new reinsurance facilities, either our net exposure to risk will increase or, if we are unwilling to bear an
increase in net risk exposures, we will have to reduce the amount of risk we underwrite.
We face significant competitive pressures in our business that could cause demand for our products to fall or
hinder our ability to introduce new products or services and keep pace with advances in technology, reducing our
revenue and profitability.
The insurance industry is highly competitive and will likely remain that way for the foreseeable future. In our
property and casualty insurance business and in our life insurance business we compete, and will continue to
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compete, with many major U.S. and non-U.S. insurers and smaller regional companies, as well as mutual
companies, specialty insurance companies, underwriting agencies, and diversified financial services companies,
including banks, mutual funds, broker-dealers and asset-managers. Except for regulatory considerations, there are
few barriers to entry in the insurance market. National banks, with their large existing customer bases, may
increasingly compete with insurers as a result of court rulings allowing national banks to sell annuity products in
some circumstances, and as a result of new legislation removing restrictions on bank affiliations with insurers. These
developments may increase competition, by increasing the number, size and financial strength of competitors who
may be able to offer, due to economies of scale, more competitive pricing than we can.
Our competitors may attempt to increase their market share by lowering rates. In that case, we could experience
reductions in our underwriting margins or sales of insurance policies. Losing business to competitors offering
similar products at lower prices or who have a competitive advantage may adversely affect the results of our
operations. Additionally, economic conditions may reduce the total volume of business available to us and our
competitors.
We price our insurance products based on estimated profit margins, and we may not be able to react in a timely
manner to reprice our insurance products to respond to changes in the market. Some of our competitors may be
larger and have far greater financial, technology and marketing resources than we do. If new or existing competitors
decide to target our policyholder base by offering similar or enhanced product offerings or technologies at lower
prices than we are able to offer, our premium revenue and our profitability could decline.
Our products are marketed exclusively through independent insurance agencies, most of which represent more than
one company. We face competition within each agency and competition to retain qualified independent agents. Our
competitors include companies that market their products through agents, as well as companies that sell insurance
directly to their customers. In personal insurance, the use of comparative rating technologies has impacted our
business and may continue to impact the entire industry. This has resulted in an increase in the total level of quote
activity but a lower percentage of quotes have resulted in new business from customers. There is also the potential
for similar technology to be used to compare rates for small business.
The successful implementation of our business model depends on our ability to adapt to evolving technologies and
industry standards and introduce new products and services. There is no guarantee we will be able to introduce new
or improved products, or that our products will achieve market acceptance. We may also not be successful in using
new technologies effectively or adapting our proprietary technology to evolving customer requirements, causing our
products or services to become obsolete.
Technology may be increasingly playing a role in our ability to be competitive. Innovations such as telematics and
other usage-based methods of determining premiums may impact product design and pricing and may be an
increasingly important factor in our ability to be competitive. Our competitive position may also be impacted by our
ability to institute technology that collects and analyzes a wide variety of data points to make underwriting or other
decisions.
Our business depends on the uninterrupted operations of our facilities, systems and business functions.
Our business depends on our employees' or vendors' ability to perform necessary business functions, such as
processing new and renewal policies, providing customer service, making claims payments, facilitating collections
and cancellations and performing actuarial functions necessary for pricing and product development. We
increasingly rely on technology and systems to accomplish these business functions in an efficient and uninterrupted
fashion. Our inability to access our facilities or a failure of technology, telecommunications or other systems could
significantly impair our ability to perform such functions on a timely basis or affect the accuracy of transactions. If
sustained or repeated, such a business interruption or system failure could result in a deterioration of our ability to
write and process new and renewal business, serve our agents and policyholders or perform other necessary business
functions as discussed above.
If a natural disaster or a terrorist act occurs, our company and employees could be directly adversely affected,
depending on the nature of the event. We have an emergency preparedness plan that consists of the information and
procedures required to enable rapid recovery from an occurrence, such as natural disaster or business disruption,
which could potentially disable us for an extended period of time. This plan was successfully tested during 2008,
both by the Midwest flooding that affected our corporate headquarters in Cedar Rapids, Iowa, and by Hurricane Ike
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that affected our Gulf Coast regional office in Galveston, Texas. It was also tested, to a lesser extent, by Super Storm
Sandy in 2012 that affected our East Coast regional office in Pennington, New Jersey.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, as well as
our access to and the cost of capital.
Although capital market conditions have improved, our results of operations, financial condition, cash flows and
statutory capital position could be materially adversely affected by continued volatility, uncertainty and disruptions
in the capital and credit markets.
We maintain a level of cash and securities which, combined with expected cash inflows from investments and
operations, is believed adequate to meet anticipated short-term and long-term benefit and expense payment
obligations. However, withdrawal and surrender levels may differ from anticipated levels for a variety of reasons,
such as changes in economic conditions or changes in our claims paying ability and financial strength ratings. In the
event our current internal sources of liquidity do not satisfy our needs, we have entered into a $50 million revolving
unsecured credit facility that we can access, which also allows the Company to increase the aggregate amount of the
commitments thereunder by up to $100 million. The availability of additional financing will depend on a variety of
factors such as market conditions, the general availability of credit, the volume of trading activities, the overall
availability of credit to the financial services industry, our credit ratings and credit capacity as well as customers' or
lenders' perception of our long- or short-term financial prospects. Similarly, our access to funds may be impaired if
regulatory authorities or rating agencies take negative actions against us.
Disruptions, uncertainty or volatility in the capital and credit markets may limit our access to capital required to
operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing
liabilities; satisfy statutory capital requirements; and access the capital necessary to grow our business. As such, we
may be forced to delay raising capital, issue shorter term securities than we prefer, utilize available internal
resources or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our
financial flexibility and liquidity.
We may experience difficulty in integrating future acquisitions to our operations.
The successful integration of any newly acquired businesses into our operations will require, among other things:
•
•
•
•
•
the timely receipt of any required regulatory approvals;
the retention and assimilation of their key management, sales and other personnel;
the coordination of their lines of insurance products and services;
the adaptation of their technology, information systems and other processes; and
the retention and transition of their customers.
Unexpected difficulties in integrating any acquisition could result in increased expenses and the diversion of
management time and resources. If we do not successfully integrate any acquired business into our operations, we
may not realize the anticipated benefits of the acquisition, which could have a material adverse impact on our
financial condition and results of operations. Further, any potential acquisitions may require significant capital
outlays and, if we issue equity or convertible debt securities to pay for an acquisition, the issuance may be dilutive to
our existing shareholders.
The exclusions and limitations in our policies may not be enforceable.
Many of the policies we issue include exclusions and other conditions that define and limit coverage, which
exclusions and conditions are designed to manage our exposure to certain types of risks and expanding theories of
legal liability. In addition, many of our policies limit the period during which a policyholder may bring a claim
under the policy, which period in many cases is shorter than the statutory period under which these claims can be
brought by our policyholders. While these exclusions and limitations help us assess and control our loss exposure, it
is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be
enacted which modifies or bars the use of these exclusions and limitations. This could result in higher than
anticipated losses by extending coverage beyond the intent of our underwriting. In some instances, these changes
may not become apparent until sometime after we have issued the insurance policies that are affected by these
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changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after
a policy is issued.
Our internal controls are not fail-safe.
As a result of the inherent limitations in all control systems, no system of controls can provide absolute assurance
that all control objectives have been or will be met, and that every instance of error or fraud has been or will be
detected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system will be met. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake.
The determination of the amount of impairments taken on our investments requires estimates and assumptions
which are subject to differing interpretations and could materially impact our results of operations or financial
position.
The determination of the amount of impairments varies by investment type and is based upon our periodic
evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations
and assessments are revised as conditions change and new information becomes available. There can be no
assurance that our management has accurately assessed the level of impairments taken in our financial statements.
Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of
future impairments.
Additionally, our management considers a wide range of factors about the instrument issuer and uses its best
judgment in evaluating the cause of the decline in the estimated fair value of the instrument and in assessing the
prospects for recovery. Inherent in management's evaluation of the security are assumptions and estimates about the
operations of the issuer and its future earnings potential.
Risks Relating to Our Common Stock
The ability of our subsidiaries to pay dividends may affect our liquidity and ability to meet our obligations.
As a holding company, we have no significant independent operations of our own. Our principal sources of funds
are dividends and other payments received from our subsidiaries. We rely on those dividends for our liquidity and to
meet our obligations to pay dividends to shareholders and make share repurchases. Dividends from those
subsidiaries depend on their statutory surplus, earnings and regulatory restrictions.
State insurance laws limit the ability of insurance subsidiaries to pay dividends and require our insurance
subsidiaries to maintain specified minimum levels of statutory capital and surplus. The actual ability to pay
dividends may further be constrained by business and regulatory considerations, such as the impact of dividends on
surplus, by our competitive position and by the amount of premiums that we can write. Ordinary dividend payments,
or dividends that do not require prior approval by the insurance subsidiaries' domiciliary state insurance regulator
are generally limited to amounts determined by a formula which varies by jurisdiction. Extraordinary dividends, on
the other hand, require prior regulatory approval by the insurance subsidiaries' domiciliary state insurance regulator
before they can be made.
In addition, competitive pressures generally require insurance companies to maintain insurance financial strength
ratings. These restrictions and other regulatory requirements affect the ability of our insurance subsidiaries to make
dividend payments to us. At times we may not be able to pay dividends on our common stock, or we may be
required to seek prior approval from the applicable regulatory authority before we can pay any such dividends. In
addition, the payment of dividends by us is within the discretion of our Board of Directors and will depend on
numerous factors, including our financial condition, our capital requirements and other factors that our Board of
Directors considers relevant.
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The price of our common stock may be volatile.
The trading price of our common stock may fluctuate substantially due to a variety of factors, some of which are
beyond our control and may not be related to our operating performance. These fluctuations could be significant and
could cause a loss in the amount invested in our shares of common stock. Factors that could cause fluctuations
include, but are not limited to, the following:
•
variations in our actual or anticipated operating results or changes in the expectations of financial market
analysts with respect to our results;
•
investor perceptions of the insurance industry in general and the Company in particular;
• market conditions in the insurance industry and any significant volatility in the market;
• major catastrophic events; and
•
departure of key personnel.
Certain provisions of our organizational documents, as well as applicable insurance laws, could impede an
attempt to replace or remove our management or members of our Board of Directors, prevent the sale of the
Company or prevent or frustrate any attempt by shareholders to change the direction of the Company, each of
which could diminish the value of our common stock.
Our articles of incorporation and bylaws, as well as applicable laws governing corporations and insurance
companies, contain provisions that could impede an attempt to replace or remove our management or prevent the
sale of the Company that, in either case, shareholders might consider being in their best interests. For example:
•
•
•
•
•
•
•
•
our Board of Directors is divided into three classes. At any annual meeting of our shareholders, our
shareholders have the right to appoint approximately one-third of the directors on our Board of Directors.
Consequently, it will take at least two annual shareholder meetings to effect a change in control of our
Board of Directors;
our articles of incorporation limit the rights of shareholders to call special shareholder meetings;
our articles of incorporation set the minimum number of directors constituting the entire Board of Directors
at nine and the maximum at 15, and they require approval of holders of 60.0 percent of all outstanding
shares to amend these provisions. Within the range, the Board of Directors may increase by one each year
the number of directors serving on the Board of Directors;
our articles of incorporation require the affirmative vote of 60.0 percent of all outstanding shares to approve
any plan of merger, consolidation, or sale or exchange of all, or substantially all, of our assets;
our Board of Directors may fill vacancies on the Board of Directors;
our Board of Directors has the authority, without further approval of our shareholders, to issue shares of
preferred stock having such rights, preferences and privileges as the Board of Directors may determine;
Section 490.1110 of the Iowa Business Corporation Act imposes restrictions on mergers and other business
combinations between us and any holder of 10.0 percent or more of our common stock; and
Section 490.624A of the Iowa Business Corporation Act authorizes the terms and conditions of stock rights
or options issued by us to include restrictions or conditions that preclude or limit the exercise, transfer, or
receipt of such rights or options by a person, or group of persons, owning or offering to acquire a specified
number or percentage of the outstanding common shares or other securities of the corporation.
Further, the insurance laws of Iowa and the states in which our insurance company subsidiaries are domiciled
prohibit any person from acquiring direct or indirect control of us or our insurance company subsidiaries, generally
defined as owning or having the power to vote 10.0 percent or more of our outstanding voting stock, without the
prior written approval of state regulators.
These provisions of our articles of incorporation and bylaws, and these state laws governing corporations and
insurance companies, may discourage potential acquisition proposals. These provisions and state laws may also
delay, deter or prevent a change of control of the Company, in particular through unsolicited transactions that some
25
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or all of our shareholders might consider to be desirable. As a result, efforts by our shareholders to change the
direction or the Company's management may be unsuccessful, and the existence of such provisions may adversely
affect market prices for our common stock if they are viewed as discouraging takeover attempts.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in Cedar Rapids, Iowa, where we own approximately 246,000 square feet of office and
building space, serving both operating segments. In addition, we own and lease office and building space, including
underwriting and claims offices, throughout the U.S. We believe our existing facilities, both owned and leased, are
in good condition and suitable for the conduct of our business.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business, the Company is a party to a variety of legal proceedings. While the final
outcome of these legal proceedings cannot be predicted with certainty, management believes all of the proceedings
pending as of December 31, 2016 to be ordinary and routine and does not expect these legal proceedings to have a
material adverse effect on the Company's financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
26
Table of Contents
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Shareholders
United Fire Group, Inc.'s common stock is traded on the NASDAQ stock market under the symbol "UFCS." On
February 24, 2017, there were 815 holders of record of United Fire Group, Inc. common stock. The number of
record holders does not reflect shareholders who beneficially own common stock in nominee or street name, but
does include participants in our employee stock purchase plan.
Dividends
Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends
received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends
payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all
cases, these state laws permit the payment of dividends only from earned surplus arising from business operations.
For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period
without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of
statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis,
not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled
may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2016,
our insurance company subsidiary, United Fire & Casualty, is able to make a maximum of $53.1 million in dividend
payments without prior regulatory approval.
The table in the following section shows the quarterly cash dividends declared in 2016 and 2015. Payments of any
future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial
condition, capital requirements, and general business conditions. We will only pay dividends if declared by our
Board of Directors out of legally available funds and there can be no assurance that we will continue to pay such
dividends or the amount of such dividends.
Additional information about these restrictions is incorporated by reference from Note 6 "Statutory Reporting,
Capital Requirements and Dividends and Retained Earnings Restrictions" contained in Part II, Item 8, "Financial
Statements and Supplementary Data."
27
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Market Information
The following table sets forth the high and low trading price as reported on the NASDAQ stock market for our
common stock for the calendar periods indicated, as well as the amount of cash dividends declared on our common
stock.
2016
Quarter Ended:
March 31
June 30
September 30
December 31
Year-end closing share price: $49.17
2015
Quarter Ended:
March 31
June 30
September 30
December 31
Year-end closing share price: $38.31
Issuer Purchases of Equity Securities
Share Price
High
Low
Cash Dividends
Declared per
share
$
44.43 $
45.75
44.00
50.75
$
31.94 $
34.09
37.00
40.64
$
$
35.16
39.12
40.37
37.54
27.57
29.31
31.68
33.70
0.22
0.25
0.25
0.25
0.20
0.22
0.22
0.22
Under our share repurchase program, we may purchase our common stock from time to time on the open market or
through privately negotiated transactions. The amount and timing of any purchases will be at our discretion and will
depend upon a number of factors, including the share price, general economic and market conditions, and corporate
and regulatory requirements. Our share repurchase program may be modified or discontinued at any time.
28
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The following table provides information with respect to purchases of shares of common stock made by or on our
behalf or by any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, during the year
ended December 31, 2016:
Period
1/1/16 - 1/31/16
2/1/16 - 2/28/16
3/1/16 - 3/31/16
4/1/16 - 4/30/16
5/1/16 - 5/31/16
6/1/16 - 6/30/16
7/1/16 - 7/31/16
8/1/16 - 8/31/16
9/1/16 - 9/30/16
10/1/16 - 10/31/16
11/1/16 - 11/30/16
12/1/16 - 12/31/16
Total
Total
Number of
Shares Purchased (1)
Average Price
Paid per Share
Total Number of Shares
Purchased as a Part of
Publicly Announced
Plans or Programs
Maximum Number of
Shares that may yet be
Purchased Under the
Plans or Programs
— $
—
—
—
—
—
—
26,564
40,928
—
22,923
—
90,415
—
—
—
—
—
—
—
42.74
42.31
—
38.32
—
—
—
—
—
—
—
—
26,564
40,928
—
22,923
—
90,415
1,528,886
1,528,886
1,528,886
1,528,886
1,528,886
1,528,886
1,528,886
3,002,322
2,961,394
2,961,394
2,938,471
2,938,471
(1) Our share repurchase program was originally announced in August 2007. In August 2016, our Board of Directors authorized the repurchase of
up to an additional 1,500,000 shares of common stock through the end of August 2018. This is in addition to the 1,528,886 shares of common
stock remaining under its previous authorizations. As of December 31, 2016 we remained authorized to repurchase 2,938,471 shares of common
stock.
United Fire Group, Inc. Common Stock Performance Graph
The following graph compares the performance of an investment in United Fire Group Inc.'s common stock from
December 31, 2011 through December 31, 2016, with the Standard & Poor's 500 Index ("S&P 500 Index"), and the
Standard & Poor's 600 Property and Casualty Index ("S&P 600 P&C Index"). The graph assumes $100 was invested
on December 31, 2011 in our common stock and each of the below listed indices and that all dividends were
reinvested on the date of payment without payment of any commissions. Dollar amounts in the graph are rounded to
the nearest whole dollar. The performance shown in the graph represents past performance and should not be
considered an indication of future performance.
29
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The following table shows the data used in the total return performance graph above.
Index
United Fire Group, Inc.
S&P 500 Index
S&P 600 P&C Index
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
$
100.00
100.00
100.00
$
111.28
116.00
108.32
$
149.69
153.57
138.06
$
159.56
174.60
145.16
$
211.06
177.01
166.80
$
277.08
198.18
208.79
Period Ended
The foregoing performance graph is being furnised as part of this Annual Report on Form 10-K solely in accordance
with the requirement under Rule 14a-3(b)(9) to furnish our shareholders with such information, and therefore, shall
not be deemed to be filed or incorporated by reference into any filings by the Company under the Securities Act or
Exchange Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data derived from the Consolidated Financial Statements of
United Fire Group, Inc. and its subsidiaries and affiliates. The data should be read in conjunction with Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II,
Item 8, "Financial Statements and Supplementary Data."
30
Table of Contents
(In Thousands, Except Per Share Data)
As of and for the years Ended December 31
Consolidated Balance Sheet Data:
Total cash and investments
Total assets
Future policy benefits and losses, claims and loss
settlement expenses
Property and casualty insurance
Life insurance
Unearned premiums
Total liabilities
Net unrealized investment gains, after tax
Repurchase of United Fire Group, Inc. common stock
Total stockholders' equity
2016
2015
2014
2013
2012
$ 3,376,513
4,054,758
$ 3,249,209
3,890,376
$
3,261,535
3,856,689
$ 3,142,330
3,720,672
$
3,151,829
3,694,653
1,123,896
1,350,503
443,873
3,112,874
133,892
(3,746)
941,884
1,003,895
1,372,358
415,057
3,011,479
128,369
(2,423)
878,897
969,437
1,447,764
378,725
3,039,274
149,623
(12,942)
817,415
960,651
1,472,132
340,464
2,937,839
116,601
(1,644)
782,833
971,911
1,498,176
311,650
2,965,476
144,096
(7,301)
729,177
Book value per share
37.04
34.94
32.67
30.87
28.90
Consolidated Income Statement Data:
Revenues
Net premiums earned
Investment income, net of investment expenses
Net realized investment gains
Other income
Consolidated revenues
Losses and loss settlement expenses
Property and casualty insurance
Life insurance
Amortization of deferred policy acquisition costs
Other underwriting expenses
Net income
Property and Casualty Insurance Segment Data:
Net premiums earned
Net income
Combined ratio(1)
Life Insurance Segment Data:
Net premiums earned
Net income
Earnings Per Share Data:
Basic earnings per common share
Diluted earnings per common share
Other Supplemental Data:
Cash dividends declared per common share
1,023,401
106,822
6,103
621
$ 1,136,947
930,890
100,781
2,846
401
$ 1,034,918
$
652,433
31,365
211,013
103,421
49,904
520,087
29,001
186,817
102,937
89,126
$
828,330
104,609
7,270
1,685
941,894
509,811
26,432
167,449
94,871
59,137
$
754,846
112,799
8,695
702
877,042
437,354
21,461
153,677
89,861
76,140
694,994
111,905
5,453
891
813,243
439,137
20,569
141,834
81,125
40,212
936,131
49,118
100.3%
851,695
85,320
766,939
52,376
694,192
67,456
92.0%
97.8%
94.8%
629,411
33,512
101.2%
87,270
786
79,195
3,806
61,391
6,761
60,654
8,684
65,583
6,700
1.97
1.93
0.97
3.56
3.53
0.86
2.34
2.32
3.01
2.98
0.78
0.69
1.58
1.58
0.60
(1) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below
100.0 percent generally indicates a profitable book of business.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis should be read in conjunction with Part II, Item 6, "Selected
Financial Data" and Part II, Item 8, "Financial Statements and Supplementary Data." Amounts (except per share
amounts) are presented in thousands, unless otherwise noted.
FORWARD-LOOKING STATEMENTS
It is important to note that our actual results could differ materially from those projected in any forward-looking
statements in this Form 10-K. Please refer to "Forward-Looking Information" and Part I, Item 1A, "Risk Factors" of
this report for information concerning factors that could cause actual results to differ materially from the forward-
looking statements contained in this Form 10-K.
BUSINESS OVERVIEW
Originally founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("UFG", "United Fire", the
"Registrant", the "Company", "we", "us", "our") and its consolidated insurance company subsidiaries provide
insurance protection for individuals and businesses through several regional companies. Our property and casualty
insurance company subsidiaries are licensed in 46 states plus the District of Columbia and are represented by
approximately 1,200 independent agencies. Our life insurance subsidiary is licensed in 37 states and is represented
by approximately 1,350 independent agencies.
Segments
We operate two business segments that are comprised of a wide range of products:
•
•
property and casualty insurance, which includes commercial insurance, personal insurance, surety bonds and
assumed reinsurance; and
life insurance, which includes deferred and immediate annuities, universal life products and traditional life
(primarily single premium whole life insurance) products.
We manage these business segments separately, as they generally do not share the same customer base, and they
each have different products, pricing, and expense structures.
For 2016, property and casualty business accounted for approximately 91.5 percent of our net premiums earned,
with the majority of which, 92.5 percent, was generated from commercial insurance. Life insurance business made
up approximately 8.5 percent of our net premiums earned, of which over 73.0 percent was generated from traditional
life insurance products.
Pooling Arrangement
All of our property and casualty insurance subsidiaries are members of an intercompany reinsurance pooling
arrangement. On July 1, 2015, UFG Specialty Insurance Company entered the pooling arrangement. The Company's
pooling arrangement permits the participating companies to rely on the capacity of the entire pool's capital and
surplus, rather than being limited to policy exposures of a size commensurate with each participant’s own surplus
level.
Geographic Concentration
For 2016, approximately 48.9 percent of our property and casualty statutory direct premiums written were written in
Texas, California, Iowa, Missouri and New Jersey and approximately 68.5 percent of our life insurance premiums
were written in Iowa, Minnesota, Illinois, Wisconsin and Nebraska.
32
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Sources of Revenue and Expense
We evaluate segment profit or loss based upon operating and investment results. Segment profit or loss described in
the following sections of this Management's Discussion and Analysis is reported on a pre-tax basis. Additional
segment information is presented in Part II, Item 8, Note 10 "Segment Information" to the Consolidated Financial
Statements.
Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses
and loss settlement expenses, future policy benefits, underwriting and other operating expenses and interest on
policyholders' accounts.
Profit Factors
Our profitability is influenced by many factors, including price, competition, economic conditions, investment
returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court
decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent
profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling,
disciplined underwriting, superior loss control services, prudent management of our investments, appropriate
matching of assets and liabilities and effective and efficient use of technology.
MEASUREMENT OF RESULTS
Our consolidated financial statements are prepared on the basis of GAAP. We also prepare financial statements for
each of our insurance company subsidiaries based on statutory accounting principles and file them with insurance
regulatory authorities in the states where they do business.
Management evaluates our operations by monitoring key measures of growth and profitability. We believe that
disclosure of certain non-GAAP financial measures enhances investor understanding of our financial performance.
The following provides further explanation of the key measures management uses to evaluate our results:
Catastrophe losses is a commonly used non-GAAP financial measure, which utilizes the designations of the
Insurance Services Office ("ISO") and are reported with losses and loss settlement expense amounts net of
reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single
unpredictable incident or series of closely related incidents that result in $25.0 million or more in U.S. industry-wide
direct insured losses to property and that affect a significant number of insureds and insurers ("ISO catastrophe"). In
addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may
include U.S. or international losses, that we believe are, or will be, material to our operations, either in amount or in
number of claims made. Management, at times, may determine for comparison purposes of our financial results that
it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation. The frequency and severity
of catastrophic losses we experience in any year affect our results of operations and financial position. In analyzing
the underwriting performance of our property and casualty insurance segment, we evaluate performance both
including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our
catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is
meaningful for investors to understand the variability in our periodic earnings.
(In Thousands)
ISO catastrophes
Non-ISO catastrophes (1)
Total catastrophes
(1) Includes international assumed losses.
2016
Years Ended December 31,
2015
2014
$
$
57,932
3,299
61,231
$
$
25,380
6,933
32,313
$
$
47,351
2,328
49,679
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CONSOLIDATED FINANCIAL HIGHLIGHTS
(In Thousands)
Revenues
Years Ended December 31,
% Change
2016
2015
2016
2015
2014
vs. 2015
vs. 2014
Net premiums earned
$ 1,023,401
$ 930,890
$ 828,330
Investment income, net of investment expenses
106,822
100,781
104,609
—
6,103
6,103
621
(1,300)
4,146
2,846
401
—
7,270
7,270
1,685
9.9 %
6.0
NM
47.2
114.4
54.9
12.4%
(3.7)
NM
(43.0)
(60.9)
(76.2)
$ 1,136,947
$1,034,918
$ 941,894
9.9 %
9.9%
Net realized investment gains (losses)
Other-than-temporary impairment charges
All other net realized gains
Total net realized investment gains
Other income
Total revenues
Benefits, losses and expenses
Losses and loss settlement expenses
$ 683,798
$ 549,088
$ 536,243
24.5 %
2.4%
Increase in liability for future policy benefits
Amortization of deferred policy acquisition costs
Other underwriting expenses
Interest on policyholders' accounts
59,969
211,013
103,421
20,079
50,945
186,817
102,937
23,680
36,623
167,449
94,871
30,245
17.7
13.0
0.5
(15.2)
Total benefits, losses and expenses
$ 1,078,280
$ 913,467
$ 865,431
18.0 %
Income before income taxes
Federal income tax expense
Net income
NM = not meaningful
Consolidated Results of Operations
$
$
58,667
$ 121,451
8,763
32,325
49,904
$
89,126
$
$
76,463
17,326
59,137
(51.7)%
(72.9)%
(44.0)%
39.1
11.6
8.5
(21.7)
5.6%
58.8%
86.6%
50.7%
In 2016, the decrease in net income was driven by a 24.5 percent increase in losses and loss settlement expenses due
to an increase in catastrophe losses and deterioration of our core loss ratio. A portion of this deterioration was driven
by an increase in large losses, which we define as losses greater than $500 thousand, in the commercial automobile
and commercial fire & allied lines of business. The increase in losses and loss settlement expenses was partially
offset by a 9.9 percent increase in net premiums earned.
In 2015, the increase in net income was driven by a 12.4 percent increase in net premiums earned, which was the
result of organic growth from new business and rate increases in the property and casualty segment. This increase in
premiums was offset by a decrease in investment income and net realized investment gains and a proportionately
lower increase in losses and loss settlement expenses on a better performing underlying book of business.
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Table of Contents
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
Property and Casualty Insurance Segment
Years Ended December 31,
% Change
(In Thousands)
Net premiums earned
Losses and loss settlement expenses
Amortization of deferred policy acquisition costs
Other underwriting expenses
Underwriting gain (loss)
Investment income, net of investment expenses
Net realized investment gains
Other income (loss)
Income before income taxes
2016
$936,131
(652,433)
(202,892)
(83,540)
$ (2,734)
55,284
4,947
—
$ 57,497
2015
$851,695
(520,087)
(180,183)
(83,631)
$ 67,794
46,559
1,124
(107)
$115,370
2014
$766,939
(509,811)
(161,310)
(79,117)
$ 16,701
44,236
4,177
911
$ 66,025
2016
vs. 2015
9.9
25.4
12.6
(0.1)
(104.0)%
18.7 %
NM
(100.0)
(50.2)%
2015
vs. 2014
11.1
2.0
11.7
5.7
305.9 %
5.3 %
(73.1)%
(111.7)%
74.7 %
63.2%
6.5
69.7%
30.6
100.3%
GAAP Ratios:
Net loss ratio (without catastrophes)
Catastrophes - effect on net loss ratio
Net loss ratio(1)
Expense ratio (2)
Combined ratio(3)
NM = not meaningful
(1) The net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as
a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio
is meaningful in evaluating our financial results as reported in our Consolidated Financial Statements.
(2) The expense ratio is calculated by dividing nondeferred underwriting expenses and amortization of deferred policy acquisition costs by net
premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance
business.
(3) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0
percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.
(4.7)%
(41.5)
(8.3)%
(1.0)
(5.9)%
10.5 %
71.1
14.3 %
(1.3)
9.0 %
60.0%
6.5
66.5%
31.3
97.8%
57.2%
3.8
61.0%
31.0
92.0%
For the year ended December 31, 2016, our property and casualty insurance segment reported income before income
taxes of $57.5 million compared to income before income taxes of $115.4 million in the same period in 2015. The
decrease in income before income taxes during 2016 as compared to 2015 was driven by an increase in losses and
loss settlement expenses from higher catastrophe losses and deterioration of our core loss ratio, with a portion of this
deterioration being driven by an increase in large losses, which we define as losses greater than $500 thousand, in
our commercial auto and commercial fire & allied losses, and an increase in deferred acquisition cost amortization
from continued organic growth; partially offset by an increase in net premiums earned from organic growth and
geographical expansion and an increase in investment income from higher valuation of our investments in limited
liability partnerships. Net premiums earned increased 9.9 percent as compared to 2015.
For the year ended December 31, 2015, our property and casualty insurance segment reported income before income
taxes of $115.4 million compared to income before income taxes of $66.0 million in the same period in 2014. The
increase in income before income taxes during 2015 as compared to 2014 was driven by organic premium growth
from new business and rate increases slightly offset by a proportionately lower increase in losses and loss settlement
expenses and underwriting expenses on a better performing underlying book of business. Net premiums earned
increased 11.1 percent as compared to 2014.
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Table of Contents
Premiums
The following table shows our premiums written and earned for 2016, 2015 and 2014:
(In Thousands)
Years ended December 31,
2016
2015
2014
Direct premiums written
$ 1,006,123
$
926,500
$
838,584
Assumed premiums written
Ceded premiums written
Net premiums written
Net premiums earned
Net Premiums Written
16,834
(57,988)
18,290
(56,916)
16,421
(50,290)
$
964,969
$
887,874
$
804,715
936,131
851,695
766,939
% Change
2016
vs. 2015
2015
vs. 2014
8.6%
(8.0)
1.9
8.7%
9.9
10.5%
11.4
13.2
10.3%
11.1
Net premiums written comprise direct and assumed premiums written, less ceded premiums written. Direct
premiums written are the total policy premiums, net of cancellations, associated with policies issued and
underwritten by our property and casualty insurance segment. Assumed premiums written are the total premiums
associated with the insurance risk transferred to us by other insurance and reinsurance companies pursuant to
reinsurance contracts. Ceded premiums written is the portion of direct premiums written that we cede to our
reinsurers under our reinsurance contracts. Net premiums earned are recognized ratably over the life of a policy and
differ from net premiums written, which are recognized on the effective date of the policy.
Direct Premiums Written
Direct premiums written increased $79.6 million in 2016 as compared to 2015 due to organic growth from a
combination of new business and geographical expansion.
Direct premiums written increased $87.9 million in 2015 as compared to 2014 due to organic growth from a
combination of rate increases across most commercial and personal lines and new business writings.
Assumed Premiums Written
Assumed premiums written decreased $1.5 million in 2016 as compared to 2015 is due to a drop in reinsurance
rates. In 2016, we renewed our participation in all of our assumed programs.
Assumed premiums written increased $1.9 million in 2015 as compared to 2014 due the addition of one new
program to our portfolio. The new assumed program is for international catastrophes (excluding the United States)
with the largest exposure to European wind perils. In 2015, we also renewed our participation in all of our assumed
programs.
Ceded Premiums Written
Direct and assumed premiums written are reduced by the ceded premiums that we pay to reinsurers. For 2016, we
ceded 1.9 percent more premium to reinsurers as a result of continued growth in direct premiums written offset by
declining ceded reinsurance rates. For 2015, we ceded 13.2 percent more premium to reinsurers as a result of growth
in direct premiums written .
Losses and Loss Settlement Expenses
Catastrophe Exposures
Catastrophe losses are inherent risks of the property and casualty insurance business. Catastrophic events include,
without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds, winter storms and other
natural disasters, along with man-made exposures to losses resulting from, without limitation, acts of war, acts of
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terrorism and political instability. Such events result in insured losses that can be, and may continue to be, a material
factor in our results of operations and financial position, as the extent of losses from a catastrophe is a function of
both the total amount of insured exposure in an area affected by the event and the severity of the event. Because the
level of insured losses that may occur in any one year cannot be accurately predicted, these losses contribute to
fluctuations in our year-to-year results of operations and financial position. Some types of catastrophes are more
likely to occur at certain times within the year than others, which adds an element of seasonality to our property and
casualty insurance claims. Our property and casualty insurance segment experiences some seasonality with regard to
premiums written, which are generally highest in January and July and lowest during the fourth quarter. Losses and
loss settlement expenses incurred tend to remain consistent throughout the year, with the exception of catastrophe
losses, which generally are highest in the second and third quarters. The frequency and severity of catastrophic
events are difficult to accurately predict in any year. However, some geographic locations are more susceptible to
these events than others.
We control our direct insurance exposures in regions that are prone to naturally occurring catastrophic events
through a combination of geographic diversification, restrictions on the amount and location of new business
production in such regions, and reinsurance. We regularly assess our concentration of risk exposures in natural
catastrophe exposed areas. We have strategies and underwriting standards to manage these exposures through
individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance
coverage. We use catastrophe modeling and a risk concentration management tool to monitor and control our
accumulations of potential losses in natural catastrophe exposed areas of the United States, such as the Gulf and East
Coasts, as well as in areas of exposure in other countries where we are exposed to a portion of an insurer's
underwriting risk under our assumed reinsurance contracts.
Overall, the models indicate increased risk estimates for our exposure to hurricanes in the U.S., but the impact of the
models on our book of business varies significantly among the regions that we model for hurricanes. Based on our
analysis, we have implemented more targeted underwriting and rate initiatives in some regions. We will continue to
take underwriting actions and/or purchase additional reinsurance as necessary to reduce our exposure.
Catastrophe modeling generally relies on multiple inputs based on experience, science, engineering and history, and
the selection of those inputs requires a significant amount of judgment. The modeling results may also fail to
account for risks that are outside the range of normal probability or are otherwise unforeseen. Because of this, actual
results may differ materially from those derived from our modeling assumptions.
Despite our efforts to manage our catastrophe exposure, the occurrence of one or more severe natural catastrophic
events in heavily populated areas could have a material effect on our results of operations, financial condition or
liquidity.
The process of estimating and establishing reserves for losses incurred from catastrophic events is inherently
uncertain and the actual ultimate cost of a claim, net of reinsurance recoveries, may vary materially from the
estimated amount reserved. Although we reinsure a portion of our exposure, reinsurance may prove to be inadequate
if a major catastrophic event exceeds our reinsurance limits or if we experience a number of small catastrophic
events that individually fall below our reinsurance retention level.
Catastrophe Losses
In 2016, our pre-tax catastrophe losses were $61.2 million, an increase as compared to $32.3 million and an increase
as compared to $49.7 million in 2015 and 2014, respectively. The increase in catastrophe losses in 2016 is primarily
due to the number of catastrophes and an increase in severity. In 2016, our catastrophe losses included 41
catastrophes, where our largest single pre-tax catastrophe loss totaled $10.4 million. Catastrophe losses in 2016
added 6.5 percentage points to the combined ratio, which is slightly below our historical 10-year average of 6.7
percentage points. In 2015, the decrease in catastrophe losses was primarily due to elevated losses in the prior year.
In 2015, our catastrophe losses included 37 catastrophes, where our largest single pre-tax catastrophe loss totaled
$4.0 million. In 2014, our catastrophe losses included 26 catastrophes, where our largest single pre-tax catastrophe
loss totaled $7.7 million. Catastrophe losses in 2015 added 3.8 percentage points to the combined ratio.
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Catastrophe Reinsurance
In 2016, 2015 and 2014, we did not exceed our catastrophe reinsurance retention level of $20.0 million.
We use many reinsurers, both domestic and foreign, which helps us to avoid concentrations of credit risk associated
with our reinsurance. All reinsurers we do business with must meet the following minimum criteria: capital and
surplus of at least $250.0 million and an A.M. Best rating or an S&P rating of at least "A-." If a reinsurer is rated by
both rating agencies, then both ratings must be at least an "A-."
The following table represents the primary reinsurers we utilize and their financial strength ratings as of
December 31, 2016:
Name of Reinsurer
Arch Reinsurance Company
FM Global
Hannover Rueckversicherung AG (1) (2)
Lloyd's
MS Frontier
Partner Re(1)(2)
QBE Reinsurance Corporation (1)
R&V Versicherung AG (2)
SCOR Reinsurance Company(1)(2)
Tokio Millennium Re Ltd
A.M. Best
S&P Rating
A+
A+
A+
A
A
A
A
N/A
A
A++
A+
N/A
AA-
A+
A+
A+
A+
AA-
AA-
A+
(1) Primary reinsurers participating in the property and casualty excess of loss programs.
(2) Primary reinsurers participating in the surety excess of loss program.
Refer to Part II, Item 8, Note 4 "Reinsurance" for further discussion of our reinsurance programs.
Terrorism Coverage
The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law on December 27, 2007. In
January 2015, TRIPRA was signed into law. TRIPRA extends the Terrorism Risk Insurance Program until December
31, 2020; gradually increases the coverage trigger for shared terrorism losses between the federal government and
the insurance industry to $200 billion per year (up from $100 billion); and gradually increases the industry-wide
retention to $37.5 billion per year (up from $27.5 billion). TRIPRA coverage includes most direct commercial lines
of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded
by an insurer, with exclusions for commercial automobile insurance, burglary and theft insurance, surety,
professional liability insurance and farm owners multiple peril insurance. Under TRIPRA, each insurer has a
deductible amount, which is 20.0 percent of the prior year's direct commercial lines earned premiums for the
applicable lines of business, and retention of 15.0 percent above the deductible. No insurer that has met its
deductible shall be liable for the payment of any portion of that amount that exceeds the annual aggregate loss cap
specified in TRIPRA. TRIPRA provides marketplace stability. As a result, coverage for terrorist events in both the
insurance and reinsurance markets is often available. The amount of aggregate losses necessary for an act of
terrorism to be certified by the U.S. Secretary of Treasury, the Secretary of State and the Attorney General was
$100.0 million for 2016 and remains the same for 2017. Our TRIPRA deductible was $111.1 million for 2016 and
our TRIPRA deductible will be $121.5 million for 2017. Our catastrophe and non-catastrophe reinsurance programs
provide limited coverage for terrorism exposure excluding nuclear, biological and chemical-related claims.
2016 Results
In 2016, our losses and loss settlement expenses were 25.4 percent higher than 2015 and our net loss ratio increased
8.7 points due to an increase in catastrophe losses, which accounted for 2.7 percentage points of the increase, and an
increase in large losses over $500 thousand in our commercial automobile and commercial fire & allied lines of
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business. Catastrophe losses increased to $61.2 million in both our direct business and assumed reinsurance business
as compared to $32.3 million in 2015.
2015 Results
In 2015, although our losses and loss settlement expenses were 2.0 percent higher than 2014, our net loss ratio
decreased 5.5 points due to a better performing underlying book of business and a decrease in catastrophe losses.
Catastrophe losses decreased to $32.3 million in both our direct business and assumed reinsurance business as
compared to $49.7 million in 2014.
2014 Results
In 2014, our losses and loss settlement expenses were affected by catastrophe losses of $49.7 million in both our
direct business and assumed reinsurance business and also by an increase in our non-catastrophe results from an
increase in frequency and severity in fire-related losses in our commercial property line of business.
Reserve Development
For many liability claims, significant periods of time, ranging up to several years, and for certain construction
defect claims, more than a decade, may elapse between the occurrence of the loss, the reporting of the loss to us
and the settlement or other disposition of the claim. As a result, loss experience in the more recent accident years
for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively
small proportion of losses in these accident years are reported claims and an even smaller proportion are paid
losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by
changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for
long-tail coverages is more complex and subject to a higher degree of variability. Reserves for these long-tail
coverages represent a significant portion of our overall carried reserves.
When establishing reserves and monitoring reserve adequacy, we analyze historical data and consider the
potential impact of various loss development factors and trends including historical loss experience, legislative
enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute
resolution, results of our medical bill review process and changes and trends in general economic conditions,
including the effects of inflation. All of these factors influence our estimates of required reserves and for long-
tail lines these factors can change over the course of the settlement of the claim. However, there is no precise
method for evaluating the specific dollar impact of any individual factor on the development of reserves.
Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after
information about a claim becomes available. This approach tends to produce, on average, prudently
conservative case reserves, which we expect to result in some level of favorable development over the course of
settlement.
2016 Development
The property and casualty insurance segment experienced $31.2 million of favorable development in our net
reserves for prior accident years for the year ended December 31, 2016. The majority of favorable development
came from two lines: commercial liability with $25.4 million of favorable development and workers compensation
with $12.2 million of favorable development. The favorable development was offset by unfavorable development
from commercial fire & allied lines with $6.4 million of unfavorable development and commercial automobile with
$5.5 million of unfavorable development. During the twelve-month period ended December 31, 2016 all other lines
combined development was $5.5 million of favorable development. The favorable development for the year ended
December 31, 2016, is attributable to reductions in reserves for loss adjustment expense which continues to benefit
from successful management of litigation expenses.
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2015 Development
The property and casualty insurance segment experienced $40.4 million of favorable development in our net
reserves for prior accident years for the year ended December 31, 2015. Three lines in aggregate accounted for a
majority of the favorable development. The largest single contributor was long-tail liability with $23.0 million of
favorable development followed by workers' compensation with $22.1 million of favorable development and auto
physical damage with $4.4 million of favorable development for the year ended December 31, 2015. The favorable
development is attributable to reductions in reserves for reported claims as well as reductions in required reserves
for incurred but not reported claims combined with continued successful management of litigation expenses. These
reserve decreases were more than sufficient to offset claim payments. The favorable development was partially
offset by adverse development, the majority coming from three lines which included property with $5.6 million of
adverse development from an increase in severity and frequency of losses, assumed reinsurance with $8.1 million of
adverse development due to prior year development of catastrophe losses and commercial auto liability with $2.8
million of adverse development due to an increase in frequency of losses in the year ended December 31, 2015. No
other single line of business contributed a significant portion of the total development.
2014 Development
The property and casualty insurance segment experienced $56.7 million of favorable development in our net
reserves for prior accident years for the year ended December 31, 2014. The significant drivers of the favorable
reserve development in 2014 were our long-tail liability lines, workers' compensation, and automobile (both liability
and physical damage), which collectively contributed $54.3 million of the total development. Much of the favorable
long-tail liability development came from loss adjustment expense and is attributed to our litigation management
initiative. Workers' compensation favorable development was due to the combination of claim reserve decreases
along with favorable changes affecting loss adjustment expense. Changes in reserve development patterns have
shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim
reserves. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial auto
liability continues to benefit from loss control and re-underwriting initiatives over the past two years as well as
favorable changes affecting loss adjustment expense as reserve development patterns also showed a redundancy in
reserves along with less need for IBNR claim reserves.
Reserve development amounts can vary significantly from year-to-year depending on a number of factors, including
the number of claims settled and the settlement terms, and are subject to reallocation between accident years and
lines of business.
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Net Loss Ratios by Line
The following table depicts our net loss ratios for 2016, 2015 and 2014:
Years ended December 31,
(In Thousands)
Commercial lines
Other liability
Fire and allied lines
Automobile
Workers' compensation
Fidelity and surety
Other
2016
Net Losses
and Loss
Settlement
Expenses
Incurred
Net Premiums
Earned
Net Loss Ratio
Net Premiums
Earned
2015
Net Losses and
Loss
Settlement
Expenses
Incurred
Net Loss Ratio
Net Premiums
Earned
2014
Net Losses and
Loss
Settlement
Expenses
Incurred
Net Loss Ratio
$
289,982
$
130,748
45.1% $
261,303
$
130,904
50.1% $
228,426
$
106,827
46.8%
221,758
214,009
103,605
22,507
1,745
176,961
211,882
74,051
222
498
79.8
99.0
71.5
1.0
28.5
202,375
185,970
95,672
21,362
2,158
128,479
152,558
47,106
2,001
428
63.5
82.0
49.2
9.4
19.8
181,710
164,537
88,522
19,212
2,741
148,856
122,683
63,425
1,597
153
81.9
74.6
71.6
8.3
5.6
Total commercial lines
$
853,606
$
594,362
69.6% $
768,840
$
461,476
60.0% $
685,148
$
443,541
64.7%
Personal lines
Fire and allied lines
Automobile
Other
Total personal lines
Reinsurance assumed
Total
NM=Not meaningful
$
$
$
$
43,463
$
25,207
1,090
69,760
12,765
936,131
$
$
$
27,402
23,123
260
50,785
7,286
63.0% $
44,075
$
65.4% $
44,376
$
91.7
23.9
72.8% $
57.1% $
24,120
1,021
69,216
13,639
$
$
$
28,815
17,817
296
46,928
11,683
73.9
29.0
67.8% $
85.7% $
23,276
994
68,646
13,145
38,644
20,571
1,972
61,187
5,083
509,811
87.1%
88.4
198.4
89.1%
38.7%
66.5%
$
$
$
520,087
61.0% $
766,939
652,433
69.7% $
851,695
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Commercial Lines
The net loss ratio in our commercial lines of business, excluding assumed reinsurance, was 69.6 percent in 2016
compared to 60.0 percent in 2015 and 64.7 percent in 2014. The change in 2016 as compared to 2015 was primarily
the result of an increase in catastrophe losses and large losses, which we define as losses greater than $500 thousand,
in our commercial automobile and commercial fire & allied lines of business.
The improvement in 2015 as compared to 2014 was primarily the result of a decrease in net losses and loss
settlement expenses incurred in fire and allied lines and workers' compensation partially offset by an increase in
losses in commercial automobile. The prior year results included an increase in catastrophe losses from spring and
summer storms in regions of the U.S where we conduct much of our business and an increase in frequency and
severity in fire-related losses in our commercial fire & allied line of business.
Other Liability
Other liability is business insurance covering bodily injury and property damage arising from general business
operations, accidents on the insured's premises and products manufactured or sold. Because of the long-tail nature of
liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the
loss, the reporting of the loss to us and the settlement of the claim.
In recent years, we began to use our loss control department more extensively in an attempt to return this line of
business to a higher level of profitability. For example, our loss control department has representatives who make
multiple visits each year to businesses and job sites to ensure safety. We also do not renew accounts that no longer
meet our underwriting or pricing guidelines. We avoid accounts that have become too underpriced for the risk.
Construction Defect Losses
Incurred losses from construction defect claims were $10.4 million in 2016 compared to $3.6 million and $10.1
million in 2015 and 2014, respectively. At December 31, 2016, we had $22.3 million in construction defect loss and
loss settlement expense reserves (excluding IBNR reserves which are calculated at the overall other liability
commercial line), which consisted of 1,382 claims. In comparison, at December 31, 2015, we had reserves of $28.8
million, excluding IBNR reserves, consisting of 1,721 claims. The increase in the incurred losses is due to an
increase in paid claims in the current year and acceleration of claims settlement rates. The decrease in reserves at
December 31, 2016 is due to a decrease in open claim counts.
Construction defect claims generally relate to allegedly defective work performed in the construction of structures
such as apartments, condominiums, single family dwellings or other housing, as well as the sale of defective
building materials. Such claims seek recovery due to damage caused by alleged deficient construction techniques or
workmanship. The reporting of such claims can be quite delayed due to an extended statute of limitations,
sometimes up to ten years. Court decisions have expanded insurers' exposure to construction defect claims as well.
Defense costs are also a part of the insured expenses covered by liability policies and can be significant, sometimes
greater than the cost of the actual paid claims.
We have exposure to construction defect liabilities in Colorado and surrounding states. We have historically insured
small- to medium-sized contractors in this geographic area. In an effort to limit the number of future claims from
multi-unit buildings, we implemented policy exclusions in 2009, later revised in 2010, that exclude liability
coverage for contractors performing "residential structural" operations on any building project with more than 12
units or on single family homes in any subdivision where the contractor is working on more than 15 homes. The
exclusions do not apply to remodeling or repair of an existing structure. We also changed our underwriting
guidelines to add a professional liability exclusion when contractors prepare their own design work or blueprints and
implemented the multi-family exclusion and tract home building limitation form for the state of Colorado and our
other western states as a means to reduce our exposure in future years. When offering commercial umbrella
coverage for structural residential contractors, limits of liability are typically limited to a maximum of $2.0 million
per occurrence. Requests to provide additional insured status for "developers" are declined.
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As a result of our acquisition of Mercer Insurance Group in 2011, we added construction defect exposure in the
states of California, Nevada and Arizona. Mercer Insurance Group has been writing in these states for more than 20
years. In order to minimize our exposure to construction defect claims in this region, we continually review the
coverage we offer and our pricing models. In an effort to limit our exposure from residential multi-unit buildings, we
started including condominium and townhouse construction policy exclusions in 2012 for our contracting policies in
this region. For the majority of our residential contractors we limit the size of any tracts the contractor is working on
to 25 homes or less and do not include a continuous trigger with our designated work exclusion. In a majority of the
policies in our small service, repair and remodel contractors program, we have a favorable new residential
construction exclusion. We also apply strict guidelines when additional insured forms are required and changed our
underwriting guidelines to limit our exposure to large, multi-party construction defect claims.
Commercial Fire and Allied Lines
Commercial fire and allied lines include fire, allied lines, commercial multiple peril and inland marine. The
insurance covers losses to an insured's property, including its contents, from weather, fire, theft or other causes. We
provide this coverage through a variety of business policies.
The deterioration in the net loss ratio in 2016 as compared to 2015 was primarily attributable to an increase in
severity in commercial fire losses and an increase in catastrophe losses. The improvement in the net loss ratio in
2015 as compared to 2014 was primarily attributable to elevated losses in the prior year. In 2014, there were
elevated catastrophe losses from spring and summer storms in regions of the U.S. where we conduct much of our
business and an increase in frequency and severity in fire-related losses in our commercial property line of business.
Commercial Automobile
Our commercial automobile insurance covers physical damage to an insured's vehicle, as well as liabilities to third
parties. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire,
theft, flood or other causes. Automobile liability insurance covers bodily injury, damage to property resulting from
automobile accidents caused by the insured, uninsured or underinsured motorists and the legal costs of defending the
insured against lawsuits. The deterioration in our commercial automobile insurance line in 2016 as compared to
2015 was due to an increase in frequency and severity of claims in 2016 due to an increase in miles driven by
commercial vehicles. The deterioration in our commercial automobile insurance line in 2015 as compared to 2014
was due to an increase in severity of claims combined with additional reserves for incurred but not reported claims
in 2015 primarily from an adverse development experience trend from an increase in highway roadway use by
commercial vehicles.
Workers' Compensation
We consider our workers' compensation business to be a companion product; we rarely write stand-alone workers'
compensation policies. Our workers' compensation insurance covers primarily small- to mid-size accounts.
The deterioration in our workers' compensation line of business in 2016 as compared to 2015 was due to an increase
in severity of claims of over $0.1 million and a decrease in favorable reserves development on prior year claims. The
improvement in our workers' compensation line of business in 2015 as compared to 2014 was due to a decrease in
severity and frequency of claims and favorable development in reserves for reported claims.
The challenges faced by workers' compensation insurance providers to attain profitability include the regulatory
climates in some states that make it difficult to obtain appropriate premium rate increases and inflationary medical
costs. Despite these pricing issues, we continue to believe that we can improve the results of this line of business.
Consequently, we have increased the utilization of our loss control unit in the analysis of current risks, with the
intention of increasing the quality of our workers' compensation book of business. We are currently using these
modeling analytics to assist us in risk selection, and we will continue to evaluate the model results.
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Fidelity and Surety
Our surety products guarantee performance and payment by our bonded principals. Our contract bonds protect
owners from failure to perform on the part of our principals. In addition, our surety bonds protect material suppliers
and subcontractors from nonpayment by our contractors. When surety losses occur, our loss is determined by
estimating the cost to complete the remaining work and to pay the contractor's unpaid bills, offset by contract funds
due to the contractor, reinsurance, and the value of any collateral to which we may have access.
In 2016, the change in the the loss ratio was primarily due to salvage and subrogation received in the second quarter
of 2016. In 2015, the loss ratio increased slightly as compared to 2014 due to a single large claim incurred in the
first quarter of 2015.
During 2016 and 2014 there were no claims that exceeded our $1.5 million reinsurance retention level. During 2015,
there were two claims that exceeded our $1.5 million surety excess of loss reinsurance retention level.
Personal Lines
Our personal lines consist primarily of fire and allied lines (including homeowners) and automobile lines. In 2016,
the net loss ratio deteriorated 5.0 percentage points primarily attributable to an increase in claim frequency in our
personal automobile line due to an increase in catastrophe losses. In 2015, the net loss ratio improved 21.3
percentage points compared to 2014. The change was primarily due to a decrease in net losses and loss settlement
expenses incurred in the fire and allied lines of business due to less catastrophe losses in 2015.
For our personal lines, we use the CATography™ Underwriter tool, which gives us the ability to determine whether
the premium we charge for an exposure is adequate in areas where hurricanes and earthquakes occur. We have also
implemented predictive analytics and data prefill for our personal automobile line. Data prefill is a data accessing
methodology that allows for a more complete profile of our customers at the agent's point of sale during the
quotation process.
Assumed Reinsurance
Our assumed reinsurance is the business we choose to write by participating in programs insuring insurance
companies. The net loss ratio improved in 2016 due to an increase in favorable reserve development on prior year
claims and from a decrease in catastrophe losses assumed. The net loss ratio deterioration in 2015 was due to an
increase in catastrophe losses assumed.
In 2016, we renewed our participation in all of our assumed programs. In 2015, we renewed our participation in all
of our assumed programs and added one new program to our portfolio. In 2014, we renewed our participation in all
but one of our assumed programs and added one new program to our portfolio. We increased participation in one
program in our assumed portfolio to replace lost premium from the program not renewed.
Other Underwriting Expenses
Our underwriting expense ratio, which is a percentage of other underwriting expenses over net premiums earned,
was 30.6 percent, 31.0 percent and 31.3 percent for 2016, 2015, and 2014, respectively. The underwriting expense
ratio improved in 2016 due to a decrease in post-retirement benefit costs and contingent commission expenses.
The underwriting expense ratio improved slightly in 2015 due to the improvement in the profitability in certain lines
of business, which led to an increase in the amount of underwriting expenses eligible for deferral, elimination of
duplicate costs associated with the previously disclosed Mercer Insurance Group, Inc. integration and completion of
technology projects, all partially offset by an increase in post-retirement benefit costs.
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Life Insurance Segment Results
(In Thousands)
Revenues
Net premiums earned
Investment income, net
Net realized investment gains (losses)
Other-than-temporary impairment charges
All other net realized gains
Net realized investment gains
Other income
Total revenues
Benefits, Losses and Expenses
Losses and loss settlement expenses
Increase in liability for future policy benefits
Amortization of deferred policy acquisition costs
Other underwriting expenses
Interest on policyholders' accounts
Total benefits, losses and expenses
Income before income taxes
NM =Not meaningful
Years Ended December 31,
% Change
2016
2015
2014
2016
vs. 2015
2015
vs. 2014
$
$
$
$
$
87,270
51,538
—
1,156
1,156
621
140,585
31,365
59,969
8,121
19,881
20,079
139,415
1,170
$
$
$
$
$
79,195
54,222
$
61,391
60,373
(1,300)
3,022
1,722
508
135,647
—
3,093
3,093
774
$ 125,631
29,001
50,945
6,634
19,306
23,680
129,566
$
26,432
36,623
6,139
15,754
30,245
$ 115,193
10.2 %
(5.0)%
NM
(61.7)%
(32.9)%
22.2 %
3.6 %
8.2 %
17.7 %
22.4 %
3.0 %
(15.2)%
7.6 %
29.0 %
(10.2)%
NM
(2.3)%
(44.3)%
(34.4)%
8.0 %
9.7 %
39.1 %
8.1 %
22.5 %
(21.7)%
12.5 %
6,081
$
10,438
(80.8)%
(41.7)%
United Life underwrites all of our life insurance business. Our principal life insurance products are deferred and
immediate annuities, universal life products and traditional life (primarily single premium whole life insurance)
products. We also underwrite and market other traditional products, including term life insurance and whole life
insurance. Deferred and immediate annuities (40.3 percent), traditional life products (47.5 percent), universal life
products (10.9 percent), and other life products (1.3 percent) comprised our 2016 life insurance premium revenues,
as determined on the basis of statutory accounting principles. We do not write variable annuities or variable
insurance products.
Income before income taxes for our life insurance segment totaled $1.2 million in 2016 compared to $6.1 million in
2015 and $10.4 million in 2014. The decrease in net income before income taxes from 2015 to 2016 was primarily a
result of a decrease in net investment income, an increase in losses and loss settlement expenses and an increase in
the increase in liability for future policy benefits, all partially offset by an increase in net premiums earned from
higher sales of single premium whole life ("SPWL") policies and a decrease in interest on policyholders' accounts
due to the continued net withdrawals of annuity products.
The decrease in net income before income taxes from 2014 to 2015 was primarily a result of a decrease in net
investment income, an increase in losses and loss settlement expenses and an increase in the increase in liability for
future policy benefits, all partially offset by an increase in net premiums earned from higher sales of SPWL policies
and a decrease in interest on policyholders' accounts due to a decline in the crediting rate paid on continued net
withdrawals of annuity products.
In 2016, net investment income decreased 5.0 percent as compared to 2015 and decreased 10.2 percent in 2015 as
compared to 2014. The decrease is due to lower asset base from declining annuity deposits and due to a decrease in
reinvestment interest rates. For discussion of our consolidated investment results, see the "Investments" section
contained in this Item.
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Net premiums earned increased 10.2 percent in 2016 as compared to 2015 primarily due to an increase in sales of
SPWL policies. Net premiums earned increased 29.0 percent in 2015 as compared to 2014 due to an increase in
sales of SPWL policies.
Underwriting expenses increased 3.0 percent in 2016 as compared to 2015 due to an increase in SPWL commissions
related to the increase in premiums as previously mentioned partially offset by a decrease in our post-retirement
benefit plan expenses.
Deferred annuity deposits decreased 24.5 percent in 2016, as compared to 2015 and decreased 55.7 percent in 2015
as compared to 2014. We gradually lowered the credited rate offered on our deferred annuity products in the low
interest rate environment, which resulted in the decrease in deferred annuity deposits.
Net cash outflow related to the Company's annuity business was $83.7 million in 2016 compared to a net cash
outflow of $129.7 million and $77.7 million, respectively, in 2015 and 2014. This result is attributed to the activity
described previously.
The fixed annuity deposits that we collect are not reported as net premiums earned under GAAP. Instead, we invest
annuity deposits and record them as a liability for future policy benefits. The revenue that is generated from fixed
annuity products consists of policy surrender charges and investment income. The difference between the yield we
earn on our investment portfolio and the interest we credit on our fixed annuities is known as the investment spread.
The investment spread is a major driver of the profitability for all of our annuity products. As of December 31, 2016,
our investment spread on our annuity products was 1.48 percent as compared to 1.34 percent at December 31, 2015.
Federal Income Taxes
We reported a federal income tax expense of $8.8 million, $32.3 million and $17.3 million in 2016, 2015, and 2014,
respectively. Our effective federal tax rate varied from the statutory federal income tax expense rate of 35.0 percent
in each year, due primarily to our portfolio of tax-exempt securities.
As of December 31, 2016, we had a net operating loss ("NOL") carryforward of $3.1 million, which is due to our
purchase of American Indemnity Financial Corporation in 1999. No NOLs will expire in 2017.
Due to our determination that we may not be able to fully realize the benefits of the NOLs acquired in the purchase
of American Indemnity Financial Corporation, which are only available to offset the future taxable income of our
property and casualty insurance operations and are further limited as to the amount that can be utilized in any given
year, we have recorded a valuation allowance against these NOLs that totaled $0.7 million at December 31, 2016.
Based on a yearly review, we determine whether the benefit of the NOLs can be realized, and, if so, the decrease in
the valuation allowance is recorded as a reduction to current federal income tax expense. If NOLs expire during the
year, the decrease in the valuation allowance is offset with a corresponding decrease to the deferred income tax
asset. The valuation allowance was reduced by $0.5 million in 2016 due to the realization of $1.6 million in NOLs.
As of December 31, 2016, we had $1.2 million of alternative minimum tax ("AMT") credit carryforwards.
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INVESTMENTS
Investment Environment
2016 can be characterized as a year of tepid global economic activity, below trend investment, and increased
geopolitical uncertainty. The current year began on a negative tone for risk assets as a severe correction in Chinese
stocks, combined with weaker-than-expected economic numbers in the United States, prompted a convincing flight-
to-safety trade among portfolio managers. In January and February, U.S. equities declined by almost 10 percent, the
price of oil fell below $30 per barrel, and 10-year Treasury yields plummeted almost 60 basis points to 1.66 percent.
However, by spring the sense of panic had transitioned into opportunity, and markets were able to stabilize as the
economic outlook improved with more upbeat data, and global central banks reaffirmed their pledge of
support. However, investor resolve was tested once again during the summer with Britain’s referendum to leave the
European Union causing a spike in volatility, and a second leg down for interest rates with U.S. 10-year treasury
rates falling to 1.34 percent.
Heading into the fall elections, the economy continued to trend positive overall. Immediately following the election,
stocks and bond yields rallied substantially, which continued into the end of the year. While the backup in rates since
the election was welcomed, the overall level of investment yield still remains historically low. Now that fiscal
stimulus seems poised to take over for monetary policy as the driving force for the economy, expectations are that
lower taxes, less regulation and increased capital spending will produce above trend growth and productivity, as well
as increase the overall level of prices and interest rates. Downside risks include stagnation due to delays in, or lack
of, policy implementation caused by government gridlock. In general, the investment environment remains
challenging for now given persistently low yields for fixed income investments, uncertainty surrounding a
meaningful pivot in U.S. government policy across many fronts and shifting global alliances as a result.
Investment Philosophy
The Company's assets are invested to preserve capital and maximize after-tax returns while maintaining an
appropriate balance of risk. The return on our portfolio is an important component of overall financial results, but
quality and safety of principal is the highest priority of our investment program. Our general investment philosophy
is to purchase financial instruments with the expectation that we will hold them to their maturity. However, active
management of our available-for-sale portfolio is considered necessary to appropriately manage risk, achieve
portfolio objectives and maximize investment income as market conditions change.
We work with our insurance company subsidiaries to develop an appropriate investment strategy that aligns with
their business needs and supports United Fire's strategic plan and risk appetite. The portfolio is structured so as to
be in compliance with state insurance laws that prescribe the quality, concentration and type of investments that may
be made by insurance companies. All but a small portion of our investment portfolio is managed internally.
Investment Portfolio
Our invested assets at December 31, 2016 totaled $3.3 billion, compared to $3.1 billion at December 31, 2015, an
increase of $122.9 million. At December 31, 2016, fixed maturity securities and equity securities comprised 89.2
percent and 8.5 percent of our investment portfolio, respectively. Because the primary purpose of the investment
portfolio is to fund future claims payments, we utilize a conservative investment philosophy, investing in a
diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government and
government agency bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to stay fully
invested (i.e., minimize cash balances). If additional cash is needed we have an ability to borrow funds available
under our revolving credit facility.
Composition
We develop our investment strategies based on a number of factors, including estimated duration of reserve
liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of
inflation and regulatory requirements. We administer our investment portfolio based on investment guidelines
47
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approved by management and the investment committee of our Board of Directors that comply with applicable
statutory regulations.
The composition of our investment portfolio at December 31, 2016 is presented at carrying value in the following
table:
Property & Casualty
Insurance Segment
Percent
of Total
Life Insurance Segment
Percent
of Total
Total
Percent
of Total
$
150
1,453,286
14,390
—% $
82.1
0.8
48
1,444,840
—
—% $
96.7
—
198
2,898,126
14,390
—%
88.7
0.4
(In Thousands)
Fixed maturities: (1)
Held-to-maturity
Available-for-sale
Trading securities
Equity securities:
246,370
5,644
Available-for-sale
Trading securities
13.9
0.3
—
Mortgage loans
—
Policy loans
2.9
Other long-term investments
—
Short-term investments
100.0% $
Total
(1) Available-for-sale and trading fixed maturities are carried at fair value. Held-to-maturity fixed maturities are carried at amortized cost.
270,416
5,644
3,706
5,366
67,639
175
3,265,660
24,046
—
3,706
5,366
15,871
—
1,493,877
1.6
—
0.2
0.4
1.1
—
100.0% $
—
—
51,768
175
1,771,783
$
8.3
0.2
0.1
0.2
2.1
—
100.0%
At December 31, 2016, we classified $2.9 billion, or 99.5 percent, of our fixed maturities portfolio as available-for-
sale, compared to $2.8 billion, or 99.5 percent, at December 31, 2015. Available-for-sale securities are carried at fair
value, with changes in fair value recognized as a component of accumulated other comprehensive income in
stockholders' equity. We classify our remaining fixed maturities as held-to-maturity or trading. We record held-to-
maturity securities at amortized cost. We record trading securities, primarily convertible redeemable preferred debt
securities, at fair value, with any changes in fair value recognized in earnings.
As of December 31, 2016 and 2015, we did not have direct exposure to investments in subprime mortgages or other
credit enhancement vehicles.
Credit Quality
The following table shows the composition of fixed maturity securities held in our available-for-sale, held-to-
maturity and trading security portfolios by credit rating at December 31, 2016 and 2015. Information contained in
the table is generally based upon the issue credit ratings provided by Moody's, unless the rating is unavailable, in
which case we obtain it from Standard & Poor's.
(In Thousands)
Rating
AAA
AA
A
Baa/BBB
Other/Not Rated
Duration
December 31, 2016
December 31, 2015
Carrying Value
782,329
857,946
651,696
554,475
66,268
2,912,714
$
$
% of Total
Carrying Value
% of Total
26.9%
29.4
22.4
19.0
2.3
100.0%
$
$
838,318
724,023
670,098
556,667
49,149
2,838,255
29.6%
25.5
23.6
19.6
1.7
100.0%
Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market
risk, specifically interest rate changes. Duration is a measurement used to quantify our inherent interest rate risk and
48
Table of Contents
analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities
have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary
purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments
will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the
duration of assets and liabilities can cause significant fluctuations in our results of operations.
Group
The weighted average effective duration of our portfolio of fixed maturity securities was 5.2 years at December 31,
2016 compared to 5.2 years at December 31, 2015.
Property and Casualty Insurance Segment
The weighted average effective duration of our portfolio of fixed maturity securities was 5.4 years at December 31,
2016 compared to 5.2 years at December 31, 2015.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at
December 31, 2016, by contractual maturity, are shown in the following table. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations
may be subject to prepayment risk and are therefore not categorized by contractual maturity.
(In Thousands)
Held-To-Maturity
Available-For-Sale
Trading
December 31, 2016
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Asset-backed securities
Mortgage-backed securities
Collateralized mortgage obligations
Life Insurance Segment
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
150
$
150
$
55,767
$
56,234
$
—
—
—
—
—
—
—
—
—
—
—
—
302,350
322,890
609,923
3,127
11,462
310,942
325,690
593,937
3,008
11,584
152,716
151,891
$
1,753
7,841
1,302
2,158
—
—
—
1,774
8,882
1,406
2,328
—
—
—
$
150
$
150
$ 1,458,235
$ 1,453,286
$
13,054
$
14,390
The weighted average effective duration of our portfolio of fixed maturity securities at December 31, 2016 was
4.9 years compared to 5.3 years at December 31, 2015.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at
December 31, 2016, by contractual maturity, are shown in the following table. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations
may be subject to prepayment risk and are therefore not categorized by contractual maturity.
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Table of Contents
(In Thousands)
Held-To-Maturity
Available-For-Sale
December 31, 2016
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Asset-backed securities
Mortgage-backed securities
Collateralized mortgage obligations
Investment Results
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
—
—
—
—
—
48
—
48
$
$
—
—
—
—
—
49
—
49
$
50,291
$
538,253
484,833
77,916
1,280
5,826
270,871
50,846
551,111
489,492
77,542
1,262
5,664
268,923
$
1,429,270
$
1,444,840
We invest the premiums received from our policyholders and annuitants in order to generate investment income,
which is an important component of our revenues and profitability. The amount of investment income that we are
able to generate is affected by many factors, some of which are beyond our control. Some of these factors are
volatility in the financial markets, economic growth, inflation, changes in interest rates, world political conditions,
terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in
which we invest and other unpredictable national or world events. Net investment income increased 6.0 percent in
2016, compared with the same period of 2015, primarily due to the change in value of our investments in limited
liability partnerships, specifically related to financial institutions. The valuation of these investments in limited
liability partnerships varies from period to period due to current equity market conditions. We expect to maintain our
investment philosophy of purchasing quality investments rated investment grade or better.
We regularly monitor the difference between our cost basis and the estimated fair value of our investments. Our
accounting policy for impairment recognition requires other-than-temporary impairment charges to be recorded
when we determine that it is more likely than not that we will be unable to collect all amounts due according to the
contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security
will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair
value of the investments at the measurement date or based on the value calculated using a discounted cash flow
model. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of
time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the
issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
Changes in unrealized gains and losses on available-for-sale securities do not affect net income and earnings per
share but do impact comprehensive income, stockholders' equity and book value per share. We believe that any
unrealized losses on our available-for-sale securities at December 31, 2016 are temporary based upon our current
analysis of the issuers of the securities that we hold and current market conditions. It is possible that we could
recognize impairment charges in future periods on securities that we own at December 31, 2016 if future events and
information cause us to determine that a decline in value is other-than-temporary. However, we endeavor to invest in
high quality assets to provide protection from future credit quality issues and corresponding other-than-temporary
impairment write-downs.
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Our investment results are summarized in the following table:
(In Thousands)
As of and for the Years Ended December 31,
2016
2015
Investment income, net
$
106,822
$
100,781
Net realized investment gains (losses)
Other-than-temporary impairment charges
All other net realized gains
Total net realized investment gains
Net unrealized investment gains, after tax
$
$
$
— $
(1,300)
6,103
6,103
133,892
4,146
2,846
128,369
$
$
2014
104,609
—
7,270
7,270
149,623
$
$
$
$
% Change
2016
vs. 2015
2015
vs. 2014
6.0%
(3.7)%
NM
47.2
114.4%
4.3%
NM
(43.0)
(60.9)%
(14.2)%
NM=not meaningful
Net Investment Income
In 2016, our investment income, net of investment expenses, increased $6.0 million to $106.8 million as compared
to 2015, primarily due to the change in value of our investments in limited liability partnerships, specifically related
to financial institutions.
In 2015, our investment income, net of investment expenses, decreased $3.8 million to $100.8 million as compared
to 2014, primarily due the decline in invested assets and decline in reinvestment interest rates from the low interest
rate environment.
The following table summarizes the components of net investment income:
(In Thousands)
Years Ended December 31,
Investment income
Interest on fixed maturities
Dividends on equity securities
Income on other long-term investments
Interest
Change in value (1)
Interest on mortgage loans
Interest on short-term investments
Interest on cash and cash equivalents
Other
Total investment income
Less investment expenses
Investment income, net
2016
2015
2014
$
$
$
92,362
7,050
2,394
10,742
221
84
445
1,227
114,525
7,703
106,822
$
$
$
92,777
7,208
2,567
3,266
237
6
305
1,452
107,818
7,037
100,781
$
$
$
97,969
6,602
1,927
1,917
252
5
255
1,998
110,925
6,316
104,609
(1) Represents the change in value of our interests in limited liability partnerships that are recorded on the equity method of accounting.
In 2016, 80.6 percent of our gross investment income originated from interest on fixed maturities, compared to 86.0
percent and 88.3 percent in 2015 and 2014, respectively.
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The following table details our annualized yield on average invested assets for 2016, 2015 and 2014, which is based
on our invested assets (including money market accounts) at the beginning and end of the year divided by net
investment income:
(In Thousands)
Years ended December 31,
2016
2015
2014
Average
Invested Assets
Investment
Income, Net
Annualized Yield on
Average Invested Assets
$
$
3,223,014
3,181,311
3,143,502
106,822
100,781
104,609
3.3%
3.2 %
3.3
Net Realized Investment Gains and Losses
In 2016, 2015 and 2014, we reported net realized investment gains of $6.1 million, $2.8 million and $7.3 million,
respectively. The following table summarizes the components of our net realized investment gains or losses:
(In Thousands)
Years Ended December 31,
Net realized investment gains (losses)
Fixed maturities:
Available-for-sale
Trading securities
Change in fair value
Sales
Equity securities:
Available-for-sale
Trading securities
Change in fair value
Sales
Other long-term investments
Other-than-temporary-impairment charges:
Fixed maturities
Cash equivalents
Total net realized investment gains
Net Unrealized Investment Gains and Losses
2016
2015
2014
$
2,160
$
3,294
$
3,353
189
931
2,359
301
(6)
—
—
169
6,103
$
$
(1,353)
1,381
2,521
(448)
66
(1,315)
(1,300)
—
2,846
$
609
1,339
1,732
238
(1)
—
—
—
7,270
As of December 31, 2016, net unrealized investment gains, after tax, totaled $133.9 million compared to $128.4
million and $149.6 million as of December 31, 2015 and 2014, respectively. The increase in unrealized gains in
2016 is the result of an increase in the fair value of the equity securities portfolio due to an increase in the financial
markets, partially offset by a decline in the fair value of the fixed maturity portfolio due to an increase in interest
rates. The decrease in unrealized gains in 2015 is the result of a decrease in the fair value of the fixed maturity
portfolio due to an increase in interest rates and the decrease in the equity portfolio due to a decline in the financial
markets.
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The following table summarizes the change in our net unrealized investment gains (losses):
(In Thousands)
Years Ended December 31,
Changes in net unrealized investment gains (losses):
Available-for-sale fixed maturity securities
Equity securities
Deferred policy acquisition costs
Income tax effect
Total change in net unrealized investment gains, net of tax
Market Risk
2016
2015
2014
$
$
(21,271)
$
(37,621)
$
34,179
(4,410)
(2,975)
5,523
(6,459)
11,380
11,446
$
(21,254)
$
51,814
15,781
(16,789)
(17,784)
33,022
Our Consolidated Balance Sheets include financial instruments whose fair values are subject to market risk. The
active management of market risk is integral to our operations. Market risk is the potential for loss due to a decrease
in the fair value of securities resulting from uncontrollable fluctuations, such as: interest rate risk, equity price risk,
foreign exchange risk, credit risk, inflation, or geopolitical conditions. Our primary market risk exposures are:
changes in interest rates, deterioration of credit quality in specific issuers, sectors or the economy as a whole, and an
unforeseen decrease in the liquidity of securities we hold. We have no foreign exchange risk.
Interest Rate Risk
Interest rate risk is the price sensitivity of a fixed income maturity security or portfolio of securities to changes in
level of interest rates. Generally, there is an inverse relationship between changes in interest rates and changes in the
price of a fixed income/maturity security. Plainly stated, if interest rates go up (down), bond prices go down (up). A
vast majority of our holdings are fixed income maturity and other interest rate sensitive securities that will decrease
(increase) in value as interest rates increase (decrease). While it is generally our intent to hold our investments in
fixed maturity securities to maturity, we have classified a majority of our fixed maturity portfolio as available-for-
sale. Available-for-sale fixed income maturity securities are carried at fair value on the Consolidated Balance Sheets
with unrealized gains or losses reported net of tax in Accumulated Other Comprehensive Income. A change in the
prevailing interest rates generally translates into a change in the fair value of our fixed income/maturity securities,
and by extension, our overall book value.
Market Risk and Duration
We analyze potential changes in the value of our investment portfolio due to the market risk factors noted above
within the overall context of asset and liability management. A technique we use in the management of our
investment portfolio is the calculation of duration. Our actuaries estimate the payout pattern of our reserve liabilities
to determine their duration, which is the present value of the weighted average payments expressed in years. We
then establish a target duration for our investment portfolio so that at any given time the estimated cash generated by
the investment portfolio will closely match the estimated cash required for the payment of the related reserves. We
structure the investment portfolio to meet the target duration to achieve the required cash flow, based on liquidity
and market risk factors.
Duration relates primarily to our life insurance segment because the long-term nature of these reserve liabilities
increases the importance of projecting estimated cash flows over an extended time frame. At December 31, 2016,
our life insurance segment had $666.7 million in deferred annuity liabilities for which investments in fixed maturity
securities were specifically allocated.
The duration of the life insurance segment's investment portfolio must take into consideration interest rate risk. This
is accomplished through the use of sensitivity analysis, which measures the price sensitivity of the fixed maturities
to changes in interest rates. The alternative valuations of the investment portfolio, given the various hypothetical
interest rate changes utilized by the sensitivity analysis, allow management to revalue the potential cash flow from
53
Table of Contents
the investment portfolio under varying market interest rate scenarios. Duration can then be recalculated at the
differing levels of projected cash flows.
Impact of Interest Rate Changes
The amounts set forth in the following table detail the impact of hypothetical interest rate changes on the fair value
of fixed maturity securities held at December 31, 2016. The sensitivity analysis measures the change in fair values
arising from immediate changes in selected interest rate scenarios. We employed hypothetical parallel shifts in the
yield curve of plus or minus 100 and 200 basis points in the simulations. Additionally, based upon the yield curve
shifts, we employ estimates of prepayment speeds for mortgage-related products and the likelihood of call or put
options being exercised within the simulations. According to this analysis, at current levels of interest rates, the
duration of the investments supporting the deferred annuity liabilities is 2.01 years longer than the projected duration
of the liabilities. If interest rates increase by 100 or 200 basis points, the duration of the investments supporting the
deferred annuity liabilities would be 2.46 years and 3.0 years longer, respectively, than the projected duration of the
liabilities.
The selection of a 100-basis-point and 200-basis-point increase or decrease in interest rates should not be construed
as a prediction by our management of future market events, but rather as an illustration of the potential impact of an
event.
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Table of Contents
December 31, 2016
(In Thousands)
HELD-TO-MATURITY
Fixed maturities
Bonds
Corporate bonds - financial services
Collateralized mortgage obligations
Total Held-to-Maturity Fixed Maturities
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political subdivisions
General obligations:
Midwest
Northeast
South
West
Special revenue:
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-For-Sale Fixed Maturities
TRADING
Fixed maturities
Bonds
Corporate bonds
Industrials
Consumer goods and services
Health care
Financial services
Technology, media and telecommunications
Redeemable preferred stock
Total Trading Fixed Maturities
Total Fixed Maturity Securities
-200 Basis
Points
-100 Basis
Points
Base
+100 Basis
Points
+ 200 Basis
Points
$
$
$
$
$
$
$
152
52
204
24,308
82,512
157,961
64,712
144,844
129,913
188,881
80,814
281,247
153,649
69,084
236,858
117,629
252,930
198,885
91,092
158,450
300,656
17,919
162,126
188,427
111,770
4,470
3,219,137
4,120
137
3,771
5,005
886
1,304
15,223
3,234,564
$
$
$
$
$
$
$
151
50
201
23,742
80,433
151,289
61,673
137,017
121,984
179,040
74,562
260,957
142,994
67,125
225,967
113,153
241,085
190,065
86,998
151,329
287,006
17,741
155,206
183,165
107,965
4,352
3,064,848
4,017
132
3,571
4,930
833
1,304
14,787
3,079,836
$
$
$
$
$
$
$
150
49
199
23,195
77,597
144,143
58,409
128,369
113,731
168,310
68,065
239,187
131,744
65,234
215,674
108,860
229,903
181,687
83,123
144,612
273,951
17,248
144,460
174,458
101,896
4,270
2,898,126
3,919
127
3,410
4,842
787
1,305
14,390
2,912,715
$
$
$
$
$
$
$
149
48
197
22,668
72,635
136,583
54,828
119,056
105,350
156,987
61,619
217,423
120,453
63,411
205,950
104,735
219,360
173,713
79,459
138,283
261,576
16,514
131,938
163,153
94,325
4,191
2,724,210
3,823
123
3,279
4,670
746
1,304
13,945
2,738,352
$
$
$
$
$
$
$
148
48
196
22,159
67,166
129,365
51,365
110,213
97,501
146,379
55,766
197,774
110,105
61,656
196,794
100,825
209,442
166,154
75,997
132,324
249,983
15,627
119,215
150,500
86,206
4,117
2,556,633
3,733
119
3,173
4,468
709
1,304
13,506
2,570,335
To the extent actual results differ from the assumptions utilized, our duration and interest rate measures could be
significantly affected. As a result, these calculations may not fully capture the impact of nonparallel changes in the
relationship between short-term and long-term interest rates.
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Equity Price Risk
Equity price risk is the potential loss arising from changes in the fair value (i.e., market price) of equity securities
held in our portfolio. Changes in the price of an equity security may be due to a change in the future earnings
capacity or strategic outlook of the security issuer, and what investors are willing to pay for those future earnings
and related strategy. The carrying values of our equity securities are based on quoted market prices, from an
independent source, as of the balance sheet date. Market prices of equity securities, in general, are subject to
fluctuations that could cause the amount to be realized upon the future sale of the securities to differ significantly
from the current reported value. The fluctuations may result from perceived changes in the underlying economic
characteristics of the security issuer, the relative price of alternative investments, general market conditions, and
supply/demand factors related to a particular security.
Impact of Price Change
The following table details the effect on the fair value of our investments in equity securities for a positive and
negative 10 percent price change at December 31, 2016:
(In Thousands)
-10%
Base
+10%
Estimated fair value of equity securities
$
248,454
$
276,060
$
303,666
Foreign Currency Exchange Rate Risk
Foreign currency exchange rate risk arises from the possibility that changes in foreign exchange rates will impact
our transactions with foreign reinsurers relating to the settlement of amounts due to or from foreign reinsurers in the
normal course of business. We consider this risk to be immaterial to our operations.
Credit Risk
Credit risk is the willingness and ability of a borrower to repay on time and in full any principal and interest due to
the lender. Losses related to credit risk are realized through the income statement and have a direct impact on the
earnings of UFG. Given the vast majority of our holdings are fixed income maturity securities, we view credit risk
as our primary investment risk. Our internal Investment Department has developed and maintains a rigorous
underwriting process to analyze and measure the expected frequency and severity of loss (i.e., credit quality) for
government, agency, municipal, structured security, and corporate bond issuers. The objective is to maintain the
appropriate balance of risk in our portfolio, consistent with our Investment Policy Statement and conservative
investment style, and ensure the portfolio is compensated appropriately for the credit risk it holds. We do have
within our municipal bond holdings a small number of securities whose ratings were enhanced by third-party
insurance for the payment of principal and interest in the event of an issuer default. Of the insured municipal
securities in our investment portfolio, 98.9 percent and 99.3 percent were rated "A" or above, and 93.2 percent and
90.9 percent were rated "AA" or above at December 31, 2016 and 2015, respectively, without the benefit of
insurance. Due to the underlying financial strength of the issuers of the securities, we believe that the loss of
insurance would not have a material impact on our operations, financial position, or liquidity.
We have no direct exposure in any of the guarantors of our investments. Our largest indirect exposure with a single
guarantor totaled $32.9 million or 19.1 percent of our insured municipal securities at December 31, 2016, as
compared to $68.5 million or 24.9 percent at December 31, 2015. Our five largest indirect exposures to financial
guarantors accounted for 63.9 percent and 71.4 percent of our insured municipal securities at December 31, 2016
and 2015, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations.
Our cash inflows are primarily a result of the receipt of premiums, annuity deposits, reinsurance recoveries, sales or
maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of
losses and loss settlement expenses, policyholder benefits under life insurance contracts, annuity withdrawals, the
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purchase of investments, operating expenses, dividends, pension plan contributions, and in recent years, common
stock repurchases.
We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our
business will depend on many factors, including our ability to write new business successfully and to establish
premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon
the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In
particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating
agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete
and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed
by regulatory agencies in the United States.
Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the
timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity
requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and
reinsurance coverage disputes.
Historically, we have generated substantial cash inflows from operations. It is our policy to invest the cash generated
from operations in securities with maturities that, in the aggregate, correlate to the anticipated timing of payments
for losses and loss settlement expenses and future policyholder benefits of the underlying insurance policies, and
annuity withdrawals. The majority of our assets are invested in available-for-sale fixed maturity securities.
The following table displays a summary of cash sources and uses in 2016, 2015 and 2014:
Cash Flow Summary
(In Thousands)
Cash provided by (used in)
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
Operating Activities
2016
Years Ended December 31,
2015
2014
$
$
214,384
(112,403)
(97,577)
4,404
$
$
189,998
(36,286)
(137,837)
15,875
$
$
151,291
(58,878)
(94,032)
(1,619)
Net cash flows provided by operating activities totaled $214.4 million, $190.0 million and $151.3 million in 2016,
2015 and 2014, respectively. Our cash flows from operations were sufficient to meet our liquidity needs for 2016,
2015 and 2014.
Investing Activities
Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities.
Fixed maturity securities provide regular interest payments and allow us to match the duration of our liabilities.
Equity securities provide dividend income, potential dividend income growth and potential appreciation. For further
discussion of our investments, including our philosophy and portfolio, see the "Investment Portfolio" section
contained in this Item.
In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed
maturity securities also can provide liquidity. During the next five years, $0.9 billion, or 31.7 percent of our fixed
maturity portfolio will mature.
We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash
equivalents. At December 31, 2016, our cash and cash equivalents included $16.8 million related to these money
market accounts, compared to $20.8 million at December 31, 2015.
Net cash flows used in investing activities totaled $112.4 million, $36.3 million and $58.9 million in 2016, 2015 and
2014, respectively. In 2016, we had cash inflows from scheduled and unscheduled investment maturities,
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redemptions, prepayments, and sales of investments that totaled $551.1 million compared to $674.9 million and
$567.7 million for the same period in 2015 and 2014, respectively. The cash inflows over the last three years
primarily relate to redemptions of fixed maturity securities that are reinvested.
Our cash outflows for investment purchases totaled $655.9 million in 2016, compared to $701.0 million and $618.4
million for the same period in 2015 and 2014, respectively.
Financing Activities
Net cash flows used in financing activities totaled $97.6 million, $137.8 million and $94.0 million in 2016, 2015 and
2014, respectively. In 2016, 2015 and 2014 we had $78.3 million, $118.4 million and 63.5 million, respectively, of
net annuity withdrawals.
Dividends
Dividends paid to shareholders totaled $24.6 million, $21.7 million and $19.7 million in 2016, 2015 and 2014,
respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March
1968.
Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net
income, financial condition, capital requirements, and general business conditions. We will only pay dividends if
declared by our Board of Directors out of legally available funds.
As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends
received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends
payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all
cases, these state laws permit the payment of dividends only from earned surplus arising from business operations.
For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period
without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of
statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis,
not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled
may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2016,
our insurance company subsidiary, United Fire & Casualty, was able to make a maximum of $53.1 million in
dividend payments without prior regulatory approval. These restrictions are not expected to have a material impact
in meeting our cash obligations.
Share Repurchases
Under our share repurchase program, first announced in August 2007, we may purchase our common stock from
time to time on the open market or through privately negotiated transactions. The amount and timing of any
purchases will be at our discretion and will depend upon a number of factors, including the share price, economic
and general market conditions, and corporate and regulatory requirements. Our share repurchase program may be
modified or discontinued at any time.
During 2016, 2015 and 2014, pursuant to authorization by our Board of Directors, we repurchased 90,415, 79,396,
and 461,835 shares of our common stock, respectively, which used cash totaling $3.7 million in 2016, $2.4 million
in 2015 and $12.9 million in 2014. At December 31, 2016, we were authorized to purchase an additional 2,938,471
shares of our common stock under our share repurchase program, which expires in August 2018.
Credit Facilities
Information specific to our credit facilities is incorporated by reference from Note 14 "Credit Facility" contained in
Part II, Item 8, "Financial Statements and Supplementary Data."
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Stockholders' Equity
Stockholders' equity increased 7.2 percent to $941.9 million at December 31, 2016, from $878.9 million at
December 31, 2015. The increase was primarily attributable to net income of $49.9 million along with the change in
valuation of our retirement benefit obligations of $23.1 million and an increase in net unrealized investment gains of
$5.5 million, net of tax, all partially offset by stockholder dividends of $24.6 million and share repurchases of $3.7
million. As of December 31, 2016, the book value per share of our common stock was $37.04, compared to $34.94
at December 31, 2015.
Risk-Based Capital
The NAIC adopted risk-based capital requirements, which requires us to calculate a minimum capital requirement
for each of our insurance companies based on individual company insurance risk factors. These "risk-based capital"
results are used by state insurance regulators to identify companies that require regulatory attention or the initiation
of regulatory action. At December 31, 2016, all of our insurance companies had capital well in excess of required
levels.
Contractual Obligations and Commitments
The following table shows our contractual obligations and commitments, including our estimated payments due by
period, at December 31, 2016:
(In Thousands)
Payments Due By Period
Contractual Obligations
Future policy benefit reserves (1)
Loss and loss settlement expense reserves
Operating leases
Profit-sharing commissions
Pension plan contributions
Total
Total
Less Than
One Year
One to
Three Years
Three to
Five Years
More Than
Five Years
$
1,999,202
$
197,600
$
387,297
$
277,538
$
1,136,767
1,123,896
389,698
25,667
16,053
6,400
6,218
16,053
6,400
352,057
11,031
—
—
143,607
8,244
—
—
238,534
174
—
—
$
3,171,218
$
615,969
$
750,385
$
429,389
$
1,375,475
(1) This projection of our obligation for future policy benefits considers only actual future cash outflows. The future policy benefit reserves
presented on the Consolidated Balance Sheets is the net present value of the benefits to be paid, less the net present value of future net
premiums.
Future Policy Benefits
The amounts presented for future payments to be made to policyholders and beneficiaries must be actuarially
estimated and are not determinable from the contract. The projected payments are based on our current assumptions
for mortality, morbidity and policy lapse, but are not discounted with respect to interest. Additionally, the projected
payments are based on the assumption that the holders of our annuities and life insurance policies will withdraw
their account balances upon the expiration of their contracts. Policies must remain in force for the policyholder or
beneficiary to receive the benefit under the policy. Depending on the terms of a particular policy, future premiums
from the policyholder may be required for the policy to remain in force. In contrast, the future policy benefit
reserves for our life insurance segment presented on the Consolidated Balance Sheets are generally based on
historical assumptions for mortality and policy lapse rates and are on a discounted basis. Accordingly, the amounts
presented above for future policy benefit reserves significantly exceeds the amount of future policy benefit reserves
reported on our Consolidated Balance Sheets at December 31, 2016.
Loss and Loss Settlement Expense Reserves
The amounts presented are estimates of the dollar amounts and time periods in which we expect to pay out our gross
loss and loss settlement expense reserves. Because the timing of future payments may vary from the stated
contractual obligation, these amounts are estimates based upon historical payment patterns and may not represent
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actual future payments. Refer to "Critical Accounting Policies: Loss and Loss Settlement Expenses — Property and
Casualty Insurance Segment" in this section for further discussion.
Operating Leases
Our operating lease obligations are for the rental of office space, vehicles, computer equipment and office
equipment. For further discussion of our operating leases, refer to Part II, Item 8, Note 13 "Lease Commitments."
Profit-Sharing Commissions
We offer our agents a profit-sharing plan as an incentive for them to place high-quality property and casualty
insurance business with us. Based on business produced by the agencies in 2016, property and casualty agencies will
receive profit-sharing payments of $16.1 million in 2017.
Pension Plan Payments
We estimated the pension contribution for 2017 in accordance with the Pension Protection Act of 2006 (the "Act").
Contributions for future years are dependent on a number of factors, including actual performance versus
assumptions made at the time of the actuarial valuations and maintaining certain funding levels relative to regulatory
requirements. Contributions in 2017, and in future years, are expected to be at least equal to the IRS minimum
required contribution in accordance with the Act.
Funding Commitments
At December 31, 2016, pursuant to an agreement with our limited liability partnership investments, we are
contractually committed to make capital contributions up to $8.4 million upon request of the partnerships through
December 31, 2023.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are representative of significant judgments and uncertainties
and that may potentially result in materially different results under different assumptions and conditions. We base
our discussion and analysis of our results of operations and financial condition on the amounts reported in our
Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these
Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis.
We base our estimates on historical experience and on other assumptions we believe to be reasonable under the
circumstances. Actual results could differ from those estimates. We believe our most critical accounting policies are
as follows.
Investment Valuation
Upon acquisition, we classify investments in marketable securities as held-to-maturity, available-for-sale, or trading.
We record investments in held-to-maturity fixed maturity securities at amortized cost. We record investments in
available-for-sale and trading fixed maturity securities and equity securities at fair value. Other long-term
investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method
of accounting. We record mortgage loans at their unpaid principal balance and policy loans at the outstanding loan
amount due from policyholders.
In general, investment securities are exposed to various risks, such as interest rate risk, credit risk, and overall
market volatility risk. Therefore, it is reasonably possible that changes in the fair value of our investment securities
that are reported at fair value will occur in the near term and such changes could materially affect the amounts
reported in the Consolidated Financial Statements. Also, it is reasonably possible that changes in the value of our
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investments in trading securities and limited liability partnerships could occur in the future and such changes could
materially affect our results of operations as reported in our Consolidated Financial Statements.
Fair Value Measurement
Information specific to the fair value measurement of our financial instruments and disclosures is incorporated by
reference from Note 3 "Fair Value of Financial Instruments" contained in Part II, Item 8, "Financial Statements and
Supplementary Data."
Other-Than-Temporary Impairment Charges ("OTTI")
We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our
accounting policy for impairment recognition requires OTTI charges to be recorded when we determine that it is
more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed
maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable
amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the
measurement date or based on the value calculated using a discounted cash flow model. Factors considered in
evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair
value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the
investment; and the likelihood that we will be required to sell the investment.
The determination of the amount of impairments varies by investment type and is based upon our periodic
evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations
and assessments are revised as conditions change and new information becomes available. Additionally, our
management considers a wide range of factors about the instrument issuer and uses its best judgment in evaluating
the cause of the decline in the estimated fair value of the instrument and in assessing the prospects for recovery.
Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer
and its future earnings potential.
At December 31, 2016 and 2015, we had a number of securities with fair value less than the cost basis. The total
unrealized loss on these securities was $34.8 million at December 31, 2016, compared with $28.1 million at
December 31, 2015. At December 31, 2016, the largest pre-tax unrealized loss on an individual equity security was
$0.2 million. Our rationale for not recording OTTI charges on these securities is discussed in Part II, Item 8, Note 2
"Summary of Investments."
Deferred Policy Acquisition Costs ("DAC") — Property and Casualty Insurance Segment
We record an asset for certain costs of underwriting new business, primarily commissions, premium taxes and
variable underwriting and policy issue expenses that have been deferred. The amount of underwriting compensation
expense eligible for deferral is based on time studies and a ratio of success in policy placement. At December 31,
2016 and 2015, our DAC asset was $93.4 million and $90.5 million, respectively.
The DAC asset is amortized over the life of the policies written, generally one year. We assess the recoverability of
DAC on a quarterly basis by line of business. This assessment is performed by comparing recorded unearned
premium to the sum of unamortized DAC and estimates of expected losses and loss settlement expenses. If the sum
of these costs exceeds the amount of recorded unearned premium (i.e., the line of business is expected to generate an
operating loss), the excess is recognized in current period other underwriting expenses as an offset against the
established DAC asset. We refer to this offset as a premium deficiency charge.
To calculate the premium deficiency charge by line of business, we estimate an expected loss and loss settlement
expense ratio which is based on our best estimate of future losses for each line of business. This calculation is
performed on a quarterly basis and developed in conjunction with our quarterly reserving process. The expected loss
and loss settlement expense ratios are the only assumptions we utilize in our premium deficiency calculation.
Changes in these assumptions can have a significant impact on the amount of premium deficiency charge recognized
for a line of business. With the completion of the Mercer Insurance Group, Inc. integration, we determined it was the
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appropriate time to review our DAC models. After reviewing our DAC model at March 31, 2015, we enhanced our
property & casualty insurance segment DAC model by updating our aggregation of certain lines of business in a
manner consistent with how the policies are currently being marketed and managed. The impact of these updates to
the model resulted in an increase to DAC amortization of $2,144 and an increase to the DAC asset of $3,830 for the
period ended December 31, 2015, as compared to what we would have recognized had we not updated our model.
The following table illustrates the hypothetical impact on the premium deficiency charge recorded for the quarter
ended December 31, 2016, of reasonably likely changes in the assumed loss and loss settlement expense ratios
utilized for purposes of this calculation. The entire impact of these changes would be recognized through income as
other underwriting expenses. The following table illustrates the impact of potential changes in the expected loss and
loss settlement expense ratios for all lines of business on the premium deficiency charge. The base amount indicated
below is the actual premium deficiency charge recorded as an offset against the DAC asset established as of the
quarter ended December 31, 2016:
Sensitivity Analysis — Impact of Changes in Projected Loss and Loss Settlement Expense Ratios
(In Thousands)
-10%
-5%
Base
+5%
+10%
Premium deficiency charge estimated
$
—
$
—
$
62
$
4,920
$
11,862
Actual future results could differ materially from our assumptions used to calculate the recorded DAC asset.
Changes in our assumed loss and loss settlement expense ratios in the future would impact the amount of deferred
costs in the period such changes in assumptions are made. The premium deficiency charge calculated for the quarter
ended December 31, 2016 was $0.1 million compared to the premium deficiency charge of $0.0 million calculated
for the same period of 2015.
Deferred Policy Acquisition Costs — Life Insurance Segment
Costs that vary with and relate to the successful acquisition of life insurance and annuity business are deferred. Such
costs consist principally of commissions, premium taxes, and related variable underwriting, agency and policy issue
expenses. The amount of underwriting and other acquisition related compensation and other internal expense
eligible for deferral is based on time studies and a ratio of success in policy placement. At December 31, 2016 and
2015, our DAC asset was $70.7 million and $77.7 million, respectively.
We defer and amortize policy acquisition costs on traditional life insurance policies over the premium-paying period
in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue. Expected
annual premium revenue and gross profits are based on the same mortality and withdrawal assumptions used in
determining future policy benefits. These assumptions are not revised after policy issuance unless the recorded DAC
asset is deemed to be unrecoverable from future expected profits.
We defer policy acquisition costs related to non-traditional business and amortize these costs in proportion to the
ratio of the expected annual gross profits to the expected total gross profits. The assumptions used to determine
expected gross profits include claims, interest rate spread, mortality experience, and expense margins and policy
lapse experience. Of these factors, we anticipate that assumptions for claims, investment returns, expenses and
persistency are reasonably likely to have a significant impact on the rate of DAC amortization each year. Changes in
the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs.
The effect on amortization of DAC for revisions to estimated gross profits is reported in earnings in the period the
estimated gross profits are revised.
We periodically review estimates of expected profitability and evaluate the need to "unlock" or revise the
assumptions for the amortization of the DAC asset related to our non-traditional business. The primary assumptions
utilized when estimating future profitability relate to interest rate spread, operating expenses, mortality and policy
lapse experience. The table below illustrates the impact that a reasonably likely change in our assumptions used to
estimate expected gross profits would have on the DAC asset for our non-traditional business recorded as of
December 31, 2016. The entire impact of the changes illustrated would be recognized through income as an increase
or decrease to amortization expense:
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Sensitivity Analysis — Impact of changes in assumptions on DAC asset
(In Thousands)
Changes in assumptions
Mortality experience
Policy lapse experience
Changes in assumptions
Interest rate spread
-10%
+10%
2,965
1,731
-1%
(1,574)
$
$
(3,154)
(1,637)
1,524
+1%
$
$
A material change in these assumptions could have a significant negative or positive effect on our reported DAC
asset, earnings and stockholders' equity.
The DAC asset recorded in connection with our non-traditional business is also adjusted with respect to estimated
expected gross profits as a result of changes in the net unrealized gains or losses on available-for-sale fixed maturity
securities allocated to support the block of deferred annuities and universal life policies. That is, because we carry
available-for-sale fixed maturity securities at fair value, we make an adjustment to the DAC asset equal to the
change in amortization that would have been recorded if we had sold such securities at their stated fair value and
reinvested the proceeds at current yields. We include this adjustment, which is called "shadow" DAC, net of tax, as a
component of accumulated other comprehensive income. At December 31, 2016 and 2015, the "shadow" DAC
adjustment decreased our DAC asset by $6.4 million and $2.0 million, respectively.
Losses and Loss Settlement Expenses — Property and Casualty Insurance Segment
Reserves for losses and loss settlement expenses are reported using our best estimate of ultimate liability for claims
that occurred prior to the end of any given reporting period, but have not yet been paid. Before credit for reinsurance
recoverables, these reserves were $1,123.9 million and $1,003.9 million at December 31, 2016 and 2015,
respectively. We purchase reinsurance to mitigate the impact of large losses and catastrophic events. Loss and loss
settlement expense reserves ceded to reinsurers were $59.8 million for 2016 and $54.7 million for 2015. Our
reserves, before credit for reinsurance recoverables, by line of business as of December 31, 2016, were as follows:
(In Thousands)
Commercial lines
Fire and allied lines
Other liability
Automobile
Workers' compensation
Fidelity and surety
Miscellaneous
Total commercial lines
Personal lines
Automobile
Fire and allied lines
Miscellaneous
Total personal lines
Reinsurance assumed
Total
Case Basis
IBNR
Loss
Settlement
Expense
Total Reserves
12,415
120,596
46,917
10,500
2,520
746
193,694
1,023
3,829
174
5,026
5,105
203,825
$
$
$
$
$
21,480
188,888
45,409
28,581
108
269
284,735
1,726
2,735
434
4,895
66
289,696
$
$
$
$
$
117,879
513,593
229,076
205,413
4,791
1,200
1,071,952
12,746
15,513
1,686
29,945
21,999
1,123,896
$
$
$
$
$
83,984
204,109
136,750
166,332
2,163
185
593,523
9,997
8,949
1,078
20,024
16,828
630,375
$
$
$
$
$
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Case-Basis Reserves
For each of our lines of business, with respect to reported claims, we establish reserves on a case-by-case basis. Our
experienced claims personnel estimate these case-basis reserves using adjusting guidelines established by
management. Our goal is to set the case-basis reserves at the ultimate expected loss amount as soon as possible after
information about the claim becomes available.
Establishing the case reserve for an individual claim is subjective and complex, requiring us to estimate future
payments and values that will be sufficient to settle an individual claim. Setting a reserve for an individual claim is
an inherently uncertain process. When we establish and adjust individual claim reserves, we do so based on our
knowledge of the circumstances and facts of the claim. Upon notice of a claim, we establish a preliminary (average
claim cost) reserve based on the limited claim information initially reported. Subsequently, we conduct an
investigation of each reported claim, which allows us to more fully understand the factors contributing to the loss
and our potential exposure. This investigation may extend over a long period of time. As our claim investigation
progresses, and as our claims personnel identify trends in claims activity, we may refine and adjust our estimates of
case reserves. To evaluate and refine our overall reserving process, we track and monitor all claims until they are
settled and paid in full, with all salvage and subrogation claims being resolved.
Most of our insurance policies are written on an occurrence basis that provides coverage if a loss occurs during the
policy period, even if the insured reports the loss many years later. For example, some liability claims for
construction defect coverage are reported 10 years or more after the policy period, and the workers' compensation
coverage provided by our policies pays unlimited medical benefits for the duration of the claimant's injury up to the
lifetime of the claimant. In addition, final settlement of certain claims can be delayed for years due to litigation or
other reasons. Reserves for these claims require us to estimate future costs, including the effect of judicial actions,
litigation trends and medical cost inflation, among others. Reserve development can occur over time as conditions
and circumstances change many years after the policy was issued and/or the loss occurred.
Our loss reserves include amounts related to both short-tail and long-tail lines of business. "Tail" refers to the time
period between the occurrence of a loss and the ultimate settlement of the claim. A short-tail insurance product is
one where ultimate losses are known and settled comparatively quickly. Ultimate losses under a long-tail insurance
product are sometimes not known and settled for many years. The longer the time span between the incidence of a
loss and the settlement of the claim, the more the ultimate settlement amount can vary from the reserves initially
established. Accordingly, long-tail insurance products can have significant implications on the reserving process.
Our short-tail lines of business include fire and allied lines, homeowners, commercial property, auto physical
damage and inland marine. The amounts of the case-based reserves that we establish for claims in these lines depend
upon various factors, such as individual claim facts (including type of coverage and severity of loss), our historical
loss experience and trends in general economic conditions (including changes in replacement costs, medical costs
and inflation).
For short-tail lines of business, the estimation of case-basis loss reserves is less complex than for long-tail lines
because the claims relate to tangible property. Because of the relatively short time from claim occurrence to
settlement, actual losses typically do not vary significantly from reserve estimates.
Our long-tail lines of business include workers' compensation and other liability. In addition, certain product lines
such as personal and commercial auto, commercial multi-peril and surety include both long-tail coverages and short-
tail coverages. For many long-tail liability claims, significant periods of time, ranging up to several years, may
elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result,
loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility
in our reserving process because a relatively small proportion of losses in these accident years are reported claims
and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to
litigation and can be significantly affected by changing contract interpretations and the legal environment.
Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree
of variability than for short-tail coverages.
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The amounts of the case-basis loss reserves that we establish for claims in long-tail lines of business depends upon
various factors, including individual claim facts (including type of coverage, severity of loss and underlying policy
limits), company historical loss experience, changes in underwriting practice, legislative enactments, judicial
decisions, legal developments in the awarding of damages, changes in political attitudes and trends in general
economic conditions, including inflation. As with our short-tail lines of business, we review and make changes to
long-tail case-based reserves based on our review of continually evolving facts as they become available to us
during the claims settlement process. Our adjustments to case-based reserves are reported in the financial statements
in the period that new information arises about the claim. Examples of facts that become known that could cause us
to change our case-based reserves include, but are not limited to: evidence that loss severity is different than
previously assessed; new claimants who have presented claims; and the assessment that no coverage exists.
Incurred But Not Reported ("IBNR") Reserves
On a quarterly basis, the Company's internal actuary performs a detailed analysis of IBNR reserves. This analysis
uses various loss projection methods (paid and reported loss development) to provide several estimates of ultimate
loss (or loss adjustment expense ("LAE")) for each individual year and line of business. The loss projection methods
include paid loss development; reported loss development; expected loss emergence based on paid losses; and
expected loss emergence based on reported losses. The two methods utilized by our internal actuary to project loss
settlement expenses are paid expenses development and development of the ratio of paid expense versus paid loss.
Results of the projection methods are compared and a point estimate of ultimate loss (or LAE) is established for
each individual year and line of business. The specific projection methods used to establish point estimates vary
depending on what is deemed most appropriate for a particular line of business and year. Results of these methods
are usually averaged together to provide a final point estimate. Given that there are several inputs depending on the
line of business, the methods may be averaged and modified based on changes known to management or trends in
the market. IBNR estimates are derived by subtracting reported loss from the final point estimate loss.
Senior management meets with our internal actuary and controller quarterly to review the adequacy of carried IBNR
reserves based on results from this actuarial analysis and makes adjustments for changes in business and other
factors not completely captured by the data within the actuarial analysis. There are two fundamental types or sources
of IBNR reserves. We record IBNR for "normal" types of claims and also specific IBNR reserves related to unique
circumstances or events. A major hurricane is an example of an event that might necessitate specific IBNR reserves
because an analysis of existing historical data would not provide an appropriate estimate. This method of
establishing our IBNR reserves has consistently resulted in aggregate reserve levels that management believes are
reasonable in comparison to the reserve estimates indicated by the actuarial analysis.
For our short-tail lines of business, IBNR reserves constitute a small portion of the overall reserves. These claims
are generally reported and settled shortly after the loss occurs. In our long-tail lines of business, IBNR reserves
constitute a relatively higher proportion of total reserves, because, for many liability claims, significant periods of
time may elapse between the initial occurrence of the loss, the reporting of the loss to us, and the ultimate settlement
of the claim.
Loss Settlement Expense Reserves
Loss settlement expense reserves include amounts ultimately allocable to individual claims, as well as amounts
required for the general overhead of the claims handling operation that are not specifically allocable to individual
claims. We do not establish loss settlement expense reserves on a claim-by-claim basis. Instead, on a quarterly basis,
our internal actuary performs a detailed statistical analysis (using historical data) to estimate the required reserve for
unpaid loss settlement expenses. On a monthly basis, the required reserve estimate is adjusted to reflect additional
earned exposure and expense payments that have occurred subsequent to completion of the quarterly analysis.
Generally, the loss settlement expense reserves for long-tail lines of business are a greater portion of the overall
reserves, as there are often substantial legal fees and other costs associated with the complex liability claims that are
associated with long-tail coverages. Because short-tail lines of business settle much more quickly and the costs are
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easier to determine, loss settlement expense reserves for such claims constitute a smaller portion of the total
reserves.
Reinsurance Reserves
The estimation of assumed and ceded reinsurance loss and loss settlement expense reserves is subject to the same
factors as the estimation of loss and loss settlement expense reserves. In addition to those factors, which give rise to
inherent uncertainties in establishing loss and loss settlement expense reserves, there exists a delay in our receipt of
reported claims for assumed business due to the procedure of having claims first reported through one or more
intermediary insurers or reinsurers.
Key Assumptions
Our internal and external actuaries and management use a number of key assumptions in establishing an estimate of
loss and loss settlement expense reserves, including the following assumptions: future loss settlement expenses can
be estimated based on the Company's historical ratios of loss settlement expenses paid to losses; the Company's
case-basis reserves reflect the most up-to-date information available about the unique circumstances of each
individual claim; no new judicial decisions or regulatory actions will increase our case-basis obligations; historical
aggregate claim reporting and payment patterns will continue into the future consistent with the observable past;
significant unique and unusual claim events have been identified and appropriate adjustments have been made; and,
to the best of our knowledge, there are no new latent trends that would impact our case-basis reserves.
Our key assumptions are subject to change as actual claims occur and as we gain additional information about the
variables that underlie our assumptions. Accordingly, management reviews and updates these assumptions
periodically to ensure that the assumptions continue to be valid. If necessary, management makes changes not only
in the estimates derived from the use of these assumptions, but also in the assumptions themselves. Due to the
inherent uncertainty in the loss reserving process, management believes that there is a reasonable chance that
modification to key assumptions could individually, or in aggregate, result in reserve levels that are either
significantly above or below the actual amount for which the related claims will eventually settle.
As an example, if our loss and loss settlement expense reserves of $1,123.9 million as of December 31, 2016, is
10.0 percent inadequate, we would experience a reduction in future pre-tax earnings of up to $112.4 million. This
reduction could be recorded in one year or multiple years, depending on when we identify the deficiency. The
deficiency would also affect our financial position in that our equity would be reduced by an amount equivalent to
the reduction in net income. Any deficiency that would be recognized in our loss and loss settlement expense
reserves usually does not have a material effect on our liquidity because the claims have not been paid. Conversely,
if our estimates of ultimate unpaid loss and loss settlement expense reserves prove to be redundant, our future
earnings and financial position would be improved. We believe our reserving philosophy, coupled with what we
believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-
year redundancies in reserves. We believe our approach produces recorded reserves that are reasonable as to their
relative position within a range of reasonable reserves from year-to-year.
We are unable to reasonably quantify the impact of changes in our key assumptions utilized to establish individual
case-basis reserves on our total reported reserves because the impact of these changes would be unique to each
specific case-basis reserve established. However, based on historical experience, we believe that aggregate case-
basis reserve volatility levels of 5.0 percent and 10.0 percent can be attributed to the ultimate development of our net
case-basis reserves. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards
and an increase if the reserves were to be adjusted downwards. The table below details the impact of this
development volatility on our reported net case-basis reserves at December 31, 2016:
(In Thousands)
Change in level of net case-basis reserve development
5%
10%
Impact on reported net case-basis reserves
$
28,928
$
57,855
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Due to the formula-based nature of our IBNR and loss settlement expense reserve calculations, changes in the key
assumptions utilized to generate these reserves can impact our reported results. It is not possible to isolate and
measure the potential impact of just one of these factors, and future loss trends could be partially impacted by all
factors concurrently. Nevertheless, it is meaningful to view the sensitivity of the reserves to potential changes in
these variables. To demonstrate the sensitivity of reserves to changes in significant assumptions, the following
example is presented. The amounts reflect the pre-tax impact on earnings from a hypothetical percentage change in
the calculation of IBNR and loss settlement expense reserves at December 31, 2016. The impact to pre-tax earnings
would be a decrease if the reserves were to be adjusted upwards and an increase if the reserves were to be adjusted
downwards. We believe that the changes presented are reasonably likely based upon an analysis of our historical
IBNR and loss settlement expense reserve experience.
(In Thousands)
Change in claim frequency and claim severity assumptions
Impact due to change in IBNR reserving assumptions
(In Thousands)
Change in LAE paid to losses paid ratio
Impact due to change in LAE reserving assumptions
5%
1%
$
$
10%
10,800
$
20,161
2%
2,839
$
5,679
In 2016, we did not change the key method through which we develop our assumptions on which we based our
reserving calculations. In estimating our 2016 loss and loss settlement expense reserves, we did not anticipate future
events or conditions that were inconsistent with past development patterns.
Certain of our lines of business are subject to the potential for greater loss and loss settlement expense development
than others, which are discussed below:
Other Liability Reserves
Other liability is considered a long-tail line of business, as it can take a relatively long period of time to settle claims
from prior accident years. This is partly due to the lag time between the date a loss or event occurs that triggers
coverage and the date when the claim is actually reported. Defense costs are also a part of the insured expenses
covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims. For the
majority of our products, defense costs are outside of the policy limit, meaning that the amounts paid for defense
costs are not subtracted from the available policy limit.
Factors that can cause reserve uncertainty in estimating reserves in this line include: reporting time lags; the number
of parties involved in the underlying tort action; whether the "event" triggering coverage is confined to only one
time period or is spread over multiple time periods; the potential dollars involved in the individual claim actions;
whether such claims were reasonably foreseeable and intended to be covered at the time the contracts were written
(i.e., coverage disputes); and the potential for mass claim actions.
Claims with longer reporting time lags may result in greater inherent risk. This is especially true for alleged claims
with a latency feature, particularly where courts have ruled that coverage is spread over multiple policy years, hence
involving multiple defendants (and their insurers and reinsurers) and multiple policies (thereby increasing the
potential dollars involved and the underlying settlement complexity). Claims with long latencies also increase the
potential time lag between writing a policy in a certain market and the recognition that such policy has potential
mass tort and/or latent claim exposure.
Our reserve for other liability claims at December 31, 2016, was $513.6 million and consisted of 5,634 claims,
compared with $495.9 million, consisting of 5,553 claims at December 31, 2015. Of the $513.6 million total reserve
for other liability claims, $151.9 million is identified as defense costs and $34.3 million is identified as general
overhead required in the settlement of claims.
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Included in the other liability line of business are gross reserves for construction defect losses and loss settlement
expenses. Construction defect is a liability allegation relating to defective work performed in the construction of
structures such as commercial buildings, apartments, condominiums, single family dwellings or other housing, as
well as the sale of defective building materials. These claims seek recovery due to damage caused by alleged
deficient construction techniques or workmanship. At December 31, 2016, we had $22.3 million in construction
defect loss and loss settlement expense reserves, excluding IBNR reserves that are calculated for the overall other
liability commercial line, which consisted of 1,382 claims. At December 31, 2015, our reserves, excluding IBNR
reserves, totaled $28.8 million, which consisted of 1,721 claims. The reporting of such claims can be delayed, as the
statute of limitations can be up to 10 years. Court decisions in recent years have expanded insurers' exposure to
construction defect claims. As a result, claims may be reported more than 10 years after a project has been
completed, as litigation can proceed for several years before an insurance company is identified as a potential
contributor. Claims have also emerged from parties claiming additional insured status on policies issued to other
parties, such as contractors seeking coverage from a subcontractor's policy.
In addition to these issues, other variables also contribute to a high degree of uncertainty in establishing reserves for
construction defect claims. These variables include: whether coverage exists; when losses occur; the size of each
loss; expectations for future interpretive rulings concerning contract provisions; and the extent to which the assertion
of these claims will expand geographically. In recent years, we have implemented various underwriting measures
that we anticipate will mitigate the amount of construction defect losses experienced. These initiatives include
increased care regarding additional insured endorsements; stricter underwriting guidelines on the writing of
residential contractors; and an increased utilization of loss control.
Asbestos and Environmental Reserves
Included in the other liability and assumed reinsurance lines of business are reserves for asbestos and other
environmental losses and loss settlement expenses. At December 31, 2016 and 2015, we had $3.7 million and $4.8
million, respectively, in direct and assumed asbestos and environmental loss reserves. The estimation of loss
reserves for environmental claims and claims related to long-term exposure to asbestos and other substances is one
of the most difficult aspects of establishing reserves, especially given the inherent uncertainties surrounding such
claims. Although we record our best estimate of loss and loss settlement expense reserves, the ultimate amounts paid
upon settlement of such claims may be more or less than the amount of the reserves, because of the significant
uncertainties involved and the likelihood that these uncertainties will not be resolved for many years.
Workers' Compensation Reserves
Like the other liability line of business, workers' compensation losses and loss settlement expense reserves are based
upon variables that create imprecision in estimating the ultimate reserve. Estimates for workers' compensation are
particularly sensitive to assumptions about medical cost inflation, which has been steadily increasing over the past
few years. Other variables that we consider and that contribute to the uncertainty in establishing reserves for
workers' compensation claims include: state legislative and regulatory environments; trends in jury awards; and
mortality rates. Because of these variables, the process of reserving for the ultimate loss and loss settlement expense
to be incurred requires the use of informed judgment and is inherently uncertain. Consequently, actual loss and loss
settlement expense reserves may deviate from our estimates. Such deviations may be significant. Our reserve for
workers' compensation claims at December 31, 2016 was $205.4 million and consisted of 2,299 claims, compared
with $192.9 million, consisting of 2,211 claims, at December 31, 2015.
Reserve Development
The following reserve development section should be read in conjunction with the "Consolidated Results of
Operations" section of this Item 7.
In 2016, 2015 and 2014, we recognized a favorable development in our net reserves for prior accident years totaling
$31.2 million, $40.9 million and $56.7 million, respectively.
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The factors contributing to our year-to-year redundancy include: establishing reserves at their ultimate expected loss
amount as soon as practicable after information becomes available, which produces, on average, prudently
conservative case reserves; using claims negotiation to control the size of settlements; assuming that we have
liability for all claims, even though the issue of liability may, in some cases, be resolved in our favor; promoting
claims management services to encourage return-to-work programs; case management by nurses for serious injuries
and management of medical provider services and billings; and using programs and services to help prevent fraud
and to assist in favorably resolving cases.
Based upon our comparison of carried reserves to actual claims experience over the last several years, we believe
that using our Company's historical premium and claims data to establish reserves for losses and loss settlement
expenses results in adequate and reasonable reserves. Reserve development is discussed in more detail under the
heading "Reserve Development" in the "Property and Casualty Insurance Segment" of the "Consolidated Results of
Operations" section in this Item.
The following table details the pre-tax impact on our property and casualty insurance segment's financial results and
financial condition of reasonably likely reserve development. Our lines of business that have historically been most
susceptible to significant volatility in reserve development have been shown separately and utilize hypothetical
levels of volatility of 5.0 percent and 10.0 percent. Our other, less volatile, lines of business have been aggregated
and utilize hypothetical levels of volatility of 3.0 percent and 5.0 percent.
(In Thousands)
Hypothetical Reserve Development Volatility Levels
-10%
-5%
+5%
+10%
Impact on loss and loss settlement expenses
Other liability
Workers' compensation
Automobile
$
(51,359)
$
(25,680)
$
(20,541)
(24,182)
(10,271)
(12,091)
$
25,680
10,271
12,091
51,359
20,541
24,182
Hypothetical Reserve Development Volatility Levels
-5%
-3%
+3%
+5%
Impact on loss and loss settlement expenses
All other lines
$
(8,153)
$
(4,892)
$
4,892
$
8,153
Independent Actuary
We engage an independent actuarial firm to render an opinion as to the reasonableness of the statutory reserves
internal management establishes. During 2016 and 2015, we engaged the services of Regnier Consulting Group, Inc.
("Regnier") as our independent actuarial firm for the property and casualty insurance segment. We anticipate that
this engagement will continue in 2017.
It is management's policy to utilize staff adjusters to develop our estimate of case-basis loss reserves. IBNR and loss
settlement expense reserves are established through various formulae that utilize pertinent, recent Company
historical data. The calculations are supplemented with knowledge of current trends and events that could result in
adjustments to the level of IBNR and loss settlement expense reserves. On a quarterly basis, we compare our
estimate of total reserves to the estimates prepared by Regnier by line of business to ensure that our estimates are
within the actuary's acceptable range. Regnier performs a review of loss and loss settlement expense reserves at each
year end using generally accepted actuarial guidelines to ensure that the recorded reserves appear reasonable. Our
net reserves for losses and loss settlement expenses as of December 31, 2016 and 2015 were $1,064.1 million and
$949.2 million, respectively. In 2016 and 2015, after considering the independent actuary's range of reasonable
estimates, management believes that carried reserves were reasonable and therefore did not adjust the recorded
amount.
Regnier uses four projection methods in its actuarial analysis of our loss reserves and uses two projection methods in
its actuarial analysis of our loss settlement expense reserves. Based on the results of the projection methods, the
actuaries select an actuarial point estimate of the reserves, which is compared to our carried reserves to evaluate the
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reasonableness of the carried reserves. The four methods utilized by Regnier to project losses are: paid loss
development; reported loss development; expected loss emergence based on paid losses; and expected loss
emergence based on reported losses. The two methods utilized by Regnier to project loss expenses are: paid
expenses-to-paid loss and paid expense-to-ultimate loss.
Future Policy Benefits and Losses, Claims and Loss Settlement Expenses — Life Insurance Segment
We establish reserves for amounts that are payable under traditional insurance policies, including traditional life
products, disability income and income annuities. Reserves are calculated as the present value of future benefits
expected to be paid, reduced by the present value of future expected premiums. Our estimates use methods and
underlying assumptions that are in accordance with GAAP and applicable actuarial standards. The key assumptions
that we utilize in establishing reserves are mortality, morbidity, policy lapse, renewal, retirement, investment returns,
inflation and expenses. Future investment return assumptions are determined based upon prevailing investment
yields as well as estimated reinvestment yields. Mortality, morbidity and policy lapse assumptions are based on our
experience. Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the
premium-paying period. These assumptions are established at the time the policy is issued, are consistent with the
assumptions for determining DAC amortization for these contracts, and are generally not changed during the policy
coverage period. However, if actual experience emerges in a manner that is significantly adverse relative to the
original assumptions, adjustments to reserves (or DAC) may be required resulting in a charge to earnings which
could have a material adverse effect on our operating results and financial condition.
For limited pay traditional life products, we periodically determine if any profit occurs at the issuance of a contract
that should be deferred over the life of that contract. To the extent that this occurs, we establish an unearned revenue
liability at issuance that is amortized over the anticipated life of the contract.
Liabilities for future policy benefits for disability claims are estimated using the present value of benefits method
and experience assumptions as to claim terminations, expenses and interest.
Other reserves include claims that have been reported but not settled and IBNR reserves for claims on life and
disability income insurance. We use our own historical experience and other assumptions such as any known or
anticipated developments or trends to establish reserves for these unsettled or unreported claims. The effects of
changes in our estimated reserves are included in our results of operations in the period in which the changes occur.
We periodically review the adequacy of traditional life product reserves and recoverability of DAC for these
contracts on an aggregate basis using actual experience. In the event that actual experience is significantly adverse
compared to the original assumptions, any remaining unamortized DAC asset must be expensed to the extent not
recoverable and the establishment of a premium deficiency reserve may be required. The effects of changes in
reserve estimates are reported in the results of operations in the period in which the changes are determined. We
have made no changes in our methods in the past three years, other than minor changes in assumptions for new
issues in each of the past three years, mostly relating to anticipated mortality rates and investment yields. These
assumption changes were made due to corresponding changes in the interest rate environment and the historical
mortality of these products. We anticipate that changes in mortality, investment and reinvestment yields, and policy
termination assumptions are the factors that would most likely require an adjustment to these reserves or related
DAC asset.
Our reserves for universal life and deferred annuity contracts are based upon the policyholders' current account
value. Acquisition expenses are amortized in relation to expected gross profits forecasted based upon current best
estimates of anticipated premium income, investment earnings, benefits and expenses. Annually, we review our
estimates of reserves and the related DAC asset and compare them with actual experience. Differences between
actual experience and the assumptions that we used in the pricing of these policies, guarantees and riders, and in the
establishment of the related reserves will result in variances in profit for the underlying contract. The effects of the
changes in such estimated reserves are included in our results of operations in the period in which the changes occur.
The following table reflects the estimated pre-tax impact to DAC, net of unearned revenue liabilities to our universal
life and fixed annuity products that could occur in a twelve-month period because of an unlocking adjustment due to
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reasonably likely changes in significant assumptions. Changes in assumptions of the same magnitude in the opposite
direction would have an impact of a similar magnitude but opposite direction of the examples provided.
Assumption
Mortality Experience
Determination Methodology
Based on our mortality experience with
consideration given to industry experience
and trends
Potential One-Time Effect on DAC Asset, Net
of Unearned Revenue Liabilities
A 10.0% increase in expected mortality
experience for all future years would result in a
reduction in DAC and an increase in current
period amortization expense of $3.2 million.
Surrender Rates
Interest Spreads
Maintenance Expenses
Independent Actuary
Based on our policy surrender experience
with consideration given to industry
experience and trends
A 10.0% increase in expected surrender rates
for all future years would result in a reduction
in DAC and an increase in current period
amortization expense of $1.6 million.
Based on our expected future investment
returns and expected future crediting rates
applied to policyholder account balances;
future crediting rates include constraints
imposed by policy guarantees
Based on our experience using an internal
expense allocation methodology
A 10-basis-point reduction in future interest
rate spreads would result in a reduction in DAC
and an increase in current period amortization
expense of $1.6 million.
A 10.0% increase in future maintenance
expenses would result in a reduction in DAC
and an increase in current period amortization
expense of $0.5 million.
We engage an independent actuarial firm to assist us in establishing our future policy benefit reserves for statutory
and GAAP reporting and our DAC asset and related amortization for GAAP reporting and to render an opinion as to
the reasonableness of the statutory reserves we establish. Statutory reserves are established using prescribed
assumptions which are considerably more conservative assumptions regarding future investment earnings and
contractual benefit payments than are used for GAAP reserves. During 2016 and 2015, we engaged the services of
Griffith, Ballard and Company as our independent actuarial firm for the life insurance segment. We anticipate that
this engagement will continue in 2017.
Pension and Post-retirement Benefit Obligations
The process of estimating our pension and post-retirement benefit obligations and related benefit expense is
inherently uncertain, and the actual cost of benefits may vary materially from the estimates recorded. These
liabilities are particularly volatile due to their long-term nature and are based on several assumptions. The main
assumptions used in the valuation of our benefit obligations are: estimated mortality of the employees and retirees
eligible for benefits; estimated expected long-term rates of return on investments; estimated compensation increases;
estimated employee turnover; estimated medical trend rate; and estimated rate used to discount the ultimate
estimated liability to a present value. We engage a consulting actuary from Principal Financial Group, an
independent firm, to assist in evaluating and establishing assumptions used in the valuation of our benefit
obligations.
A change in any one or more of these assumptions is likely to result in an ultimate liability different from the
original actuarial estimate. Such changes in estimates may be material. For example, a 100 basis point decrease in
our estimated discount rate would increase the pension and post-retirement benefit obligation at December 31, 2016,
by $29.5 million and $8.4 million, respectively, while a 100 basis point increase in the rate would decrease the
benefit obligation at December 31, 2016, by $23.3 million and $6.6 million, respectively.
In addition, for the post-retirement benefit plan, a 100 basis point decrease in the medical trend rate would decrease
the post-retirement benefit obligation at December 31, 2016, by $6.4 million, while a 100 basis point increase in the
medical trend rate would increase the benefit obligation at December 31, 2016, by $8.0 million.
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A 100 basis point decrease in our estimated long-term rate of return on pension plan assets would increase the
benefit expense for the year ended December 31, 2016, by $1.3 million, while a 100 basis point increase in the rate
would decrease benefit expense by $1.3 million, for the same period.
For the post-retirement benefit plan, a 100 basis point increase in our estimated medical trend rate would increase
the benefit expense for the year ended December 31, 2016, by $0.8 million, while a 100 basis point decrease in the
rate would decrease benefit expense by $0.7 million, for the same period.
Recently Issued Accounting Standards
Information specific to accounting standards that we adopted in 2016 or pending accounting standards that we
expect to adopt in the future is incorporated by reference from Note 1 "Summary of Significant Accounting Policies"
contained in Part II, Item 8, "Financial Statements and Supplementary Data."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item 7A is incorporated by reference from Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the headings "Investments" and "Market
Risk."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
United Fire Group, Inc.
Consolidated Balance Sheets
December 31,
2016
2015
(In Thousands, Except Share Data)
Assets
Investments
Fixed maturities
Held-to-maturity, at amortized cost (fair value $199 in 2016 and $675 in 2015)
Available-for-sale, at fair value (amortized cost $2,887,505 in 2016 and $2,793,069 in 2015)
Trading securities, at fair value (amortized cost $13,054 in 2016 and $11,475 in 2015)
$
198
2,898,126
14,390
$
672
2,824,961
12,622
Equity securities
Available-for-sale, at fair value (cost $68,504 in 2016 and $68,514 in 2015)
Trading securities, at fair value (cost $5,434 in 2016 and $4,443 in 2015)
Mortgage loans
Policy loans
Other long-term investments
Short-term investments
Cash and cash equivalents
Accrued investment income
Premiums receivable (net of allowance for doubtful accounts of $1,255 in 2016 and $867 in
2015)
Deferred policy acquisition costs
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of
$50,925 in 2016 and $46,590 in 2015)
Reinsurance receivables and recoverables
Prepaid reinsurance premiums
Income taxes receivable
Goodwill and net intangible assets
Other assets
Total assets
Liabilities and stockholders' equity
Liabilities
Future policy benefits and losses, claims and loss settlement expenses
270,416
5,644
3,706
5,366
67,639
175
3,265,660
110,853
25,056
306,202
164,112
236,247
4,353
3,961
5,618
54,151
175
3,142,760
106,449
25,136
276,517
168,264
55,524
69,413
3,782
15,061
24,740
14,355
$ 4,054,758
53,241
73,527
3,790
—
25,509
15,183
$ 3,890,376
Property and casualty insurance
Life insurance
Unearned premiums
Accrued expenses and other liabilities
Income taxes payable
Deferred income taxes
Total liabilities
Stockholders' equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,429,769 and 25,151,428
shares issued and outstanding in 2016 and 2015, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
Total stockholders' equity
Total liabilities and stockholders' equity
The Notes to Consolidated Financial Statements are an integral part of these statements.
$ 1,123,896
1,350,503
443,873
159,014
—
35,588
$ 3,112,874
$
25 $
216,482
616,322
109,055
$
941,884
$ 4,054,758
$ 1,003,895
1,372,358
415,057
200,599
4,917
14,653
$ 3,011,479
25
207,426
591,009
80,437
$
878,897
$ 3,890,376
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Table of Contents
United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income
(In Thousands, Except Share Data)
2016
2015
2014
For the Years Ended December 31,
Revenues
Net premiums earned
Investment income, net of investment expenses
Net realized investment gains (losses)
Other-than-temporary impairment charges
All other net realized gains (includes reclassifications for net
unrealized gains on available-for-sale securities of $4,520 in 2016;
$4,513 in 2015; and $5,085 in 2014 previously included in
accumulated other comprehensive income)
Total net realized investment gains
Other income
Total revenues
Benefits, losses and expenses
Losses and loss settlement expenses
Increase in liability for future policy benefits
Amortization of deferred policy acquisition costs
Other underwriting expenses (includes reclassifications for employee
benefit costs of $5,486 in 2016; $7,468 in 2015; and $3,072 in 2014
previously included in accumulated other comprehensive income)
Interest on policyholders' accounts
Total benefits, losses and expenses
Income before income taxes
Federal income tax expense (includes reclassifications of $338 in 2016;
$1,034 in 2015; and ($704) in 2014 previously included in accumulated
other comprehensive income)
Net income
Other comprehensive income (loss)
Change in net unrealized appreciation on investments
Change in liability for underfunded employee benefit plans
Other comprehensive income (loss), before tax and reclassification
adjustments
Income tax effect
Other comprehensive income (loss), after tax, before reclassification
adjustments
Reclassification adjustment for net realized gains included in income
Reclassification adjustment for employee benefit costs included in
expense
Total reclassification adjustments, before tax
Income tax effect
Total reclassification adjustments, after tax
Comprehensive income
Weighted average common shares outstanding
Basic earnings per common share
Diluted earnings per common share
$
1,023,401 $
106,822
930,890
100,781
$
828,330
104,609
—
(1,300)
—
6,103
6,103
621
1,136,947 $
4,146
2,846
401
1,034,918
683,798 $
59,969
211,013
549,088
50,945
186,817
103,421
20,079
1,078,280 $
102,937
23,680
913,467
58,667 $
121,451
8,763
49,904 $
32,325
89,126
13,017 $
30,045
43,062
(15,072)
27,990
(4,520)
5,486
966
(338)
628
78,522 $
(28,185)
8,714
(19,471)
6,814
(12,657)
(4,513)
7,468
2,955
(1,034)
1,921
78,390
25,335,706
1.97 $
1.93
25,047,405
3.56
3.53
$
$
$
$
$
$
$
$
7,270
7,270
1,685
941,894
536,243
36,623
167,449
94,871
30,245
865,431
76,463
17,326
59,137
55,888
(47,685)
8,203
(2,871)
5,332
(5,085)
3,072
(2,013)
704
(1,309)
63,160
25,230,854
2.34
2.32
$
$
$
$
$
$
$
$
The Notes to Consolidated Financial Statements are an integral part of these statements.
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Table of Contents
United Fire Group, Inc.
Consolidated Statement of Stockholders' Equity
(In Thousands, Except Share Data)
2016
2015
2014
For the Years Ended December 31,
25 $
—
—
25 $
25 $
—
—
25 $
25
—
—
25
207,426 $
202,676 $
211,574
2,880
(3,746)
9,922
216,482 $
591,009 $
49,904
(24,591)
616,322 $
80,437 $
5,523
23,095
109,055 $
1,677
(2,423)
5,496
207,426 $
523,541 $
89,126
(21,658)
591,009 $
91,173 $
(21,254)
10,518
80,437 $
817,415 $
89,126
(27,644)
878,897 $
1,784
(12,942)
2,260
202,676
484,084
59,137
(19,680)
523,541
87,150
33,022
(28,999)
91,173
782,833
59,137
(24,555)
817,415
Common stock
Balance, beginning of year
Shares repurchased (90,415 in 2016; 79,396 in 2015; and 461,835 in
2014)
Shares issued for stock-based awards (376,142 in 2016; 202,882 in
2015; and 108,679 in 2014)
Balance, end of year
Additional paid-in capital
Balance, beginning of year
Compensation expense and related tax benefit for stock-based award
grants
Shares repurchased
Shares issued for stock-based awards
Balance, end of year
Retained earnings
Balance, beginning of year
Net income
Dividends on common stock ($0.97 per share in 2016; $0.86 per share
in 2015; $0.78 per share in 2014)
Balance, end of year
Accumulated other comprehensive income, net of tax
Balance, beginning of year
Change in net unrealized investment appreciation (1)
Change in liability for underfunded employee benefit plans (2)
Balance, end of year
$
$
$
$
$
$
$
$
Summary of changes
Balance, beginning of year
Net income
All other changes in stockholders' equity accounts
Balance, end of year
(1) The change in net unrealized appreciation is net of reclassification adjustments and income taxes.
(2) The change in liability for underfunded employee benefit plans is net of income taxes.
878,897 $
49,904
13,083
941,884 $
$
$
The Notes to Consolidated Financial Statements are an integral part of these statements.
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United Fire Group, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities
Net accretion of bond premium
Depreciation and amortization
Stock-based compensation expense
Net realized investment gains
Net cash flows from trading investments
Deferred income tax expense (benefit)
Changes in:
Accrued investment income
Premiums receivable
Deferred policy acquisition costs
Reinsurance receivables
Prepaid reinsurance premiums
Income taxes receivable
Other assets
Future policy benefits and losses, claims and loss settlement
expenses
Unearned premiums
Accrued expenses and other liabilities
Income taxes payable
Deferred income taxes
Other, net
Total adjustments
Net cash provided by operating activities
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments
Proceeds from call and maturity of held-to-maturity investments
Proceeds from call and maturity of available-for-sale investments
Proceeds from short-term and other investments
Purchase of held-to-maturity investments
Purchase of available-for-sale investments
Purchase of short-term and other investments
Net purchases and sales of property and equipment
Net cash used in investing activities
Cash Flows From Financing Activities
Policyholders' account balances
Deposits to investment and universal life contracts
Withdrawals from investment and universal life contracts
Payment of cash dividends
Repurchase of common stock
Issuance of common stock
Tax impact from issuance of common stock
Net cash used in financing activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
For the Years Ended December 31,
2016
2015
2014
$
49,904
$
89,126
$
59,137
14,097
6,035
3,696
(6,103)
(2,390)
4,482
80
(29,685)
(258)
4,114
8
(15,061)
828
176,492
28,816
(6,054)
(4,917)
1,043
(10,743)
164,480
214,384
14,322
516
533,784
2,456
(42)
(651,365)
(4,474)
(7,600)
(112,403)
79,815
(158,161)
(24,591)
(3,746)
9,922
(816)
(97,577)
4,404
106,449
110,853
$
$
$
$
$
$
$
$
13,745
6,473
2,510
(2,846)
3,080
(4,496)
853
(27,487)
(17,165)
13,283
(158)
—
(734)
77,471
36,332
4,095
(95)
(829)
(3,160)
100,872
189,998
11,543
175
658,728
4,421
(450)
(695,351)
(5,656)
(9,696)
(36,286)
99,486
(217,905)
(21,658)
(2,423)
5,496
(833)
(137,837)
15,875
90,574
106,449
$
$
$
$
$
$
$
$
14,434
6,891
1,944
(7,270)
(6,855)
1,926
1,934
(30,395)
(6,417)
641
(472)
1,786
581
47,928
38,261
25,287
5,012
(249)
(2,813)
92,154
151,291
3,091
260
561,434
2,883
—
(614,044)
(4,351)
(8,151)
(58,878)
180,487
(243,997)
(19,680)
(12,942)
2,260
(160)
(94,032)
(1,619)
92,193
90,574
$
$
$
$
$
$
$
$
The Notes to Consolidated Financial Statements are an integral part of these statements.
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Table of Contents
Index of Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. Summary of Investments
Note 3. Fair Value of Financial Instruments
Note 4. Reinsurance
Note 5. Reserves for Losses and Loss Settlement Expenses
Note 6. Statutory Reporting, Capital Requirements and Dividends and Retained Earnings Restrictions
Note 7. Federal Income Tax
Note 8. Employee Benefits
Note 9. Stock-Based Compensation
Note 10. Segment Information
Note 11. Quarterly Supplementary Financial Information (Unaudited)
Note 12. Earnings Per Common Share
Note 13. Lease Commitments
Note 14. Credit Facility
Note 15. Intangible Assets
Note 16. Accumulated Other Comprehensive Income
Page
78
86
95
101
104
119
120
122
128
131
135
135
136
136
137
138
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UNITED FIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise noted)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United Fire Group, Inc. ("UFG", "United Fire", the "Registrant", the "Company","we", "us", or "our") and its
consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance and
life insurance and selling annuities through a network of independent agencies. We report our operations in two
business segments: property and casualty insurance and life insurance. Our insurance company subsidiaries are
licensed as a property and casualty insurer in 46 states, plus the District of Columbia, and as a life insurer in 37
states.
Principles of Consolidation
The accompanying Consolidated Financial Statements include United Fire and its wholly owned subsidiaries:
United Fire & Casualty Company, United Real Estate Holdings Company, LLC, United Life Insurance Company
("United Life"), Addison Insurance Company, Lafayette Insurance Company, United Fire & Indemnity Company,
United Fire Lloyds, UFG Specialty Insurance Company, Financial Pacific Insurance Company, Franklin Insurance
Company, Mercer Insurance Company, and Mercer Insurance Company of New Jersey, Inc.
United Fire Lloyds, an affiliate of United Fire & Indemnity Company, is organized as a Texas Lloyds plan, which is
an aggregation of underwriters who, under a common name, engage in the business of insurance through a corporate
attorney-in-fact. United Fire Lloyds is financially and operationally controlled by United Fire & Indemnity
Company, its corporate attorney-in-fact, pursuant to three types of agreements: trust agreements between United Fire
& Indemnity Company and certain individuals who agree to serve as trustees; articles of agreement among the
trustees who agree to act as underwriters to establish how the Lloyds plan will be operated; and powers of attorney
from each of the underwriters appointing a corporate attorney-in-fact, who is authorized to operate the Lloyds plan.
Because United Fire & Indemnity Company can name the trustees, the Lloyds plan is perpetual, subject only to
United Fire & Indemnity Company's desire to terminate it.
United Fire & Indemnity Company provides all of the statutory capital necessary for the formation of the Lloyds
plan by contributing capital to each of the trustees. The trust agreements require the trustees to become underwriters
of the Lloyds plan, to contribute the capital to the Lloyds plan, to sign the articles of agreement and to appoint the
attorney-in-fact. The trust agreements also require the trustees to pay to United Fire & Indemnity Company all of the
profits and benefits received by the trustees as underwriters of the Lloyds plan, which means that United Fire &
Indemnity Company has the right to receive 100 percent of the gains and profits from the Lloyds plan. The trustees
serve at the pleasure of United Fire & Indemnity Company, which may remove a trustee and replace that trustee at
any time. Termination of a trustee must be accompanied by the resignation of the trustee as an underwriter, so that
the trustee can obtain the capital contribution from the Lloyds plan to reimburse United Fire & Indemnity Company.
By retaining the ability to terminate trustees, United Fire & Indemnity Company possesses the ability to name and
remove the underwriters.
United Real Estate Holdings, LLC, formed in 2013, is a wholly owned subsidiary of United Fire & Casualty
Company and is organized as an Iowa limited liability corporation, an unincorporated association formed for the
purpose of holding United Fire & Casualty Company's ownership in commercial real estate.
In 2015, the Company dissolved three of its holding companies in order to flatten our organizational chart. The
companies dissolved were American Indemnity Financial Corporation, Mercer Insurance Group, Inc. and Financial
Pacific Insurance Group, Inc. In addition, Texas General Indemnity Company was renamed UFG Specialty
Insurance Company on July 1, 2015.
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Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared on the basis of U.S. generally accepted
accounting principles ("GAAP"), which differ in some respects from those followed in preparing our statutory
reports to insurance regulatory authorities. Our stand-alone subsidiary financial statements submitted to insurance
regulatory authorities are presented on the basis of accounting practices prescribed or permitted by the insurance
departments of the states in which we are domiciled ("statutory accounting principles").
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The financial statement categories that are most
dependent on management estimates and assumptions include: investments; deferred policy acquisition costs;
reinsurance receivables and recoverables; future policy benefits and losses, claims and loss settlement expenses; and
pension and post-retirement benefit obligations.
Property and Casualty Insurance Business
Premiums written are deferred and recorded as earned premium on a daily pro rata basis over the terms of the
respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the
unexpired term of insurance policies in force. Premiums receivable are presented net of an estimated allowance for
doubtful accounts, which is based on a periodic evaluation of the aging and collectability of amounts due from
agents and policyholders.
To establish loss and loss settlement expense reserves, we make estimates and assumptions about the future
development of claims. Actual results could differ materially from those estimates, which are subjective, complex
and inherently uncertain. When we establish and adjust reserves, we do so given our knowledge at the time of the
circumstances and facts of known claims. To the extent that we have overestimated or underestimated our loss and
loss settlement expense reserves, we adjust the reserves in the period in which such adjustment is determined.
We record our best estimate of reserves for claim litigation that arises in the ordinary course of business. We
consider all of our pending litigation as of December 31, 2016 to be ordinary, routine and incidental to our business.
Life Insurance Business
Our whole life and term insurance (i.e., traditional business) premiums are reported as earned when due and benefits
and expenses are associated with premium income in order to result in the recognition of profits over the lives of the
related contracts. Premiums receivable are presented net of an estimated allowance for doubtful accounts. Income
annuities with life contingencies (single premium immediate annuities and supplementary contracts) have premium
recorded and any related expense charge fees recorded as income and expense when the contract is issued. On
universal life and deferred annuity policies (i.e., non-traditional business), income and expenses are reported when
charged and credited to policyholder account balances in order to result in recognition of profits over the lives of the
related contracts. We accomplish this by means of a provision for future policy benefits and the deferral and
subsequent amortization of policy acquisition costs.
Liabilities for future policy benefits for traditional products are computed by the net level premium method, using
interest assumptions ranging from 3.7 percent to 6.0 percent and withdrawal, mortality and morbidity assumptions
appropriate at the time the policies were issued. Liabilities for non-traditional business are stated at policyholder
account values before surrender charges. Liabilities for traditional immediate annuities are based primarily upon
future anticipated cash flows using assumptions for mortality and interest rates. Liabilities for deferred annuities are
carried at the account value.
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Reinsurance
Premiums earned and losses and loss settlement expenses incurred are reported net of reinsurance ceded. Ceded
insurance business is accounted for on a basis consistent with the original policies issued and the terms of the
reinsurance contracts. Refer to Note 4 "Reinsurance" for a discussion of our reinsurance activities.
Investments
Investments in fixed maturities include bonds and redeemable preferred stocks. Our investments in held-to-maturity
fixed maturities are recorded at amortized cost. Our investments in available-for-sale fixed maturities and trading
securities are recorded at fair value.
Investments in equity securities, which include common and non-redeemable preferred stocks, are classified as
available-for-sale or trading and are recorded at fair value.
Changes in unrealized appreciation and depreciation, with respect to available-for-sale fixed maturities and equity
securities, are reported as a component of accumulated other comprehensive income, net of applicable deferred
income taxes, in stockholders' equity. Changes in unrealized appreciation and depreciation, with respect to trading
securities, are reported as a component of income.
Other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on
the equity method of accounting. Mortgage loans are recorded at their unpaid principal balance. Policy loans are
recorded at the outstanding loan amount due from policyholders. Included in investments at December 31, 2016 and
2015, are securities on deposit with, or available to, various regulatory authorities as required by law, with fair
values of $1,509,339 and $1,515,193, respectively.
In 2016 and 2014, we did not record any other-than-temporary impairment ("OTTI") charges in our investment
portfolio. In 2015 we recorded a pre-tax realized loss of $1,300 as a result of the recognition of OTTI charges on a
certain holding in our investment portfolio. The OTTI charge did not have a noncredit related loss component. We
review all of our investment holdings for appropriate valuation on an ongoing basis. Refer to Note 2 "Summary of
Investments" for a discussion of our accounting policy for impairment recognition.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-
negotiable certificates of deposit with original maturities of three months or less.
In 2016, 2015, and 2014, we made cash payments for income taxes of $24,034, $39,497 and $9,626, respectively. In
addition, we received federal tax refunds of $919 and $615 in 2015 and 2014, respectively, that resulted from the
utilization of our 2011 net operating losses and net capital losses in the carryforward period. In 2016, we did not
receive any federal tax refunds. We made no interest payments in 2016, 2015 and 2014. These payments exclude
interest credited to policyholders' accounts.
Deferred Policy Acquisition Costs ("DAC")
Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable
underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following
table is a summary of the components of DAC that are reported in the accompanying Consolidated Financial
Statements.
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Property and Casualty Insurance
Recorded asset at beginning of year
Underwriting costs deferred
Amortization of deferred policy acquisition costs
Recorded asset at end of year
Life Insurance
Recorded asset at beginning of year
Underwriting costs deferred
Amortization of deferred policy acquisition costs
Change in "shadow" deferred policy acquisition costs
Recorded asset at end of year
Total
Recorded asset at beginning of year
Underwriting costs deferred
Amortization of deferred policy acquisition costs
Change in "shadow" deferred policy acquisition costs
Recorded asset at end of year
2016
2015
2014
$
$
$
$
$
$
$
$
90,547
205,707
(202,892)
93,362
77,717
5,564
(8,121)
75,160
(4,410)
70,750
168,264
211,271
(211,013)
168,522
(4,410)
164,112
$
$
$
$
$
$
$
$
72,861
197,869
(180,183)
90,547
66,858
6,113
(6,634)
66,337
11,380
77,717
139,719
203,982
(186,817)
156,884
11,380
168,264
$
$
$
$
$
$
$
$
67,663
166,508
(161,310)
72,861
82,429
7,357
(6,139)
83,647
(16,789)
66,858
150,092
173,865
(167,449)
156,508
(16,789)
139,719
Property and casualty insurance policy acquisition costs deferred are amortized as premium revenue is recognized.
The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value.
This takes into account the premium to be earned, losses and loss settlement expenses expected to be incurred and
certain other costs expected to be incurred as the premium is earned. After reviewing our DAC model at March 31,
2015, we enhanced our property and casualty insurance segment DAC model by updating our aggregation of certain
lines of business in a manner consistent with how the policies are currently being marketed and managed. With the
completion of the Mercer Insurance Group, Inc. integration, we determined it was the appropriate time to review our
DAC models. The impact of these updates to the model resulted in an increase to DAC amortization of $2,144 and
an increase to the DAC asset of $3,830 for the period ended December 31, 2015, as compared to what we would
have recognized had we not updated our model.
For traditional life insurance policies, DAC is amortized to income over the premium-paying period in proportion to
the ratio of the expected annual premium revenue to the expected total premium revenue. Expected premium
revenue and gross profits are based on the same mortality and withdrawal assumptions used in determining future
policy benefits. These assumptions are not revised after policy issuance unless the recorded DAC asset is deemed to
be unrecoverable from future expected profits.
For non-traditional life insurance policies, DAC is amortized over the anticipated terms in proportion to the ratio of
the expected annual gross profits to the total expected gross profits. Changes in the amount or timing of expected
gross profits result in adjustments to the cumulative amortization of these costs. The effect on amortization of DAC
for revisions to estimated gross profits is reported in earnings in the period the estimated gross profits are revised.
The effect on DAC that results from the assumed realization of unrealized gains (losses) on investments allocated to
non-traditional life insurance business is recognized with an offset to net unrealized investment appreciation as of
the balance sheet date. The impact of unrealized gains (losses) on available-for-sale securities decreased the DAC
asset by $6,413, $2,003 and $13,383 at December 31, 2016, 2015 and 2014, respectively.
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Property, Equipment and Depreciation
Property and equipment is presented at cost less accumulated depreciation. The following table is a summary of the
components of the property and equipment that are reported in the accompanying Consolidated Financial
Statements.
Real estate:
Land
Buildings
Furniture and fixtures
Computer equipment and software
Airplane
Total property and equipment
2016
2015
$
$
8,231 $
41,119
4,711
1,463
—
55,524 $
7,999
37,451
3,954
2,452
1,385
53,241
Expenditures for maintenance and repairs on property and equipment are generally expensed as incurred. We
periodically review these assets for impairment whenever events or changes in business circumstances indicate that
the carrying value of the underlying asset may not be recoverable. A loss would be recognized if the estimated fair
value of the asset were less than its carrying value.
Depreciation is computed primarily by the straight-line method over the following estimated useful lives:
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Real estate
Airplane
Useful Life
Three years
Seven years
Shorter of the lease term or useful life of the asset
Seven to thirty-nine years
Five years
Depreciation expense totaled $5,266, $5,704 and $6,122 for 2016, 2015 and 2014, respectively.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise as a result of business combinations and consist of the excess of the fair
value of consideration paid over the tangible assets acquired and liabilities assumed. All of our goodwill and the
majority of our intangible assets relate to the Mercer acquisition in 2011. We evaluate goodwill and other intangible
assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is
more likely than not that the carrying amount of goodwill and other intangible assets may exceed its implied fair
value. Goodwill is evaluated at the reporting unit level. Any impairment is charged to operations in the period that
the impairment is identified. In 2016 and 2015, we performed a quantitative impairment assessment of our goodwill
and in 2014, we performed a qualitative impairment assessment of our goodwill. As a result of these assessments,
we did not recognize an impairment charge on our goodwill in 2016, 2015 or 2014.
Our other intangible assets, which consist primarily of agency relationships, trade names, state insurance licenses,
and software, are being amortized by the straight-line method over periods ranging from 2 years to 15 years, with
the exception of state insurance licenses, which are indefinite-lived and not amortized. In 2016 and 2014, we
performed a qualitative impairment assessment of our indefinite lived intangible assets and, in 2015, we performed a
quantitative impairment assessment of our indefinite lived intangible assets. As a result of these assessments, we did
not recognize an impairment charge on our intangible assets in 2016, 2015 and 2014. Amortization expense, which
is allocated to the property and casualty insurance segment, totaled $769 for each of 2016, 2015 and 2014,
respectively.
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Income Taxes
Deferred tax assets and liabilities are established based on differences between the financial statement bases of
assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax
rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability,
except for certain changes in deferred tax amounts that affect stockholders' equity and do not impact federal income
tax expense.
The Company performs a quarterly review of its tax positions and makes a determination whether it is more likely
than not that the tax position will be sustained upon examination. If based on this review, it appears not more likely
than not that the position will be sustained, the Company will calculate any unrecognized tax benefits and calculate
any interest and penalties. At December 31, 2016, 2015, and 2014 the Company did not recognize any liability for
unrecognized tax benefits. In addition, we have not accrued for interest and penalties related to unrecognized tax
benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such
amounts would be recognized as a component of federal income tax expense.
We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We
are no longer subject to federal or state income tax examination for years before 2009. The Internal Revenue Service
is conducting a routine examination of our income tax return for the 2011 tax year.
Stock-Based Compensation
We currently have two equity compensation plans. One plan allows us to grant restricted and unrestricted stock,
stock appreciation rights, incentive stock options, and non-qualified stock options to employees. The other plan
allows us to grant restricted and non-qualified stock options to non-employee directors.
We utilize the Black-Scholes option pricing method to establish the fair value of non-qualified stock options granted
under our equity compensation plans. Our determination of the fair value of stock options on the date of grant using
this option-pricing model is affected by our stock price, as well as assumptions regarding a number of complex and
subjective variables, which include the expected volatility in our stock price, the expected term of the award, the
expected dividends to be paid over the term of the award and the expected risk-free interest rate. Any changes in
these assumptions may materially affect the estimated fair value of the award. For our restricted and unrestricted
stock awards, we utilize the fair value of our common stock on the date of grant to establish the fair value of the
award. Refer to Note 9 "Stock-Based Compensation" for further discussion.
Comprehensive Income
Comprehensive income includes all changes in stockholders' equity during a period except those resulting from
investments by and dividends to stockholders.
Subsequent Events
In the preparation of the accompanying financial statements, the Company has evaluated all material subsequent
events or transactions that occurred after the balance sheet date through the date on which the financial statements
were issued for potential recognition or disclosure in the Company's financial statements.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2016
Short-Duration Contracts
In May 2015, the Financial Accounting Standards Board ("FASB") issued guidance on disclosure requirements for
short-duration contracts. The new guidance requires additional disclosures about the liability for unpaid loss and loss
adjustment expenses and requires disclosure of any information about significant changes in methodologies and
assumptions used to calculate the liability. The new guidance is effective for annual periods beginning after
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December 15, 2015 and interim periods beginning the following year. The Company has included the new annual
disclosures beginning with the December 31, 2016 annual financial statements. The adoption of the new guidance
changed disclosures in Note 5 "Reserves for Losses and Loss Settlement Expenses," of this section regarding short-
duration contracts, but had no impact on the Company's financial position or results of operations.
Other Internal Use Software
In April 2015, the FASB issued guidance which clarifies customers' accounting for fees paid for cloud computing
arrangements. The new standard provides guidance to customers about whether a cloud computing arrangement
includes a software license or whether the arrangement is considered a service contract. The new guidance is
effective for annual and interim periods beginning after December 15, 2015. The Company adopted the new
guidance as of January 1, 2016. The adoption of the new guidance had no impact on the Company's financial
position or results of operations as we have no material cloud computing arrangements.
Debt Issuance Costs
In April 2015, the FASB issued new guidance on the presentation of debt issuance costs. The new guidance requires
that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of the debt liability. The new guidance is effective for annual and interim periods
beginning after December 15, 2015. The Company adopted the new guidance as of January 1, 2016. The adoption of
the new guidance had no impact on the Company's financial position or results of operations in 2016 as we did not
issue any debt.
Consolidation
In February 2015, the FASB issued amendments to the consolidation guidance that a reporting entity follows to
determine whether it should consolidate certain legal entities. Specifically, the new guidance modifies the evaluation
of whether limited partnerships and similar legal entities are variable interest entities ("VIE"), eliminates the
presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of
reporting entities that have VIE's, particularly those with fee arrangements and related party relationships. The new
guidance is effective for annual and interim periods beginning after December 15, 2015. The Company adopted the
guidance as of January 1, 2016. The adoption of the new guidance had no impact on the Company's financial
position or results of operations.
Going Concern
In August 2014, the FASB issued new guidance on the disclosure of uncertainties about an entity's ability to
continue as a going concern. The new guidance requires management to evaluate whether there is substantial doubt
about the entity's ability to continue as a going concern and, if so, to disclose that fact and what the entity's plans are
to alleviate that doubt. The guidance is effective for annual periods ending after December 15, 2016 and interim
periods within annual periods beginning after December 15, 2016. The Company adopted the guidance as of January
1, 2016. The adoption of the new guidance had no impact on the Company's financial position or results of
operations.
Share-Based Payments
In June 2014, the FASB issued new guidance on the accounting for share-based payments when the terms of an
award provide that a performance target could be achieved after the requisite service period. The new guidance
requires a performance target that affects vesting and that could be achieved after the service period, be treated as a
performance condition. The guidance is effective for interim and annual periods beginning after December 15, 2015.
The amendments can be applied prospectively or retrospectively and early adoption is permitted. The Company
adopted the guidance as of January 1, 2016. The adoption of the new guidance had no impact on the Company's
financial position or results of operations.
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Pending Adoption of Accounting Standards
Share-Based Payments
In March 2016, the FASB issued new guidance on the accounting for share-based payments. The new guidance was
issued to simplify the accounting of share-based payments, specifically in the areas of income taxes, classification
on the balance sheets as liabilities or equity and classification in the cash flow statement. The new guidance is
effective for annual periods beginning after December 15, 2016 and interim periods within those years. The
Company adopted the new guidance as of January 1, 2017. The new guidance will result in classification changes
between the financing and operating section of the Statement of Cash Flow. The new guidance will also result in
additional tax expense or net income, but will vary depending on the number of stock options granted and exercised.
Income Taxes
In December 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. The new
guidance eliminates the requirement to split deferred tax liabilities and assets between current and non-current in a
classified balance sheet. The new guidance allows deferred tax liabilities and assets to be included in non-current
accounts. The Company adopted the new guidance as of January 1, 2017. The adoption will have no impact on the
Company's financial position and results of operations since we do not currently report deferred taxes in classified
balance sheets.
Revenue Recognition
In May 2014, the FASB issued comprehensive new guidance on revenue recognition which supersedes nearly all
existing revenue recognition guidance under GAAP. The new guidance requires a company to recognize revenue
when it transfers promised goods or services to customers in an amount that reflects the consideration to which the
company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that
requires companies to exercise judgment when considering the terms of the contract(s) and all relevant facts and
circumstances. Insurance contracts are not within the scope of this new guidance. The new guidance is effective for
annual and interim periods beginning after December 15, 2017. The Company will adopt the guidance as of January
1, 2018. The adoption of the new guidance will have no impact on the Company's reporting and disclosure of net
premiums earned, net investment income or net realized gains and losses, as these items are not within the scope of
this new guidance. The Company is currently evaluating the impact on the Company's financial position and results
of operations with other revenue streams under this new guidance. These other revenue streams, currently reported
in other income in the Consolidated Statements of Income and Comprehensive Income, are not a material amount of
the Company's total revenue.
Financial Instruments
In January 2016, the FASB issued guidance updating certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments. The amendments in this update supersede the guidance to classify equity
securities with readily determinable fair values into different categories (for example, trading or available-for-sale)
and require equity securities to be measured at fair value with changes in the fair value recognized through net
income. The new guidance also simplifies the impairment process for equity investments without readily
determinable fair values. The new guidance is effective for annual periods beginning after December 15, 2017 and
interim periods within those years. The Company will adopt the new guidance as of January 1, 2018 and is currently
evaluating the impact on the Company's financial position, results of operations and key processes. If the new
guidance were adopted as of December 31, 2016, there would be a reclassification from accumulated other
comprehensive income to retained earnings equal to the amount of net unrealized gains and losses on available-for-
sale equity securities at December 31, 2015 disclosed in Note 2 "Summary of Investments," of this section. The
impact to net realized gains (losses) would equal the change in net unrealized gains and losses on available-for-sale
equity securities between December 31, 2016 and December 31, 2015, in the same tables.
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Statement of Cash Flows - Classification of Certain Cash Receipts and Payments
In August 2016, the FASB issued an update that clarifies the classification of certain cash receipts and payments in
the Statement of Cash Flows. The update addresses eight existing cash flow issues by clarifying the correct
classification to establish uniformity in practice. The updated guidance is effective for annual periods beginning
after December 15, 2017 and interim periods within those years. The Company will adopt the new guidance as of
January 1, 2018 and is currently reviewing the updates to the eight existing cash flow issues. Currently, management
believes that one existing cash flow issue will be impacted by these updates. Management believes the update will
have no impact on the Company's financial position and results of operations but may effect the current
classification of the cash flow in the Statement of Cash Flows.
Leases
In February 2016, the FASB issued guidance on the accounting for leases. The new guidance requires lessees to
place most leases on their balance sheets with expenses recognized on the income statement in a similar manner as
previous methods. The new guidance is effective for annual periods beginning after December 15, 2018 and interim
periods within those years. The Company will adopt the new guidance as of January 1, 2019. The Company has
created an inventory of its leases and has calculated the current minimum future lease payment which is disclosed in
Note 13 "Lease Commitments."
Financial Instruments - Credit Losses
In June 2016, the FASB issued new guidance on the measurement of credit losses for most financial instruments.
The new guidance replaces the current incurred loss model for recognizing credit losses with an expected loss model
for instruments measured at amortized cost and requires allowances to be recorded for available-for-sale debt
securities rather than reduce the carrying amount. These allowances will be remeasured each reporting period. The
new guidance is effective for annual periods beginning after December 15, 2020 and interim periods within those
years. The Company will adopt the new guidance as of January 1, 2021 and is currently evaluating the impact on the
Company's financial position, results of operations and key processes.
Income Taxes - Intra-entity Transfers
In October 2016, the FASB issued new guidance on the income tax treatment of intra-entity transfers. The new
guidance replaces the current guidance which prohibits the recognition of current and deferred income taxes of intra-
entity transfers until the asset is sold externally. Under the new guidance, the exemption is eliminated and income
taxes will be recognized on transfers of intra-entity assets. The new guidance is effective for annual periods
beginning after December 15, 2018 and interim periods beginning after December 15, 2019. The Company will
adopt the new guidance as of January 1, 2019 and is currently evaluating the impact on the Company's financial
position and results of operations.
Goodwill
In January 2017, the FASB issued new guidance which simplifies the test for goodwill impairment. The new
guidance eliminates the implied fair value calculation when measuring a goodwill impairment charge. Under the
new guidance, impairment charges will be based on the excess of the carrying value over fair value of goodwill. The
new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company will
adopt the new guidance as of January 1, 2020 and is currently evaluating the impact on the Company's financial
position and results of operations.
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NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
The table that follows is a reconciliation of the amortized cost (cost for equity securities) to fair value of investments
in held-to-maturity and available-for-sale fixed maturity and available-for-sale equity securities as of December 31,
2016 and 2015.
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December 31, 2016
Type of Investment
HELD-TO-MATURITY
Fixed maturities
Bonds
Corporate bonds - financial services
Mortgage-backed securities
Total Held-to-Maturity Fixed Maturities
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political subdivisions
General obligations:
Midwest
Northeast
South
West
Special revenue:
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-For-Sale Fixed Maturities
Equity securities
Common stocks
Public utilities
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Nonredeemable preferred stocks
Total Available-for-Sale Equity Securities
Total Available-for-Sale Securities
$
$
$
$
$
$
$
Cost or
Amortized
Cost
Gross
Unrealized
Appreciation
Gross
Unrealized
Depreciation
Fair Value
—
1
1
87
1,445
1,808
909
1,249
1,380
2,313
487
1,753
1,509
2,239
3,761
2,195
5,359
3,847
2,063
2,029
5,328
201
1,279
1,638
1,816
145
44,840
13,465
8,555
38,715
13,851
19,657
9,476
98,728
11
202,458
247,298
$
$
$
$
$
$
$
—
—
—
108
540
1,412
231
2,355
2,173
1,433
2,624
6,791
4,052
—
447
419
982
295
151
819
1,358
241
2,766
3,406
1,334
282
34,219
188
22
173
58
—
38
67
—
546
34,765
$
$
$
$
$
$
$
150
49
199
23,195
77,597
144,143
58,409
128,369
113,731
168,310
68,065
239,187
131,744
65,234
215,674
108,860
229,903
181,687
83,123
144,612
273,951
17,248
144,460
174,458
101,896
4,270
2,898,126
19,671
15,047
51,794
24,117
27,420
15,369
115,950
1,048
270,416
3,168,542
$
$
$
$
$
$
$
150
48
198
23,216
76,692
143,747
57,731
129,475
114,524
167,430
70,202
244,225
134,287
62,995
212,360
107,084
225,526
178,135
81,211
143,402
269,981
17,288
145,947
176,226
101,414
4,407
2,887,505
6,394
6,514
13,252
10,324
7,763
5,931
17,289
1,037
68,504
2,956,009
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December 31, 2015
Type of Investment
HELD-TO-MATURITY
Fixed maturities
Bonds
Corporate bonds
Technology, media and telecommunications
Financial services
Mortgage-backed securities
Total Held-to-Maturity Fixed Maturities
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political subdivisions
General obligations:
Midwest
Northeast
South
West
Special revenue:
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-For-Sale Fixed Maturities
Equity securities
Common stocks
Public utilities
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Nonredeemable preferred stocks
Total Available-for-Sale Equity Securities
Total Available-for-Sale Securities
$
$
$
$
$
$
$
Cost or
Amortized
Cost
Gross
Unrealized
Appreciation
Gross
Unrealized
Depreciation
Fair Value
1
—
2
3
100
2,622
4,990
1,996
3,358
3,160
4,956
919
4,281
3,150
2,405
3,701
1,032
3,329
2,844
2,168
1,972
5,246
376
1,391
2,377
2,400
221
58,994
12,022
5,374
31,872
13,017
20,454
7,538
78,411
34
168,722
227,716
$
$
$
$
$
$
$
$
$
$
$
$
$
$
450
150
72
672
21,587
232,808
160,484
56,449
125,565
103,721
152,780
23,892
144,183
78,935
82,580
213,233
116,800
227,589
172,529
92,132
142,431
259,382
16,413
120,220
137,874
106,021
5,461
2,793,069
7,231
6,103
13,251
10,301
7,763
5,931
17,392
542
68,514
2,861,583
89
—
—
—
—
38
2,400
18
—
134
67
30
212
27
44
2,457
1,251
4,713
6,663
776
791
2,003
1,143
51
1,985
1,342
941
16
27,102
193
266
313
3
—
105
109
—
989
28,091
$
$
$
$
$
$
$
451
150
74
675
21,649
233,030
165,456
58,445
128,789
106,814
157,706
24,599
148,437
82,041
82,528
215,683
113,119
224,255
174,597
93,509
142,400
263,485
16,738
119,626
138,909
107,480
5,666
2,824,961
19,060
11,211
44,810
23,315
28,217
13,364
95,694
576
236,247
3,061,208
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Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at
December 31, 2016, by contractual maturity, are shown in the following table. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations
may be subject to prepayment risk and are therefore not categorized by contractual maturity.
Held-To-Maturity
Available-For-Sale
Trading
Amortized
Cost
Fair Value
December 31, 2016
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Asset-backed securities
Mortgage-backed securities
Collateralized mortgage obligations
$
$
150 $
—
—
—
—
48
—
198 $
Fair Value
Amortized
Cost
106,058 $ 107,080 $
840,603
807,723
687,839
4,407
17,288
423,587
150 $
—
—
—
—
49
—
199 $ 2,887,505 $ 2,898,126 $
862,053
815,182
671,479
4,270
17,248
420,814
Amortized
Cost
Fair Value
1,774
8,882
1,406
2,328
—
—
—
14,390
1,753 $
7,841
1,302
2,158
—
—
—
13,054 $
Net Realized Investment Gains and Losses
Net realized gains (losses) on disposition of investments are computed using the specific identification method and
are included in the computation of net income. A summary of net realized investment gains (losses) for 2016, 2015
and 2014, is as follows:
Net realized investment gains (losses)
Fixed maturities:
Available-for-sale
Trading securities
Change in fair value
Sales
Equity securities:
Available-for-sale
Trading securities
Change in fair value
Sales
Other long-term investments
Other-than-temporary-impairment charges:
Fixed maturities
Cash equivalents
Total net realized investment gains
2016
2015
2014
$
2,160
$
3,294
$
3,353
189
931
(1,353)
1,381
2,359
2,521
301
(6)
—
(448)
66
(1,315)
—
169
6,103 $
(1,300)
—
2,846
$
$
609
1,339
1,732
238
(1)
—
—
—
7,270
The proceeds and gross realized gains (losses) on the sale of available-for-sale securities for 2016, 2015 and 2014,
were as follows:
Proceeds from sales
Gross realized gains
Gross realized losses
2016
2015
2014
$
14,322 $
985
(639)
$
11,543
1,134
—
3,091
900
(56)
There were no sales of held-to-maturity securities in 2016, 2015 and 2014.
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Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily
convertible securities which are recorded at fair value. Income or loss, including the change in the fair value of these
trading securities, is recognized currently in earnings as a component of net realized investment gains and losses.
Our portfolio of trading securities had a fair value of $20,034 and $16,975 at December 31, 2016 and 2015,
respectively.
Net Investment Income
Net investment income for the years ended December 31, 2016, 2015 and 2014, is comprised of the following:
Years Ended December 31,
Investment income
Interest on fixed maturities
Dividends on equity securities
Income on other long-term investments
Investment income
Change in value (1)
Interest on mortgage loans
Interest on short-term investments
Interest on cash and cash equivalents
Other
Total investment income
Less investment expenses
Net investment income
2016
2015
2014
$
$
$
92,362
7,050
2,394
10,742
221
84
445
1,227
114,525
7,703
106,822
$
$
$
92,777
7,208
2,567
3,266
237
6
305
1,452
107,818
7,037
100,781
$
$
$
97,969
6,602
1,927
1,917
252
5
255
1,998
110,925
6,316
104,609
(1) Represents the change in value of our interests in limited liability partnerships that are recorded on the equity method of accounting.
Funding Commitment
At December 31, 2016, pursuant to an agreement with our limited liability partnership investments, we are
contractually committed to make capital contributions up to $8,428 upon request of the partnerships through
December 31, 2023.
Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation for 2016, 2015 and 2014, is as follows:
Change in net unrealized investment appreciation
Available-for-sale fixed maturities
Available-for-sale equity securities
Deferred policy acquisition costs
Income tax effect
Total change in net unrealized investment appreciation, net of tax
2016
2015
2014
$
$
(21,271) $
34,179
(4,410)
(2,975)
5,523 $
(37,621) $
(6,459)
11,380
11,446
(21,254) $
51,814
15,781
(16,789)
(17,784)
33,022
We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our
accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be
recorded when we determine that it is more likely than not that we will be unable to collect all amounts due
according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the
equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based
on the fair value of the investments at the measurement date or based on the value calculated using a discounted
cash flow model. Credit-related impairments on fixed maturity securities that we do not plan to sell, and for which
we are not more likely than not to be required to sell, are recognized in net income. Any non-credit related
impairment is recognized as a component of other comprehensive income. Factors considered in evaluating whether
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a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less
than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the
likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss
position at December 31, 2016 and 2015. The securities are presented by the length of time they have been
continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on
securities held at December 31, 2016 if future events or information cause us to determine that a decline in fair value
is other-than-temporary.
We have evaluated the near-term prospects of the issuers of our fixed maturity securities in relation to the severity
and duration of the unrealized loss and determined that these losses did not warrant the recognition of an OTTI
charge in 2016 or 2014. In 2015, we recognized a $1,300 credit loss OTTI on an energy sector fixed maturity
security in our Consolidated Statements of Income and Comprehensive Income. All fixed maturity securities in the
investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. We
believe the unrealized depreciation in value of other securities in our fixed maturity portfolio is primarily
attributable to changes in market interest rates and not the credit quality of the issuer. We have no intention to sell
and it is more likely than not that we will not be required to sell these securities until the fair value recovers to at
least equal to our cost basis or the securities mature.
We have evaluated the near-term prospects of the issuers of our equity securities in relation to the severity and
duration of the unrealized loss and, unless otherwise noted, these losses do not warrant the recognition of an OTTI
charge at December 31, 2016. There were no OTTI losses on equity securities recognized in 2016, 2015 or 2014.
Our largest unrealized loss greater than 12 months on an individual equity security at December 31, 2016, 2015 and
2014 was $188, $225 and $54, respectively. We have no intention to sell any of these securities prior to a recovery in
value, but will continue to monitor the fair value reported for these securities as part of our overall process to
evaluate investments for OTTI recognition.
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December 31, 2016
Less than 12 months
12 months or longer
Total
Type of Investment
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and
political subdivisions
General obligations
Midwest
Northeast
South
West
Special revenue
Midwest
Northeast
South
West
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and
services
Health care
Technology, media and
telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage
obligations
Government national
mortgage association
Federal home loan
mortgage corporation
Federal national mortgage
association
Asset-backed securities
Total Available-for-Sale Fixed
Maturities
Equity securities
Common stocks
Public utilities
Energy
Industrials
Consumer goods and services
Technology, media and
telecommunications
Financial services
Total Available-for-Sale
Equity Securities
Total Available-for-Sale
Securities
Number
of
Issues
Fair
Value
Gross
Unrealized
Depreciation
Number
of
Issues
Fair
Value
Gross
Unrealized
Depreciation
Fair
Value
Gross
Unrealized
Depreciation
9
10
$
10,800
36,593
$
108
540
— $
—
— $
—
— $
—
10,800
36,593
$
108
540
27
9
37
30
41
22
79
44
20
8
24
11
9
16
37
16
36
41
27
1
40,545
9,874
53,699
55,265
62,937
54,993
152,979
81,676
38,511
15,938
42,854
21,059
20,918
41,230
75,286
9,611
82,430
105,775
46,633
971
1,412
231
2,355
2,173
1,433
2,624
6,791
4,052
423
313
596
295
151
516
1,358
187
2,261
3,165
1,091
29
—
—
—
—
—
—
—
—
2
3
3
—
—
3
—
5
9
3
4
1
—
—
—
—
—
—
—
—
2,122
8,232
5,641
—
—
10,241
—
1,198
—
—
—
—
—
—
—
—
24
106
386
—
—
303
—
54
40,545
9,874
53,699
55,265
62,937
54,993
152,979
81,676
40,633
24,170
48,495
21,059
20,918
51,471
75,286
10,809
13,603
505
96,033
5,141
4,341
2,559
241
110,916
243
253
50,974
3,530
1,412
231
2,355
2,173
1,433
2,624
6,791
4,052
447
419
982
295
151
819
1,358
241
2,766
3,406
1,334
282
554
$1,060,577
$
32,104
33
$ 53,078
$
2,115
$1,113,655
$
34,219
— $
—
—
3
7
3
— $
—
—
282
26
53
13
$
361
567
$1,060,938
$
$
—
—
—
55
5
3
63
$
3
1
6
2
8
2
120
163
239
15
33
150
22
$
720
32,167
55
$ 53,798
$
$
$
$
188
22
173
3
33
64
120
163
239
297
59
203
483
$
1,081
2,598
$1,114,736
$
$
$
188
22
173
58
38
67
546
34,765
93
Table of Contents
December 31, 2015
Less than 12 months
12 months or longer
Total
Number
of
Issues
Fair
Value
Gross
Unrealized
Depreciation
Number
of
Issues
Fair
Value
Gross
Unrealized
Depreciation
Fair
Value
Gross
Unrealized
Depreciation
Type of Investment
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and
political subdivisions
General obligations
Midwest
South
West
Special revenue
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and
services
Health care
Technology, media and
telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage
obligations
Government national
mortgage association
Federal home loan mortgage
corporation
Federal national mortgage
association
Asset-backed securities
Total Available-for-Sale Fixed
Maturities
Equity securities
Common stocks
Public utilities
Energy
Industrials
Consumer goods and services
Technology, media and
telecommunications
Financial services
Total Available-for-Sale Equity
Securities
Total Available-for-Sale
Securities
$ 1,634
18,821
$
12
629
$
8,042
123,442
$
38
2,400
6
38
$ 6,408
104,621
$
26
1,771
4
3
4
—
1
4
4
9
35
29
38
24
18
22
49
9
17
20
15
1
2,417
4,805
8,927
—
4,755
7,445
6,851
16,991
72,680
61,496
78,588
64,661
43,992
59,503
92,814
7,423
29,769
35,343
32,800
985
12
55
23
—
212
26
44
1,289
880
3,286
3,631
770
652
1,478
1,143
43
437
644
524
16
2
6
1
8
2
1
—
2
—
2
5
4
3
4
2
2
—
4
528
3,743
2,274
2,494
—
1,851
—
4,036
2,840
7,991
6,649
2,491
3,737
8,940
—
183
6
79
44
30
—
1
—
1,168
371
1,427
3,032
6
139
525
—
8
2,945
8,548
11,201
2,494
4,755
9,296
6,851
21,027
75,520
69,487
85,237
67,152
47,729
68,443
92,814
7,606
14
40,027
1,548
69,796
6
19,887
11
—
11,962
—
698
417
—
55,230
44,762
985
18
134
67
30
212
27
44
2,457
1,251
4,713
6,663
776
791
2,003
1,143
51
1,985
1,342
941
16
350
$743,274
$
16,962
79
$140,088
$
10,140
$ 883,362
$
27,102
— $
10
3
—
9
6
— $
2,868
177
—
438
326
28
$ 3,809
378
$747,083
$
$
—
266
44
—
91
51
452
$
3
—
5
2
2
1
115
—
193
14
12
136
13
$
470
17,414
92
$140,558
$
$
$
$
193
—
269
3
14
58
115
2,868
370
14
450
462
537
$
4,279
10,677
$ 887,641
$
$
$
193
266
313
3
105
109
989
28,091
94
Table of Contents
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that
requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which
is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs
(i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level
is based on the lowest priority level input that is significant to the fair value measurement of the financial
instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
•
•
•
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial
instruments that we have the ability to access.
Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices
included in Level 1, in markets that are not active or on inputs that are observable either directly or
indirectly for the full term of the financial instrument.
Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs
may reflect management's own assumptions about the assumptions a market participant would use in
pricing the financial instrument.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain
financial instruments may change if the input observations have changed. Transfers between levels, if any, are
recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent,
nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot
provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers
with whom we have had several years experience and who have demonstrated knowledge of the subject security. We
request and utilize one broker quote per security.
In order to determine the proper classification in the fair value hierarchy for each security where the price is
obtained from an independent pricing service, we obtain and evaluate the vendors' pricing procedures and inputs
used to price the security, which include unadjusted quoted market prices for identical securities, such as a New
York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed
maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals,
volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these
processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on
fair value measurements.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading
securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on
market information obtained from independent pricing services and brokers or on valuation techniques that are both
unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may
reflect management's own assumptions about the assumptions a market participant would use in pricing the financial
instrument. Our valuation techniques are discussed in more detail throughout this section.
The fair value of our mortgage loans is determined by modeling performed by us based on the stated principal and
coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate
risk-adjusted discount rate to determine the security's fair value, which is a Level 3 fair value measurement.
95
Table of Contents
The fair value of our policy loans is equivalent to carrying value, which is a reasonable estimate of fair value and is
classified as Level 2. We do not make policy loans for amounts in excess of the cash surrender value of the related
policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for
traditional insurance policies or by the policyholders' account balance for non-traditional policies.
Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded
on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is
based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values
represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund
managers.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value
due to the short-term nature of these financial instruments.
Policy reserves are developed and recorded for deferred annuities, which is an interest-sensitive product, and income
annuities. The fair value of the reserve liability for these annuity products is based upon an estimate of the
discounted pretax cash flows that are forecast for the underlying business, which is a Level 3 fair value
measurement. We base the discount rate on the current U.S. Treasury spot yield curve, which is then risk-adjusted
for nonperformance risk and, for interest-sensitive business and market risk factors. The risk-adjusted discount rate
is developed using interest rates that are available in the market and representative of the risks applicable to the
underlying business.
The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Non-
qualified Deferred Compensation Plan and United Fire Group Supplemental Executive Retirement and Deferral Plan
(collectively the "Executive Retirement Plans"). Within the rabbi trust, corporate-owned life insurance ("COLI")
policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plans.
The COLI policies invest in mutual funds, which are priced daily by independent sources. As of December 31, 2016,
the cash surrender value of the COLI policies was $2,592, which is equal to the fair value measured using Level 2
inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated
Balance Sheets.
96
Table of Contents
A summary of the carrying value and estimated fair value of our financial instruments at December 31, 2016 and
2015 is as follows:
December 31, 2016
December 31, 2015
Fair Value
Carrying Value
Fair Value
Carrying Value
Assets
Investments
Fixed maturities:
Held-to-maturity securities
Available-for-sale securities
Trading securities
Equity securities:
Available-for-sale securities
Trading securities
Mortgage loans
Policy loans
Other long-term investments
Short-term investments
Cash and cash equivalents
Corporate-owned life insurance
Liabilities
Policy reserves
$
$
199
2,898,126
14,390
$
198
2,898,126
14,390
$
675
2,824,961
12,622
672
2,824,961
12,622
270,416
5,644
3,895
5,366
67,639
175
110,853
2,592
270,416
5,644
3,706
5,366
67,639
175
110,853
2,592
236,247
4,353
4,237
5,618
54,151
175
106,449
1,716
236,247
4,353
3,961
5,618
54,151
175
106,449
1,716
Annuity (accumulations) (1)
Annuity (benefit payments)
666,711
95,129
(1) Annuity accumulations represent deferred annuity contracts that are currently earning interest.
646,764
144,283
$
$
$
707,190
131,899
$
744,931
95,467
The following tables present the categorization for our financial instruments measured at fair value on a recurring
basis in our Consolidated Balance Sheets at December 31, 2016 and 2015:
Description
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political
subdivisions
General obligations
Midwest
Northeast
South
West
Special revenue
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
December 31, 2016
Level 1
Fair Value Measurements
Level 2
Level 3
$
23,195
77,597
$
— $
—
23,195
77,597
$
144,143
58,409
128,369
113,731
168,310
68,065
239,187
131,744
65,234
215,674
108,860
229,903
181,687
83,123
144,612
97
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
144,143
58,409
128,369
113,731
168,142
68,065
239,187
131,744
65,234
215,674
108,860
229,903
180,590
83,123
144,612
—
—
—
—
—
—
168
—
—
—
—
—
—
—
1,097
—
—
—
—
—
—
—
—
— $
265,154
17,248
144,460
174,458
101,896
3,821
2,887,615
$
$
19,671
15,047
51,794
24,117
27,420
15,369
111,958
453
265,829
265,829
$
$
$
— $
—
—
—
—
—
—
—
— $
2,887,615
$
15,098
8,797
—
—
—
—
449
10,511
—
—
—
—
—
—
3,992
595
4,587
— $
—
—
—
—
1,305
613
286
877
1,202
339
206
2,121
6,949
175
16,802
$
$
$
3,919
127
3,410
787
4,842
—
—
—
—
—
—
—
—
13,085
$
$
— $
— $
— $
2,592
289,755
$
2,903,292
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,098
Table of Contents
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-For-Sale Fixed Maturities
Equity securities
Common stocks
Public utilities
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Nonredeemable preferred stocks
Total Available-for-Sale Equity Securities
Total Available-for-Sale Securities
TRADING
Fixed maturities
Bonds
Corporate bonds
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Redeemable preferred stocks
Equity securities
Public utilities
Energy
Industrials
Consumer goods and services
Health care
Financial Services
Nonredeemable preferred stocks
Total Trading Securities
Short-Term Investments
Money Market Accounts
Corporate-Owned Life Insurance
Total Assets Measured at Fair Value
$
$
$
$
$
$
$
$
$
$
273,951
17,248
144,460
174,458
101,896
4,270
2,898,126
19,671
15,047
51,794
24,117
27,420
15,369
115,950
1,048
270,416
3,168,542
3,919
127
3,410
787
4,842
1,305
613
286
877
1,202
339
206
2,121
20,034
175
16,802
2,592
3,208,145
$
$
$
$
$
$
$
$
$
98
Table of Contents
Description
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political
subdivisions
General obligations
Midwest
Northeast
South
West
Special revenue
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-For-Sale Fixed Maturities
Equity securities
Common stocks
Public utilities
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Nonredeemable preferred stocks
Total Available-for-Sale Equity Securities
Total Available-for-Sale Securities
TRADING
Fixed maturities
Bonds
Corporate bonds
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
$
$
$
$
$
Fair Value Measurements
December 31, 2015
Level 1
Level 2
Level 3
$
21,649
233,030
$
— $
—
21,649
233,030
$
—
—
—
—
—
—
343
—
—
—
—
—
—
—
1,233
—
—
9,662
—
—
—
—
1,036
12,274
—
—
—
—
—
—
3,978
—
3,978
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
165,456
58,445
128,789
106,814
157,363
24,599
148,437
82,041
82,528
215,683
113,119
224,255
173,364
93,509
142,400
253,823
16,738
—
—
—
—
— $
119,626
138,909
107,480
4,630
2,812,687
$
19,060
11,211
44,810
23,315
28,217
13,364
91,588
576
232,141
232,141
$
$
$
— $
—
—
—
—
—
128
—
128
$
2,812,815
$
16,252
— $
—
—
—
$
3,558
118
2,032
335
—
—
—
—
165,456
58,445
128,789
106,814
157,706
24,599
148,437
82,041
82,528
215,683
113,119
224,255
174,597
93,509
142,400
263,485
16,738
119,626
138,909
107,480
5,666
2,824,961
19,060
11,211
44,810
23,315
28,217
13,364
95,694
576
236,247
3,061,208
3,558
118
2,032
335
99
$
$
$
$
$
Table of Contents
Financial services
Redeemable preferred stocks
Equity securities
Energy
Industrials
Consumer goods and services
Health care
Financial Services
Nonredeemable preferred stocks
Total Trading Securities
Short-Term Investments
Money Market Accounts
Corporate-Owned Life Insurance
Total Assets Measured at Fair Value
4,094
2,485
267
986
942
304
229
1,625
16,975
175
20,805
1,716
3,100,879
$
$
$
$
$
—
2,485
267
986
942
304
229
1,625
6,838
175
20,805
$
$
$
4,094
—
—
—
—
—
—
—
10,137
$
— $
— $
— $
1,716
259,959
$
2,824,668
$
$
—
—
—
—
—
—
—
—
—
—
—
—
16,252
$
$
$
$
$
The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and
regularly available.
We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party
valuation service provider. Any of these securities not valued by this service provider are submitted to another third-
party valuation service provider. Both service providers use a market approach to find pricing of similar financial
instruments. The market inputs our service providers normally seek to value our securities include the following,
listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-
sided markets, benchmark securities, bids, offers, and reference data including market research publications. The
method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit
quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities,
collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to
value these securities, including the following: new issue data, periodic payment information, monthly payment
information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs
based on market conditions, and not all inputs listed are available for use in the valuation process for each security
on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify
that they are reasonable and representative of the fair value of the underlying securities held in the investment
portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for
reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review
for unusual fluctuations. Unusual fluctuations outside of our expectations are independently corroborated with
additional third-party sources that use similar valuation techniques as discussed above. In addition, we also
randomly select securities and independently corroborate the valuations obtained from our third-party valuation
service providers. In our opinion, the pricing obtained at December 31, 2016 and 2015 was reasonable.
For the year ended December 31, 2016, the change in our available-for-sale securities categorized as Level 1 and
Level 2 is the result of investment purchases that were made using funds held in our money market accounts,
disposals and the change in unrealized gains on both fixed maturities and equity securities. During the twelve month
period ended December 31, 2016, there were no securities transferred between Level 1 and Level 2.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities
for which an active market does not currently exist. The fair value of our Level 3 private placement securities is
determined by management relying on pricing received from our independent pricing services and brokers
consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level
3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the
brokers’ valuation processes. If pricing cannot be obtained from these sources, which occurs on a limited basis,
management will perform a discounted cash flow analysis, using an appropriate risk-adjusted discount rate, on the
100
Table of Contents
underlying security to estimate fair value. During the twelve month period ended December 31, 2016, there were no
securities transferred in or out of Level 3.
The following table provides a summary of the changes in fair value of our Level 3 securities for 2016:
Balance at January 1, 2016
Unrealized gains (losses) (1)
Purchases
Disposals
Balance at December 31, 2016
States,
municipalities
and political
subdivisions
Corporate
bonds
Asset-backed
securities
Equities
Total
$
$
343
$
10,895
$
1,036
$
3,978
$
16,252
(15)
—
(160)
134
—
(1,135)
(39)
—
(548)
—
727
(118)
80
727
(1,961)
168
$
9,894
$
449
$
4,587
$
15,098
(1) Realized gains (losses) are recorded as a component of earnings, whereas unrealized gains (losses) are recorded as a component of
comprehensive income.
The following table provides a summary of the changes in fair value of our Level 3 securities for 2015:
Balance at January 1, 2015
Realized gains (losses) (1)
Unrealized gains (losses) (1)
Purchases
Disposals
Balance at December 31, 2015
States,
municipalities
and political
subdivisions
Corporate
bonds
Asset-backed
securities
Equities
Total
$
$
519
$
12,312
$
1,612
$
3,872
$
18,315
—
(26)
—
(150)
(142)
—
100
(1,375)
—
(39)
—
(537)
—
—
121
(15)
(142)
(65)
221
(2,077)
343
$
10,895
$
1,036
$
3,978
$
16,252
(1) Realized gains (losses) are recorded as a component of earnings, whereas unrealized gains (losses) are recorded as a component of
comprehensive income.
The fixed maturities reported as disposals relate to the receipt of principal on calls or sinking fund bonds, in
accordance with the indentures.
NOTE 4. REINSURANCE
Property and Casualty Insurance Segment
Ceded and Assumed Reinsurance
Reinsurance is a contract by which one insurer, called the reinsurer, agrees to cover, under certain defined
circumstances, a portion of the losses incurred by a primary insurer if a claim is made under a policy issued by the
primary insurer. Our property and casualty insurance companies follow the industry practice of reinsuring a portion
of their exposure by ceding to reinsurers a portion of the premium received and a portion of the risk under the
policies written. We purchase reinsurance to reduce the net liability on individual risks to predetermined limits and
to protect us against catastrophic losses, such as a hurricane or tornado. We do not engage in any reinsurance
transactions classified as finite risk reinsurance.
We account for premiums, written and earned, and losses incurred net of reinsurance ceded. The ceding of insurance
does not legally discharge us from primary liability under our policies, and we must pay the loss if the reinsurer fails
to meet its obligation. We periodically monitor the financial condition of our reinsurers to confirm that they are
financially stable. We believe that all of our reinsurers are in an acceptable financial condition and there were no
reinsurance balances at December 31, 2016 for which collection is at risk that would result in a material impact on
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our Consolidated Financial Statements. The amount of reinsurance recoverable on paid losses totaled $2,447 and
$11,887 at December 31, 2016 and 2015, respectively.
We also assume both property and casualty insurance from other insurance or reinsurance companies. Most of the
business we have assumed is property insurance, with an emphasis on catastrophe coverage.
Premiums and losses and loss settlement expenses related to our ceded and assumed business are as follows:
Years Ended December 31,
Ceded Business
Ceded premiums written
Ceded premiums earned
Loss and loss settlement expenses ceded
Assumed Business
Assumed premiums written
Assumed premiums earned
Loss and loss settlement expenses assumed
2016
2015
2014
$
$
$
$
57,988
57,996
13,278
16,834
17,037
9,814
$
$
56,916
56,758
3,868
18,290
18,396
14,415
50,290
49,818
9,728
16,421
16,265
7,727
In 2016, we renewed our participation in all of our assumed programs. Loss and loss settlement expenses ceded
increased in 2016 as compared to 2015, primarily due to an increase in significant large losses and catastrophe
losses.
In 2015, we renewed our participation in all of our assumed programs and added one new program to our portfolio.
The new assumed program is for international catastrophes excluding the United States with the largest exposure to
European wind perils. Loss and loss settlement expenses ceded decreased in 2015 as compared to 2014 primarily
due to a decrease in significant large losses and catastrophe losses.
In 2014, we renewed our participation in all but one of our assumed programs and added one new program to our
portfolio. We increased participation in one program in our assumed portfolio to replace lost premium from the
program not renewed.
Refer to Note 5 "Reserves for Losses and Loss Settlement Expenses" for an analysis of changes in our overall
property and casualty insurance reserves.
Reinsurance Programs and Retentions
We have several programs that provide reinsurance coverage. This reinsurance coverage limits the risk of loss that
we retain by reinsuring direct risks in excess of our retention limits. The following table provides a summary of our
primary reinsurance programs. Retention amounts reflect the accumulated retentions and co-participation of all
layers within a program. For 2016, there was an all lines annual aggregate excess of loss program with a variable
retention of 7.73 percent of gross net earned premium with a minimum retention of $52.0 million and a maximum of
$65.0 million. Our all line aggregate recovery is also limited to a maximum of $30.0 million. For 2014 and 2015,
there was a $4,000 aggregate annual deductible on our multi-line core program (casualty excess and property
excess).
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Type of Reinsurance
Casualty excess of loss
Property excess of loss
Surety excess of loss
Property catastrophe, excess
Boiler and machinery
Type of Reinsurance
Casualty excess of loss
Property excess of loss
Surety excess of loss
Property catastrophe, excess
Property catastrophe, excess
Boiler and machinery
Type of Reinsurance
Casualty excess of loss
Property excess of loss
Surety excess of loss
Property catastrophe, excess
Property catastrophe, excess
Boiler and machinery
$
$
$
Stated Retention
Limits
Coverage
2016 Reinsurance Programs
$
2,500
2,500
1,500
20,000
N/A
40,000
25,000
36,000
250,000
50,000
100% of $
37,500
100% of $
22,500
100% of $
34,500
100% of $
230,000
100% of $
50,000
Stated Retention
Limits
Coverage
2015 Reinsurance Programs
$
2,000
2,000
1,500
20,000
200,000
N/A
40,000
25,000
36,000
200,000
250,000
50,000
100% of $
38,000
100% of $
23,000
96% of $
34,500
100% of $
180,000
90.5% of $
50,000
100% of $
50,000
Stated Retention
Limits
Coverage
2014 Reinsurance Programs
$
2,000
2,000
1,500
20,000
200,000
N/A
40,000
15,000
28,000
200,000
250,000
50,000
100% of $
38,000
100% of $
13,000
91% of $
26,500
100% of $
180,000
90.5% of $
50,000
100% of $
50,000
If we incur catastrophe losses and loss settlement expenses that exceed the coverage limits of our reinsurance
program, our property catastrophe program provides one guaranteed reinstatement. In such an instance, we are
required to pay the reinsurers a reinstatement premium equal to the full amount of the original premium, which will
reinstate the full amount of reinsurance available under the property catastrophe program.
Life Insurance Segment
Ceded Reinsurance
United Life purchases reinsurance to limit the dollar amount of any one risk of loss. Our retention on standard
individual life cases is $300. Our accidental death benefit rider on an individual policy is reinsured at 100 percent,
up to a maximum benefit of $250. Our group coverage, both life and accidental death and dismemberment, is
reinsured at 50.0 percent. Catastrophe excess reinsurance coverage applies when three or more insureds die in a
catastrophic accident. For catastrophe excess claims, we retain the first $1,000 of ultimate net loss and the reinsurer
agrees to indemnify us for the excess up to a maximum of $5,000. We supplement this coverage when appropriate
with "known concentration" coverage. Known concentration coverage is typically tied to a specific event and time
period, with a threshold of a minimum number of lives involved in the event, minimum event deductible (stated
retention limit) and a maximum payout.
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Premiums and losses and loss settlement expenses related to our ceded business are as follows:
Years Ended December 31,
Ceded Business
Ceded insurance in-force
Ceded premiums earned
Loss and loss settlement expenses ceded
2016
2015
2014
$
1,023,197
$
1,165,868
$
1,130,059
2,768
3,359
3,161
2,113
2,959
3,467
The ceding of insurance does not legally discharge United Life from primary liability under its policies. United Life
must pay the loss if the reinsurer fails to meet its obligations. We periodically monitor the financial condition of our
reinsurers to confirm that they are financially stable and have strong credit ratings. We believe that all of our
reinsurers are in an acceptable financial condition. Approximately 99 percent of ceded life insurance in force as of
December 31, 2016 was ceded to five reinsurers.
NOTE 5. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such
property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to
property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates
the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.
Liabilities for losses and loss settlement expenses reflect management's best estimates at a given point in time of
what we expect to pay for claims that have been reported and those that have been incurred but not reported
("IBNR"), based on known facts, circumstances, and historical trends. Because property and casualty insurance
reserves are estimates of the unpaid portions of incurred losses that have been reported to us, as well as losses that
have been incurred but not reported, the establishment of appropriate reserves, including reserves for catastrophes, is
an inherently uncertain and complex process. The ultimate cost of losses and related loss settlement expenses may
vary materially from recorded amounts. We regularly update our reserve estimates as new information becomes
available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve
estimates, which may be material, are reported as a component of losses and loss settlement expenses incurred in the
period such changes are determined.
The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag
in claim reporting) requires significant work to reasonably project expected future claim reporting and payment
patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written
are incurring higher than expected losses, we will take action that may include, among other things, increasing the
related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we
make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc. ("Regnier"), to render
an opinion as to the reasonableness of our statutory reserves annually. The actuarial opinion is filed in those states
where we are licensed.
On a quarterly basis, United Fire's internal actuary performs a detailed actuarial review of IBNR reserves. This
review includes a comparison of results from the most recent analysis of reserves completed by both our internal and
external actuaries. Senior management meets with our internal actuary to review, on a regular and quarterly basis,
the adequacy of carried reserves based on results from this actuarial analysis. There are two fundamental types or
sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves
related to unique circumstances or events. A major hurricane is an example of an event that might necessitate
establishing specific IBNR reserves because an analysis of existing historical data would not provide an appropriate
estimate.
Our IBNR methodologies and assumptions are reviewed periodically, but changes are infrequent. Between calendar
year 2015 and 2016, in response to an increase in miles driven by commercial vehicles, we revised our commercial
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automobile frequency and severity assumptions, resulting in an increase to our carried loss IBNR. We also reviewed
our methodology and assumptions in our product liability line, associated with our construction defects business,
and decreased our frequency and severity assumptions due to improvement in development patterns related to the
statute of limitations on accident years that have matured 13 to 15 years which haven't developed to the extent we
initially expected. These assumption changes resulted in a release of IBNR in 2016 in our product liability line.
Beside the changes to our assumptions used for our commercial automobile line and product liability line, we did
not make any other significant methodology or assumption changes in 2016.
We do not discount loss reserves based on the time value of money.
The following table provides an analysis of changes in our property and casualty losses and loss settlement expense
reserves for 2016, 2015 and 2014 (net of reinsurance amounts):
Years Ended December 31,
2016
2015
2014
Gross liability for losses and loss settlement expenses
at beginning of year
Ceded losses and loss settlement expenses
Net liability for losses and loss settlement expenses
at beginning of year
Losses and loss settlement expenses incurred
for claims occurring during
Current year
Prior years
Total incurred
Losses and loss settlement expense payments
for claims occurring during
Current year
Prior years
Total paid
Net liability for losses and loss settlement expenses
at end of year
Ceded loss and loss settlement expenses
Gross liability for losses and loss settlement expenses
at end of year
$
$
$
$
$
$
$
$
1,003,895
(54,653)
949,242
683,662
(31,229)
652,433
277,053
260,520
537,573
1,064,102
59,794
1,123,896
$
$
$
$
$
$
$
$
969,437
(63,757)
905,680
560,482
(40,395)
520,087
225,022
251,503
476,525
949,242
54,653
1,003,895
$
$
$
$
$
$
$
$
960,651
(75,150)
885,501
566,555
(56,744)
509,811
247,651
241,981
489,632
905,680
63,757
969,437
There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited
to: historical data, the potential impact of various loss reserve development factors and trends including historical
loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience
with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and
subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these
factors influence our estimates of required reserves and for long tail lines these factors can change over the course of
the settlement of the claim. However, there is no precise method for evaluating the specific dollar impact of any
individual factor on the development of reserves.
The significant drivers of the favorable reserve development in 2016 were our commercial liability and workers
compensation. Much of the favorable commercial liability development came from loss adjustment expense and is
attributed to our continued litigation management efforts. Workers compensation favorable development was due to
the combined effects of decreases in claim reserves along with favorable changes affecting loss adjustment expense.
Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial property,
commercial automobile and assumed reinsurance exhibited adverse development which provided a partial offset to
the favorable development previously noted. The adverse development for all three lines is due to paid loss which
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was greater than reductions in reported loss reserves and reserves for claims incurred but not reported. No other
single line of business contributed a significant portion of the total development.
The significant drivers of the favorable reserve development in 2015 were our long-tail liability lines, workers
compensation, and automobile (physical damage). The favorable development is attributable to reductions in
reserves for reported claims as well as reductions in required reserves for IBNR claims combined with continued
successful management of litigation expenses. These reserve decreases were more than sufficient to offset claim
payments. The favorable development was partially offset by adverse development, the majority coming from three
lines which included property, assumed reinsurance and commercial auto liability. No other single line of business
contributed a significant portion of the total development.
The significant drivers of the favorable reserve development in 2014 were our long-tail liability lines, workers
compensation, and automobile (both liability and physical damage). Much of the favorable long-tail liability
development came from loss adjustment expense and is attributed to our litigation management initiative. Workers'
compensation favorable development was due to the combination of claim reserve decreases along with favorable
changes affecting loss adjustment expense. Changes in reserve development patterns have shown increased
redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Loss
adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial auto liability
continues to benefit from loss control and re-underwriting initiatives over the past two years as well as favorable
changes affecting loss adjustment expense as reserve development patterns also showed a redundancy in reserves
along with less need for IBNR claim reserves.
Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is
appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially
when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts
can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will
decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this
philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement
practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves
that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year.
However, conditions and trends that have affected the reserve development for a given year do change. Therefore,
such development cannot be used to project future reserve redundancies or deficiencies.
We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of
property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our
underwriters are aware of these exposures and use riders or endorsements to limit exposure.
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The following tables provide information about incurred and paid losses and loss settlement expense development as of December 31, 2016, net of reinsurance, as well as
cumulative development, cumulative claim frequency and IBNR liabilities. Claim data for Mercer Insurance Group, which was acquired on March 28, 2011, is presented
retrospectively.
The cumulative number of reported claims, for calendar year 2016, are counted for all lines of business on a per claimant per coverage basis and a single event may result in
multiple claims due to the involvement of multiple individual claimants and / or multiple independent coverages. Claim counts for calendar years 2015 and prior are
counted on a per claim and per coverage basis. Claim counts include open claims, claims that have been paid and closed, and reported claims that have been closed without
the need for any payment.
Line of business: Commercial other liability
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2016
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(Unaudited)
Total of
incurred but
not reported
liabilities plus
expected
development
on reported
claims
Cumulative
development
Cumulative
number of
reported
claims
$
64,793 $
64,117 $
71,032 $
72,407 $
67,115 $
61,811 $
76,740 $
76,130 $
74,956 $
76,049
$
79,455
84,944
88,298
81,963
85,991
88,987
73,892
73,545
69,533
81,522
63,231
65,831
65,299
64,738
100,389
78,152
84,286
82,865
88,371
96,158
104,982
75,178
83,660
78,564
88,200
94,195
91,460
74,115
85,761
77,948
79,591
91,980
90,502
74,915
86,757
78,291
80,801
92,537
86,119
118,928
117,958
106,486
137,386
125,307
139,144
Total
$ 946,406
12,056
14,050
15,018
15,154
17,772
21,130
16,331
26,590
43,435
71,618
11,256
(4,540)
(1,541)
(10,696)
(721)
(7,852)
(18,863)
(12,442)
(12,079)
6,948
6,506
5,915
5,060
5,193
5,426
5,787
5,769
6,309
5,279
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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Line of business: Commercial other liability
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
6,054 $
17,542 $
31,120 $
41,306 $
51,337 $
53,663 $
56,838 $
59,085 $
60,429 $
(Unaudited)
9,220
24,096
8,375
34,482
21,151
7,103
42,545
32,073
15,230
6,236
47,112
41,696
24,577
13,670
6,875
50,143
50,098
35,043
26,260
24,620
9,835
52,659
56,789
51,336
40,595
39,948
25,228
10,207
55,843
63,149
56,761
50,146
55,316
39,953
29,679
11,185
61,499
59,052
67,733
60,116
56,150
64,574
54,559
50,211
27,182
13,782
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
26,712
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
458,261
Total
$
514,858
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Line of business: Commercial fire & allied
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2016
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(Unaudited)
Total of
incurred but
not reported
liabilities
plus
expected
development
on reported
claims
Cumulative
development
Cumulative
number of
reported
claims
$
94,762 $
90,694 $
89,790 $
88,746 $
89,160 $
87,407 $
71,495 $
71,454 $
71,542 $
71,569
$
157,303
141,384
138,602
140,321
134,821
116,940
118,115
118,376
118,329
113,754
106,085
105,031
105,614
113,139
106,152
108,246
87,751
83,836
87,845
83,932
87,932
83,767
88,891
83,981
148,220
142,330
117,082
120,492
119,820
120,219
138,602
110,448
108,774
108,047
107,958
91,521
88,550
91,498
92,212
126,216
131,198
128,762
103,177
108,293
147,473
Total
$ 1,067,687
14
64
188
205
519
735
1,142
2,178
3,577
14,476
(23,193)
(38,974)
(24,863)
(29,158)
(28,001)
(30,644)
691
2,546
5,116
18,351
21,086
18,017
16,647
15,989
6,361
6,484
7,650
6,976
7,142
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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Line of business: Commercial fire & allied
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
40,578 $
56,759 $
59,322 $
63,329 $
68,928 $
70,960 $
71,178 $
71,360 $
71,376 $
(Unaudited)
80,005
102,804
53,219
107,480
72,181
52,660
112,678
77,732
72,271
85,585
115,804
82,809
78,284
104,800
71,008
115,897
86,930
80,352
109,429
94,380
59,331
117,553
87,544
82,037
112,497
100,078
78,226
84,456
117,690
87,721
83,000
116,614
103,197
82,853
113,663
67,217
71,406
118,003
88,037
83,374
118,183
105,250
86,115
116,750
90,454
92,895
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
564
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
97,785
Total
$
970,467
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Line of business: Commercial automobile
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2016
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(Unaudited)
Total of
incurred but
not reported
liabilities
plus
expected
development
on reported
claims
Cumulative
development
Cumulative
number of
reported
claims
$
71,186 $
68,864 $
67,566 $
69,968 $
69,802 $
69,368 $
68,986 $
68,756 $
68,900 $
68,872
$
80,461
78,391
80,021
76,051
69,328
75,781
76,527
68,569
68,068
84,887
75,070
64,121
65,860
87,299
100,039
75,021
64,516
67,015
90,750
90,848
104,356
73,506
63,605
67,563
92,519
94,755
98,037
73,431
63,560
67,296
92,379
95,321
73,463
63,567
68,086
91,336
96,594
102,943
103,726
107,723
106,076
113,720
125,506
129,816
174,018
Total
$ 983,198
5
68
38
121
647
1,127
2,647
6,443
15,837
47,509
(2,314)
(6,998)
(16,454)
(7,695)
6,449
(3,445)
(630)
5,997
4,310
15,851
18,113
15,018
16,239
15,224
14,335
15,462
17,045
19,302
22,910
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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Line of business: Commercial automobile
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
27,058 $
42,688 $
53,231 $
62,272 $
65,798 $
67,634 $
68,074 $
68,439 $
68,794 $
(Unaudited)
30,527
47,271
27,674
58,926
44,867
29,329
68,629
53,451
41,141
34,332
70,459
58,087
52,953
50,931
39,247
72,122
61,398
57,947
65,021
57,201
43,592
72,984
62,732
62,231
79,383
71,469
67,630
45,704
72,990
63,495
65,169
85,348
82,944
79,663
68,033
50,782
68,834
73,018
63,503
67,622
87,475
90,292
90,780
87,590
78,225
66,013
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
137
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
209,984
Total
$
773,352
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Line of business: Workers' compensation
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2016
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(Unaudited)
Total of
incurred but
not reported
liabilities
plus
expected
development
on reported
claims
Cumulative
development
Cumulative
number of
reported
claims
$
36,494 $
35,972 $
33,430 $
32,986 $
31,933 $
31,945 $
32,276 $
31,200 $
31,095 $
31,255
$
42,739
42,301
43,560
39,895
39,009
38,210
41,278
36,294
42,531
39,967
40,474
36,837
41,180
38,481
48,848
40,010
36,823
41,167
35,352
46,279
64,048
39,386
36,158
40,647
34,309
42,158
62,579
64,051
39,680
36,014
41,422
33,585
38,423
56,369
60,729
53,788
39,768
35,026
41,468
33,314
38,553
54,584
58,284
55,578
70,419
Total
$ 458,249
261
564
392
745
640
716
1,252
1,921
2,818
10,858
(5,239)
(2,971)
(8,534)
3,258
(6,653)
(10,295)
(9,464)
(5,767)
1,790
4,660
5,035
4,243
3,923
3,799
3,687
3,949
4,105
4,366
3,847
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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Line of business: Workers' compensation
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
8,246 $
18,220 $
22,444 $
24,768 $
26,284 $
27,330 $
27,922 $
29,212 $
29,444 $
(Unaudited)
10,082
21,227
10,478
25,736
20,292
11,821
30,123
24,189
22,606
10,322
31,980
27,747
28,765
21,678
11,802
33,770
29,898
31,887
26,033
23,023
14,136
34,319
31,003
33,119
27,497
28,397
30,209
13,965
34,862
31,886
34,143
28,247
30,933
38,023
30,289
12,063
29,577
35,292
32,911
35,052
29,022
33,063
42,941
38,441
27,304
14,413
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
20,072
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
160,303
Total
$
318,016
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Line of business: Personal
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2016
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(Unaudited)
Total of
incurred but
not reported
liabilities
plus
expected
development
on reported
claims
Cumulative
development
Cumulative
number of
reported
claims
$
29,005 $
28,358 $
28,074 $
27,837 $
27,521 $
27,427 $
27,376 $
27,384 $
27,368 $
27,345
$
49,961
44,686
34,597
43,408
33,519
36,686
43,672
31,945
34,347
50,014
43,577
32,026
33,928
48,534
47,924
43,535
32,134
33,865
47,090
46,199
39,232
43,515
32,029
33,403
47,035
46,403
38,525
53,910
43,482
32,085
33,413
46,968
46,150
37,262
52,661
42,848
42,882
32,070
33,432
47,013
44,715
37,086
52,944
41,088
48,072
Total
$ 406,647
34
70
140
201
300
427
628
796
989
3,928
(1,660)
(7,079)
(2,527)
(3,254)
(3,001)
(3,209)
(2,146)
(966)
(1,760)
12,703
15,821
13,501
13,312
14,839
10,749
9,213
10,843
9,313
10,291
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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Line of business: Personal
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
19,900 $
25,024 $
26,073 $
26,840 $
27,214 $
27,257 $
27,260 $
27,259 $
27,311 $
(Unaudited)
32,032
40,114
22,086
41,735
27,926
24,499
42,414
29,801
29,867
36,489
42,613
30,829
31,340
43,801
30,415
42,627
31,564
32,076
45,306
41,979
25,505
42,748
31,644
32,771
45,949
43,375
32,788
37,055
42,748
31,718
32,997
46,487
44,448
34,297
47,912
29,551
27,311
42,787
31,804
33,165
46,573
43,569
35,306
49,710
37,431
32,999
All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
1,800
27,793
Total
$
380,655
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The reconciliation of the net incurred and loss development tables to the liability for unpaid losses and loss settlement expenses
in the consolidated statement of financial position is as follows.
Net outstanding liabilities for unpaid losses and allocated loss settlement expenses:
December 31, 2016
Commercial other liability
Commercial fire and allied
Commercial automobile
Commercial workers' compensation
Personal
All other lines
Net outstanding liabilities for unpaid losses and allocated loss settlement expenses
Net outstanding liabilities for unpaid unallocated loss settlement expenses
Fair value adjustment (purchase accounting adjustment for Mercer acquisition)
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance
Reinsurance recoverable on unpaid losses and allocated loss settlement expenses:
Commercial other liability
Commercial fire and allied
Commercial automobile
Commercial workers' compensation
Personal
All other lines
Reinsurance recoverable on unpaid losses and allocated loss settlement expenses
Reinsurance fair value amortization (purchase accounting adjustment for Mercer acquisition)
Total reinsurance recoverable on unpaid losses and loss settlement expenses
$
458,261
97,785
209,984
160,303
27,793
26,510
980,636
79,751
3,715
1,064,102
21,173
9,748
1,544
29,686
41
1,155
63,347
(3,553)
59,794
Total gross liability for unpaid losses and loss settlement expenses
$
1,123,896
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The following is supplementary information about average historical claims duration as of December 31, 2016.
Average annual percentage payout of incurred claims by age, net of reinsurance
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Commercial other liability
Commercial fire and allied
Commercial automobile
Commercial workers' compensation
Personal
9.4%
63.9%
40.5%
26.4%
71.5%
15.3%
21.0%
21.2%
29.1%
19.2%
15.6%
4.7%
15.1%
13.3%
4.0%
14.3%
3.9%
11.3%
8.0%
2.3%
(Unaudited)
11.9%
3.7%
5.5%
4.4%
0.9%
5.8%
1.2%
2.7%
3.2%
0.3%
4.8%
0.6%
1.7%
2.0%
0.3%
4.2%
0.2%
0.2%
2.8%
0.1%
3.0%
0.1%
0.3%
0.9%
0.1%
1.4%
—%
0.1%
0.4%
—%
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NOTE 6. STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDENDS AND RETAINED
EARNINGS RESTRICTIONS
Statutory capital and surplus in regards to policyholders at December 31, 2016, 2015 and 2014 and statutory net
income for the years then ended are as follows:
2016
Property and casualty (1)
Life, accident and health
2015
Property and casualty (1)
Life, accident and health
2014
Property and casualty (1)
Life, accident and health
Statutory Capital and
Surplus
Statutory Net Income
(Loss)
$
$
$
770,908
$
139,806
722,404
$
138,855
685,866
$
155,667
39,087
(3,177)
75,554
(1,524)
54,233
3,517
(1) Because United Fire & Casualty Company owns United Life Insurance Company, the property and casualty statutory capital and surplus
includes life, accident and health statutory capital and surplus, and therefore represents our total consolidated statutory capital and surplus.
State insurance holding company laws and regulations generally require approval from the insurer's domicile state
insurance Commissioner for any material transaction or extraordinary dividend. For property and casualty insurers, a
material transaction is defined as any sale, loan, exchange, transfer or guarantee with an affiliate where the aggregate
value of the transaction exceeds 25 percent of the insurer's policyholders' surplus or three percent of its admitted
assets (measured at December 31 of the preceding year), whichever is less. For life insurers, a material transaction
with an affiliate is defined as a transaction with an aggregate value exceeding three percent of the life insurer's
admitted assets (measured at December 31 of the preceding year).
State laws and regulations generally limit the amount of funds that an insurance company may distribute to a parent
as a dividend without Commissioner approval. As a holding company with no independent operations of its own,
United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay
dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in
the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from
earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or
distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner
is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net
income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in
which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and
distributions. Based on these restrictions, at December 31, 2016, our insurance company subsidiary, United Fire &
Casualty Company, is able to make a maximum of $53,091 in dividend payments without prior approval. At
December 31, 2016, we were in compliance with applicable state laws and regulations. These restrictions will not
have a material impact in meeting our cash obligations. In addition, United Fire Group, Inc. maintains a credit
agreement, as discussed in Part II, Note 14 "Credit Facility," which permits us to borrow up to an aggregate principal
amount of $50,000 and allows the Company to increase the aggregate amount of the commitments thereunder by up
to $100,000.
We paid dividends to our common shareholders of $24,591, $21,658 and $19,680 in 2016, 2015 and 2014,
respectively. Payments of any future dividends and the amounts of such dividends, however, will depend upon
factors such as net income, financial condition, capital requirements, and general business conditions. We will only
pay dividends if declared by our Board of Directors, out of funds legally available, and subject to any other
restrictions that may be applicable to us.
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In 2016, 2015 and 2014, United Fire & Casualty Company received dividends from its wholly owned subsidiaries of
$26,000, $16,500 and $13,500, respectively. In 2016, 2015 and 2014, United Fire & Casualty Company paid
dividends to United Fire Group, Inc. totaling $24,000, $22,500 and $29,000, respectively. These intercompany
dividend payments are eliminated for reporting in our Consolidated Financial Statements.
A majority of our custodial assets are subject to a tri-party agreement between one of our subsidiary companies,
United Life, the custodian, and the Iowa Insurance Commissioner. Under this agreement, as long as United Life
maintains the minimum aggregate value of securities in the account (based on its legal reserve requirements), it is
free to invest, withdraw or loan these funds or pay dividends using these funds without approval from the
Commissioner. Investment of these funds is subject to the same limitations on asset class and credit quality imposed
by the Commissioner on all insurance company invested assets. Investment income derived from these custodied
funds is available for general corporate purposes and to satisfy corporate obligations without approval from the
Commissioner.
At December 31, 2016, United Life had net admitted assets, on a statutory basis, of $1,524,559, $200,238 in excess
of its legal reserve requirement. Therefore, any restriction on funds deposited by United Life with the Iowa
Insurance Commissioner would not materially affect its financial position or results of operations and its cash flows
are sufficient to meet its operational requirements. Under the material transaction and dividend standards described
above, United Life currently is not able to enter into an affiliate transaction and/or pay a dividend without approval
from the Commissioner.
Our property and casualty and life insurance subsidiaries are required to prepare and file statutory-basis financial
statements in conformity with the National Association of Insurance Commissioners ("NAIC") Accounting Practices
and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner
and/or director. The accounting principles used to prepare these statutory-basis financial statements follow
prescribed or permitted accounting practices that differ from GAAP. Prescribed statutory accounting principles
include state laws, regulations and general administrative rules issued by the state of domicile, as well as a variety of
publications and manuals of the NAIC. Permitted accounting practices encompass all accounting practices not
prescribed, but allowed by the state of domicile. No material permitted accounting practices were used to prepare
our statutory-basis financial statements during 2016, 2015 and 2014. Statutory accounting principles primarily differ
from GAAP in that policy acquisition and certain sales inducement costs are charged to expense as incurred,
goodwill is amortized, life insurance reserves are established based on different actuarial assumptions and the values
reported for investments, pension obligations and deferred taxes are established on a different basis.
We are directed by the state insurance departments' solvency regulations to calculate a required minimum level of
statutory capital and surplus based on insurance risk factors. The risk-based capital results are used by the NAIC and
state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory
action. Both United Life and United Fire & Casualty Company and its property and casualty insurance subsidiaries
and affiliates had statutory capital and surplus in regards to policyholders well in excess of their required levels at
December 31, 2016.
NOTE 7. FEDERAL INCOME TAX
Federal income tax expense (benefit) is composed of the following:
Years Ended December 31,
2016
2015
2014
Current
Deferred
Total
3,239
5,524
8,763
$
$
37,649
(5,324)
32,325
$
$
15,649
1,677
17,326
$
$
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A reconciliation of income tax expense computed at the applicable federal tax rate of 35.0 percent to the amount
recorded in the accompanying Consolidated Statements of Income and Comprehensive Income is as follows:
Years Ended December 31,
Computed expected income tax expense
Tax-exempt municipal bond interest income
Nontaxable dividend income
Valuation allowance reduction
Other, net
Federal income tax expense
2016
2015
2014
20,533
$
42,508
$
(8,330)
(1,317)
(547)
(1,576)
(7,669)
(1,337)
(548)
(629)
8,763
$
32,325
$
26,762
(7,417)
(1,232)
(548)
(239)
17,326
$
$
The significant components of our net deferred tax liability at December 31, 2016 and 2015 are as follows:
December 31,
Deferred tax liabilities
Net unrealized appreciation on investment securities:
Equity securities
All other securities
Deferred policy acquisition costs
Prepaid pension cost
Net bond discount accretion
Depreciation
Revaluation of investment basis (1)
Identifiable intangible assets (1)
Other
Gross deferred tax liability
Deferred tax assets
Financial statement reserves in excess of income tax reserves
Unearned premium adjustment
Net operating loss carryforwards
Underfunded benefit plan obligation
Post-retirement benefits other than pensions
Other-than-temporary impairment of investments
Contingent ceding commission accrual
Compensation expense related to stock options
Other
Gross deferred tax asset
Valuation allowance
Deferred tax asset
Net deferred tax liability
(1) Related to our acquisition of Mercer Insurance Group.
2016
2015
$
$
$
$
$
$
70,640
3,711
52,031
4,449
1,134
854
1,342
3,311
10,943
148,415
29,174
30,697
718
13,374
20,221
4,658
2,769
4,578
7,356
113,545
(718)
112,827
35,588
$
$
$
$
$
$
58,674
11,159
53,960
1,920
1,430
1,791
1,824
3,560
7,627
141,945
34,535
28,679
1,265
25,810
17,838
5,609
3,342
4,627
6,852
128,557
(1,265)
127,292
14,653
Due to our determination that we may not be able to fully realize the benefits of the net operating losses ("NOLs")
acquired in the purchase of American Indemnity Financial Corporation in 1999, which are only available to offset
the future taxable income of our property and casualty insurance operations and are further limited as to the amount
that can be utilized in any given year, we have recorded a valuation allowance against these NOLs that totaled $718
and $1,265, respectively, at December 31, 2016 and 2015. Based on a yearly review, we determine whether the
benefit of the NOLs can be realized, and, if so, the decrease in the valuation allowance is recorded as a reduction to
current federal income tax expense. If NOLs expire during the year, the decrease in the valuation allowance is offset
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with a corresponding decrease to the deferred income tax asset. The valuation allowance was reduced by $547 and
$548 during 2016 and 2015, respectively, due to the realization of $1,565 in NOLs. No portion of the NOLs expired
in 2015 or 2016 or will expire in 2017. At December 31, 2016, we had $1,194 of alternative minimum tax ("AMT")
credit carryforwards.
NOTE 8. EMPLOYEE BENEFITS
We offer various benefits to our employees including a noncontributory defined benefit pension plan, an employee/
retiree health and dental benefit plan, a profit-sharing plan and an employee stock ownership plan.
Pension and Post-retirement Benefit Plans
We offer a noncontributory defined benefit pension plan in which all of our employees are eligible to participate
after they have completed one year of service, attained 21 years of age and have met the hourly service
requirements. Retirement benefits under our pension plan are based on the number of years of service and level of
compensation. Our policy to fund the pension plan on a current basis to not less than the minimum amounts required
by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as
amended, is to assure that plan assets will be adequate to provide retirement benefits. We estimate that we will
contribute approximately $6,400 to the pension plan in 2017.
We also offer a health and dental benefit plan to all of our eligible employees and retirees that consists of two
programs: (1) the self-funded employee health and dental benefit plan and (2) the self-funded (pre-65) and fully-
funded (post-65) retiree health and dental benefit plan (the "post-retirement benefit plan"). Effective January 1,
2017, there was a plan amendment, which included the following changes: eliminated the pre-65 retirement plan
with a $500 hundred dollar deductible; for retirements after January 1, 2017, the retiree will pay 50 percent of the
lower cost supplemental plan if they are 65 or older and 100 percent of the premium if less than 65; and removed
spousal coverage after the death of the participant. The financial impact of these changes are reflected in
accumulated other comprehensive income at December 31, 2016.
The post-retirement benefit plan provides health and dental benefits to our retirees (and covered dependents) who
have met the service and participation requirements stipulated by the post-retirement benefit plan. The third party
administrators for the post-retirement benefit plan are responsible for making medical and dental care benefit
payments. Participants are required to submit claims for reimbursement or payment to the claims administrator
within twelve months after the end of the calendar year in which the charges were incurred. An unfunded benefit
obligation is reported for the post-retirement benefit plan in the accompanying Consolidated Balance Sheets.
Investment Policies and Strategies
Our investment policy and objective for the pension plan is to generate long-term capital growth and income by way
of a diversified investment portfolio along with appropriate employer contributions, which will allow us to provide
for the pension plan's benefit obligation.
The investments held by the pension plan at December 31, 2016 include the following asset categories:
•
Fixed income securities, which may include bonds, and convertible securities;
• Equity securities, which may include various types of stock, such as large-cap, mid-cap, small-cap, and
international stocks;
•
Pooled separate accounts, which includes two separate funds, a core plus bond separate account and a real
estate separate account;
• An arbitrage fund, which is a fund that takes advantage of price discrepancies, primarily equity securities,
for the same asset in different markets;
• A group annuity contract that is administered by United Life, a subsidiary of United Fire; and
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• Cash and cash equivalents, which include money market funds.
We have an internal investment/retirement committee, which includes our Chief Executive Officer, Chief Investment
Officer, and Chief Operating Officer, all of whom receive monthly information on the value of the pension plan
assets and their performance. Quarterly, the committee meets to review and discuss the performance of the pension
plan assets as well as the allocation of investments within the pension plan.
As of December 31, 2016, we had six external investment managers that are allowed to exercise investment
discretion, subject to limitations, if any, established by the investment/retirement committee. We utilize multiple
investment managers in order to maximize the pension plan's investment return while mitigating risk. None of our
investment managers uses leverage in managing the pension plan. Annually, the investment/retirement committee
meets with each investment manager to review the investment manager's goals, objectives and the performance of
the assets they manage. The decision to establish or terminate a relationship with an investment manager is at the
discretion of our investment/retirement committee.
We consider historical experience for comparable investments and the target allocations we have established for the
various asset categories of the pension plan to determine the expected long-term rate of return, which is an
assumption as to the average rate of earnings expected on the pension plan funds invested, or to be invested, by the
pension plan, to provide for the settlement of benefits included in the projected pension benefit obligation.
Investment securities, in general, are exposed to various risks, such as fluctuating interest rates, credit standing of
the issuer of the security and overall market volatility. Annually, we perform an analysis of expected long-term rates
of return based on the composition and allocation of our pension plan assets and recent economic conditions.
The following is a summary of the pension plan's actual and target asset allocations at December 31, 2016 and 2015
by asset category:
Target
Pension Plan Assets
2016
% of Total
2015
% of Total
Fixed maturity securities - corporate bonds
$
Redeemable preferred stock
Equity securities
Pooled separate accounts
Core plus bond separate account fund
U.S. property separate account fund
Arbitrage fund
United Life annuity
Cash and cash equivalents
Total plan assets
9,451
3,144
69,770
10,401
14,330
8,292
9,377
3,665
7.4% $
2.4
54.3
8.1
11.1
6.5
7.3
2.9
6,894
3,744
58,613
6,605
11,252
7,856
8,931
2,705
6.5%
3.5
55.0
6.2
10.5
7.4
8.4
2.5
$
128,430
100.0% $
106,600
100.0%
Allocation
0% -
0% -
50% -
15%
10%
70%
0% -
0% -
0% -
5% -
0% -
40%
25%
10%
10%
10%
The investment return expectations for the pension plan are used to develop the asset allocation based on the specific
needs of the pension plan. Accordingly, equity securities comprise the largest portion of our pension plan assets, as
they yield the highest rate of return. The United Life annuity, which is the third largest asset category and was
originally written by our life insurance subsidiary in 1976, provides a guaranteed rate of return. The interest rate on
the group annuity contract is determined annually.
The availability of assets held in cash and cash equivalents enables the pension plan to mitigate market risk that is
associated with other types of investments and allows the pension plan to maintain liquidity both for the purpose of
making future benefit payments to participants and their beneficiaries and for future investment opportunities.
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Valuation of Investments
Fixed Maturity and Equity Securities
Investments in fixed maturity and equity securities are stated at fair value based upon quoted market prices reported
on recognized securities exchanges on the last business day of the year. Purchases and sales of securities are
recorded as of the trade date.
Pooled Separate Accounts
The pension plan invests in two pooled separate account funds, a core plus bond separate account fund and a U.S.
property separate account fund. Investments in the core plus bond separate account fund are stated at fair value as
provided by the administrator of the fund based on the fair value of the underlying assets owned by the fund. The
fair value measurement is classified within Level 2 of the fair value hierarchy. The fair value of the investments in
the U.S. property separate account fund is provided by the administrator of the fund based on the net asset value of
the fund. The net asset value is based on the fair value of the underlying properties included in the fund. The fair
value of the underlying properties are based on property appraisals conducted by an independent third party. The fair
value measurement is classified within Level 3 of the fair value hierarchy. We have not adjusted the net asset value
provided by the custodian for either fund.
Arbitrage Fund
The fair value of the arbitrage fund is determined based on its net asset value, which is obtained from the custodian
and determined monthly with issuances and redemptions of units of the fund made, based on the net asset value per
unit as determined on the valuation date. We have not adjusted the net asset value provided by the custodian.
United Life Annuity
The United Life group annuity contract, which is a deposit administration contract, is stated at contract value as
determined by United Life. Under the group annuity contract, the plan's investment account is credited with
compound interest on the average account balance for the year. The interest rate is equivalent to the ratio of net
investment income to mean assets of United Life, net of investment expenses.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of insured cash and money market funds held with various financial
institutions. Interest is earned on a daily basis. The fair value of these funds approximates their cost basis due to
their short-term nature.
Fair Value Measurement
The following tables present the categorization of the pension plan's assets measured at fair value on a recurring
basis at December 31, 2016 and 2015:
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Description
December 31, 2016
Level 1
Level 2
Level 3
Fair Value Measurements
Fixed maturity securities - corporate bonds
$
9,451
$
— $
9,451
$
Redeemable preferred stock
Equity securities
Pooled separate accounts
Core plus bond separate account fund
U.S. property separate account fund
Arbitrage fund
Money market funds
3,144
69,770
10,401
14,330
8,292
3,659
3,144
69,770
—
—
—
3,659
—
—
10,401
—
8,292
—
—
—
—
—
14,330
—
—
Total assets measured at fair value
$
119,047
$
76,573
$
28,144
$
14,330
Fair Value Measurements
Description
December 31, 2015
Level 1
Level 2
Level 3
Fixed maturity securities - corporate bonds
$
6,894
$
— $
6,894
$
Redeemable preferred stock
Equity securities
Pooled separate accounts
Core plus bond separate account fund
U.S. property separate account fund
Arbitrage fund
Money market funds
3,744
58,613
6,605
11,252
7,856
2,619
3,744
58,613
—
—
—
2,619
—
—
6,605
—
7,856
—
—
—
—
—
11,252
—
—
Total assets measured at fair value
$
97,583
$
64,976
$
21,355
$
11,252
There were no transfers of assets in or out of Level 1 or Level 2 during the period.
The fair value of investments categorized as Level 1 is based on quoted market prices that are readily and regularly
available.
The fair value of fixed maturity securities categorized as Level 2 is determined by management based on fair value
information reported in the custodial statements, which is derived from recent trading activity of the underlying
security in the financial markets. These securities represent various taxable bonds held by the pension plan. These
securities categorized as Level 2 are valued in the same manner as described in Part II, Item 8, Note 3 and have the
same controls in place.
The fair value of the arbitrage fund and bond and mortgage pooled separate account fund are categorized as Level 2
since there are no restrictions as to the pension plan's ability to redeem its investment at the net asset value of the
fund as of the reporting date.
The following tables provide a summary of the changes in fair value of the pension plan's Level 3 securities:
Balance at January 1, 2016
Unrealized gains
Purchases
Balance at December 31, 2016
125
U.S. property
separate account fund
11,252
$
1,078
2,000
14,330
$
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Balance at January 1, 2015
Unrealized gains
Balance at December 31, 2015
Estimates and Assumptions
U.S. property
separate account fund
$
$
9,895
1,357
11,252
The preparation of financial statements in conformity with GAAP requires us to make various estimates and
assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the
date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to
the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate
of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of
the respective plan's benefit obligations as of December 31. In estimating the discount rate, we look to rates of return
on high-quality, fixed-income investments currently available and expected to be available during the period to
maturity of the respective plan's benefit obligations.
In October 2014, the Society of Actuaries finalized a new mortality table and a new mortality improvement scale.
The mortality improvement scale was further refined by the Society of Actuaries in 2015 and 2016. These updated
tables reflect improved life expectancies and an expectation that the trend will continue. We have reviewed these
updated tables and have updated the mortality assumptions based on this information and also based on research
provided by our external actuaries. We will continue to monitor mortality assumptions and make changes as
appropriate to reflect additional research and our resulting best estimate of future mortality rates.
Assumptions Used to Determine Benefit Obligations
The following actuarial assumptions were used to determine the reported plan benefit obligations at December 31:
Weighted-average assumptions as of
Pension Benefits
Post-retirement Benefits
December 31,
Discount rate
Rate of compensation increase
2016
2015
2016
2015
4.17%
3.00
4.21%
3.00
4.17%
N/A
4.21%
N/A
Decreasing interest rates resulted in a decrease in the discount rates we use to value our respective plan's benefit
obligations at December 31, 2016 compared to December 31, 2015.
Assumptions Used to Determine Net Periodic Benefit Cost
The following actuarial assumptions were used at January 1 to determine our reported net periodic benefit costs for
the year ended December 31:
Weighted-average assumptions as of
Pension Benefits
Post-retirement Benefits
January 1,
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
2016
2015
2014
2016
2015
2014
4.21%
3.86%
4.84%
4.21%
3.86%
4.84%
7.50
3.00
7.50
3.00
7.50
3.50
N/A
N/A
N/A
N/A
N/A
N/A
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Assumed Health Care Cost Trend Rates
Health Care Benefits
Dental Claims
Years Ended December 31,
2016
2015
2016
2015
Health care cost trend rates assumed for next year
Rate to which the health care trend rate is assumed
to decline (ultimate trend rate)
Year that the rate reaches the ultimate trend rate
7.00%
4.50%
2025
7.00%
4.50%
2024
4.00%
4.00%
N/A
N/A
N/A
N/A
Assumed health care cost trend rates have a significant effect on the amounts reported for the post-retirement benefit
plan. A 1.0 percent change in assumed health care cost trend rates would have the following effects:
Effect on the net periodic post-retirement health care benefit cost
$
Effect on the accumulated post-retirement benefit obligation
1% Increase
1% Decrease
839
7,922
$
(663)
(6,429)
Benefit Obligation and Funded Status
The following table provides a reconciliation of benefit obligations, plan assets and funded status of our plans:
Years Ended December 31,
2016
2015
2016
2015
Pension Benefits
Post-retirement Benefits
Reconciliation of benefit obligation
Benefit obligation at beginning of year
$
160,390
$
157,600
$
72,175
$
74,552
5,220
2,856
(9,253)
—
(1,200)
72,175
—
—
1,200
(1,200)
—
Service cost
Interest cost
Actuarial (gain) loss
Adjustment for plan amendment
Benefit payments
Benefit obligation at end of year (1)
Reconciliation of fair value of plan assets
$
Fair value of plan assets at beginning of year $
Actual return on plan assets
Employer contributions
Benefit payments and adjustments
Fair value of plan assets at end of year
Funded status at end of year
$
$
6,490
6,654
2,215
—
(3,873)
171,876
106,600
9,320
16,383
(3,873)
128,430
(43,446)
$
$
$
$
6,675
5,999
(5,678)
—
(4,206)
160,390
102,800
1,654
6,352
(4,206)
106,600
(53,790)
$
$
$
$
3,728
3,015
1,468
(32,289)
(1,312)
46,785
$
— $
—
1,311
(1,311)
— $
(46,785)
$
(72,175)
(1) For the pension plan, the benefit obligation is the projected benefit obligation. For the post-retirement benefit plan, the benefit obligation is
the accumulated post-retirement benefit obligation.
Our accumulated pension benefit obligation was $152,620 and $141,550 at December 31, 2016 and 2015,
respectively.
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The following table displays the effect that the unrecognized prior service cost and unrecognized actuarial loss of
our plans had on accumulated other comprehensive income ("AOCI"), as reported in the accompanying
Consolidated Balance Sheets:
Years Ended December 31
Amounts recognized in AOCI
Unrecognized prior service cost
Unrecognized actuarial (gain) loss
Total amounts recognized in AOCI
Pension Benefits
Post-retirement Benefits
2016
2015
2016
2015
$
$
— $
49,745
49,745
$
— $
52,936
52,936
$
(32,289)
20,756
(11,533)
$
$
—
20,806
20,806
We anticipate amortization of the net actuarial losses for our pension plan in 2017 to be $3,562. We anticipate
amortization of the net actuarial losses for our post-retirement benefit plan in 2017 to be $1,846.
Net Periodic Benefit Cost
The components of the net periodic benefit cost for our pension and post-retirement benefit plans are as follows:
Years Ended December 31,
2016
Pension Plan
2015
2014
Post-retirement Benefit Plan
2015
2014
2016
Net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
Net periodic benefit cost
Projected Benefit Payments
$
$
6,490
6,654
(7,952)
3,968
9,160
$
$
6,675
5,999
(7,800)
4,546
9,420
$
$
5,210
5,874
(6,956)
2,174
6,302
$
$
3,728
3,015
—
1,518
8,261
$
5,220
2,856
—
2,920
$ 10,996
$
$
3,696
2,342
—
898
6,936
The following table summarizes the expected benefits to be paid from our plans over the next 10 years:
Pension benefits
Post-retirement benefits
$
$
5,120
1,150
$
$
5,500
1,290
$
$
6,010
1,450
$
$
6,600
1,600
$
$
7,300
1,750
$
$
47,540
11,700
2017
2018
2019
2020
2021
2022 -
2026
Profit-Sharing Plan and Employee Stock Ownership Plan
We have a profit-sharing plan in which employees who meet service requirements are eligible to participate. The
amount of our contribution is discretionary and is determined annually, but cannot exceed the amount deductible for
federal income tax purposes. Our contribution to the profit-sharing plan for 2016, 2015 and 2014, was $2,904,
$7,706 and $3,847, respectively.
Prior to October 31, 2015 we had an employee stock ownership plan (the "ESOP") for the benefit of eligible
employees and their beneficiaries. In June 2015, the plan administrator decided to merge the ESOP into the United
Fire Group, Inc. 401K Plan effective October 31, 2015. Participant ESOP account balances were transferred to each
participant’s 401K Plan.
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NOTE 9. STOCK-BASED COMPENSATION
Non-Qualified Employee Stock Award Plan
The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and
unrestricted stock awards, stock appreciation rights, incentive stock options, and non-qualified stock options for up
to 1,900,000 shares of United Fire common stock to employees. In May 2014, the Registrant's shareholders
approved an additional 1,500,000 shares of United Fire common stock issuable at any time and from time to time
pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc.
Stock Plan, (as amended, the "Stock Plan"). At December 31, 2016, there were 1,248,651 authorized shares
remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines
those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards.
The Board of Directors may also take any action it deems necessary and appropriate for the administration of the
Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our
employees who are in positions of substantial responsibility with United Fire.
Options granted pursuant to the Stock Plan are granted to buy shares of United Fire's common stock at the market
value of the stock on the date of grant. All outstanding option awards vest and are exercisable in installments of 20.0
percent of the number of shares covered by the option award each year from the grant date, unless the Board of
Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and
are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not
later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the Stock Plan
are granted at the market value of our common stock on the date of the grant. Restricted stock awards fully vest after
3 years or 5 years from the date of issuance, unless accelerated upon the approval of the Board of Directors, at which
time United Fire common stock will be issued to the awardee. All awards are generally granted free of charge to the
eligible employees of United Fire as designated by the Board of Directors.
The activity in the Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Beginning balance
Additional shares authorized
Number of awards granted
Number of awards forfeited or expired
Ending balance
Number of option awards exercised
Number of unrestricted stock awards granted
Number of restricted stock awards vested
Year Ended
December 31, 2016
From Inception to
December 31, 2016
1,394,578
—
(249,638)
103,711
1,248,651
298,549
980
18,394
1,900,000
1,500,000
(2,612,566)
461,217
1,248,651
949,068
7,325
36,970
Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan
The United Fire Group, Inc. 2005 Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan
(the "Director Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase
shares of United Fire's common stock to non-employee directors. At December 31, 2016, we had 74,771 authorized
shares available for future issuance.
The Board of Directors has the authority to determine which non-employee directors receive awards, when options
and restricted stock shall be granted, the option price, the option expiration date, the date of grant, the vesting
schedule of options or whether the options shall be immediately vested, the terms and conditions of options and
restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common
stock to be issued pursuant to an option agreement or restricted stock agreement (subject to limits set forth in the
plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of
the Director Plan.
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The activity in the Director Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Beginning balance
Number of awards granted
Number of awards forfeited or expired
Ending balance
Number of option awards exercised
Number of restricted stock awards vested
Stock-Based Compensation Expense
Year Ended
December 31, 2016
From Inception to
December 31, 2016
69,938
(13,167)
18,000
74,771
37,666
11,385
300,000
(249,232)
24,003
74,771
52,473
31,556
In 2016, 2015 and 2014, we recognized stock-based compensation expense of $3,696, $2,510 and $1,944,
respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.
As of December 31, 2016, we had $7,120 in stock-based compensation expense that has yet to be recognized
through our results of operations. We expect this compensation to be recognized in subsequent years according to
the following table, except with respect to awards that are accelerated by the Board of Directors, in which case we
will recognize any remaining compensation expense in the period in which the awards are accelerated.
2017
2018
2019
2020
2021
Total
Analysis of Award Activity
$
$
2,958
2,259
1,191
640
72
7,120
The analysis below details the award activity for 2016 and the awards outstanding at December 31, 2016, for both of
our plans and ad hoc options, which were granted prior to the adoption of the other plans:
Options
Weighted-
Average Exercise
Price
Weighted-
Average
Remaining Life
(in years)
Shares
Aggregate
Intrinsic Value
Outstanding at January 1, 2016
1,383,880
$
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2016
Exercisable at December 31, 2016
180,912
(336,215)
(107,900)
1,120,677
462,639
$
$
28.66
39.91
30.26
38.24
29.08
25.85
6.63
2.83
$
$
22,519
10,789
Intrinsic value is the difference between our share price on the last day of trading (i.e., December 31, 2016) and the
price of the options when granted and represents the value that would have been received by option holders had they
exercised their options on that date. These values change based on the fair market value of our shares. The intrinsic
value of options exercised totaled $4,339, $1,546 and $790 in 2016, 2015 and 2014, respectively.
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The analysis below details the award activity for the restricted stock awards outstanding at December 31, 2016:
Restricted stock awards
Non-vested at January 1, 2016
Granted
Vested
Forfeited
Non-vested at December 31, 2016
Shares
Weighted-Average Grant Date
Fair Value
144,763
$
80,913
(29,779)
(13,811)
182,086
$
27.81
40.22
23.94
26.16
34.08
In 2016, 2015 and 2014 we recognized $1,766, $924 and $588, respectively, in compensation expense related to the
restricted stock awards. At December 31, 2016, we had $3,674 in compensation expense that has yet to be
recognized through our results of operations related to the restricted stock awards. The intrinsic value of the non-
vested restricted stock awards outstanding totaled $2,747, $1,520 and $459 at December 31, 2016, 2015 and 2014,
respectively.
Assumptions
The weighted-average grant-date fair value of the options granted under our plans has been estimated using the
Black-Scholes option pricing model with the following weighted-average assumptions:
December 31,
Risk-free interest rate
Expected volatility
Expected option life (in years)
Expected dividends (in dollars)
Weighted-average grant-date fair value of options
granted during the year (in dollars)
2016
2015
2014
1.53%
25.44%
7
0.88
8.42
$
$
1.94%
21.92%
7
0.80
4.98
$
$
2.19%
36.58%
7
0.78
9.15
$
$
The following table summarizes information regarding the stock options outstanding and exercisable at
December 31, 2016:
Options Outstanding
Options Exercisable
Range of Exercise Prices
$
$
15.01
21.01
28.01
35.01
15.01
-
-
-
-
-
21.00
28.00
35.00
41.00
41.00
Number
Outstanding
(in shares)
Weighted-
Average
Remaining
Contractual Life
(in years)
Weighted-
Average Exercise
Price
Number
Exercisable
(in shares)
Weighted-
Average Exercise
Price
144,163
194,025
595,544
186,945
4.27 $
5.48
6.95
8.62
1,120,677
6.63 $
20.25
23.37
29.77
39.60
29.08
129,463 $
122,391
200,285
10,500
462,639 $
20.18
23.11
30.70
35.23
25.85
NOTE 10. SEGMENT INFORMATION
We have two reportable business segments in our operations: property and casualty insurance and life insurance. The
property and casualty insurance segment has seven domestic locations from which it conducts its business. The life
insurance segment operates from our home office. Because all of our insurance is sold domestically, we have no
revenues allocable to foreign operations. The accounting policies of the segments are the same as those described in
Note 1 to our Consolidated Financial Statements. We analyze results based on profitability (i.e., loss ratios),
expenses and return on equity.
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Property and Casualty Insurance Segment
We write both commercial and personal lines of property and casualty insurance. We focus on our commercial lines,
which represented 92.5% of our property and casualty insurance premiums earned for 2016. Our personal lines
represented 7.5% of our property and casualty insurance premiums earned for 2016.
Products
Our primary commercial policies are tailored business packages that include the following coverages: fire and allied
lines, other liability, automobile, workers' compensation and surety. Our personal lines consist primarily of
automobile and fire and allied lines coverage, including homeowners.
Pricing
Pricing levels for our property and casualty insurance products are influenced by many factors, including an
estimation of expected losses, the expenses of producing, issuing and servicing business and managing claims, the
time value of money associated with such loss and expense cash flows, and a reasonable allowance for profit. We
have a disciplined approach to underwriting and risk management that emphasizes profitable growth rather than
premium volume or market share. Our insurance company subsidiaries are subject to state laws and regulations
regarding rate and policy form approvals. The applicable state laws and regulations establish standards in certain
lines of business to ensure that rates are not excessive, inadequate, unfairly discriminatory, or used to engage in
unfair price competition. Our ability to increase rates and the relative timing of the process are dependent upon each
respective state's requirements, as well as the competitive market environment.
Seasonality
Our property and casualty insurance segment experiences some seasonality with regard to premiums written, which
are generally highest in January and July and lowest during the fourth quarter. Although we experience some
seasonality in our premiums written, premiums are earned ratably over the period of coverage. Losses and loss
settlement expenses incurred tend to remain consistent throughout the year, with the exception of catastrophe losses
which generally are highest in the second and third quarters. Catastrophes inherently are unpredictable and can occur
at any time during the year from man-made or natural disaster events that include, but are not limited to, hail,
tornadoes, hurricanes and windstorms.
Life Insurance Segment
Products
United Life underwrites all of our life insurance business and sells annuities. Our principal products are single
premium annuities, universal life products and traditional life (primarily single premium whole life insurance)
products. We also underwrite and market other traditional products, including term life insurance and whole life
insurance. We do not write variable annuities or variable insurance products.
Life insurance in force, before ceded reinsurance, totaled $5,314,548 and $5,491,932 as of December 31, 2016 and
2015, respectively. Traditional life insurance products represented 73.0 percent and 68.5 percent of our insurance in-
force at December 31, 2016 and 2015, respectively. Universal life insurance represented 26.6 percent and 26.3
percent of insurance in force at December 31, 2016 and 2015, respectively.
Pricing
Premiums for our life and health insurance products are based on assumptions with respect to mortality, morbidity,
investment yields, expenses, and lapses and are also affected by state laws and regulations, as well as competition.
Pricing assumptions are based on our experience, as well as the industry in general, depending upon the factor being
considered. The actual profit or loss produced by a product will vary from the anticipated profit if the actual
experience differs from the assumptions used in pricing the product.
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Premiums Earned by Segment
The following table sets forth our net premiums earned by segment before intersegment eliminations:
Years Ended December 31,
Property and casualty insurance segment
2016
2015
2014
Net premiums earned
Other liability
Fire and allied lines
Automobile
Workers' compensation
Fidelity and surety
Reinsurance assumed
Other
Total net premiums earned
Life insurance segment
Net premiums earned
Ordinary life (excluding universal life)
Universal life policy fees
Immediate annuities with life contingencies
Accident and health
Other
Total net premiums earned
$
$
$
$
$
$
$
289,982
265,221
239,216
103,605
22,507
12,765
2,835
936,131
63,668
11,577
10,533
1,434
58
$
$
$
261,303
246,450
210,090
95,672
21,362
13,639
3,179
851,695
53,114
12,834
12,223
1,425
388
87,270
$
79,984
$
228,426
226,086
187,813
88,522
19,212
13,145
3,735
766,939
35,557
13,190
11,639
1,274
261
61,921
Total revenue by segment includes sales to external customers and intersegment sales that are eliminated to arrive at
the total revenues as reported in the accompanying Consolidated Statements of Income and Comprehensive Income.
We account for intersegment sales on the same basis as sales to external customers.
The following table sets forth certain data for each of our business segments and is reconciled to our Consolidated
Financial Statements. Depreciation and amortization expense and property and equipment acquisitions for 2016,
2015 and 2014 are reported in the property and casualty insurance segment.
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Property and casualty insurance:
Revenues:
Net premiums earned
Investment income, net of investment expenses
Net realized investment gains
Other income (loss)
Total revenues before eliminations
Intersegment eliminations
Total revenues
Net income before income taxes:
Revenues
Benefit, losses and expenses
Total net income before eliminations
Intersegment eliminations
Income before income taxes
Income tax expense
Net income
Assets
Total segment
Intersegment eliminations
Total assets
Life insurance:
Revenues:
Net premiums earned
Investment income, net of investment expenses
Net realized investment gains
Other income
Total revenues before eliminations
Intersegment eliminations
Total revenues
Net income before income taxes:
Revenues
Benefit, losses and expenses
Total net income before eliminations
Intersegment eliminations
Income before income taxes
Income tax expense
Net income
Assets
Consolidated totals:
Total revenues
Total net income
Total assets
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
2015
2014
851,695
46,606
1,124
(107)
899,318
(47)
899,271
899,318
784,691
114,627
743
115,370
30,050
85,320
2,490,138
(209,464)
2,280,674
79,984
54,222
1,722
508
136,436
(789)
135,647
136,436
129,771
6,665
(584)
6,081
2,275
3,806
1,609,702
1,034,918
89,126
3,890,376
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
766,939
44,219
4,177
910
816,245
18
816,263
816,245
750,768
65,477
548
66,025
13,649
52,376
2,360,764
(233,141)
2,127,623
61,921
60,373
3,093
774
126,161
(530)
125,631
126,161
115,361
10,800
(362)
10,438
3,677
6,761
1,729,066
941,894
59,137
3,856,689
936,131
55,441
4,947
—
996,519
(157)
996,362
996,519
938,864
57,655
(158)
57,497
8,379
49,118
2,662,272
(213,132)
2,449,140
87,270
51,538
1,156
621
140,585
—
140,585
140,585
139,671
914
256
1,170
384
786
1,605,618
1,136,947
49,904
4,054,758
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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NOTE 11. QUARTERLY SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth our selected unaudited quarterly financial information:
(In Thousands Except Share Data)
Quarters
First
Second
Third
Fourth
Total
Year Ended December 31, 2016
Total revenues
Income before income taxes
Net income
Basic earnings per share (1)
Diluted earnings per share (1)
Year Ended December 31, 2015
Total revenues
Income before income taxes
Net income
Basic earnings per share (1)
Diluted earnings per share (1)
$
$
$
$
$
$
$
$
$
$
$
$
265,685
28,774
22,427
0.89
0.88
238,484
31,831
23,679
0.95
0.94
$
$
$
$
$
$
279,773
864
3,114
0.12
0.12
255,918
19,533
15,018
0.60
0.59
$
$
$
$
$
$
289,494
15,175
12,368
0.49
0.48
264,560
26,824
19,534
0.78
0.77
$
$
$
$
$
$
301,995
13,854
11,995
0.47
0.46
275,956
43,263
30,895
1.23
1.21
1,136,947
58,667
49,904
1.97
1.93
1,034,918
121,451
89,126
3.56
3.53
(1) The sum of the quarterly reported amounts may not equal the full year, as each is computed independently.
NOTE 12. EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares
outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares
outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation
relate to our outstanding stock options and restricted stock awards.
We determine the dilutive effect of our outstanding stock options using the "treasury stock" method. Under this
method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the
weighted-average market value of our common stock during the reporting period. This method also assumes that the
proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the
weighted-average market value of the stock during the reporting period. The net of the assumed stock options
exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add
to the denominator of the earnings per share calculation.
The components of basic and diluted earnings per share were as follows:
2016
Years Ended December 31,
2015
2014
(In Thousands Except Share and Per
Share Data)
Net income
Weighted-average common shares
outstanding
Add dilutive effect of restricted stock
awards
Add dilutive effect of stock options
Weighted-average common shares
Earnings per common share
Awards excluded from diluted
calculation(1)
Basic
Diluted
Basic
Diluted
Basic
Diluted
$
49,904
$
49,904
$
89,126
$
89,126
$
59,137
$
59,137
25,335,706
25,335,706
25,047,405
25,047,405
25,230,854
25,230,854
—
—
25,335,706
1.97
$
155,059
313,913
25,804,678
1.93
$
—
—
25,047,405
3.56
$
122,840
65,751
25,235,996
3.53
$
—
—
25,230,854
2.34
$
114,313
148,496
25,493,663
2.32
$
—
—
—
343,390
—
835,610
(1) Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including
them would have been anti-dilutive.
135
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NOTE 13. LEASE COMMITMENTS
At December 31, 2016, we were obligated under noncancelable operating lease agreements for office space,
vehicles, computer equipment and office equipment. Most of our leases include renewal options, purchase options or
both. These provisions may be exercised by us upon the expiration of the related lease agreements. Rental expense
under our operating lease agreements was $6,908, $6,256 and $7,040 for 2016, 2015 and 2014, respectively. Our
most significant lease commitment is for mainframe computer equipment. This lease was signed in November 2016
and has a term of 5 years. The monthly lease payments for this lease are $154.
At December 31, 2016, our future minimum rental payments were as follows:
2017
2018
2019
2020
2021
Thereafter
Total
$
6,218
5,761
5,270
4,715
3,529
174
$
25,667
NOTE 14. CREDIT FACILITY
On February 2, 2016, the Company, as borrower, entered into a Credit Agreement (the "New Credit Agreement") by
and among the Company, with the lenders from time to time party thereto and KeyBank National Association ("Key
Bank"), as administrative agent, swingline lender and letter of credit issuer. The New Credit Agreement provides for
a $50,000 four-year unsecured revolving credit facility that includes a $20,000 letter of credit subfacility and a
swingline subfacility in the amount up to $5,000. The New Credit Agreement allows the Company to increase the
aggregate amount of the commitments thereunder by up to $100,000, provided that no event of default has occurred
and is continuing and certain other conditions are satisfied.
The New Credit Agreement is available for the Company's general corporate purposes, including liquidity,
acquisitions and working capital. All unpaid principal and accrued interest under the New Credit Agreement is due
and payable in full at maturity on February 2, 2020. Based on the type of loan, advances under the New Credit
Agreement would bear interest on either the London interbank offered rate ("LIBOR") or a base rate plus, in each
case, a calculated margin amount.
The unused commitments under the New Credit Agreement will be subject to a commitment fee that will be
calculated at a per annum rate. The applicable margins for borrowings under the New Credit Agreement and the
commitment fee thereunder will be determined by reference to a pricing grid based on the Company’s issuer credit
rating by A.M. Best Company, Inc.
The New Credit Agreement contains customary representations, conditions to borrowing, covenants and events of
default, including certain covenants that limit or restrict, subject to certain exceptions, the ability of the Company
and its subsidiaries to sell or transfer assets, enter into a merger or consolidate with another company, create liens,
impose restrictions on subsidiary dividends, enter into sale-leaseback transactions, make investments or acquisitions,
enter into certain reinsurance agreements, pay dividends during any period of default, enter into transactions with
affiliates, change the nature of its business, or incur indebtedness. The New Credit Agreement also includes financial
covenants that require the Company to (i) maintain a minimum consolidated net worth, (ii) maintain a minimum
consolidated statutory surplus and (iii) not exceed a 0.35 to 1.0 debt to total capitalization ratio. As of December 31,
2016 we were in compliance with all covenants of the New Credit Agreement.
In December 2011, United Fire & Casualty Company entered into a credit agreement with a syndicate of financial
institutions as lenders, which terminated by expiration on its stated termination date of December 22, 2015.
KeyBank National Association was the administrative agent, lead arranger, sole book runner, swingline lender, and
letter of credit issuer, and Bankers Trust Company was the syndication agent. The four-year credit agreement
136
Table of Contents
provided for a $100,000 unsecured revolving credit facility that included a $20,000 letter of credit subfacility and a
swing line subfacility in the amount of up to $5,000.
On June 4, 2013, United Fire & Casualty Company, United Fire Group, Inc. and the syndicated lenders entered into
an Assignment, Joinder, Assumption, and Release Agreement (the "Joinder Agreement") transferring the obligations
under the credit agreement from United Fire & Casualty Company to United Fire Group, Inc. Effective with the
execution of the Joinder Agreement, United Fire & Casualty Company was released from any further obligations
under the credit agreement.
During the term of this credit agreement, we had the right to increase the total credit facility from $100,000 up to
$125,000 if no event of default has occurred and is continuing and certain other conditions are satisfied. The credit
facility was available for general corporate purposes, including working capital, acquisitions and liquidity purposes.
Any principal outstanding under the credit facility was due in full at maturity, on December 22, 2015. The interest
rate was based on our monthly choice of either a base rate or the LIBOR plus, in each case, a calculated margin
amount. A commitment fee on each lender's unused commitment under the credit facility was also payable quarterly.
The credit agreement contained customary representations, covenants and events of default, including certain
covenants that limit or restrict our ability to engage in certain activities. Subject to certain exceptions, those
activities included restricting our ability to sell or transfer assets or enter into a merger or consolidate with another
company, grant certain types of security interests, incur certain types of liens, impose restrictions on subsidiary
dividends, enter into leaseback transactions, or incur certain indebtedness. The credit agreement contained certain
financial covenants including covenants that required us to maintain a minimum consolidated net worth, a debt to
capitalization ratio and minimum stockholders' equity.
There was no outstanding balance on the credit facility at December 31, 2016 or 2015. We did not incur any interest
expense related to these credit facilities in 2016, 2015 or 2014. We were in compliance with all covenants of the
credit agreement on its stated termination date of December 22, 2015.
NOTE 15. INTANGIBLE ASSETS
The carrying value of our goodwill was $15,091 at both December 31, 2016 and 2015, respectively. The goodwill is
fully allocated to our property and casualty insurance segment.
Our major classes of intangible assets are presented in the following table:
Agency relationships
Accumulated amortization - agency relationships
Software
Accumulated amortization - software
Trade names
Accumulated amortization - trade names
Favorable contract
Accumulated amortization - favorable contract
State insurance licenses (1)
Net intangible assets
(1) The intangible asset for licenses has an indefinite life and therefore is not amortized.
137
Year Ended December 31,
2016
2015
$
$
$
$
$
$
$
$
$
$
10,338
(4,929)
5,409
3,260
(3,260)
—
1,978
(758)
1,220
286
(286)
—
3,020
9,649
$
$
$
$
$
$
$
$
$
$
10,338
(4,292)
6,046
3,260
(3,260)
—
1,978
(626)
1,352
286
(286)
—
3,020
10,418
Table of Contents
The estimated useful lives assigned to our major classes of amortizable intangible assets are as follows:
Agency relationships
Software
Trade names
Favorable contract
Useful Life
Fifteen years
Two years
Fifteen years
Two years
Our estimated aggregate amortization expense for each of the next five years is as follows:
2017
2018
2019
2020
2021
$
769
719
709
709
709
NOTE 16. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table shows the changes in the components of our accumulated other comprehensive income (loss),
net of tax, for the years ended December 31, 2016, 2015 and 2014:
Balance as of January 1, 2014
$
116,601
$
(29,451)
$
87,150
Net unrealized
appreciation
Liability for
underfunded
employee
on investments
benefit costs
Total
36,328
(3,306)
149,623
(18,321)
(2,933)
128,369
8,461
(2,938)
133,892
$
$
$
(30,996)
1,997
(58,450)
5,664
4,854
(47,932)
19,529
3,566
(24,837)
$
$
5,332
(1,309)
91,173
(12,657)
1,921
80,437
27,990
628
$
109,055
Change in accumulated other comprehensive income
before reclassifications
Reclassification adjustments from accumulated other
comprehensive income
Balance as of December 31, 2014
Change in accumulated other comprehensive income
before reclassifications
Reclassification adjustments from accumulated other
comprehensive income
Balance as of December 31, 2015
Change in accumulated other comprehensive income
before reclassifications
Reclassification adjustments from accumulated other
comprehensive income
Balance as of December 31, 2016
$
$
$
138
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
United Fire Group, Inc.
We have audited the accompanying consolidated balance sheets of United Fire Group, Inc. as of December 31, 2016
and 2015, and the related consolidated statements of income and comprehensive income, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial
statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of United Fire Group, Inc. at December 31, 2016 and 2015, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), United Fire Group, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework) and our report, dated February 28, 2017, expressed an unqualified
opinion thereon.
Des Moines, Iowa
February 28, 2017
/s/ Ernst & Young LLP
Ernst & Young LLP
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Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end
of the period covered by this report, were designed and functioning effectively to provide reasonable assurance that
the information required to be disclosed by us in reports filed or submitted under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in the SEC's rules and forms. We believe that
a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of
the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of United Fire Group, Inc. is responsible for establishing and maintaining adequate internal control
over financial reporting. United Fire Group, Inc.'s internal control over financial reporting is a process designed
under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of its Consolidated Financial Statements for
external purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2016, United Fire Group, Inc.'s management assessed the effectiveness of United Fire Group
Inc.'s internal control over financial reporting based on the criteria for effective internal control over financial
reporting established in "Internal Control — Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework). Based on the assessment, United Fire Group, Inc.'s
management determined that effective internal control over financial reporting was maintained as of December 31,
2016, based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the Consolidated Financial
Statements of United Fire Group, Inc. included in this Annual Report on Form 10-K, has audited the effectiveness of
internal control over financial reporting as of December 31, 2016. Their attestation report, which expresses an
unqualified opinion on the effectiveness of United Fire Group, Inc.'s internal control over financial reporting as of
December 31, 2016, is included in this Item under the heading "Report of Independent Registered Public Accounting
Firm."
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
United Fire Group, Inc.
We have audited United Fire Group, Inc.'s internal control over financial reporting as of December 31, 2016, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). United Fire Group, Inc.'s
management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, United Fire Group, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements
of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2016 of United Fire Group, Inc. and our report dated February 28, 2017 expressed an
unqualified opinion thereon.
Des Moines, Iowa
February 28, 2017
/s/ Ernst & Young LLP
Ernst & Young LLP
141
Table of Contents
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules
13a-15 and 15d-15) that occurred during the fiscal quarter ended December 31, 2016, that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 9B. OTHER INFORMATION
None.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 regarding the Company’s executive officers is included in '"Executive Officers
of the Company" under Part I, Item 1 of this report.
The information required by this Item regarding our directors and corporate governance matters is included under
the captions "Board of Directors," subheading "Corporate Governance" and "Proposal One-Election of Directors," in
our definitive Proxy Statement for our annual meeting of shareholders to be held on May 17, 2017 (the "2017 Proxy
Statement") and is incorporated herein by reference.
The information required by this Item regarding our Code of Ethics is included under the caption "Board of
Directors," subheading "Corporate Governance," subpart "Code of Ethics" in our 2017 Proxy Statement and is
incorporated herein by reference.
The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is included
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in our 2017 Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item regarding our executive compensation and our Compensation Committee
Report is included under the caption "Executive Compensation" and the subheading "Report of the Compensation
Committee" in our 2017 Proxy Statement and is incorporated herein by reference. The information required by this
Item regarding Compensation Committee interlocks and insider participation is included under the caption "Board of
Directors," subheading "Committees of the Board," subheading "Compensation Committee," subpart
"Compensation Committee Interlocks and Insider Participation" in our 2017 Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information required under this Item is included under the captions "Security Ownership of Certain Beneficial
Owners," "Security Ownership of Management" and "Securities Authorized for Issuance under Equity
Compensation Plans" in our 2017 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required under this Item is included under the captions "Board of Directors" and "Transactions with
Related Persons" in our 2017 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this Item is included under the caption "Proposal Two - Ratification of the Audit
Committee's Appointment of Independent Registered Public Accounting Firm," subheading "Information About Our
Independent Registered Public Accounting Firm" in our 2017 Proxy Statement and is incorporated herein by
reference.
143
Table of Contents
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
(a) 1. Financial Statements
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Income and Comprehensive Income for the three years ended December 31,
2016
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2016
Consolidated Statements of Cash Flows for the three years ended December 31, 2016
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules required to be filed by Item 8 of this Form:
Schedule I. Summary of Investments — Other than Investments in Related Parties
Schedule II. Condensed Financial Statements of Parent Company
Schedule III: Supplementary Insurance Information
Schedule IV: Reinsurance
Schedule V: Valuation and Qualifying Accounts
Schedule VI: Supplemental Information Concerning Property and Casualty Insurance Operations
Page
73
74
75
76
78
145
146
149
150
151
152
All other schedules have been omitted as not required, not applicable, not deemed material or because the information is
included in the Consolidated Financial Statements.
(a) 3. See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
144
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Schedule I. Summary of Investments — Other than Investments in Related Parties
December 31, 2016
Type of Investment
Fixed maturities
Bonds
United States Government and government agencies
and authorities
States, municipalities and political subdivisions
Foreign governments
Public utilities
All other bonds
Redeemable preferred stock
Total fixed maturities
Equity securities
Common stocks
Public utilities
Banks, trusts and insurance companies
Industrial, miscellaneous and all other
Nonredeemable preferred stocks
Total equity securities
Mortgage loans on real estate
Policy loans
Other long-term investments
Short-term investments
Total investments
(In thousands)
Cost or Amortized
Cost
Fair Value
Amounts at Which
Shown in Balance
Sheet
$
$
$
$
$
$
99,908
$
100,792
$
1,061,621
62,995
212,360
1,462,594
1,279
2,900,757
6,995
17,493
46,431
3,019
73,938
3,706
5,366
48,908
175
$
$
$
$
1,051,958
65,234
215,674
1,477,753
1,304
2,912,715
20,284
116,156
136,451
3,169
276,060
3,895
5,366
67,639
175
$
$
$
$
100,792
1,051,958
65,234
215,674
1,477,752
1,304
2,912,714
20,284
116,156
136,451
3,169
276,060
3,706
5,366
67,639
175
3,032,850
$
3,265,850
$
3,265,660
145
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Schedule II. Condensed Financial Statements of Parent Company
United Fire Group, Inc. (parent company only)
Condensed Balance Sheets
(In thousands, except share data)
Assets
Fixed maturities, held-to-maturity, at amortized cost (fair value $150 in 2016 and
$150 in 2015)
Investment in subsidiary
Cash and cash equivalents
Federal income tax receivable
Accrued investment income
Total assets
Liabilities and stockholders' equity
Liabilities
Stockholders' equity
Common stock, $0.001 par value, authorized 75,000,000 shares; 25,429,769 and
25,151,428 issued and outstanding in 2016 and 2015, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
$
$
December 31,
2016
2015
150 $
925,887
14,325
1,521
1
941,884 $
150
871,590
6,565
591
1
878,897
— $
—
25 $
216,482
616,322
109,055
941,884 $
25
207,426
591,009
80,437
878,897
941,884 $
878,897
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes
included in Part II, Item 8 of this Annual Report on Form 10-K.
146
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Schedule II. Condensed Financial Statements of Parent Company (continued)
United Fire Group, Inc. (parent company only)
Condensed Statements of Income and Comprehensive Income
(In thousands)
Revenues
Investment income
Total revenues
Expenses
Other operating expenses
Total expenses
Loss before income taxes and equity in net income of subsidiary
Federal income tax benefit
Net loss before equity in net income of subsidiary
Equity in net income of subsidiary
Net income
Other comprehensive income (loss)
Change in unrealized appreciation on investments held by subsidiary
Change in liability for underfunded employee benefit plans of subsidiary
Other comprehensive income (loss), before tax and reclassification
adjustments
Income tax effect
Other comprehensive income (loss), after tax, before reclassification
adjustments
Reclassification adjustment for net realized gains of the subsidiary
included in income
Reclassification adjustment for employee benefit costs of the subsidiary
included in expense
Total reclassification adjustments, before tax
Income tax effect
Total reclassification adjustments, after tax
Comprehensive income
For the Years Ended December 31,
2016
2015
2014
66 $
66
73 $
73
(7)
(3)
(4) $
25 $
25
116 $
116
(91)
(42)
(49) $
49,908
49,904 $
89,175
89,126 $
13,017 $
30,045
(28,185) $
8,714
43,062 $
(19,471) $
(15,072)
6,814
27,990 $
(12,657) $
22
22
297
297
(275)
(107)
(168)
59,305
59,137
55,888
(47,685)
8,203
(2,871)
5,332
(4,520)
(4,513)
(5,085)
5,486
7,468
966 $
(338)
628 $
2,955 $
(1,034)
1,921 $
3,072
(2,013)
704
(1,309)
78,522 $
78,390 $
63,160
$
$
$
$
$
$
$
$
$
$
United Fire Group, Inc. and its subsidiaries file a consolidated federal income tax return. The federal income tax provision
represents an allocation under it's tax allocation agreements.
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes
included in Part II, Item 8 of this Annual Report on Form 10-K.
147
Table of Contents
Schedule II. Condensed Financial Statements of Parent Company (continued)
United Fire Group, Inc. (parent company only)
Condensed Statements of Cash Flows
For the Years Ended December 31,
(In thousands)
2016
2015
2014
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities
$
49,904 $
89,126 $
59,137
Equity in net income of subsidiary
Dividends received from subsidiary
Other, net
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities
Purchase of held-to-maturity investments
Net cash used in investing activities
Cash flows from financing activities
Repurchase of common stock
Issuance of common stock
Tax impact from issuance of common stock
Payment of cash dividends
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of year
(49,908)
24,000
2,995
(22,913) $
26,991 $
(89,175)
22,500
1,269
(65,406) $
23,720 $
(59,305)
29,000
700
(29,605)
29,532
— $
— $
— $
— $
—
—
(3,746) $
9,922
(816)
(24,591)
(19,231) $
7,760 $
6,565
14,325 $
(2,423) $
5,496
(833)
(21,658)
(19,418) $
4,302 $
2,263
6,565 $
(12,942)
2,260
(160)
(19,680)
(30,522)
(990)
3,253
2,263
$
$
$
$
$
$
$
$
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes
included in Part II, Item 8 of this Form 10-K.
148
Table of Contents
Schedule III. Supplementary Insurance Information
Future
Policy
Benefits,
Losses,
Claims and
Loss
Expenses
Deferred
Policy
Acquisition
Costs
Unearned
Premiums
Earned
Premium
Revenue
Investment
Income,
Net
Benefits,
Claims,
Losses
and
Settlement
Expenses
Amortization
of Deferred
Policy
Acquisition
Costs
Other
Underwriting
Expenses
Interest on
Policyholders'
Accounts
Premiums
Written (2)
(In thousands)
Year Ended December 31, 2016
Property and casualty
Life, accident and health (1)
Total
$
93,362
$ 1,123,896
$ 443,802
$ 936,131
$
55,284
$ 652,433
70,750
1,350,503
71
87,270
51,538
91,334
$ 164,112
$ 2,474,399
$ 443,873
$1,023,401
$ 106,822
$ 743,767
Year Ended December 31, 2015
Property and casualty
Life, accident and health (1)
Total
$
90,547
$ 1,003,895
$ 414,971
$ 851,695
$
46,559
$ 520,087
77,717
1,372,358
86
79,195
54,222
79,946
$ 168,264
$ 2,376,253
$ 415,057
$ 930,890
$ 100,781
$ 600,033
Year Ended December 31, 2014
Property and casualty
Life, accident and health (1)
Total
$
72,861
$ 969,437
$ 378,635
$ 766,939
$
44,236
$ 509,811
66,858
1,447,764
90
61,391
60,373
63,055
$ 139,719
$ 2,417,201
$ 378,725
$ 828,330
$ 104,609
$ 572,866
(1) Annuity deposits are included in future policy benefits, losses, claims and loss expenses.
(2) Pursuant to Regulation S-X, premiums written does not apply to life insurance companies.
$
$
$
$
$
$
202,892
8,121
211,013
180,183
6,634
186,817
161,310
6,139
167,449
$
$
$
$
$
$
83,540
19,881
103,421
83,631
19,306
102,937
79,117
15,754
94,871
$
$
$
$
$
$
— $ 964,970
20,079
—
20,079
$ 964,970
— $ 887,874
23,680
—
23,680
$ 887,874
— $ 804,715
30,245
—
30,245
$ 804,715
149
Table of Contents
Schedule IV. Reinsurance
(In thousands)
Year Ended December 31, 2016
Life insurance in force
Premiums earned
Property and casualty insurance
Life, accident and health insurance
Total
Year Ended December 31, 2015
Life insurance in force
Premiums earned
Property and casualty insurance
Life, accident and health insurance
Total
Year Ended December 31, 2014
Life insurance in force
Premiums earned
Property and casualty insurance
Life, accident and health insurance
Total
Gross Amount
Ceded to Other
Companies
Assumed From
Other Companies
Net Amount
Percentage of
Amount Assumed
to Net Earned
$
$
$
$
$
$
$
$
$
5,314,548
977,090
90,038
1,067,128
5,491,932
890,057
82,356
972,413
5,366,061
800,492
64,350
864,842
$
$
$
$
$
$
$
$
$
1,023,197
57,996
2,768
60,764
1,165,868
56,758
3,161
59,919
1,130,059
49,818
2,959
52,777
$
$
$
$
$
$
$
$
$
— $
4,291,351
17,037
—
17,037
$
$
936,131
87,270
1,023,401
— $
4,326,064
18,396
—
18,396
$
$
851,695
79,195
930,890
— $
4,236,002
16,265
—
16,265
$
$
766,939
61,391
828,330
1.82%
—%
1.66%
2.16 %
— %
1.98 %
2.12 %
— %
1.96 %
150
Table of Contents
Schedule V. Valuation And Qualifying Accounts
(In thousands)
Description
Allowance for bad debts
Year Ended December 31, 2016
Year Ended December 31, 2015
Year Ended December 31, 2014
Deferred tax asset valuation allowance (1)
Year Ended December 31, 2016
Year Ended December 31, 2015
Year Ended December 31, 2014
Balance at
beginning of period
Charged to costs
and expenses
Deductions
Balance at end
of period
$
$
$
$
867
618
896
1,265
1,813
2,361
388
249
—
— $
—
—
$
— $
—
278
547
548
548
$
1,255
867
618
718
1,265
1,813
(1) Recorded in connection with the purchase of American Indemnity Financial Corporation in 1999.
151
Table of Contents
Schedule VI. Supplemental Information Concerning Property and Casualty Insurance Operations
(In thousands)
Affiliation with Registrant:
United Fire & Casualty
Company and consolidated
property and casualty
subsidiaries
Deferred
Policy
Acquisition
Costs
Reserves
for Unpaid
Claims and
Claim
Adjustment
Expenses
Unearned
Premiums
Earned
Premiums
Net
Realized
Investment
Gains
Net
Investment
Income
Claims and Claim
Adjustment Expenses
Incurred Related to:
Current
Year
Prior
Years
Amortization
of Deferred
Policy
Acquisition
Costs (1)
Paid Claims
and Claim
Adjustment
Expenses
Premiums
Written
2016
2015
2014
$
$
$
93,362
$ 1,123,896
$ 443,802
$ 936,131
90,547
$ 1,003,895
$ 414,971
$ 851,695
72,861
$
969,437
$ 378,635
$ 766,939
$
$
$
4,947
1,124
4,177
$
$
$
55,284
46,559
44,236
$
$
$
683,662
$ (31,229) $
202,892
560,482
$ (40,395) $
180,183
566,555
$ (56,744) $
161,310
$
$
$
537,573
$ 964,970
476,525
$ 887,874
489,631
$ 804,715
152
Table of Contents
ITEM 16. FORM 10-K SUMMARY
None.
153
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED FIRE GROUP, INC.
By:
/s/ Randy A. Ramlo
Randy A. Ramlo, Chief Executive Officer, Director and Principal
Executive Officer
Date: 2/28/2017
By:
/s/ Dawn M. Jaffray
Dawn M. Jaffray, Senior Vice President, Chief Financial Officer,
Principal Financial Officer and Principal Accounting Officer
Date: 2/28/2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By
/s/ Jack B. Evans
Jack B. Evans, Chairman and Director
Date 2/28/2017
By
/s/ John P. Besong
John P. Besong, Director
Date 2/28/2017
By
/s/ Scott L. Carlton
Scott L. Carlton, Director
Date 2/28/2017
By:
/s/ Brenda K. Clancy
Brenda K. Clancy, Director
Date 2/28/2017
By
/s/ Christopher R. Drahozal
Christopher R. Drahozal, Director
Date 2/28/2017
By
/s/ Sarah Fisher Gardial
Sarah Fisher Gardial, Director
Date 2/28/2017
By
/s/ Dawn M. Jaffray
Dawn M. Jaffray, Senior Vice President, Chief
Financial Officer, Principal Financial Officer
and Principal Accounting Officer
By
/s/ Casey D. Mahon
Casey D. Mahon, Director
Date 2/28/2017
Date 2/28/2017
By
/s/ George D. Milligan
George D. Milligan, Director
Date 2/28/2017
By
/s/ Mary K. Quass
Mary K. Quass, Director
By
/s/ James W. Noyce
James W. Noyce, Vice Chairman and Director
Date 2/28/2017
By
/s/ Randy A. Ramlo
Randy A. Ramlo, Chief Executive Officer,
Director and Principal Executive Officer
Date 2/28/2017
Date 2/28/2017
By
/s/ Kyle D. Skogman
Kyle D. Skogman, Director
Date 2/28/2017
By
/s/ Susan E. Voss
Susan E. Voss, Director
Date 2/28/2017
154
Table of Contents
Exhibit Index
Filed
herewith
Exhibit
number
2.1
Exhibit description
Agreement and Plan of Reorganization among
United Fire & Casualty Company, United Fire
Group, Inc. and UFC MergeCo, Inc.
3.1
Articles of Incorporation of United Fire Group,
3.2
Inc.
Articles of Amendment to Articles of
Incorporation of United Fire Group, Inc.
3.3
Bylaws of United Fire Group, Inc.
Form
8-K
S-4
8-K
S-4
Incorporated by reference
Period
ending
Exhibit
2.1
Filing date
5/25/2011
Annex II
5/25/2011
3.1
5/26/2015
Annex III
5/25/2011
10.1
Employee Stock Purchase Plan
10-K
12/31/2007
10.2
2/27/2008
10.2 * 2005 Non-qualified Non-employee Director Stock
Option and Restricted Stock Plan (as amended)
10.4 * United Fire Group, Inc. Amended and Restated
Annual Incentive Plan (Amended February 24,
2012)
DEF14A
Exhibit A
4/18/2011
10-K
12/31/2011
10.4
3/15/2012
10.5 * Non-qualified Deferred Compensation Plan
10-Q
9/30/2007
10.3
10/25/2007
10.6 * United Fire Group, Inc. Stock Plan, amended as
DEF14A
App A
4/8/2014
of February 21, 2014 (amending and restating the
United Fire & Casualty Company 2008 Stock
Plan) (the "Stock Plan")
10.7 * Form of Non-qualified Employee Stock Option
10-K
12/31/2007
10.7
2/27/2008
Agreement under the Stock Plan
10.8 * Form of Option Issued Pursuant to the 2005 Non-
10-K
12/31/2007
10.8
2/27/2008
qualified Non-employee Director Stock Option
and Restricted Stock Plan
10.9 * Form of Stock Award Agreement under the Stock
Plan
10.10 * Form of Non-qualified Stock Option Agreement
for the Purchase of Stock under the Stock Plan
10.11 * Form of Incentive Stock Option Agreement for
the Purchase of Stock under the Stock Plan
10.12 * Amendment to Non-qualified Stock Option
Agreements for John A. Rife
8-K
8-K
8-K
99.2
5/22/2008
99.3
5/22/2008
99.4
5/22/2008
8-K/A
99.1
2/24/2009
10.13 * Form of Restricted Stock Agreement under the
10-K
12/31/2011
10.14
3/15/2012
2005 Non-qualified Non-employee Director Stock
Option and Restricted Stock Plan
10.14 * Director’s Restricted Stock Agreement amended
10-Q
6/30/2016
10.1
8/3/2016
10.14 * United Fire Group, Inc. Plan for Allocation of
Equity Compensation to Management Team
10.15 * Deferred Compensation Plan for United Fire
Group, Inc. Non-Employee Directors
10.16 * United Fire Group, Inc. Executive Nonqualified
Excess Plan
10.17 * United Fire & Casualty Company Executive
Nonqualified Excess Plan Adoption Agreement
10.18 * United Fire & Casualty Company Rabbi Directed
Trust Agreement
10.19 * United Fire Group, Inc. Template Change in
Control Severance Agreement
*Indicates a management contract or compensatory plan or arrangement.
155
10-K
12/31/2011
10.15
3/15/2012
8-K
8-K
8-K
8-K
8-K
10.1
11/19/2012
0.0101
5/22/2014
0.0102
5/22/2014
0.0103
5/22/2014
0.0104
5/22/2014
Table of Contents
Exhibit Index
Exhibit description
Exhibit
number
10.20 * Amendment Number One to United Fire &
Casualty Company Nonqualified Deferred
Compensation Plan
Incorporated by reference
Filed
herewith
Form
8-K
Period
ending
Exhibit
0.0105
Filing date
5/22/2014
10.21 * Form of Non-Qualified Employee Stock Option
10-Q
6/30/14
10.7
8/5/2014
10-Q
6/30/14
10.8
8/5/2014
8-K
8-K
8-K
8-K
10.1
12/23/2011
10.1
1/30/2012
10.1
12/21/2012
10.1
6/5/2013
8-K
10.1
2/5/2016
8-K/A
14.1
1/31/2013
Agreement under the United Fire Group, Inc.
Stock Plan
10.22 * Form of Stock Award Agreement under the
United Fire Group, Inc. Stock Plan
10.24
10.25
10.26
10.27
10.28
Credit Agreement between United Fire &
Casualty Company and syndicated lenders
First Amendment to Credit Agreement between
United Fire & Casualty Company and syndicated
lenders
Second Amendment to Credit Agreement between
United Fire & Casualty Company and syndicated
lenders
Assignment, Joinder, Assumption, and Release
Agreement, between and among United Fire
Group, Inc., United Fire & Casualty Company, a
syndicate of financial institutions, as lenders party
thereto, and KeyBank National Association, as
Administrative Agent, Lead Arranger, Sole Book
Runner, Swingline Lender, and Letter of Credit
Issuer
Credit Agreement dated as of February 2, 2016,
by and among United Fire Group, Inc., as
borrower, the lenders from time to time party
thereto, and KeyBank National Association, as
administrative agent, swingline lender and letter
of credit issuer.
11
Statement Re Computation of Per Share Earnings.
X
All information required by Exhibit 11 is
presented within Note 12 of the Notes to
Consolidated Financial Statements
Statement Re Computation of Ratios
Code of Ethics
Subsidiaries of the Registrant
Consent of Ernst & Young LLP, Independent
Registered Public Accounting Firm
Consent of Griffith, Ballard & Company,
Independent Actuary
Consent of Regnier Consulting Group, Inc.,
Independent Actuary
Certification of Randy A. Ramlo Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
12
14
21
23.1
23.2
23.3
31.1
X
X
X
X
X
X
*Indicates a management contract or compensatory plan or arrangement.
156
Incorporated by reference
Form
Period
ending
Exhibit
Filing date
Table of Contents
Exhibit Index
Filed
herewith
X
X
X
X
Exhibit
number
31.2
32.1
32.2
101.1
Exhibit description
Certification of Dawn M. Jaffray Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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
Certification of Dawn M. Jaffray Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
The following financial information from United
Fire Group, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2016 formatted
in XBRL: (i) Consolidated Balance Sheets at
December 31, 2016 and 2015; (ii) Consolidated
Statements of Income and Comprehensive
Income for the years ended December 31, 2016,
2015 and 2014; (iii) Consolidated Statement of
Stockholders' Equity for the years ended
December 31, 2016, 2015 and 2014; (iv)
Consolidated Statements of Cash Flows for the
years ended December 31, 2016, 2015 and 2014;
and (v) Notes to Consolidated Financial
Statements.
157
EXHIBIT 12. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In Thousands)
Years ended December 31
Earnings
Income (loss) before income taxes
Add: fixed charges
Total earnings
Fixed charges
Interest on policyholders’ accounts
Portion of rent representative of interest factor
Total fixed charges
2016
2015
2014
2013
2012
$
$
$
$
58,667 $
121,451 $
76,463 $
101,902 $
21,461
24,931
31,653
36,467
80,128 $
146,382 $
108,116 $
138,369 $
46,074
42,612
88,686
20,079 $
23,680 $
30,245 $
35,163 $
41,409
1,382
1,251
1,408
1,304
1,203
21,461 $
24,931 $
31,653 $
36,467 $
42,612
Ratio of earnings to fixed charges
3.73
5.87
3.42
3.79
2.08
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
Subsidiary
United Fire & Casualty Company
United Life Insurance Company
Addison Insurance Company
UFG Specialty Insurance Company
Jurisdiction of
Organization
% of Ownership by United Fire Group, Inc. or one of its
Subsidiaries
Iowa
Iowa
Iowa
Iowa
100% owned by United Fire Group, Inc.
100% owned by United Fire & Casualty Company
100% owned by United Fire & Casualty Company
100% owned by United Fire & Casualty Company
Lafayette Insurance Company
Louisiana
100% owned by United Fire & Casualty Company
Financial Pacific Insurance Company
California
100% owned by United Fire & Casualty Company
Mercer Insurance Company
Pennsylvania
100% owned by United Fire & Casualty Company
Franklin Insurance Company
Pennsylvania
100% owned by Mercer Insurance Company
Mercer Insurance Company of New
Jersey, Inc.
United Fire & Indemnity Company
United Fire Lloyds
United Real Estate Holdings, LLC
New Jersey
100% owned by Mercer Insurance Company
Texas
Texas
Iowa
100% owned by United Fire & Casualty Company
Operationally and financially controlled by United Fire &
Indemnity Company, its Corporate Attorney-in-Fact
Single-member LLC 100% owned by United Fire & Casualty
Company
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements of United Fire Group, Inc.
(United Fire) described in the following table of our reports dated February 28, 2017, with respect to the
consolidated financial statements and schedules of United Fire and the effectiveness of internal control over
financial reporting of United Fire included in this Annual Report (Form 10-K) of United Fire for the year ended
December 31, 2016.
Registration Statement
Number
Form
Purpose
S-8, S-8 POS
S-8
S-8, S-8 POS
S-8, S-8 POS
S-8, S-8 POS
333-42895
333-63103
333-107041
333-129923/
333-178095
333-151074/
333-196251
Pertaining to United Fire's employee stock purchase plan
Pertaining to United Fire's non-qualified employee stock option plan
Pertaining to the United Fire Group 401(k) plan
Pertaining to United Fire's 2005 non-qualified non-employee director stock
option and restricted stock plan
Pertaining to United Fire's Stock Plan
/s/ Ernst & Young LLP
Ernst & Young LLP
Des Moines, Iowa
February 28, 2017
EXHIBIT 23.2
Consent of Independent Actuary
We consent to the use of and reference to our name in the Annual Report on Form 10-K of United Fire Group, Inc.
(“United Fire”) for the year ended December 31, 2016 in Item 1, “Business” under the heading “Reserves” under the
subheading “Life Insurance Segment” and in Item 7, “Management's Discussion and Analysis of Financial
Condition and Results of Operations” under the subheading “Critical Accounting Policies” under the heading
“Independent Actuary” under “Future Policy Benefits and Losses, Claims and Loss Settlement Expenses - Life
Insurance Segment.” We also consent to the incorporation by reference of such use and reference into the
Registration Statements of United Fire described in the following table:
Registration Statement
Number
Form
Purpose
S-8, S-8 POS 333-42895
Pertaining to United Fire's employee stock purchase plan
S-8
333-63103
Pertaining to United Fire's non-qualified employee stock option plan
S-8, S-8 POS 333-107041
Pertaining to the United Fire Group 401(k) plan
S-8, S-8 POS
S-8, S-8 POS
333-129923/
333-178095
333-151074/
333-196251
Pertaining to United Fire's 2005 non-qualified non-employee director stock
option and restricted stock plan
Pertaining to United Fire's Stock Plan
February 28, 2017
/s/ Steve Griffith
Griffith, Ballard and Company
President
EXHIBIT 23.3
Consent of Independent Actuary
We consent to the use of and reference to our name in the Annual Report on Form 10-K of United Fire Group, Inc.
(“United Fire”) for the year ended December 31, 2016 in Item 1. “Business” under the heading “Reserves” under the
subheading “Property and Casualty Insurance Segment” and Item 7, “Management's Discussion and Analysis of
Financial Condition and Results of Operations” under the heading “Critical Accounting Policies” under the
subheadings “Incurred But Not Reported (IBNR) Reserves” and “Independent Actuary” under “Loss and Loss
Settlement Expenses - Property and Casualty Insurance Segment.” We also consent to the incorporation by reference
of such use and reference into the Registration Statements of United Fire described in the following table:
Registration Statement
Number
Form
Purpose
S-8, S-8 POS
333-42895
Pertaining to United Fire's employee stock purchase plan
S-8
S-8, S-8 POS
333-63103
333-107041
Pertaining to United Fire's non-qualified employee stock option plan
Pertaining to the United Fire Group 401(k) plan
S-8, S-8 POS
S-8, S-8 POS
333-129923/
333-178095
333-151074/
333-196251
Pertaining to United Fire's 2005 non-qualified non-employee director stock
option and restricted stock plan
Pertaining to United Fire's Stock Plan
February 28, 2017
/s/ Steven J. Regnier
Regnier Consulting Group, Inc.
Steven J. Regnier, President
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Randy A. Ramlo, certify that:
1.
I have reviewed this annual report on Form 10-K of United Fire Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Consolidated Financial Statements and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
GAAP;
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: February 28, 2017
/s/ Randy A. Ramlo
Randy A. Ramlo
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dawn M. Jaffray, certify that:
1.
I have reviewed this annual report on Form 10-K of United Fire Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Consolidated Financial Statements and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
GAAP;
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: February 28, 2017
/s/ Dawn M. Jaffray
Dawn M. Jaffray
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of United Fire Group, Inc. (the “Company”) on Form 10-K for the period
ending December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Randy A. Ramlo, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
Date: February 28, 2017
/s/ Randy A. Ramlo
Randy A. Ramlo
Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to United Fire Group, Inc. and
will be retained by United Fire Group, Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of United Fire Group, Inc. (the “Company”) on Form 10-K for the period
ending December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Dawn M. Jaffray, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
Date: February 28, 2017
/s/ Dawn M. Jaffray
Dawn M. Jaffray
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to United Fire Group, Inc. and
will be retained by United Fire Group, Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
UNITED FIRE GROUP, INC.
United Fire & Casualty Company
United Life Insurance Company
UFG Specialty Insurance Company
United Fire & Indemnity Company
United Fire Lloyds
Addison Insurance Company
Financial Pacific Insurance Company
Franklin Insurance Company
Lafayette Insurance Company
Mercer Insurance Company
Mercer Insurance Company of New Jersey, Inc.
Corporate Headquarters:
118 Second Avenue SE
Cedar Rapids, Iowa 52401
Telephone: 319-399-5700
ufgInsurance.com
©UFG 2017. All rights reserved.
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