FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements about our operations,
anticipated performance and other similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of
1933 and the Securities Exchange Act of 1934 for forward-looking statements. The
forward-looking statements are not historical facts and involve risks and
uncertainties that could cause actual results to differ materially from those
expected and/or projected. Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about our company, the
industry in which we operate, and beliefs and assumptions made by management.
Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s),"
"believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "target(s),"
"forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will
continue," "might," "hope," "can" and other words and terms of similar meaning
or expression in connection with a discussion of future operations, financial
performance or financial condition, are intended to identify forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed in such forward-looking statements. Information concerning factors
that could cause actual results to differ materially from those in the
forward-looking statements is contained in Part II Item 1A, "Risk Factors" of
this document. Among the factors that could cause our actual outcomes and
results to differ are:
• The frequency and severity of claims, including those related to catastrophe
losses, and the impact those claims have on our loss reserve adequacy.
• Developments in the domestic and global financial markets that could affect
our investment portfolio and financing plans.
• The calculation and recovery of deferred policy acquisition costs ("DAC").
• The valuation of pension and other postretirement benefit obligations.
• Our relationship with our agencies and agents.
• Our relationship with our reinsurers.
• The financial strength rating of our reinsurers.
• Changes in industry trends and significant industry developments.
• Our exposure to international catastrophes through our assumed reinsurance
program.
• 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.
• NASDAQ policies or regulations relating to corporate governance and the cost
to comply.
These are representative of the risks, uncertainties, and assumptions that could
cause actual outcomes and results to differ materially from what is expressed in
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this report
or as of the date they are made. Except as required under the federal securities
laws and the rules and regulations of the Securities and Exchange Commission, we
do not have any intention or obligation to update publicly any forward-looking
statements, whether as a result of new information, future events, or otherwise.
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CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are defined as those that are representative of
significant judgments and uncertainties and that potentially may result in
materially different results under different assumptions and conditions. We base
our discussion and analysis of our results of operations and financial condition
on the amounts reported in our Consolidated Financial Statements, which we have
prepared in accordance with GAAP. As we prepare these Consolidated Financial
Statements, we must make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses for the reporting period. We evaluate our estimates on an
ongoing basis. We base our estimates on historical experience and on other
assumptions that we believe to be reasonable under the circumstances. Actual
results could differ from those estimates. Our critical accounting estimates
are: the valuation of investments; the valuation of reserves for losses, claims,
and loss settlement expenses and the related valuation of reinsurance
recoverable on paid and unpaid losses; the valuation of reserves for future
policy benefits; the calculation of the deferred policy acquisition costs asset;
the recoverability of goodwill and other intangible assets; and the valuation of
pension and postretirement benefit obligations. These critical accounting
estimates are more fully described in our Management's Discussion and Analysis
of Results of Operations and Financial Condition presented in our Annual Report
on Form 10-K for the year ended December 31, 2011.
INTRODUCTION
The purpose of the Management's Discussion and Analysis is to provide an
understanding of our results of operations and consolidated financial position.
Our Management's Discussion and Analysis should be read in conjunction with our
consolidated financial statements and related notes, including those in our
Annual Report on Form 10-K for the year ended December 31, 2011. When we provide
information on a statutory basis, we label it as such, otherwise, all other data
is presented in accordance with GAAP.
This discussion and analysis is presented in these sections:
• Our Business
• Consolidated Financial Highlights
• Results of Operations for Property and Casualty Insurance, Life Insurance
and Investment Portfolio
• Liquidity and Capital Resources
• Measurement of Results
OUR BUSINESS
Founded in 1946 as United Fire & Casualty Company, we provide insurance
protection for individuals and businesses through several regional companies. We
are licensed as a property and casualty insurer in 43 states plus the District
of Columbia and are represented by more than 1,200 independent agencies. Our
life insurance subsidiary is licensed in 36 states and is represented by more
than 900 independent agencies.
Segments
We operate two business segments, each with a wide range of products:
• property and casualty insurance, which includes commercial insurance,
personal insurance, surety bonds and assumed insurance; and
• life insurance, which includes deferred and immediate annuities, universal
life products and traditional life (primarily single premium whole life
insurance) products.
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We manage these business segments separately, as they generally do not share the
same customer base, and each has different products, pricing, and expense
structures.
For the six-month period ended June 30, 2012, property and casualty business
accounted for 90.7 percent of our net premiums earned, of which 89.7 percent was
generated from commercial lines. Life insurance business made up 9.3 percent of
our net premiums earned, of which 68.7 percent was generated from traditional
life insurance products.
Pooling Arrangement
All of our property and casualty insurance subsidiaries, with the exception of
Texas General Indemnity Company, are members of an intercompany reinsurance
pooling arrangement. The insurance entities of Mercer Insurance Group
participated in their own pooling arrangement in 2011, which was in place when
we acquired Mercer Insurance Group on March 28, 2011. Effective January 1, 2012,
one pooling arrangement covers all participating insurance subsidiaries of
United Fire Group, Inc. 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.
Geographic Concentration
For the six-month period ended June 30, 2012, more than half of our property and
casualty direct premiums were written in Iowa, Texas, California, New Jersey,
and Missouri, and over three-fourths of our life insurance premiums, excluding
annuities, were written in Iowa, Nebraska, Illinois, Wisconsin, and Minnesota.
Segment Revenue and Expense
We evaluate segment profit or loss based upon operating and investment results.
Segment profit or loss described in the following sections of the Management's
Discussion and Analysis is reported on a pre-tax basis. Additional segment
information is presented in Part I, Item 1, Note 6 "Segment Information" to the
unaudited Consolidated Financial Statements.
Our primary sources of revenue are premiums and investment income. Major
categories of expenses include losses and loss settlement expenses, future
policy benefits, operating expenses and interest on policyholders' accounts.
Profit Factors
The profitability of our company is influenced by many factors, including price,
competition, economic conditions, interest rates, catastrophic events and other
natural disasters, man-made disasters, state regulations, court decisions, and
changes in the law. Unless a connection between future increased extreme weather
events and climate change is ultimately proven true, management believes that
climate change considerations will not have a material impact on our
profitability.
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, and effective and efficient use of technology.
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CONSOLIDATED FINANCIAL HIGHLIGHTS
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2012 2011 % 2012 2011(1) %
Revenues
Net premiums earned $ 170,090 $ 152,210 11.7 % $ 331,593 $ 266,414 24.5 %
Investment income, net
of investment expenses 28,749 27,741 3.6 57,895 54,804 5.6
Net realized investment
gains
Other-than-temporary
impairment charges (4 ) - NM(2) (4 ) - NM(2)
All other net realized
gains 568 1,124 (49.5 ) 3,362 3,777 (11.0 )
Net realized investment
gains 564 1,124 (49.8 ) 3,358 3,777 (11.1 )
Other income 243 729 (66.7 ) 499 885 (43.6 )
$ 199,646 $ 181,804 9.8 % $ 393,345 $ 325,880 20.7 %
Benefits, Losses and
Expenses
Losses and loss
settlement expenses $ 106,766 $ 135,811 (21.4 )% $ 198,250 $ 211,993 (6.5 )%
Future policy benefits 8,356 7,880 6.0 18,494 16,062 15.1
Amortization of deferred
policy acquisition costs 34,179 43,732 (21.8 ) 68,730 69,778 (1.5 )
Other underwriting
expenses 20,541 14,720 39.5 42,535 30,777 38.2
Interest on
policyholders' accounts 10,627 10,657 (0.3 ) 21,283 21,327 (0.2 )
$ 180,469 $ 212,800 (15.2 )% $ 349,292 $ 349,937 (0.2 )%
Income (loss) before
income taxes $ 19,177 $ (30,996 ) 161.9 % $ 44,053 $ (24,057 ) NM(2)
Federal income tax
expense (benefit) 4,461 (13,082 ) 134.1 10,153 (11,953 ) 184.9 %
Net income (Loss) $ 14,716 $ (17,914 ) 182.1 % $ 33,900
$ (12,104 ) NM(2)
(1) The information presented for 2011 includes Mercer Insurance Group's results
after the March 28, 2011 acquisition date.
(2) Not meaningful.
The following is a summary of our financial performance for the three- and
six-month periods ended June 30, 2012:
