In addition, three of our regional locations in Lock Haven, Pennsylvania, Pennington, New Jersey, and Rocklin, California, conduct operations in office space that we own. A portion of the Lock Haven (approximately 20.0 percent) office space is leased to tenants. We also own a tract of land adjacent to the Pennington office and a townhouse located near the Rocklin office that is used for corporate purposes.
The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy;
In 2010, we reported favorable reserve development on prior year claims of $45.9 million, which included $8.6 million in adverse development from Hurricane Katrina as a result of our continuing resolution of outstanding claims litigation.
As a result of our acquisition of Mercer Insurance Group, 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 multi-unit buildings, we have condominium and townhouse construction policy exclusions in all of 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 removed the continuous trigger with our designated work exclusion. In a majority of our small service, repair and remodel contractors program, we added a 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.
The following table details our annualized yield on average invested assets for 2012, 2011 and 2010, which is based on our invested assets (including money market accounts) at the beginning and end of the year divided by net investment income:
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, 2012:
If no event of default has occurred or is continuing to occur, and certain other conditions are satisfied, during the term of this credit facility, we have the right to increase the total facility from $100.0 million up to $125.0 million. The credit facility is available for general corporate purposes, including working capital, acquisitions and liquidity purposes. Principal of the credit facility is due in full at maturity, on December 22, 2015. The interest rate is based on our monthly choice of either a base rate or the London Interbank Offered Rate (“LIBOR”) plus, in each case, a
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. If pricing cannot be obtained from these sources, which occurs on a limited basis, management will perform an analysis of the contractual cash flows of the underlying security to estimate fair value.
To calculate the premium deficiency charge by line of business, we estimate expected losses and loss settlement expenses by calculating an expected loss and loss settlement expense ratio which is based on an analysis of actual experience of the line of business in recent years. This calculation is performed on a quarterly basis. 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.
We defer and amortize policy acquisition costs, with interest, on traditional life insurance policies, over the anticipated premium-paying period in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue. The expected total premium revenue is based upon the premium requirement of each policy and assumptions for mortality, morbidity, persistency and investment returns at policy issuance. These assumptions are not revised after policy issuance unless the recorded DAC asset is deemed to be unrecoverable from future expected profits. Absent a premium deficiency, variability in amortization after policy issuance is caused only by variability in premium volumes.
United Fire's internal actuary compares results from the most recent analysis of IBNR reserves (both internal and from Regnier). Senior management meets with our internal actuary and controller quarterly to review the adequacy of carried IBNR reserves based on results from these actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR for “normal” kinds 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 analyses.
Our intangible assets, which consist primarily of agency relationships, trade names, licenses, and software, are being amortized by the straight-line method over periods ranging from 2 years to 15 years, with the exception of licenses, which are indefinite-lived and not amortized. We did not recognize an impairment charge on our intangible assets in 2012, 2011 and 2010. Amortization expense, which is allocated to the property and casualty insurance segment, totaled $2,539, $1,922 and $60 for 2012, 2011 and 2010, respectively.
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 unrestricted stock and non-qualified stock options to non-employee directors.
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 equity securities as of December 31, 2012 and 2011.
The fair value of our Level 3 impaired securities was determined primarily based upon management’s assumptions regarding the timing and amount of future cash inflows. If a security has been written down or the issuer is in bankruptcy, management relies in part on outside opinions from rating agencies, our lien position on the security, general economic conditions and management’s expertise to determine fair value. We have the ability and the positive intent to hold securities until such time that we are able to recover all or a portion of our original investment. If there is no market for the impaired security at the balance sheet date, management will estimate the security’s fair value based on other securities in the market. Management will continue to monitor securities after the balance sheet date to confirm that their estimated fair value is reasonable.
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, 2012, for which collection is at risk that would result in a material impact on our Consolidated Financial Statements. The amount of reinsurance recoverable on paid losses totaled $4,669 and $3,272 at December 31, 2012 and 2011, respectively.
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 2012, 2011 and 2010, was $1,812, $1,092 and $2,074, respectively.
At December 31, 2012, we had 54,338 shares of restricted stock awards outstanding, of which 18,576 shares were granted in May 2008 at a fair market value of $33.43 per share, 29,360 shares were granted in February 2011 at a fair market value of $20.54 per share, which resulted in compensation expense that is recognized over a five year vesting period from the date of grant, and 6,402 shares were granted in May 2012 at a fair market value of $20.90 per share, which resulted in compensation expense that will be recorded over a one year vesting period. In 2012, 2011 and 2010 we recognized $329, $245 and $127, respectively, in compensation expense related to these awards. At December 31, 2012, we had $467 in compensation expense that has yet to be recognized through our results of operations related to these awards. The intrinsic value of the unvested restricted stock awards outstanding totaled $1,187 and $1,013 at December 31, 2012 and 2011, respectively.
Outstanding awards excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.
The credit agreement contains 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, these activities include 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 contains certain financial covenants including covenants that require us to maintain a minimum consolidated net worth, a debt to capitalization ratio and minimum stockholders' equity.
The estimated useful lives assigned to our major classes of amortizable intangible assets are as follows: