The following table shows a brief description of our owned and leased office space as of December 31, 2013. We believe our current facilities are adequate to meet our needs with additional space available for future expansion, if necessary, at each of our owned and leased facilities:
(1) Our Gulf Coast Regional office relocated from Galveston, Texas to Webster, Texas in January 2014.
Originally founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. (“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 43 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 1,000 independent agencies.
For 2013, approximately 50.0 percent of our property and casualty direct written premiums were written in Texas, Iowa, California, New Jersey, and Missouri; approximately 75.0 percent of our life insurance premiums were written in Iowa, Illinois, Minnesota, Wisconsin and Nebraska.
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.
(1) The information presented for 2011 and after includes Mercer Insurance Group’s results after the March 28, 2011 acquisition date.
In 2013, we continued to expand the geographical footprint of our life insurance subsidiary by receiving approval to operate in Nevada, after receiving approval in 2012 to operate in California, Maryland and Delaware and approval in 2011 to operate in New Jersey, North Carolina, Pennsylvania, Virginia and West Virginia, further leveraging the Mercer Insurance Group acquisition. Our life management team continues to improve service to our agents by increasing marketing support and automating life product processes.
During 2012 the increase in net income was driven by growth in property and casualty premium revenue and a reduction in the combined ratio. The reduction in the combined ratio resulted from lower catastrophe losses as well as improvement in non-catastrophe loss experience. In addition, the combined ratio improved due to an improvement in the expense ratio.
Net premiums earned increased to $695.0 million, compared to $586.8 million for the same period of 2011 due in part to the acquisition of Mercer Insurance Group in March 2011, which accounted for $34.9 million of additional earned premium. Our organic growth was $73.3 million over the same period of 2011.
During 2011, we began the process of integrating Mercer Insurance Group into our operations. The integration of the West Coast business of Mercer Insurance Group’s policy renewals into our processing systems was completed in 2012. We began the integration of the East Coast policy renewals into our processing systems which are on schedule to be completed at the end of 2015. In addition, effective January 1, 2012, we consolidated Mercer Insurance Group’s core and catastrophe reinsurance programs into our programs, resulting in increased coverage and reduction in Mercer Insurance Group’s historical costs.
(2) 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.
(3) The GAAP 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. The statutory expense ratio is calculated in a similar fashion as GAAP but uses net premium written instead of net premium earned.
(4) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.
For the year ended December 31, 2012, our property and casualty insurance segment reported income before income taxes of $36.1 million compared to losses before income taxes of $24.2 million in the same period in 2011. The increase in income before income taxes during 2012 as compared to 2011 is primarily a result of a 17.9 percent
increase in net premiums earned, a decrease in catastrophe losses, and a decrease in amortization of deferred policy acquisition costs, partially offset by an increase in underwriting expenses, and an increase in loss and loss settlement expenses.
The following table shows our premiums written and earned for 2013, 2012 and 2011:
Direct premiums written increased $72.2 million in 2013 as compared to 2012 primarily due to organic growth and is the result of a combination of rate increases across most commercial and personal lines and new business writings.
Assumed premiums written increased $1.8 million in 2013 as compared to 2012 due to pricing increases in recent years, the addition of two new assumed programs and the renewal of our participation levels in all but one of our active assumed programs. We added two new programs to replace the lost premium from the program not renewed and to take advantage of areas where we had exposure capacity. One of the new programs has worldwide exposure and the other has exposure in the United Kingdom and Japan.
Direct and assumed premiums written are reduced by the ceded premiums that we pay to reinsurers. For 2013, ceded premiums written increased slightly compared to 2012 due to premium rate increases.
Our 2012 losses included Super Storm Sandy, which occurred in October 2012, which represented $25.0 million ($20.0 million direct and $5.0 million assumed) of incurred losses and 26 other catastrophes, where our largest single pre-tax catastrophe loss totaled $12.3 million.
In 2012, our loss and loss settlement expenses were affected by catastrophe losses of $64.7 million in both our direct business and assumed reinsurance business as compared to $80.8 million in 2012. Our non-catastrophe results also improved, which is reflected in our favorable development of reserves established for claims that occurred in prior years of $73.4 million.
We experienced favorable reserve development in all lines of business with the exception of assumed reinsurance which adversely developed as a result of additional reported losses of $4.6 million on 2011 catastrophe activity, and direct commercial multi-peril, which experienced a slight deficiency. Other liability and products liability had a reduction in legal expenses as a result of an initiative we implemented in 2009, and an overall improvement in our underwriting results.
In 2011, our loss and loss settlement expenses were affected by significant catastrophe activity in both our direct business and assumed reinsurance business. However, our non-catastrophe results improved, which is reflected in our favorable development of reserves established for claims that occurred in prior years of $61.1 million, which included $6.5 million in adverse development from Hurricane Katrina as a result of our continuing resolution of outstanding claims litigation.
We experienced favorable reserve development in all lines of business with the exception of assumed reinsurance which adversely developed as a result of additional reported losses of $4.6 million on 2010 catastrophe activity, and direct commercial multi-peril, which experienced a slight deficiency. Our other liability and products liability lines had significant decreases in losses as a result of a lower level of required reserves for IBNR losses in 2011, a reduction in our legal expenses as a result of an initiative we implemented in 2009, and an overall improvement in our underwriting results.
When establishing reserves and monitoring reserve adequacy, we analyze historical data and consider the potential impact of various loss development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long-tail lines these factors can change over the course of the settlement of the claim. However there is no precise method for evaluating the specific dollar impact of any individual factor on the development of reserves.
The significant driver of the favorable reserve development in 2012 was the other liability line which contributed $53.9 million of the total. The favorable development is generally caused by changes in loss development patterns due to many of the factors cited above. Specifically, we observed a continuation of a trend, started in 2011, reducing the overall number of reported new construction defect claims and lower than expected loss emergence on known claims. In addition, in 2009 management began an initiative to control legal defense costs. As these costs are a significant component of the carried reserves for the other liability line, management believes this initiative is also contributing to the favorable reserve development trends.
Reserves for all other lines of business, with the exception of assumed reinsurance, experienced favorable reserve development in 2012, only to a lesser extent than the other liability line. We attribute this remaining development to the factors noted above. Our assumed reinsurance line was impacted by adverse reserve development on prior year catastrophes of $8.4 million, with $3.9 million coming from accident year 2011 (Japan earthquake and tsunami, Thailand flood, and Christchurch, New Zealand earthquake) and $4.7 million from accident year 2010 (Canterbury, New Zealand earthquake).
In 2011, we experienced favorable reserve development of $61.1 million for reserves established for claims that occurred in prior years. The majority of this favorable development is related to our long-tail lines of commercial business including other liability, workers’ compensation and auto liability.
The significant driver of the favorable reserve development in 2011 was the other liability line which contributed $49.0 million of the total. The favorable development is generally caused by changes in loss development patterns due to many of the factors cited above. Specifically, we have observed an overall reduction in reported new construction defect claims and less than expected loss emergence on known claims. In addition, in 2009 management began an initiative to control legal defense costs. As these costs are a significant component of the carried reserves for the other liability line, management believes this initiative is also contributing to the favorable reserve development trends.
Our commercial automobile liability line developed favorably in 2011 and contributed $10.9 million of the total. The favorable reserve development is generally caused by changes in loss development patterns due to many of the factors cited above. Specifically, we have observed a lower level of latent claim development.
The following table depicts our net loss ratio for 2013, 2012 and 2011:
The net loss ratio in our commercial lines of business, excluding assumed reinsurance, improved to 62.7 percent in 2013 from 66.5 percent in 2012 and 71.3 percent in 2011. The improvement in 2013 as compared to 2012 was primarily the result of an increase in net premiums earned and a reduction in catastrophe losses.
The improvement in 2012 as compared to 2011 was primarily the result of an increase in net premiums earned and a reduction in catastrophe losses.
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.
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
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 2013 as compared to 2012 was the result of an increase in claim frequency.
In 2013, our claims frequency decreased along with a release of IBNR reserves as a result of actual emergence of paid losses being less than expected. This resulted in the negative loss ratio in 2013.
During 2013 and 2011, there were no claims that exceeded our $1.5 million reinsurance retention level. During 2012, there was one claim that exceeded our $1.5 million reinsurance retention level.
Our personal lines consist primarily of fire and allied lines (including homeowners) and automobile lines. In 2013, catastrophe activity decreased resulting in a decrease in the net loss ratio as compared to 2012. Net premiums earned were up 4.5% as compared to 2012. Rate increases in the fire and allied lines are the primary driver of the increased premium while retention remained relatively unchanged.
While catastrophe activity remained elevated in 2012, primarily due to Super Storm Sandy, personal lines results improved as catastrophe losses decreased compared to 2011. Personal lines pricing remained consistent in 2012, with increases for homeowners’ line of business and personal auto line of business. Policy retention rates remained strong, up slightly during the year as compared to 2011.
We will continue pursuing opportunities to grow our personal lines business in the future. We have added within our CATography™ Underwriter tool the ability to determine whether the premium we charge for an exposure is adequate in areas where hurricanes and earthquakes occur. Some initiatives that we hope to implement include predictive analytics for the homeowners and automobile lines and data prefill, which 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.
Our assumed reinsurance is the business we choose to write by participating in programs insuring insurance companies. The net loss ratio in 2013 improvement was driven by the decrease in catastrophe losses. The net loss ratio in 2012 was impacted by catastrophe losses associated with Super Storm Sandy as well as the adverse reserve development from Thailand floods. The net loss ratio in 2011 was impacted by significant losses from natural disasters, including catastrophes in New Zealand and Japan.
United Life Insurance Company 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 (65.6 percent), traditional life products (24.7 percent), universal life products (8.4 percent), and other life products (1.3 percent) comprised our 2013 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 $13.2 million in 2013 compared to $10.0 million in 2012 and $11.5 million in 2011. The increase in net income before income taxes is primarily a result of a decrease in interest on policyholders’ accounts which is due to an increase in net withdrawals of annuity products and a smaller change in the liability for future policy benefits as a result of a decline in sales of single premium whole life products. These were partially offset by a decrease in net investment income as explained in more detail in the following paragraph.
Underwriting expenses decreased 7.3 percent in 2013 as compared to 2012 due to a decrease in single premium whole life commissions related to the decrease in premiums as previously mentioned.
We reported a federal income tax expense (benefit) of $25.8 million, $5.9 million and $(12.7) million in 2013, 2012, and 2011, respectively. The benefit in 2011 resulted from a taxable loss in our property and casualty insurance operations. 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.
In 2013, the financial markets and economy were again aided by the Federal Reserve (the “FED”), which took the lead in supporting financial markets and moving the economy forward by means of its accommodative monetary policy. Since the 2008-2009 financial market crises, the FED’s policy tools have consisted of (1) keeping short-term rates near zero percent, (2) intermittent bond buying programs (i.e., quantitative easing or “QE”), and (3) greater transparency and communication on future decisions. The FED’s use of these tools has had a profound impact on investment returns, including in 2013. In early May, FED Chairman Ben Bernanke sparked a significant sell-off in U.S. Treasuries by declaring the central bank could potentially reduce the amount of asset purchases going forward (i.e., “tapering”). As investors speculated in the weeks that followed on when and how much the FED would taper, economic data, though mixed, began pointing towards a deeper, more sustainable recovery. Rates moved higher through the remainder of the year with the 10 year Treasury reaching 3.0 percent in September 2013 and again at end of the year. Overall, the increase in rates may be helpful, but investment yields still remain near historic lows given the high demand for income-producing assets. Equity markets produced large, broad-based returns, but this rally may not be sustainable. As markets transition to a less accommodative FED, underlying economic fundamentals will begin to have an increasing impact on the movement of both interest rates and equity valuations. We believe the balance of risks in our portfolio are appropriate and well-positioned given current market dynamics and opportunities.
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.
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, 2013 and 2012. 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.
Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement used to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments
The weighted average effective duration of our portfolio of fixed maturity securities, at December 31, 2013, was 5.0 years compared to 4.0 years at December 31, 2012.
The weighted average effective duration of our portfolio of fixed maturity securities, at December 31, 2013 was 5.0 years compared to 4.0 years at December 31, 2012.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at December 31, 2013, 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 our property and casualty insurance segment, an increase in the value of our investments in limited liability partnerships contributed to the increase of 10.6 percent in net investment income in 2013, compared with the same period of 2012. The increases were somewhat offset by the impact of low investment yields. Our property and casualty insurance segment holds certain investments in limited liability partnerships that are recorded on the equity method of accounting, with changes in the value of these investments recorded in investment income.
Interest rate risk is the price sensitivity of a fixed maturity security or portfolio of securities to changes in interest rates. We invest in fixed maturity and other interest rate sensitive securities. 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 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.
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 the investment portfolio under varying market interest rate scenarios. Duration can then be recalculated at the differing levels of projected cash flows.
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, 2013:
We base our investment decisions on the credit characteristics of individual securities; however, we have within our municipal bond portfolio a 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. A downgrade in the credit ratings of the insurers of these securities in 2013 and 2012 resulted in a corresponding downgrade in the ratings of the securities. Of the insured municipal securities in our investment portfolio, 94.9 percent and 95.0 percent were rated single “A” or above, and 83.8 percent and 88.9 percent were rated “AA” or above at December 31, 2013 and 2012, 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.
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.
The following table displays a summary of cash sources and uses in 2013, 2012 and 2011:
Net cash flows provided by operating activities totaled $161.5 million, $172.1 million and $74.4 million in 2013, 2012 and 2011, respectively. Operating cash flows in 2013 reflect an increase in net withdrawals of annuity products offset by a higher level of property and casualty premiums collected and a lower level of property and casualty loss payments. Operating cash flows in 2012 reflect a higher level of property and casualty premiums collected, and a lower level of property and casualty loss payments from the prior year. Operating cash flows in 2011 reflected a higher level of loss and loss settlement expense payments, and a lower level of investment income received compared to prior year.
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.
Net cash flows used in investing activities totaled $102.0 million, $111.3 million and $175.2 million in 2013, 2012 and 2011, respectively. In 2013, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments that totaled $508.3 million compared to $555.6 million and $610.0 million for the same period in 2012 and 2011, respectively. The cash inflows over the last three years primarily relate to redemptions of fixed maturity securities that are reinvested at lower interest rates as interest rates have been declining during this period.
Net cash flows provided by (used in) financing activities totaled $(74.8) million, $(97.8) million and $65.2 million in 2013, 2012 and 2011, respectively. In 2013 we had $58.6 million of net annuity withdrawals. In 2012, we repaid the remaining balance of $45.0 million outstanding on our credit facility and we also fully repaid the $15.6 million of trust preferred securities previously issued by Mercer Insurance Group. In the first quarter of 2011, we borrowed $79.9 million to partially finance the purchase of Mercer Insurance Group.
Dividends paid to shareholders totaled $17.5 million, $15.3 million and $15.5 million in 2013, 2012 and 2011, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
During 2013, 2012 and 2011, pursuant to authorization by our Board of Directors, we repurchased 59,603; 340,159; and 702,947 shares of our common stock respectively, which used cash totaling $1.6 million in 2013, $7.3 million in 2012 and $12.4 million in 2011. At December 31, 2013, we were authorized to purchase an additional 1,070,117 shares of our common stock under our share repurchase program, which expires in August 2014.
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. As of December 31, 2013, we have not been in default and were in compliance with all covenants of the credit agreement.
Stockholders’ equity increased 7.4 percent to $782.8 million at December 31, 2013, from $729.2 million at December 31, 2012. The increase was primarily attributable to net income of $76.1 million offset by a decrease in net unrealized investment gains of $27.5 million, net of tax, and by stockholder dividends of $17.5 million. As of December 31, 2013, the book value per share of our common stock was $30.87, compared to $28.90 at December 31, 2012.
assumptions made at the time of the actuarial valuations and maintaining certain funding levels relative to regulatory requirements. Contributions in 2014, and in future years, are expected to be at least equal to the IRS minimum required contribution in accordance with the Act.
We value our available-for-sale fixed maturity, trading securities, equity securities, short-term investments and money market accounts at fair value in accordance with the current accounting guidance on fair value measurements. We exclude unrealized appreciation or depreciation on investments carried at fair value, with the exception of trading securities, from net income, and report it, net of applicable deferred income taxes, as a component of accumulated other comprehensive income in stockholders’ equity.
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
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
Transfers between levels, if any, are recorded as of the beginning of the reporting period.
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. In our opinion, the pricing obtained at December 31, 2013 was reasonable.
In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors’ pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications which are consistent with the applicable accounting guidance on fair value measurements.
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 a cash flow analysis using an appropriate risk-adjusted discount rate on the underlying security to estimate fair value.
At December 31, 2013 and 2012, we had a number of securities where fair value was less than our cost basis. The total unrealized loss on these securities was $59.8 million at December 31, 2013, compared with $4.6 million at December 31, 2012. At December 31, 2013, the largest pre-tax unrealized loss on an individual equity security was $0.1 million. Our rationale for not recording OTTI charges on these securities is discussed in Part II, Item 8, Note 2 “Summary of Investments.”
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. At December 31, 2013 and 2012, our DAC asset was $67.7 million and $64.9 million, respectively.
Costs that vary with and relate to the successful acquisition of life insurance and annuity business are deferred. Such costs consist principally of commissions and related variable underwriting, agency and policy issue expenses. At December 31, 2013 and 2012, our DAC asset was $82.4 million and $40.4 million, respectively.
As discussed in the Property and Casualty Segment, the DAC asset was impacted by a change in accounting guidance that limits the amount of underwriting expenses eligible for deferral. We prospectively adopted the new accounting guidance effective January 1, 2012 that resulted in the recognition of $1.6 million of additional expense in 2012 in our life insurance segment. The 2013 DAC asset has been computed on a comparable basis at December 31, 2013 and 2012.
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. 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.
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 components of expected gross profits include investment spread, mortality and expense margins and surrender charges. Of these factors, we anticipate that assumptions for investment returns, expenses and persistency are reasonably likely to have a significant impact on the rate of DAC amortization each year.
estimate expected gross profits would have on the DAC asset for our non-traditional business recorded as of December 31, 2013. The entire impact of the changes illustrated would be recognized through income as an increase or decrease to amortization expense:
Loss and Loss Settlement Expenses - Property and Casualty Insurance Segment
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.
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 analyses and makes adjustments for changes in business and other factors not completely captured by the actuarial analyses. 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 analyses.
As an example, if our loss and loss settlement expense reserves of $960.7 million as of December 31, 2013, is 10.0 percent inadequate, we would experience a reduction in future pre-tax earnings of up to $96.1 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. Our approach is consistent year-to-year and produces a reasonable range of reserves that is better than experiencing year-to-year uncertainty as to the adequacy of our reserves.
In 2013, we did not change the key assumptions on which we based our reserving calculations. In estimating our 2013 loss and loss settlement expense reserves, we did not anticipate future events or conditions that were inconsistent with past development patterns.
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, 2013 and 2012, we had $4.6 million and $1.7 million, respectively, in direct and assumed asbestos and environmental loss reserves. In addition, we had ceded asbestos and environmental loss reserves of $3.5 million and $0.4 million at December 31, 2013 and 2012, respectively. 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.
In 2013, 2012 and 2011, we recognized a favorable development in our net reserves for prior accident years totaling $57.5 million, $73.4 million and $61.1 million, respectively.
Based upon our comparison of carried reserves to actual claims experience over the last several years, we believe that using company 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 “Results of Operations” section in this Item.
We engage an independent actuarial firm to render an opinion as to the reasonableness of the statutory reserves internal management establishes. During 2013 and 2012, 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 2014.
We engage an independent actuarial firm to render an opinion as to the reasonableness of the statutory reserves we establish. Statutory reserves are established using considerably more conservative assumptions regarding future investment earnings and contractual benefit payments than are used for GAAP reserves. During 2013 and 2012, 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 2014.
In addition, for the postretirement benefit plan, a 100 basis point increase in the medical trend rate would increase the postretirement benefit obligation at December 31, 2013, by $6.8 million, while a 100 basis point decrease in the medical trend rate would decrease the benefit obligation at December 31, 2013, by $8.3 million.
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This new guidance is effective for annual and interim periods beginning after December 15, 2013. The Company currently does not have any liability for unrecognized tax benefits. Therefore, the adoption of the new guidance in not expected to have an impact on the Company’s financial position or results of operations.
We have accounted for the Reorganization as a merger of entities under common control, which is similar to the former “pooling of interests method” to account for business combinations. Accordingly, the accompanying Consolidated Financial Statements include the consolidated financial position and results of operations of United Fire & Casualty Company on the same basis as was historically presented, except that the amount reported for common stock at par value has been retrospectively restated to report the par value of United Fire Group, Inc. common stock. The resulting difference has been recorded in additional paid-in capital for all periods presented.
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 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”).
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
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.
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, 2013 and 2012, are securities on deposit with, or available to, various regulatory authorities as required by law, with fair values of $1,620,505 and $1,736,466, respectively.
In 2013, 2012, and 2011, we made payments for income taxes of $13,628, $11,920 and $570, respectively. In addition, we received federal tax refunds of $8,744 and $15,798 in 2013 and 2012, respectively, that resulted from the utilization of our 2009 net operating losses and net capital losses in the carryback period. No tax refunds were received in 2011. We made no interest payments in 2013. In 2012 and 2011, we made interest payments of $961 and $1,926, respectively. These payments exclude interest credited to policyholders’ accounts.
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, or “shadow” DAC, to net unrealized investment appreciation as of the balance sheet date. The “shadow” DAC adjustment increased the DAC asset by $3,407 and decreased the DAC asset by $38,695 at December 31, 2013 and 2012, respectively.
Depreciation expense totaled $4,391, $5,440 and $3,661 for 2013, 2012 and 2011, respectively.
Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by and dividends to stockholders.
In February 2013, the FASB issued guidance that requires significant items that are reclassified out of accumulated other comprehensive income (“AOCI”) to net income in their entirety in the same reporting period, to be reported to show the effect of the reclassifications on the respective line items of the statement where net income is presented. These reclassifications can be presented either on the face of the statement where net income is presented or in the notes to the financial statements. For items that are not reclassified to net income in their entirety in the same reporting period a cross reference to other disclosures currently required under GAAP is required in the notes to the financial statements. The new guidance also requires companies to report changes in the accumulated balances of each component of AOCI. This new guidance was effective for annual and interim periods beginning after December 15, 2012. The Company adopted the new guidance effective January 1, 2013. The adoption of the new guidance affects presentation only and therefore had no impact on the Company’s results of operations or financial position.
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This new guidance is effective for annual and interim periods beginning after December 15, 2013. The Company currently does not have any liability for unrecognized tax benefits. Therefore, the adoption of the new guidance is not expected to have an impact on the Company’s financial position or results of operations.
The proceeds and gross realized gains (losses) on the sale of available-for-sale securities for 2013, 2012 and 2011, were as follows:
There were no sales of held-to-maturity securities in 2013, 2012 and 2011.
A summary of changes in net unrealized investment appreciation for 2013, 2012 and 2011, is as follows:
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 which resulted in the recognition of a $139 and $395 credit loss OTTI in our Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2013 and 2011, respectively. There were no OTTI losses on fixed maturity securities recognized in 2012. 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 intent to sell and it is more likely than not that we will not be required to sell these securities until the fair value recovers to at least equal our cost basis or the securities mature.
We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the specific asset or liability.
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 agreement. 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.
Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The values of the partnerships are determined by the fund managers primarily based on the fair value of the underlying investments held. In management’s opinion, these values represent fair value.
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 of experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.
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. In our opinion, the pricing obtained at December 31, 2013 and 2012 was reasonable.
For the year ended December 31, 2013, 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. There were no transfers of securities between Level 1 and Level 2 during the period.
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 a cash flow analysis, using an appropriate risk-adjusted discount rate, on the underlying security to estimate fair value.
The following table provides a summary of the changes in fair value of our Level 3 securities for 2012:
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, 2013, 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 $6,090 and $4,669 at December 31, 2013 and 2012, respectively.
Premiums and loss and loss settlement expenses related to our ceded and assumed business are as follows:
In 2011, we renewed our participation in all of our assumed programs, while increasing the participation level on one contract, that generated the growth of our assumed premiums written and earned. Loss and loss settlement expenses were higher than historical levels due to several natural disasters, primarily in New Zealand and Japan, that impacted our assumed program.
(1) On August 1, 2011, Mercer Insurance Group’s reinsurance retention and limits were changed to match those of the Company.
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.
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. We believe that all of our reinsurers are in an acceptable financial condition. Approximately 99.0 percent of ceded life insurance in force as of December 31, 2013, has been ceded to five reinsurers.
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 (“IBNR”), 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, which are based on management’s best estimates. 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 following table provides an analysis of changes in our property and casualty loss and loss settlement expense reserves for 2013, 2012 and 2011 (net of reinsurance amounts):
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 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.
Reserves for all other lines of business, with the exception of assumed reinsurance, experienced favorable reserve development in 2012, only to a lesser extent than the other liability line. We attribute this remaining development to the factors noted above. Our assumed reinsurance line was impacted by adverse reserve development on prior year catastrophes from accident year 2011 (Japan earthquake and tsunami, Thailand flood, and Christchurch, New Zealand earthquake) and from accident year 2010 (Canterbury, New Zealand earthquake).
The significant driver of the favorable reserve development in 2011 was the other liability line. The favorable development is generally caused by changes in loss development patterns due to many of the factors cited above. Specifically, we have observed an overall reduction in reported new construction defect claims and less than expected loss emergence on known claims. In addition, in 2009 management began an initiative to control legal defense costs. As these costs are a significant component of the carried reserves for the other liability line, management believes this initiative is also contributing to the favorable reserve development trends.
Our commercial automobile liability line developed favorably in 2011. The favorable reserve development is generally caused by changes in loss development patterns due to many of the factors cited above. Specifically, we have observed a lower level of latent claim development.
Reserves for all other lines of business, with the exception of assumed reinsurance, experienced favorable reserve development in 2011, only to a lesser extent than the other liability line. We attribute this remaining development to the factors noted above. Our assumed reinsurance line was impacted by adverse reserve development on prior year catastrophes from accident year 2010 (Canterbury, New Zealand earthquake).
Statutory capital and surplus in regards to policyholders at December 31, 2013, 2012 and 2011 and statutory net income for the years then ended are as follows:
A majority of our custodial assets are subject to a tri-party agreement between one of our subsidiary companies, United Life Insurance Company (“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.
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 2013, 2012 and 2011. 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, certain fair value adjustments related to the acquisition of Mercer Insurance Group are recorded for GAAP and not recorded for statutory accounting, 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.
The alternative minimum tax (“AMT”) credit carryforward of $476 has an indefinite life. We expect to realize the benefits from the AMT credit carryforward and the NOL other than as noted above.
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 $6,260 to the pension plan in 2014.
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 retiree health and dental benefit plan (the “postretirement benefit plan”). The postretirement benefit plan provides health and dental benefits to our retirees (and covered dependents) who have met the service and participation requirements stipulated by the postretirement benefit plan. The third party administrators for the postretirement 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 postretirement benefit plan in the accompanying Consolidated Balance Sheets.
The investments held by the pension plan at December 31, 2013, include the following asset categories:
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, 2013 and 2012, by asset category:
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.
The fair value of the arbitrage fund is 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.
Increasing interest rates resulted in a significant increase in the discount rates we use to value our respective plan’s benefit obligations at December 31, 2013 compared to December 31, 2012. As a result, the valuation of the benefit obligations has decreased, which has increased the funded status of those plans as disclosed later in this section.
The following table displays the effect that the unrecognized prior service cost and unrecognized actuarial loss of our plans had on AOCI, as reported in the accompanying Consolidated Balance Sheets:
We anticipate amortization of the net actuarial losses for our pension plan in 2014 to be $2,174. We anticipate amortization of the net actuarial losses for our postretirement benefit plan in 2014 to be $898.
the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the 2008 Stock Plan. Pursuant to the 2008 Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees who are in positions of substantial responsibility with United Fire.
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, 2013, we had 103,912 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. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Plan.
In 2013, 2012, and 2011, we recognized stock-based compensation expense of $1,777, $1,764 and $1,829, respectively.
As of December 31, 2013, we had $3,272 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.
The analysis below details the award activity for 2013 and the awards outstanding at December 31, 2013, for both of our plans and ad hoc options, which were granted prior to the adoption of the other plans:
Intrinsic value is the difference between our share price on the last day of trading (i.e., December 31, 2013) 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 $1,383, $229 and $35 in 2013, 2012 and 2011, respectively.
The analysis below details the award activity for the restricted stock awards outstanding at December 31, 2013:
We write both commercial and personal lines of property and casualty insurance. We focus on our commercial lines, which represented 90.5 percent of our property and casualty insurance premiums earned for 2013. Our personal lines represented 9.5 percent of our property and casualty insurance premiums earned for 2013.
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
Life insurance in force, before ceded reinsurance, totaled $5,300,209 and $5,206,087 as of December 31, 2013 and 2012, respectively. Traditional life insurance products represented 66.7 percent and 65.4 percent of our insurance in-force at December 31, 2013 and 2012, respectively. Universal life insurance represented 28.4 percent and 29.8 percent of insurance in force at December 31, 2013 and 2012, respectively.
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 our selected unaudited quarterly financial information:
During the term of this credit agreement, we have 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 is available for general corporate purposes, including working capital, acquisitions and liquidity purposes. Any principal outstanding under 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 calculated margin amount. A commitment fee on each lender’s unused commitment under the credit facility is also payable quarterly.
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 carrying value of our goodwill was $15,091 at both December 31, 2013 and 2012, respectively. The goodwill is fully allocated to our property and casualty insurance segment.
(1) The intangible asset for licenses has an indefinite life and therefore is not amortized.
The excess of the purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed through the acquisition of Mercer Insurance Group at the acquisition date has been allocated to goodwill and intangible assets of our property and casualty insurance segment.
agencies that are in excess of the return required on the investment in contributory assets necessary to realize those benefits. The rate used to discount the net benefits is based on a risk-adjusted rate that takes into consideration market-based rates of return and is representative of the relative risk of the acquired asset.
The fair value of the intangible asset for trade names was established using the relief from royalty method, which treats the trade name as being licensed in an arm’s length transaction to a third party. A review was performed of comparable arm’s length royalty or license agreements involving assets that reflect similar risk and return investment characteristics with the subject trade name. The royalty rate selected is then multiplied by the net revenue expected to be generated by the trade names over the course of the assumed life of the trade names. The product of the royalty rate and the revenue provides an estimate of the royalty income that could be generated hypothetically by licensing the subject trade name.
The following is a summary of our unaudited pro forma historical results as if Mercer Insurance Group had been acquired on January 1, 2011:
(1) The year ended December 31, 2011 excludes transaction related expenses incurred that reduced net income by $11.9 million.
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, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, 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.
As discussed in Note 1 to the consolidated financial statements, in 2012 United Fire Group, Inc. changed its method of accounting for costs associated with acquiring or renewing insurance contracts.
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, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report, dated March 5, 2014, expressed an unqualified opinion thereon.