Net unrealized gains, after tax, were impacted in 2008 due to the volatility in the financial markets. The severe downturn in the financial markets resulted in a significant decrease to our net unrealized appreciation in 2008, while in 2009 and 2010 our net unrealized appreciation returned to levels similar to years prior to 2008.
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),”
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.
property and casualty insurance, which includes commercial insurance, personal insurance, surety bonds and assumed insurance; and
For 2010, property and casualty business accounted for nearly 90.0 percent of our net premiums earned, of which 90.5 percent was generated from commercial insurance. Life insurance business made up approximately 10.0 percent of our net premiums earned, of which over 61.0 percent was generated from traditional life insurance products.
Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, changes in reserves for future policy benefits, operating expenses and interest on policyholders’ accounts.
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. Management believes that climate change considerations will not have a material impact on our profitability, unless a connection to increased extreme weather events related to climate change is ultimately proven true.
Net income was $47.5 million in 2010 compared to net losses of $10.4 million and $13.1 million in 2009 and 2008, due to an improvement in underwriting income resulting from a decrease in loss and loss settlement expenses, along with increases in net investment income and realized investment gains. The increase in our realized investment gains is attributable to a significant reduction in other-than-temporary impairment (“OTTI”) charges, which totaled $0.5 million, $18.3 million and $9.9 million for 2010, 2009 and 2008, respectively.
Our property and casualty premium writings decreased 2.3 percent for 2010 and 7.6 percent in 2009. The slow economic recovery continues to affect potential commercial lines policyholders. In 2010, policy cancellations due to non-payment and/or companies going out of business contributed to the decline in our premium writings. In addition, ongoing competition in a soft insurance market continued to impact our business. In the fourth quarter of 2010, we slightly reduced our commercial lines pricing levels in order to retain quality accounts, however, new business pricing remained unchanged.
Deferred annuity deposits (i.e., sales) decreased to $92.4 million for 2010, from $216.6 million and $161.1 million in 2009 and 2008, respectively. In 2010, historic, low interest rates continued to affect our level of
deferred annuity deposits. Our deposits were driven by consumers who sought a conservative, guaranteed rate of return on their funds, while our surrenders and withdrawals were driven by consumers who had a greater tolerance for risk and were seeking a potentially greater return. Deferred annuity deposits are not recorded as a component of net premiums written or net premiums earned; however, they do generate investment income.
A benign hurricane season contributed to a reduction in catastrophe losses in both 2010 and 2009. Our catastrophe losses excluding the impact of Hurricane Katrina totaled $19.8 million in 2010 compared to $22.4 million in 2009. In 2008, our catastrophe losses totaled $76.1 million.
Adverse development from Hurricane Katrina resulted in losses of $8.6 million in 2010 compared to $38.0 million for 2009 and $26.6 million for 2008, as we continued to resolve outstanding litigation.
Deferred annuity deposits and withdrawals resulted in a net cash inflow related to our annuity business of $0.4 million and $96.0 million in 2010 and 2009, respectively, compared to a net cash outflow of $73.0 million in 2008.
In 2010, we repurchased 343,328 shares of our common stock for $6.3 million, at an average cost of $18.29. As of December 31, 2010, 172,826 shares of common stock remained authorized for repurchase under our share repurchase program, which expires in August 2011.
The carrying value of our investment portfolio increased in 2010, with net unrealized gains, after tax, of $102.6 million at December 31, 2010, compared to $82.5 million and $25.5 million at December 31, 2009 and 2008, respectively. The 2010 and 2009 increases in net unrealized investment gains was the result of increases in the fair value of our bond and equity holdings. In 2008, depressed bond and equity prices contributed to a decrease in net unrealized gains.
We were encouraged by the economic improvement in 2010, despite seeing some lingering effects of the credit crisis and recession from 2008 and 2009 that continued to affect our business:
While there are industry-wide concerns about the municipal bond market, we believe the fundamentals of our own bond portfolio are strong. We select bonds based solely on their underlying credit (92 percent are rated “A” or better) and diversify risk by purchasing bonds issued across a large number of states. In 2010, we added a small number of bonds to our municipal bond portfolio and extended durations on new purchases in order to capture higher interest rates on our other bonds.
Our 2009 results were negatively impacted by a decline in net premiums written and earned due to the weak economy. Additionally, in 2009, we incurred OTTI charges of $9.8 million and $38.0 million in adverse development from Hurricane Katrina, which impacted our pre-tax earnings. Our 2008 results were negatively impacted by the significant number of catastrophe losses we experienced that year, along with an increase in the severity of non-catastrophe losses and the impact of competitive market conditions on pricing.
Our policy retention rate in both the personal and commercial lines of business was approximately 80.0 percent in 2009, which was a slight decrease from 2008, as our underwriters continued to focus on writing good business at an adequate price, preferring quality to volume. Despite continued competition, particularly on medium and large commercial accounts, we were able to renew a select number of accounts at a higher rate/premium level in 2009 as compared to 2008.
In 2010, we increased our participation in assumed business, which led to the increase in assumed premiums written for the year. The decrease in 2009 was attributable to the termination of one of our assumed reinsurance contracts and our reduced participation level on another contract. Also contributing to the decline in 2009 and 2008 was some of our assumed business in early 2009 that had been in run-off since late 2006.
For 2009, the renewals for both our catastrophe and non-catastrophe reinsurance programs increased slightly. The increase in our catastrophe program was a result of the active hurricane season in the United States during 2008, which included Hurricanes Ike and Gustav.
In 2009 and 2008, adverse development from Hurricane Katrina resulted in losses of $38.0 million and $26.6 million, respectively.
Since the occurrence of Hurricane Katrina in 2005, we have focused on reducing our risk exposure in southern Louisiana by decreasing the number of insured properties, raising rates and purchasing additional reinsurance coverage.
In 2010, our pre-tax catastrophe losses without adverse development from Hurricane Katrina claims litigation were $19.8 million. In comparison our 2009 and 2008 pre-tax catastrophe losses were $22.4 million and $76.1 million, respectively. In 2008, the portion of these losses attributable to adverse development from Hurricane Katrina that was not related to claims litigation was $15.8 million. Our 2010 losses were the result of 26 new catastrophes with our largest single pre-tax catastrophe totaling $2.5 million. That loss was the result of a hailstorm that primarily affected the state of Colorado, but also impacted some areas in Wyoming, South Dakota and Nebraska.
For 2009, we also experienced 26 new catastrophe losses, with our largest single loss coming from a Midwest storm that caused wind and hail damage and resulted in pre-tax losses totaling $3.6 million. In 2008, we experienced our second highest year for catastrophe losses in the past decade, with losses from 34 new catastrophe events. Our largest losses during 2008 were related to Hurricane Ike ($20.2 million) and Hurricane Gustav ($15.8 million).
Our planned reduction in southern Louisiana that began after Hurricane Katrina has reduced our estimated 100-year maximum probable loss by over 60.0 percent as of December 31, 2010. To maintain profitability of our remaining southern Louisiana business, we have employed portfolio optimizing techniques (i.e., proximity to the coast, type of construction, the reduction of geographic risk concentration and higher deductibles) to reduce the impact of any one future catastrophe. As an example of the effectiveness of our risk-reduction efforts, we estimate that we incurred $12.8 million less in losses related to Hurricane Gustav in 2008 than we would have if we had not undertaken these measures.
The following table represents the primary reinsurers we utilize and their financial strength ratings as of December 31, 2010:
In 2010, we saw an improvement in our loss and loss settlement expenses due to favorable reserve development of $45.9 million from prior year’s losses. This level of development is consistent with our historical experience, excluding the impact of Hurricane Katrina. The 2010 development included $8.6 million in adverse development from Hurricane Katrina as a result of our continuing resolution of outstanding litigation.
In 2009, we increased our reserves on prior year losses partially due to an increase in late reported claims. In addition, we focused on establishing reserves for reported claims more quickly. Our other liability line of business had a significant increase in losses and loss settlement expenses as a result of unfavorable reserve development from the re-estimation of our recorded reserves, a slight increase in severity as a result of larger jury awards and continuing construction defect claims and loss settlement expenses. Overall, claims frequency decreased. Claims severity also flattened for a majority of lines, with a slight increase in certain liability lines, specifically automobile and other liability as compared to 2008.
The following table illustrates the major components of the net redundancy (deficiency) we experienced in our reserves for 2010, 2009 and 2008:
The net loss ratio in our commercial lines of business improved to 73.2 percent in 2010 from 85.8 percent in 2009 and 82.1 percent in 2008, due to the significant decrease in our loss and loss settlement expenses for 2010 as compared to prior years, and in spite of the lower level of premiums earned during the year. The decrease occurred in our largest lines of business, other liability, fire and allied, automobile, and workers’ compensation, as a result of favorable reserve development on our prior year’s claims experience, which is consistent with our historical development, excluding the impact of Hurricane Katrina.
The slow economic recovery during 2010 continued to affect potential commercial lines policyholders. In 2010, cancellations due to non-payment and/or companies going out of business contributed to the decline in our premium written and earned. Our profitability has also been impacted by ongoing competition in a soft commercial lines market in each of the last three years. In 2010 and 2009, we experienced a modest decrease in premium level, reflecting the continuation of a trend of gradual decreases in premium level for some lines of business dating back to the third quarter of 2004.
In 2009, we continued the expansion of the loss control function in our Gulf Coast and Denver regions. Our service account program, which provides at least annual loss control visits, was implemented for larger and/or more complex accounts.
In 2009, we changed our underwriting guidelines to address issues noted in large loss audits. The result of this change was that underwriting guidelines now focus on older buildings and hazards from adjacent properties, such as vacancies and changing occupancies. We are reinspecting more older properties and also are taking the age of the building more into account in our rate structure for both renewals and new business.
In addition, since the occurrence of Hurricane Katrina in 2005, we have focused on reducing our risk exposure in southern Louisiana by, among other things, decreasing the number of insured properties and raising rates, which has led to a decline in premiums earned in recent years. In 2010, we reduced the number of insured properties by over 15.0 percent as compared to the number of insureds at December 31, 2009.
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. We reported a net loss ratio in this line of 83.3 percent in 2010, 99.7 percent in 2009 and 69.2 percent in 2008.
Losses from construction defect claims were $9.7 million in 2010 compared to $6.0 million and $11.0 million in 2009 and 2008, respectively. At December 31, 2010, we had $21.1 million in construction defect loss and loss settlement expense reserves, excluding IBNR reserves, which consisted of 326 claims. The number of construction defect claims at December 31, 2010, is a result of the long-tail nature of this line of business, as some prior year claims remained open. However, the number of current year claims moderated as compared to our experience in recent years. In comparison, at December 31, 2009 and 2008, we had reserves of $15.2 million and $16.0 million, excluding IBNR reserves, consisting of 234 claims and 243 claims, respectively.
Defense costs are also a part of the insured expenses covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims.
Because of the long-tail nature of liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. In both 2009 and 2008, over 37.0 percent of our other liability losses incurred (other than construction defect) resulted from losses that occurred in prior years.
In recent years, we have begun to use our loss control department more extensively in an attempt to return this line of business to a higher level of profitability. For example, our loss control department has representatives make multiple visits each year to businesses and job sites to ensure safety. We also non-renew accounts that no longer meet our underwriting or pricing guidelines. As pricing in the industry continues to decrease, we continue to avoid accounts that have become too underpriced for the risk.
In 2010 and 2009, both the nonrenewal of accounts that no longer meet our underwriting or pricing guidelines and avoiding accounts that have become too underpriced for the risk have contributed to the reduction in premiums earned in this line. Also in 2010, cancellations due to non-payment and/or companies going out of business contributed to the decline in our premium writings. In 2008, we increased our writing of workers’ compensation business, as we worked to retain business with current policyholders that required workers’ compensation insurance coverage.
The improvement in the loss and loss settlement expenses in 2010 was the result of a reduction in frequency as well as favorable reserve development on resolved cases. In comparison, the deterioration in 2009 is reflective of the increased premium writings we undertook in recent years and the risk associated with this long-tail line of business.
Beginning in 2008, a downturn in general economic conditions decreased demand for our surety products, as construction activity declined. This contributed to the slight decline in premiums earned in 2009. The improvement in our loss and loss settlement expense for 2009 was the result of a slight decrease in claims frequency and related loss settlement expenses.
In 2010, we had an increase in our loss and loss settlement expenses, which is primarily the result of one large claim. Also, in 2010, the construction environment continued to be impacted by the economy and competition remained strong, especially in the Midwest.
Our personal lines consist primarily of fire and allied lines (including homeowners) and automobile lines. The net loss ratio was 64.4 percent in 2010, 66.2 percent in 2009 and 135.3 percent in 2008.
In late 2009, we averaged low- to mid-single-digit percentage increases in premium rates for our homeowner and personal auto lines of business. In 2008, premium rates decreased only in our personal auto line of business. In 2009, policy counts for homeowners, automobile and umbrella increased, as compared to 2008.
In 2010, losses and loss settlement expenses were $(7.3) million compared to $4.0 million in 2009, of which $0.9 million of the losses were attributable to Hurricanes Gustav and Ike. The remaining losses incurred were primarily from business that was in run-off. In 2008, we incurred $1.6 million of losses and loss settlement expenses, which is attributable to a low level of assumed catastrophe losses, as well as favorable claims development on run-off business. We continue to have exposure, primarily with respect to environmental and asbestos coverage related to the runoff of some business, as well as exposure to catastrophe losses for the small number of assumed reinsurance contracts that we have continued to underwrite.
Our other underwriting expense ratio decreased slightly in 2010, primarily as the result of a higher level of deferrable underwriting expenses in 2010 as compared to 2009. Included in this line for 2010 are the transaction costs totaling $1.2 million that were incurred during the fourth quarter related to our planned acquisition of Mercer. For further discussion of this planned acquisition, refer to “Pending Purchase of Mercer Insurance Group” in Part I, Item 1, “Business” and in the “Liquidity and Capital Resources” section contained in this item.
In 2009, we were unable to defer underwriting expenses (primarily agent commissions and employee salaries) at the same level as we were able to in 2008, due to lower premium writings resulting from continued competition and the weak economy, thus leading to the increase in our expense ratio.
Net investment income in 2010 was higher than in 2009 and 2008. An increase in annuity sales in 2009 contributed to the increase in net investment income and invested assets. For discussion of our consolidated investment results, see the “Investments” section contained in this item.
The decrease in amortization of DAC for 2009 was due to modest changes in amortization schedules implemented for the universal life and deferred annuity lines, as compared to more significant changes in 2008. The 2008 changes were implemented because of lower than expected investment returns, reflecting large realized capital losses, as well as an adjustment in anticipated lapse rates, based upon recent experience. The impact of the changes each year resulted in a decrease of $3.1 million in DAC amortization charges in 2009 as compared to 2008. Offsetting this decrease was an increase in regular amortization charges in the traditional life line due to the growth of the business, increasing amortization charges by $0.8 million in 2009 as compared to 2008.
During 2010, we saw the financial markets begin to strengthen, with less volatility than what was experienced in 2009 and 2008. The improvement in the markets lead to an increase in our unrealized investments gains and net investment income and a significant decrease in OTTI charges as compared to our 2009 results. We continue to carefully monitor the national and global economies and financial markets and modify our investment portfolio to reflect changes in market conditions in order to match the duration of our liabilities and maximize our investment return.
We invest the property and casualty insurance segment’s assets to meet our liquidity needs and maximize our after-tax returns while maintaining appropriate risk diversification. We invest the life insurance segment’s assets primarily in investment-grade fixed maturities in order to meet our liquidity needs, maximize our investment return and achieve a matching of assets to liabilities.
With respect to our portfolio of fixed maturity securities, our general investment philosophy is to purchase financial instruments with the expectation that we will hold them to their maturity. However, close management of our available-for-sale portfolio is considered necessary to maintain an approximate matching of assets to liabilities and to adjust the portfolio to respond to changing market conditions and tax considerations.
The composition of our investment portfolio at December 31, 2010, is presented in the following table:
At December 31, 2010, $2.3 billion, or 99.7 percent, of our fixed maturities were classified as available-for-sale, compared with $2.2 billion, or 99.6 percent, at December 31, 2009. We classify our remaining fixed maturities as held-to-maturity or trading. We record held-to-maturity securities at amortized cost. We record trading securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings.
Our investment portfolio is comprised primarily of 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 claims liabilities. If our invested assets and claims liabilities have similar durations, then any change in interest rates will have an equal and opposite effect on these account balances. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations. The primary purpose for matching invested assets and claims liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely.
The weighted average duration of our portfolio of fixed maturity securities, at December 31, 2010, is 5.2 years compared to 6.0 years at December 31, 2009.
We invest the premiums received from our policyholders and annuitants in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by factors, some of which are beyond our control. These factors include: volatility in the financial markets, economic growth, inflation, interest rates, world political conditions, terrorism attacks or threats, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events.
The following table details our yield on average invested assets for 2010, 2009 and 2008, which is based on our invested assets (including money market accounts) at the beginning and end of the year divided by net investment income:
We recorded $0.5 million in OTTI charges in 2010 compared to $18.3 million and $9.9 million in 2009 and 2008, respectively, as follows:
The charges that occurred in all three years represented less than 1.0 percent of our investment portfolio at the balance sheet date.
As of December 31, 2010, net unrealized gains, after tax, totaled $102.6 million, compared to $82.5 million and $25.5 million as of December 31, 2009 and 2008, respectively. In both 2010 and 2009, the improvement in the equity markets and a decrease in market interest rates led to an increase in the carrying value of our fixed maturity and equity securities, which improved our net unrealized gains. We have and will continue to closely monitor market conditions and evaluate the long-term impact of the market volatility experienced in recent years on all of our investment holdings.
Interest rate risk is the price sensitivity of a fixed maturity security or portfolio 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 balance sheet with unrealized gains or losses reported net of tax in accumulated other comprehensive income.
The amounts set forth in the following tables detail the impact of hypothetical interest rate changes on the fair value of fixed maturity securities held at December 31, 2010 and 2009. The sensitivity analysis measures the change in fair values arising from immediate changes in selected interest rate scenarios. We employed hypothetical parallel shifts in the yield curve of plus or minus 100 and 200 basis points in the simulations. Additionally, based upon the yield curve shifts, we employ estimates of prepayment speeds for mortgage-related products and the likelihood of call or put options being exercised within the simulations. According to this analysis, at current levels of interest rates, the duration of the investments supporting the deferred annuity liabilities is 0.70 years shorter than the projected duration of the liabilities. If interest rates increase by 100 basis points, the duration of the investments supporting the deferred annuity liabilities would be 0.27 years longer than the projected duration of the liabilities.
Equity price risk is the potential loss arising from changes in the fair value of equity securities. Our exposure to this risk relates to our equity securities portfolio and covered call options that we write from time to time to generate additional portfolio income. The carrying values of our equity securities are based on quoted market prices as of the balance sheet date. Market prices of equity securities, in general, are subject to fluctuations that could cause the amount to be realized upon the sale of the securities to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of the issuer of securities, the relative price of alternative investments, general market conditions, and supply and demand imbalances for a particular security.
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, 2010 and 2009:
Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations. Our cash inflows are primarily a result of premiums, annuity deposits, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used primarily for loss and loss settlement expenses, payment of policyholder benefits under life insurance contracts; annuity withdrawals, operating expenses, dividends, pension plan contributions, and in recent years, for common share repurchases.
Our cash flows from operations were sufficient to meet our liquidity needs in 2010, 2009 and 2008.
Net cash flows used in investment activities totaled $94.7 million in 2010, compared to $130.1 million in 2009 and $107.3 million in 2008.The cash available from annuity deposits received in 2009 allowed us to invest at a level in 2010, similar to 2008.
Net cash flows provided by financing activities totaled $12.7 million and $111.0 million in 2010 and 2009, respectively, compared to net cash used in financing activities totaling $79.6 million in 2008. Net cash from financing activities decreased in 2010, due to a lower volume of annuity deposits. Net cash flows from financing activities improved significantly in 2009, primarily due to the life insurance segment's annuity and universal life contract deposits exceeding withdrawals. We began to experience a slowdown in the amount of withdrawals in 2008, which is indicative of the change in economic conditions and the inclination of consumers to choose products with less risk and guaranteed returns. This slowdown continued into 2009, with 2009 experiencing the largest reduction of withdrawals since 2005.
Dividends paid to stockholders totaled $15.8 million, $16.0 million and $16.2 million in 2010, 2009 and 2008, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
State law permits the payment of dividends only from earned surplus arising from business operations. Furthermore, under Iowa law we may pay dividends only if after giving effect to the payment we are either able to pay our debts as they become due in the normal course of business or our total assets would be equal to or more than the sum of our total liabilities. Our subsidiaries are also subject to similar state law restrictions on dividends. Based on these restrictions, in 2011, we are allowed to make a maximum of $59.4 million in dividend distributions to stockholders without prior approval. Dividend payments by the insurance subsidiaries to United Fire are subject to similar restrictions in the states in which they are domiciled. These restrictions will not have a material impact in meeting our cash obligations.
During 2010, 2009 and 2008, pursuant to authorization by our Board of Directors, we repurchased 343,328; 92,721; and 580,792 shares of common stock respectively, which used cash totaling $6.3 million in 2010, $1.5 million in 2009 and $14.8 million in 2008. At December 31, 2010, we were authorized to purchase an additional 172,826 shares of common stock under our Share Repurchase Program, which expires in August 2011.
Stockholders’ equity increased from $672.7 million at December 31, 2009, to $716.4 million at December 31, 2010, an increase of 6.5 percent. The increase in stockholders’ equity between years is primarily due to net income of
We believe that our existing sources of liquidity, including cash and short-term investments, are adequate to meet anticipated operating needs at comparable risk-based interest rates for the foreseeable future. Acquisition spending and/or share repurchases could increase our debt. Management anticipates that the net debt to net capitalization ratio will be approximately 10.0 percent. A combination of our operating cash flows, our bank line of credit (as described in Note 4 “Short-Term Borrowings” contained in Part II, Item 8, “Financial Statements and Supplementary Data”), and a loan from the Federal Home Loan Bank are expected to satisfy our costs related to the planned acquisition of Mercer.
The following table shows our contractual obligations and commitments, including our estimated payments due by period, at December 31, 2010:
Upon acquisition, we classify investments in marketable securities as held-to-maturity, available-for-sale, or trading. We record investments in held-to-maturity fixed maturities at amortized cost. We record available-for-sale fixed maturity securities, trading securities and equity securities at fair value. Other long-term investments are recorded on the equity method of accounting. We record mortgage loans at amortized cost and policy loans at the outstanding loan amount due from policyholders.
In general, investment securities are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility risk. Therefore, it is reasonably possible that changes in the fair value of our investment securities, reported at fair value, will occur in the near term and such changes could materially affect the amounts reported in the Consolidated Financial Statements. Also, it is reasonably possible that a change in the value of our investments in limited liability partnerships could occur in the future and such changes could materially affect our results of operations and financial condition on the amounts reported in our Consolidated Financial Statements.
We value our available-for-sale fixed maturities, 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 and disclosures. 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.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years’ experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.
The fair value of our Level 3 impaired securities was determined primarily based upon management’s assumptions regarding the timing and amount of future cash inflows. If a security has been written down or the issuer is in bankruptcy, management relies, in part, on outside opinions from rating agencies, our lien position on the security, general economic conditions, and management’s expertise to determine fair value. We have the ability and the positive intent to hold securities until such time that we are able to recover all or a portion of our original investment. If a security does not have a market at the balance sheet date, management will estimate the security’s fair value based on other securities in the market. Management will continue to monitor securities after the balance sheet date to confirm that their estimated fair value is reasonable.
The following table provides a summary of the changes in fair value of our Level 3 securities for 2010:
As of December 31, 2010 and 2009, we had a number of securities where fair value was less than our cost. The total unrealized depreciation on these securities was $8.8 million at December 31, 2010, compared with $14.7 million at December 31, 2009. At December 31, 2010, the largest unrealized loss, after tax, on any single 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 DAC, such as commissions, premium taxes and other variable costs incurred in connection with the writing of our property and casualty lines of business.
The following table summarizes the activity related to our DAC asset for December 31, 2010 and 2009:
Actual future results could differ materially from our current estimates, requiring adjustments to the recorded DAC asset. Such adjustments are recorded through operations in the period the adjustments are identified. Due to changes in the estimated recoverability of DAC, the premium deficiency charge calculated at both December 31, 2010 and 2009, increased $1.8 million from the premium deficiency charge calculated at December 31, 2009 and 2008, respectively. An increase in the premium deficiency charge results in the deferral of comparatively less underwriting costs period over period, resulting in a relatively smaller DAC asset. The changes in the estimated recoverability of DAC are attributable to deterioration in our underwriting experience in the past two years.
Costs that vary with and relate to the acquisition of life insurance and annuity business are deferred and recorded as a DAC asset. Such costs consist principally of commissions and related policy issue expenses.
The following table summarizes the activity related to our DAC asset for 2010 and 2009. The majority of the DAC asset relates to our universal life and annuity contracts, hereafter referred to as non-traditional business.
We defer policy acquisition costs related to non-traditional business and amortize these costs in proportion to the present value of estimated expected gross profits. The components of expected gross profits include investment spread, mortality and expense margins and surrender charges. Of these factors, we anticipate that investment returns, expenses and persistency are reasonably likely to significantly impact the rate of DAC amortization.
The DAC asset recorded in connection with our non-traditional business is also adjusted with respect to estimated expected gross profits as a result of changes in the net unrealized gains or losses on available-for-sale fixed maturity securities allocated to support the block of fixed annuities and universal life policies. That is, because we carry available-for-sale fixed maturity securities at fair value, we make an adjustment to the DAC asset equal to the change in amortization that would have been recorded if we had sold such securities at their stated fair value and reinvested the proceeds at current yields. We include this adjustment, which is called “shadow” DAC, net of tax, as a component of accumulated other comprehensive income. At December 31, 2010 and 2009, the “shadow” DAC adjustment decreased our DAC asset by $37.3 million and $35.1 million, respectively.
Most of our insurance policies are written on an occurrence basis that provides coverage if a loss occurs in the policy period, even if the insured reports the loss many years later. For example, some general liability claims are reported 10.0 years or more after the policy period, and the workers’ compensation coverage provided by our policies pays unlimited medical benefits for the duration of the claimant’s injury up to the lifetime of the claimant. In addition, final settlement of certain claims can be delayed for years due to litigation or other reasons. Reserves for these claims require us to estimate future costs, including the effect of judicial actions, litigation trends and medical cost inflation, among others. Reserve development can occur over time as conditions and circumstances change in years after the policy was issued.
For short-tail lines of business, the estimation of case-basis loss reserves is less complex than for long-tail lines because claims are generally reported and settled shortly after the loss occurs and because the claims relate to tangible property. Because of the relatively short time from claim occurrence to settlement, actual losses typically do not vary significantly from reserve estimates.
Loss settlement expense reserves include amounts ultimately allocable to individual claims, as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. We do not establish loss settlement expense reserves on a claim-by-claim basis. Instead, we examine the ratio of loss settlement expenses paid to losses paid over the most recent three-year period, by line. We use these factors and apply them to open reserves, including IBNR reserves. We develop these factors annually in December, and use them throughout the year, unless development patterns or emerging trends warrant adjustments to the factors.
In 2010, we did not change the key assumptions on which we based our reserving calculations. In estimating our 2010 loss and loss settlement expense reserves, we did not anticipate future events or conditions that were inconsistent with past development patterns.
Certain of our lines of business are subject to the potential for greater loss and loss settlement expense development than others, which are discussed below.
Other liability is considered a long-tail line of business, as it can take a relatively long period of time to settle claims from prior accident years. This is partly due to the lag time between the date when a loss or event occurs that triggers coverage and the date when the claim is actually reported. Defense costs are also a part of the insured
Claims with longer reporting lags may result in greater inherent risk. This is especially true for alleged claims with a latency feature, particularly where courts have ruled that coverage is spread over multiple policy years, hence involving multiple defendants (and their insurers and reinsurers) and multiple policies (thereby increasing the potential dollars involved and the underlying settlement complexity). Claims with long latencies also increase the potential lag between writing a policy in a certain market and the recognition that such policy has potential mass tort and/or latent claim exposure.
In addition to these issues, other variables also contribute to a high degree of uncertainty in establishing reserves for construction defect claims. These variables include: whether coverage exists; when losses occur; the size of each loss; expectations for future interpretive rulings concerning contract provisions; and the extent to which the assertion of these claims will expand geographically. In recent years, we have implemented various underwriting measures that we anticipate will mitigate the amount of construction defect losses experienced. These initiatives include increased care regarding additional insured endorsements and stricter underwriting guidelines on the writing of residential contractors and an increased utilization of loss control.
Assuming that we have liability for all claims, even though the issue of liability may, in some cases, be resolved in our favor.
Promoting claims management services to encourage return-to-work programs, case management by nurses for serious injuries and management of medical provider services and billings.
We engage an independent actuarial firm to render an opinion as to the reasonableness of the statutory reserves we establish. There were no material differences between our statutory reserves and those established under GAAP. During 2010 and 2009, we engaged the services of Regnier as our independent actuarial firm for the property and casualty insurance segment. We anticipate that this engagement will continue in 2011.
It is management’s policy to utilize staff adjusters to develop our estimate of case-basis loss reserves. IBNR and loss settlement expense reserves are established through various formulae that utilize pertinent, recent company historical data. The calculations are supplemented with knowledge of current trends and events that could result in adjustments to the level of IBNR and loss settlement expense reserves. In addition, management consults with Regnier throughout the year as deemed necessary. On an annual basis, we compare our estimate of total reserves to
Other reserves include claims that have been reported but not settled and IBNR claims on life and disability income insurance. We use our own historical experience and other assumptions such as any known or anticipated developments or trends to establish reserves for these unsettled or unreported claims. The effects of changes in our estimated reserves are included in the results of operations in the period in which the changes occur.
Our reserves for universal life and deferred annuity contracts are based upon the policyholders’ current account value. Acquisition expenses are amortized in relation to expected gross profits forecast based upon current best estimates of anticipated premium income, investment earnings, benefits and expenses. Annually, we review our estimates of reserves and the related DAC asset and compare them with actual experience. Differences between actual experience and the assumptions that we used in the pricing of these policies, guarantees and riders, and in the establishment of the related reserves will result in variances in profit, and could result in changes in net income. The effects of the changes in such estimated reserves are included in the results of operations in the period in which the changes occur.
Premiums written is a measure of our overall business volume. Net premiums written comprise direct and assumed premiums written, less ceded premiums written. Direct premiums written is the amount of premiums charged for policies issued during the period. For the property and casualty insurance segment there are no differences between direct statutory premiums written and direct premiums written under GAAP. However, for the life insurance segment, annuity deposits (i.e., sales) are included in direct statutory premiums written, whereas they are excluded for GAAP.
Assumed premiums written is consideration or payment we receive in exchange for insurance we provide to other insurance companies. We report these premiums as revenue as they are earned over the underlying policy period. Ceded premiums written is the portion of direct premiums written that we cede to our reinsurers under our reinsurance contracts. Premiums written is an important measure of business production for the period under review.
Catastrophe losses utilize the designations of the Insurance Services Office (ISO) and are reported with loss and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25.0 million or more in industry-wide direct insured losses to property and that affect a significant number of insureds and insurers (“ISO catastrophe”). In addition to ISO catastrophes, we also include as catastrophes those events (“non-ISO catastrophes”) we believe are, or will be, material to our operations, either in amount or in number of claims made. Management, at times, may determine for comparison purposes that it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation, such as Hurricane Katrina. The frequency and severity of catastrophic losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance segment, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in periodic earnings.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement accounts that are most dependent on management estimates and assumptions include investments; deferred policy acquisition costs (“DAC”); and future policy benefits and losses, claims and loss settlement expenses.
The costs of acquiring new life business, principally commissions, certain variable underwriting, agency and policy issue expenses, have been deferred. These costs are amortized to income over the premium-paying period of the related traditional policies in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue and over the anticipated terms of non-traditional policies in proportion to the ratio of the expected annual gross profits to the expected total gross profits. Policy acquisition costs deferred in 2010, 2009 and 2008 were $8,807,000, $13,612,000 and $10,620,000, respectively. Amortization of DAC in 2010, 2009 and 2008 totaled $10,735,000, $9,287,000 and $11,568,000, respectively. The expected premium revenue and gross profits are based upon the same mortality and withdrawal assumptions used in determining future policy benefits. For non-traditional policies, changes in the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs. The effect on the amortization of DAC for revisions to estimated gross profits is reported in earnings in the period such estimated gross profits are revised.
Depreciation expense totaled $2,812,000, $3,473,000 and $3,556,000 for 2010, 2009 and 2008, respectively.
We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2006. There are ongoing examinations of income tax returns by the Internal Revenue Service of the 2008 tax year and by the State of Illinois for the 2007 and 2008 tax years.
For our restricted and unrestricted stock awards, we utilize the fair value of our common stock on the date of grant to establish the fair value of the award.
In January 2010, the FASB issued revised accounting guidance that clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The guidance requires separate disclosures for the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the transfers. Additionally, a separate disclosure is required for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements. The guidance also provides additional clarification for both the level of disaggregation reported for each class of assets or liabilities and disclosures of inputs and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3.
In October 2010, the FASB issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2011. We are currently evaluating the impact that our adoption of the guidance, effective January 1, 2012, will have on our Consolidated Financial Statements.
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 at December 31, 2010 and 2009, is as follows:
There were no sales of held-to-maturity securities in 2010, 2009 and 2008.
Our investment portfolio includes trading securities with embedded derivatives. These securities, which are primarily convertible redeemable preferred debt securities, are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of realized investment gains (losses). Our portfolio of trading securities had a fair value of $12,886,000 and $12,613,000 at December 31, 2010 and 2009, respectively.
The realized gains (losses) attributable to the change in fair value of trading securities still held at December 31, 2010, 2009 and 2008 were $(325,000), $1,547,000 and $(1,528,000), respectively.
Pursuant to an agreement with one of our limited liability partnership holdings, we are contractually committed to make capital contributions up to $15,000,000, upon request by the partnership, through December 31, 2017. Our remaining potential contractual obligation was $11,406,000 at December 31, 2010.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position at December 31, 2010 and 2009. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at December 31, 2010, if future events or information cause us to determine that a decline in fair
We calculate the fair value of the liabilities for all annuity products based upon the estimated value of the business, using current market rates and forecast assumptions and risk-adjusted discount rates, when relevant observable market data does not exist.
A summary of the carrying value and estimated fair value of our financial instruments at December 31, 2010 and 2009, is as follows:
In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors’ pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable current accounting guidance on fair value measurements.
The following tables present the categorization for our financial instruments measured at fair value on a recurring basis in our Consolidated Balance Sheets at December 31, 2010 and 2009:
Realized gains are recorded as a component of current operations whereas unrealized gains are recorded as a component of comprehensive income.
The $26,010,000 reported as “transfers in” consisted of $22,760,000 in available-for-sale fixed maturities that were primarily private placement securities that had no observable price available at December 31, 2010, and $3,250,000 of available-for-sale fixed maturities that were subsequently reclassified, as a disposal, to other long-term investments due to bankruptcy reorganization. The $4,051,000 in “transfers out” resulted from available-for-sale fixed maturities and equity securities that previously had no observable market price at December 31, 2009, but for which observable prices were available at December 31, 2010.
We maintain a $50,000,000 bank line of credit. Under the terms of the agreement, interest on outstanding notes is payable at the lender’s prevailing prime rate minus 1.0 percent. No outstanding loan balances existed at December 31, 2010 and 2009, and we did not borrow against this line of credit in 2010, 2009 or 2008.
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, 2010, for which collection is at risk that would result in a material impact on our Consolidated Financial Statements.
We also assume both property and casualty insurance from other insurance or reinsurance companies. Most of the business we have assumed is property insurance, with an emphasis on catastrophe coverage. The assumption of reinsurance is not a significant component of our property and casualty operations.
We limit our exposure on our assumed reinsurance contracts through selective renewal. However, we still have exposure related to the assumed reinsurance contracts that we have elected to continue writing and those that are in run-off status.
If we incur catastrophe losses and loss settlement expenses that exceed the coverage limits of our reinsurance program, our property catastrophe program provides one guaranteed reinstatement. In such an instance, we are required to pay the reinsurers a reinstatement premium at 100.0 percent of the original premium, which will reinstate the full amount of reinsurance available under the property catastrophe program.
United Life purchases reinsurance to limit the dollar amount of any one risk of loss. Beginning in 2011, our retention on standard individual life cases is $300,000. Our accidental death benefit rider on an individual policy is reinsured at 100.0 percent, up to a maximum benefit of $250,000. Our group coverage, both life and accidental death and dismemberment, is reinsured at 50.0 percent. Catastrophe excess reinsurance coverage applies when three or more insureds die in a catastrophic accident. For catastrophe excess claims, we retain the first $1,000,000 of ultimate net loss and the reinsurer agrees to indemnify us for the excess up to a maximum of $5,000,000. We supplement this coverage when appropriate with “known concentration” coverage. Known concentration coverage is typically tied to a specific event and time period, with a threshold of a minimum number of lives involved in the event, minimum event deductible (stated retention limit) and a maximum payout.
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 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 in losses and loss settlement expenses in the accompanying Consolidated Statements of Income 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 2010, 2009 and 2008 (net of reinsurance amounts):
The favorable development in 2010 on claims that occurred in prior years, resulted from a re-estimation of loss reserves recorded at December 31 of the prior year. This re-estimation is primarily attributable to both the payment of claims in amounts less than the amounts reserved and changes in loss reserves due to additional information on individual claims that we received after the reserves for those claims had been established. Another factor contributing to the redundancy recognized is the development of reserves for IBNR loss and loss settlement expenses at a level significantly less than anticipated at December 31 of the prior year. We attribute the favorable development to the fact that we have experienced overall lower levels of claims frequency and severity during recent years.
We did not alter our reserving process during 2010. However, conditions and trends that have affected the reserve development for a given year may change. Therefore, such development cannot be used to extrapolate future reserve redundancies or deficiencies.
The State of Iowa Insurance Department governs the amount of dividends that we may pay to stockholders without prior approval by the department. Based on these restrictions, we are allowed to make a maximum of $59,431,000 in dividend distributions to stockholders in 2011 without prior approval. We paid dividends of $15,774,000, $15,951,000 and $16,162,000 in 2010, 2009 and 2008, respectively. Dividend payments by the insurance subsidiaries to United Fire are subject to similar restrictions in the states in which they are domiciled. United Fire received a dividend from United Life of $15,000,000, $4,000,000 and $4,000,000 in 2010, 2009 and 2008, respectively. These intercompany dividend payments are eliminated in our Consolidated Financial Statements.
The significant components of the net deferred tax liability at December 31, 2010 and 2009, are as follows:
We have a gross deferred tax asset for net operating loss carryforwards totaling $12,520,000 at December 31, 2010. Net operating loss carryforwards totaling $1,565,000 expire in 2011 and can only be used to offset future income of our property and casualty insurance segment. We are required to establish a valuation allowance for any portion of the gross deferred tax asset that we believe may not be realized. Accordingly, we recorded a valuation allowance of $4,004,000 at December 31, 2010. As we determine that the benefit of these net operating losses can be realized, the related reduction in the deferred tax asset valuation allowance will be recorded as a reduction to our federal income tax expense in the period of such determination.
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 $6,000,000 to the pension plan in 2011.
The investments held by the pension plan at December 31, 2010, include the following asset categories:
Equity securities, which may include various types of stock, such as large-cap, mid-cap and small-cap stocks, international stocks and United Fire common stock.
We have an internal investment/retirement committee, which includes our Chief Executive Officer, Chief Investment Officer, and Executive Vice President, all of whom receive monthly information on the value of the pension plan assets and their performance. Quarterly, the committee meets to review and discuss the performance of the pension plan assets as well as the allocation of investments within the pension plan.
The following is a summary of the pension plan’s actual and target asset allocations at December 31, 2010 and 2009, by asset category:
The investment in United Fire common stock is stated at fair value based upon the closing sales price reported on a recognized securities exchange on the last business day of the year or, when no sales are reported, the bid price on that date. Our common stock is actively traded.
The following tables present the categorization of the pension plan’s assets measured at fair value on a recurring basis at December 31, 2010 and 2009:
The fair value of investments categorized as Level 1 is based on quoted market prices that are readily and regularly available.
The fair value of fixed maturity securities categorized as Level 2 is determined by management based on fair value information reported in the custodial statements, which is derived from recent trading activity of the underlying security in the financial markets. These securities represent various taxable bonds held by the pension plan.
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.
Assumed health care cost trend rates have a significant effect on the amounts reported for the other retiree plan. A 1.0 percent change in assumed health care cost trend rates would have the following effects:
For the pension plan, the benefit obligation is the projected benefit obligation. For the other retiree benefit plan, the benefit obligation is the accumulated postretirement benefit obligation.
The components of the net periodic benefit cost for our plans are as follows:
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 2010, 2009 and 2008, was $2,074,000, $927,000 and $974,000, respectively.
We have a non-employee director stock option and restricted stock plan that authorizes United Fire to grant restricted and unrestricted stock and non-qualified stock options to purchase 150,000 shares of United Fire's common stock with 37,003 options available for future issuance at December 31, 2010. The Board of Directors has the authority to determine which non-employee directors receive awards, when options and restricted and unrestricted stock shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the plan.
The activity in our non-employee director stock option and restricted stock plan is displayed in the following table:
Life insurance in force, before ceded reinsurance, totaled $4,804,167,000 and $4,715,258,000 as of December 31, 2010 and 2009, respectively. Traditional life insurance products represented 64.1 percent and 62.8 percent of our insurance in-force at December 31, 2010 and 2009, respectively. Universal life insurance represented 33.2 percent and 34.3 percent of insurance in force at December 31, 2010 and 2009, respectively.
The following table set forth our net premiums earned by segment before intersegment eliminations:
Comprehensive income (loss) includes changes in stockholders’ equity during a period except those resulting from investments by and dividends to stockholders.
Several actions pending against various insurers, including us, were consolidated for purposes of pre-trial discovery and motion practice under the caption In re Katrina Canal Breaches Consolidated Litigation, Civil Action No. 05-4182 in the United States District Court, Eastern District of Louisiana. In August 2009, the federal trial court ruled in that case that certification of policyholder claims as a class would be inappropriate. The Federal Fifth Circuit Court of Appeals affirmed the denial of class certification. Federal court rulings in that case are not binding on state courts, which do not have to follow the federal court ruling on class certification.
In July 2008, Lafayette Insurance Company participated in a hearing in St. Bernard Parish, Louisiana, after which the court entered an order certifying a class defined as all Lafayette Insurance Company personal lines policyholders within an eight parish area in and around New Orleans who sustained wind damage as a result of Hurricane Katrina and whose claims were at least partially denied or allegedly misadjusted. We appealed this order, and in a decision dated, November 30, 2010, the Louisiana Supreme Court ruled that certification of the class was improper and remanded the matter to the trial court for a determination of the merits of the claims of individually identified policyholders. In light of this decision, we believe it unlikely that class certification will be upheld in any of the other suits seeking class relief. As the claims of potential class members will likely not be addressed in class action litigation, the only recourse for policyholders dissatisfied with their insurance claim adjustment will be through litigation pursued by specifically named persons. While we believe that the allowable time for commencement of such litigation has passed, this issue has not yet been definitively decided by Louisiana courts, and it is possible that suits may still be commenced that are not subject to dismissal as untimely.
We intend to continue to defend the cases related to losses incurred as a consequence of Hurricane Katrina. We have established our loss and loss settlement expense reserves on the assumption that the application of the Valued Policy Law will not result in our having to pay damages for perils not otherwise covered. We believe that, in the aggregate, these reserves are adequate. Our evaluation of these claims and the adequacy of recorded reserves may change if we encounter adverse developments in the further defense of these claims.
Law will not result in our having to pay damages for perils not otherwise covered. We believe that, in the aggregate, these reserves are adequate. Our evaluation of these claims and the adequacy of recorded reserves may change if we encounter adverse developments in the further defense of these claims.
We have audited the accompanying consolidated balance sheets of United Fire & Casualty Company (United Fire) as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedules of United Fire listed in Item 15(a)(2). These financial statements and schedules are the responsibility of United Fire’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.