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.
We operate two business segments that are comprised of a wide range of products:
For 2014, property and casualty business accounted for approximately 92.6 percent of our net premiums earned, of which 91.0 percent was generated from commercial insurance. Life insurance business made up approximately 7.4 percent of our net premiums earned, of which over 63.2 percent was generated from traditional life insurance products.
We evaluate segment profit or loss based upon operating and investment results. Segment profit or loss described in the following sections of Management's Discussion and Analysis is reported on a pre-tax basis. Additional segment information is presented in Part II, Item 8, Note 10 "Segment Information" to the Consolidated Financial Statements.
corporation, and United Fire & Casualty Company is now a wholly owned subsidiary of United Fire Group, Inc. In addition to creating a more streamlined corporate structure, the new holding company's organizational documents enhanced our shareholders' rights by reducing the percentage of shareholders required to amend our Articles of Incorporation, approve the merger or sale of substantially all Company assets, and call a special meeting. This new structure will potentially provide us with more flexibility to operate and finance our businesses, particularly if we should need to raise capital in the future.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
For the year ended December 31, 2014, our property and casualty insurance segment reported income before income taxes of $66.0 million compared to income before income taxes of $88.7 million in the same period in 2013. The decrease in income before income taxes during 2014 as compared to 2013 is primarily due to an increase in losses and loss settlement expenses partially offset by a 10.5 percent increase in net premiums earned.
The following table shows our premiums written and earned for 2014, 2013 and 2012:
Assumed premiums written decreased $2.5 million in 2014 as compared to 2013 due to softening market conditions. We renewed our participation levels in all but one of our active assumed programs and added one new program to replace the lost premium from the program not renewed.
Direct and assumed premiums written are reduced by the ceded premiums that we pay to reinsurers. For 2014, we benefited from softening market conditions that allowed us to cede 0.8 percent less premium while growing direct premiums written by 11.1 percent. For 2013, ceded premiums written increased slightly compared to 2012 due to premium rate increases.
In 2014, our pre-tax catastrophe losses were $49.7 million, an increase as compared to $30.2 million in 2013, but a decrease as compared to $64.7 million in 2012. The increase in catastrophe losses in 2014 is primarily due to spring and summer convective storms in regions of the U.S. where we conduct much of our business. Our 2014 losses included 26 catastrophes, where our largest single pre-tax catastrophe loss totaled $7.7 million. Our 2013 losses included 29 catastrophes, where our largest single pre-tax catastrophe loss totaled $4.0 million.
Primary reinsurers participating in the property and casualty excess of loss programs.
The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law on December 27, 2007. On January 2015, President Obama signed into law The Terrorism Risk Insurance Program Reauthorization Act of 2015 ("TRIPRA"). TRIPRA extends the Terrorism Risk Insurance Program until December 31, 2020; gradually increases the coverage trigger for shared terrorism losses between the federal government and the insurance industry to $200 billion per year (up from $100 billion); and gradually increases the industry-wide retention to $37.5 billion per year (up from $27.5 billion). TRIPRA coverage includes most direct commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an insurer, with exclusions for commercial automobile insurance, burglary and theft insurance, surety, professional liability insurance and farm owners multiple peril insurance. Under TRIPRA, each insurer has a deductible amount, which is 20.0 percent of the prior year's direct commercial lines earned premiums for the applicable lines of business, and retention of 15.0 percent above the deductible. No insurer that has met its deductible shall be liable for the payment of any portion of that amount that exceeds the annual aggregate loss cap specified in TRIPRA. TRIPRA provides marketplace stability. As a result, coverage for terrorist events in both the insurance and reinsurance markets is often available. The amount of aggregate losses necessary for an act of terrorism to be certified by the U.S. Secretary of Treasury, the Secretary of State and the Attorney General was $100.0 million for 2014 and remains the same for 2015. Our TRIPRA deductible was $89.5 million for 2014 and our TRIPRA deductible will be $99.2 million for 2015. Our catastrophe and non-catastrophe reinsurance programs provide limited coverage for terrorism exposure excluding nuclear, biological and chemical-related claims.
In 2014, our losses and loss settlement expenses were affected by catastrophe losses of $49.7 million in both our direct business and assumed reinsurance business as compared to $30.2 million in 2013 and also by an increase in our non-catastrophe results from an increase in frequency and severity in fire-related losses in our commercial property line of business.
In 2012, our losses and loss settlement expenses were affected by catastrophe losses of $64.7 million in both our direct business and assumed reinsurance business. Our non-catastrophe results reflected our favorable development of reserves established for claims that occurred in prior years of $73.4 million.
Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after information about a claim becomes available. This approach tends to produce, on average, prudently conservative case reserves, which we expect to result in some level of favorable development over the course of settlement.
The property and casualty insurance segment experienced $56.7 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2014. The significant drivers of the favorable reserve development in 2014 were our long-tail liability lines, workers' compensation, and automobile (both liability and physical damage), which collectively contributed $54.3 million of the total development. Much of the favorable long-tail liability development came from loss adjustment expense and is attributed to our litigation management initiative. Workers' compensation favorable development was due to the combination of claim reserve decreases along with favorable changes affecting loss adjustment expense. Changes in reserve development patterns have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim
reserves. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial auto liability continues to benefit from loss control and re-underwriting initiatives over the past two years as well as favorable changes affecting loss adjustment expense as reserve development patterns also showed a redundancy in reserves along with less need for IBNR claim reserves.
The property and casualty insurance segment experienced $57.5 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2013. The favorable reserve development on prior year reserves was primarily 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 2013 was the other liability line which contributed $33.5 million of the total, primarily due to additional recognition of relatively recent changes in reserve development patterns which have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Also, contributing to the favorable reserve development in 2013, only to a lesser extent than the other liability line of business, were workers' compensation, commercial auto liability and surety lines of business, which contributed $7.5 million, $6.3 million and $4.7 million, respectively, to the favorable reserve development.
In recent years, we began to use our loss control department more extensively in an attempt to return this line of business to a higher level of profitability. For example, our loss control department has representatives 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. We avoid accounts that have become too underpriced for the risk.
Incurred losses from construction defect claims were $10.1 million in 2014 compared to $13.7 million and $9.6 million in 2013 and 2012, respectively. At December 31, 2014, we had $33.6 million in construction defect loss and loss settlement expense reserves (excluding IBNR reserves which is calculated at the overall other liability commercial line), which consisted of 1,597 claims. In comparison, at December 31, 2013, we had reserves of $35.8 million, excluding IBNR reserves, consisting of 2,102 claims.
The deterioration in the net loss ratio in 2014 as compared to 2013 was due to an increase in catastrophe losses from spring and summer storms in regions of the U.S where we conduct much of our business and an increase in frequency and severity in fire-related losses in our commercial property line of business. The improvement in the net loss ratio in 2013 as compared to 2012, was due to an increase in premiums earned in these lines, which increased 25.1 percent to $165.1 million, primarily from organic growth.
In 2014, the loss ratio increased as compared to 2013 which experienced a decrease in claim frequency 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. The 2014 loss ratio improved compared to 2012 which experienced an increase in losses and loss settlement expenses, which is primarily the result of one large claim.
In 2012, we renewed our participation in all of our assumed programs although with reduced participation in programs with heavier Northeast U.S. exposure, in response to the exposure added in this region from the Mercer Insurance Group acquisition. Losses and loss settlement expenses were elevated from historic levels due to several natural disasters, primarily the Thailand floods and Super Storm Sandy.
Income before income taxes for our life insurance segment totaled $10.4 million in 2014 compared to $13.2 million in 2013 and $10.0 million in 2012. The decrease in net income before income taxes from 2013 to 2014 is primarily a result of a decrease in net investment income and an increase in losses and loss settlement expenses due to an increase in death benefits paid, which were partially offset by a decrease in interest on policyholders' accounts which is due to continued net withdrawals of annuity products and a decline in the increase in liability for future policy benefits as a result of a decline in sales of single premium whole life products.
In 2014, net investment income decreased 9.2 percent as compared to 2013 and decreased 5.1 percent in 2013 as compared to 2012. This was due to a decrease in the reinvestment interest rates from the the continued low interest rate environment and, to a lesser extent, a decrease in invested assets resulting from negative cash flows on annuity products. For discussion of our consolidated investment results, see the "Investments" section contained in this Item.
Net premiums earned increased 1.2 percent in 2014 as compared to 2013 due in part to an increase in the sale of single premium immediate annuities. Net premiums earned were 7.5 percent lower in 2013 as compared to 2012 primarily due to a decrease in sales of single premium whole life products.
Underwriting expenses decreased 3.0 percent in 2014 as compared to 2013 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 of $17.3 million, $25.8 million and $5.9 million in 2014, 2013, and 2012, respectively. Our effective federal tax rate varied from the statutory federal income tax expense rate of 35.0 percent in each year, due primarily to our portfolio of tax-exempt securities.
The composition of our investment portfolio at December 31, 2014 is presented at carrying value in the following table:
(1) Available-for-sale and trading fixed maturities are carried at fair value. Held-to-maturity fixed maturities are carried at amortized cost.
The weighted average effective duration of our portfolio of fixed maturity securities at December 31, 2014 was 5.2 years compared to 5.0 years at December 31, 2013.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at December 31, 2014, 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.
We invest the premiums received from our policyholders and annuitants in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, changes in interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Net investment income decreased 7.3 percent in 2014, compared with the same period of 2013, due to changes in value of our investments in limited liability partnerships and secondarily to the decline of reinvestment interest rates from the continued low interest rate environment. Our property and casualty insurance segment holds certain investments in limited liability partnerhsips that are recorded on the equity method of accounting, with changes in the value of these investments recorded in investment income. We expect to maintain our investment philosophy of purchasing quality investments rated investment grade or better.
We regularly monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
Changes in unrealized gains and losses on available-for-sale securities do not affect net income and earnings per share but do impact comprehensive income, stockholders' equity and book value per share. We believe that any unrealized losses on our available-for-sale securities at December 31, 2014 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. It is possible that we could recognize impairment charges in future periods on securities that we own at December 31, 2014 if future events and information cause us to determine that a decline in value is other-than-temporary. However, we endeavor to invest in high quality assets to provide protection from future credit quality issues and corresponding other-than-temporary impairment write-downs.
In 2014, 88.3 percent of our gross investment income originated from interest on fixed maturities, compared to 86.3 percent and 91.9 percent in 2013 and 2012, respectively.
The following table details our annualized yield on average invested assets for 2014, 2013 and 2012, which is based on our invested assets (including money market accounts) at the beginning and end of the year divided by net investment income:
Our Consolidated Balance Sheets include financial instruments whose fair values are subject to market risk. The active management of market risk is integral to our operations. Market risk is the potential for loss due to a decrease in the fair value of securities resulting from uncontrollable fluctuations such as: interest rate risk, equity price risk, foreign exchange risk, credit risk, inflation, or world political conditions. Our primary market risk exposures are: changes in interest rates, deterioration of credit quality and an unforeseen decrease in liquidity. We also have limited exposure to equity price risk and no foreign exchange risk.
Duration relates primarily to our life insurance segment because the long-term nature of these reserve liabilities increases the importance of projecting estimated cash flows over an extended time frame. At December 31, 2014, our life insurance segment had $863.6 million in deferred annuity liabilities for which investments in fixed maturity securities were specifically allocated.
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, 2014:
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 2014 and 2013 resulted in a corresponding downgrade in the ratings of the securities. Of the insured municipal securities in our investment portfolio, 98.9 percent and 94.9 percent were rated "A" or above, and 87.9 percent and 83.8 percent were rated "AA" or above at December 31, 2014 and 2013, respectively, without the benefit of insurance. Due to the underlying financial strength of the issuers of the securities, we believe that the loss of insurance would not have a material impact on our operations, financial position, or liquidity.
We have no direct exposure in any of the guarantors of our investments. Our largest indirect exposure with a single guarantor totaled $88.8 million or 25.8 percent of our insured municipal securities at December 31, 2014, as compared to $114.2 million or 29.7 percent at December 31, 2013. Our five largest indirect exposures to financial guarantors accounted for 74.8 percent and 79.9 percent of our insured municipal securities at December 31, 2014 and 2013, respectively.
The following table displays a summary of cash sources and uses in 2014, 2013 and 2012:
Net cash flows provided by operating activities totaled $151.3 million, $161.5 million and $172.1 million in 2014, 2013 and 2012, respectively. Operating cash flows in 2014 reflect a higher level of property and casualty loss payments. 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.
Our cash flows from operations were sufficient to meet our liquidity needs for 2014, 2013 and 2012.
We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At December 31, 2014, our cash and cash equivalents included $28.1 million related to these money market accounts, compared to $37.8 million at December 31, 2013.
Net cash flows used in investing activities totaled $58.9 million, $102.0 million and $111.3 million in 2014, 2013 and 2012, respectively. In 2014, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments that totaled $567.7 million compared to $508.3 million and $555.6 million for the same period in 2013 and 2012, 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.
Our cash outflows for investment purchases totaled $618.4 million in 2014, compared to $601.8 million and $663.8 million for the same period in 2013 and 2012, respectively.
Net cash flows used in financing activities totaled $94.0 million, $74.8 million and $97.8 million in 2014, 2013 and 2012, respectively. In 2014 and 2013 we had $63.5 million and $58.6 million, respectively, 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.
As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2014, our insurance company subsidiary, United Fire & Casualty, is able to make a maximum of $39.6 million in dividend payments without prior regulatory approval. These restrictions will not have a material impact in meeting our cash obligations.
In December 2011, United Fire entered into a credit agreement with a syndicate of financial institutions as lenders. KeyBank National Association is the administrative agent, lead arranger, sole book runner, swingline lender, and letter of credit issuer, and Bankers Trust Company is the syndication agent. The four-year credit agreement provides for a $100.0 million unsecured revolving credit facility that includes a $20.0 million letter of credit subfacility and a swing line subfacility in the amount of up to $5.0 million. As of December 31, 2014, there were no balances outstanding under this credit agreement.
On June 4, 2013, United Fire & Casualty Company, United Fire Group, Inc. and the syndicated lenders entered into an Assignment, Joinder, Assumption, and Release Agreement (the "Joinder Agreement") transferring the obligations under the credit agreement from United Fire & Casualty Company to United Fire Group, Inc. Effective with the execution of the Joinder Agreement, United Fire & Casualty Company was released from any further obligations under the credit agreement.
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. As of December 31, 2014, we have not been in default and were in compliance with all covenants of the credit agreement.
Stockholders' equity increased 4.4 percent to $817.4 million at December 31, 2014, from $782.8 million at December 31, 2013. The increase was primarily attributable to net income of $59.1 million along with an increase in net unrealized investment gains of $33.0 million, net of tax, offset by the change in valuation of our retirement benefit obligations of $29.0 million, stockholder dividends of $19.7 million and share repurchases of $12.9 million. As of December 31, 2014, the book value per share of our common stock was $32.67, compared to $30.87 at December 31, 2013.
The amounts presented for future payments to be made to policyholders and beneficiaries must be actuarially estimated and are not determinable from the contract. The projected payments are based on our current assumptions for mortality, morbidity and policy lapse, but are not discounted with respect to interest. Additionally, the projected payments are based on the assumption that the holders of our annuities and life insurance policies will withdraw their account balances upon the expiration of their contracts. Policies must remain in force for the policyholder or
The amounts presented are estimates of the dollar amounts and time periods in which we expect to pay out our gross loss and loss settlement expense reserves. Because the timing of future payments may vary from the stated contractual obligation, these amounts are estimates based upon historical payment patterns and may not represent actual future payments. Refer to "Critical Accounting Policies: Loss and Loss Settlement Expenses - Property and Casualty Insurance Segment" in this section for further discussion.
We offer our agents a profit-sharing plan as an incentive for them to place high-quality property and casualty insurance business with us. Based on business produced by the agencies in 2014, we estimate property and casualty agencies will receive profit-sharing payments of $17.6 million in 2015.
Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through December 31, 2023 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $11.8 million at December 31, 2014.
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, 2014 properly reflects the fair value of our investments.
At December 31, 2014 and 2013, we had a number of securities with fair value less than the cost basis. The total unrealized loss on these securities was $13.9 million at December 31, 2014, compared with $59.8 million at December 31, 2013. At December 31, 2014, 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."
The DAC asset is amortized over the life of the policies written, generally one year. We assess the recoverability of DAC on a quarterly basis by line of business. This assessment is performed by comparing recorded unearned premium to the sum of unamortized DAC and estimates of expected losses and loss settlement expenses. If the sum of these costs exceeds the amount of recorded unearned premium (i.e., the line of business is expected to generate an operating loss), the excess is recognized as an offset against the established DAC asset. We refer to this offset as a premium deficiency charge.
The following table illustrates the hypothetical impact on the premium deficiency charge recorded for the quarter ended December 31, 2014, of reasonably likely changes in the assumed loss and loss settlement expense ratios utilized for purposes of this calculation. The entire impact of these changes would be recognized through income as other underwriting expenses. The following table illustrates the impact of potential changes in the expected loss and loss settlement expense ratios for all lines of business on the premium deficiency charge. The base amount indicated below is the actual premium deficiency charge recorded as an offset against the DAC asset established as of the quarter ended December 31, 2014:
Actual future results could differ materially from our assumptions used to calculate the recorded DAC asset. Changes in our assumed loss and loss settlement expense ratios in the future would impact the amount of deferred costs in the period such changes in assumptions are made. The premium deficiency charge calculated for the quarter ended December 31, 2014 was $4.0 million and was comparable to the premium deficiency charge of $3.8 million calculated for the same period of 2013.
Costs that vary with and relate to the successful acquisition of life insurance and annuity business are deferred. Such costs consist principally of commissions, premium taxes, and related variable underwriting, agency and policy issue expenses. At December 31, 2014 and 2013, our DAC asset was $66.9 million and $82.4 million, respectively.
reasonably likely to have a significant impact on the rate of DAC amortization each year. Changes in the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs. The effect on amortization of DAC for revisions to estimated gross profits is reported in earnings in the period the estimated gross profits are revised.
We periodically review estimates of expected profitability and evaluate the need to "unlock" or revise the assumptions for the amortization of the DAC asset related to our non-traditional business. The primary assumptions utilized when estimating future profitability relate to interest rate spread, mortality experience and policy lapse experience. The table below illustrates the impact that a reasonably likely change in our assumptions used to estimate expected gross profits would have on the DAC asset for our non-traditional business recorded as of December 31, 2014. The entire impact of the changes illustrated would be recognized through income as an increase or decrease to amortization expense:
Reserves for losses and loss settlement expenses are reported using our best estimate of ultimate liability for claims that occurred prior to the end of any given reporting period, but have not yet been paid. Before credit for reinsurance recoverables, these reserves were $969.4 million and $960.7 million at December 31, 2014 and 2013, respectively. We purchase reinsurance to mitigate the impact of large losses and catastrophic events. Loss and loss settlement expense reserves ceded to reinsurers were $63.8 million for 2014 and $75.2 million for 2013. Our reserves, before credit for reinsurance recoverables, by line of business as of December 31, 2014, were as follows:
Establishing the case reserve for an individual claim is subjective and complex, requiring us to estimate future payments and values that will be sufficient to settle an individual claim. Setting a reserve for an individual claim is an inherently uncertain process. When we establish and adjust individual claim reserves, we do so based on our knowledge of the circumstances and facts of the claim. Upon notice of a claim, we establish a preliminary (average claim cost) reserve based on the limited claim information initially reported. Subsequently, we conduct an investigation of each reported claim, which allows us to more fully understand the factors contributing to the loss and our potential exposure. This investigation may extend over a long period of time. As our claim investigation progresses, and as our claims personnel identify trends in claims activity, we may refine and adjust our estimates of case reserves. To evaluate and refine our overall reserving process, we track and monitor all claims until they are settled and paid in full, with all salvage and subrogation claims being resolved.
On a quarterly basis, United Fire's internal actuary performs a detailed analysis of IBNR reserves. This analysis uses various loss projection methods (paid and reported loss development) to provide several estimates of ultimate loss (or loss adjustment expense ("LAE")) for each individual year and line of business. The loss projection methods include paid loss development; reported loss development; expected loss emergence based on paid losses; and expected loss emergence based on reported losses. The two methods utilized by our internal actuary to project loss expenses are: paid expenses development and development of the ratio of paid expense versus paid loss. Results of the projection methods are compared and a point estimate of ultimate loss (or LAE) is established. The specific projection methods used to establish point estimates vary depending on what is deemed most appropriate for a particular line of business and year. In general, results of several methods are averaged together to provide a final point estimate. IBNR estimates are derived by subtracting reported loss from projected ultimate loss.
Senior management meets with our internal actuary and controller quarterly to review the adequacy of carried IBNR reserves based on results from this actuarial analysis and makes adjustments for changes in business and other factors not completely captured by the actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate. This method of establishing our IBNR reserves has consistently resulted in aggregate reserve levels that management believes are reasonable in comparison to the reserve estimates indicated by the actuarial analysis.
As an example, if our loss and loss settlement expense reserves of $969.4 million as of December 31, 2014, is 10.0 percent inadequate, we would experience a reduction in future pre-tax earnings of up to $96.9 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
We are unable to reasonably quantify the impact of changes in our key assumptions utilized to establish individual case-basis reserves on our total reported reserves because the impact of these changes would be unique to each specific case-basis reserve established. However, based on historical experience, we believe that aggregate case-basis reserve volatility levels of 5.0 percent and 10.0 percent can be attributed to the ultimate development of our net case-basis reserves. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards and an increase if the reserves were to be adjusted downwards. The table below details the impact of this development volatility on our reported net case-basis reserves at December 31, 2014:
In 2014, we did not change the key method though which we develop our assumptions on which we based our reserving calculations. In estimating our 2014 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 line of business are gross reserves for construction defect losses and loss settlement expenses. Construction defect is a liability allegation relating to defective work performed in the construction of structures such as commercial buildings, apartments, condominiums, single family dwellings or other housing, as well as the sale of defective building materials. These claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. At December 31, 2014, we had $33.6 million in construction defect loss and loss settlement expense reserves, excluding IBNR reserves that are calculated for the overall other liability commercial line, which consisted of 1,597 claims. At December 31, 2013, our reserves, excluding IBNR reserves, totaled $35.8 million, which consisted of 2,102 claims. The reporting of such claims can be delayed, as the statute of limitations can be up to 10 years. Court decisions in recent years have expanded insurers' exposure to construction defect claims. As a result, claims may be reported more than 10 years after a project has been completed, as litigation can proceed for several years before an insurance company is identified as a potential contributor. Claims have also emerged from parties claiming additional insured status on policies issued to other parties, such as contractors seeking coverage from a subcontractor's policy.
particularly sensitive to assumptions about medical cost inflation, which has been steadily increasing over the past few years. Other variables that we consider and that contribute to the uncertainty in establishing reserves for workers' compensation claims include: state legislative and regulatory environments; trends in jury awards; and mortality rates. Because of these variables, the process of reserving for the ultimate loss and loss settlement expense to be incurred requires the use of informed judgment and is inherently uncertain. Consequently, actual loss and loss settlement expense reserves may deviate from our estimates. Such deviations may be significant. Our reserve for workers' compensation claims at December 31, 2014 is $196.1 million and consists of 2,551 claims, compared with $186.0 million, consisting of 2,348 claims, at December 31, 2013.
In 2014, 2013 and 2012, we recognized a favorable development in our net reserves for prior accident years totaling $56.7 million, $57.5 million and $73.4 million, respectively.
The following table details the pre-tax impact on our property and casualty insurance segment's financial results and financial condition of reasonably likely reserve development. Our lines of business that have historically been most susceptible to significant volatility in reserve development have been shown separately and utilize hypothetical levels of volatility of 5.0 percent and 10.0 percent. Our other, less volatile, lines of business have been aggregated and utilize hypothetical levels of volatility of 3.0 percent and 5.0 percent.
("Regnier") as our independent actuarial firm for the property and casualty insurance segment. We anticipate that this engagement will continue in 2015.
Regnier uses four projection methods in its actuarial analysis of our loss reserves and uses two projection methods in its actuarial analysis of our loss settlement expense reserves. Based on the results of the projection methods, the actuaries select an actuarial point estimate of the reserves, which is compared to our carried reserves to evaluate the reasonableness of the carried reserves. The four methods utilized by Regnier to project losses are: paid loss development; reported loss development; expected loss emergence based on paid losses; and expected loss emergence based on reported losses. The two methods utilized by Regnier to project loss expenses are: paid expenses-to-paid loss and paid expense-to-ultimate loss.
The process of estimating our pension and postretirement benefit obligations and related benefit expense is inherently uncertain, and the actual cost of benefits may vary materially from the estimates recorded. These liabilities are particularly volatile due to their long-term nature and are based on several assumptions. The main assumptions used in the valuation of our benefit obligations are: estimated mortality of the employees and retirees eligible for benefits; estimated expected long-term rates of returns on investments; estimated compensation increases; estimated employee turnover; estimated medical trend rate; and estimated rate used to discount the
ultimate estimated liability to a present value. We engage an independent actuarial firm to assist in evaluating and establishing assumptions used in the valuation of our benefit obligations.
A change in any one or more of these assumptions is likely to result in an ultimate liability different from the original actuarial estimate. Such changes in estimates may be material. For example, a 100 basis point decrease in our estimated discount rate would increase the pension and postretirement benefit obligation at December 31, 2014, by $28.7 million and $15.4 million, respectively, while a 100 basis point increase in the rate would decrease the benefit obligation at December 31, 2014, by $22.2 million and $12.0 million, respectively.
A 100 basis point decrease in our estimated long-term rate of return on pension plan assets would increase the benefit expense for the year ended December 31, 2014, by $1.0 million, while a 100 basis point increase in the rate would decrease benefit expense by $1.0 million, for the same period.
For the postretirement benefit plan, an increase in our estimated medical trend rate would increase the benefit expense for the year ended December 31, 2014, by $2.0 million, while a 100 basis point decrease in the rate would decrease benefit expense by $1.5 million, for the same period.
In August 2014, the FASB issued updated guidance on the accounting for creditors who are holding receivables with troubled debt restructuring, specifically related to the classification of certain government guaranteed mortgage loans that are in foreclosure. The objective of this update is to provide greater consistency and transparency by addressing the classification of certain foreclosed mortgage loans guaranteed through government programs. The guidance is effective for interim and annual periods beginning after December 15, 2014. The Company will adopt the guidance on January 1, 2015. Management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.
In June 2014, the FASB issued new guidance on the accounting for share based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires a performance target that affects vesting and that could be achieved after the service period, be treated as a performance condition. The guidance is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively or retrospectively and early adoption is permitted. The Company will adopt the guidance on January 1, 2016 and is currently evaluating the impact on the Company's financial position and results of operations.
In May 2014, the FASB issued comprehensive new guidance on revenue recognition which supersedes nearly all existing revenue recognition guidance under GAAP. The new guidance requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. Insurance contracts are not within the scope of this new guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company will adopt the guidance on January 1, 2017 and is currently evaluating the impact on the Company's financial position and results of operations and considering which transition method it will use in implementing the new guidance.
In April 2014, the FASB issued new guidance on reporting discontinued operations and disclosures of disposals of components of an entity. The new guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning after December 15, 2014. The Company will adopt the guidance on January 1, 2015. Management currently does not expect the adoption of the new guidance to have an impact on the Company's financial position or results of operations.
The accompanying Consolidated Financial Statements include United Fire and its wholly owned subsidiaries: United Fire & Casualty Company, United Real Estate Holdings Company, LLC, United Life Insurance Company ("United Life"), Addison Insurance Company, American Indemnity Financial Corporation, Lafayette Insurance Company, United Fire & Indemnity Company, Texas General Indemnity Company (currently in run-off) and Mercer Insurance Group, Inc., Financial Pacific Insurance Company, Financial Pacific Insurance Group, Inc., Franklin Insurance Company, Mercer Insurance Company, and Mercer Insurance Company of New Jersey, Inc.
United Fire & Indemnity Company provides all of the statutory capital necessary for the formation of the Lloyds plan by contributing capital to each of the trustees. The trust agreements require the trustees to become underwriters of the Lloyds plan, to contribute the capital to the Lloyds plan, to sign the articles of agreement and to appoint the
We record our best estimate of reserves for claim litigation that arises in the ordinary course of business. We consider all of our pending litigation as of December 31, 2014 to be ordinary, routine and incidental to our business.
Our whole life and term insurance (i.e., traditional business) premiums are reported as earned when due and benefits and expenses are associated with premium income in order to result in the recognition of profits over the lives of the related contracts. Premiums receivable are presented net of an estimated allowance for doubtful accounts. Income annuities with life contingencies (single premium immediate annuities and supplementary contracts) have premium recorded and any related expense charge fees recorded as income and expense when the contract is issued. On
Changes in unrealized appreciation and depreciation, with respect to available-for-sale fixed maturities and equity securities, are reported as a component of accumulated other comprehensive income, net of applicable deferred income taxes, in stockholders' equity.
In 2014 we did not record any other-than-temporary impairment ("OTTI") charges in our investment portfolio. In 2013 and 2012, we recorded a pre-tax realized loss of $139 and $4, respectively, as a result of the recognition of OTTI charges on certain holdings in our investment portfolio. None of the OTTI charges were considered to have a noncredit related loss component. We review all of our investment holdings for appropriate valuation on an ongoing basis. Refer to Note 2 "Summary of Investments" for a discussion of our accounting policy for impairment recognition.
Property and casualty policy acquisition costs deferred are amortized as premium revenue is recognized. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value. This takes into account the premium to be earned, losses and loss settlement expenses to be incurred and certain other costs expected to be incurred as the premium is earned.
Our intangible assets, which consist primarily of agency relationships, trade names, licenses, and software, are being amortized by the straight-line method over periods ranging from 2 years to 15 years, with the exception of licenses, which are indefinite-lived and not amortized. We performed a qualitative assessment of our intangible assets. As a result of this assessment, we did not recognize an impairment charge on our intangible assets in 2014, 2013 and
2012. Amortization expense, which is allocated to the property and casualty insurance segment, totaled $769, $1,212 and $2,539 for 2014, 2013 and 2012, respectively.
We currently have two equity compensation plans. One plan allows us to grant restricted and unrestricted stock, stock appreciation rights, incentive stock options, and non-qualified stock options to employees. The other plan allows us to grant restricted and non-qualified stock options to non-employee directors.
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. The new guidance was effective for annual and interim periods beginning after December 15, 2013. The Company currently does not have any liability for unrecognized tax benefits. The Company adopted the new guidance effective January 1, 2014. The adoption of the new guidance had no impact on the Company's financial position or results of operations.
The table that follows is a reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities as of December 31, 2014 and 2013.
Net realized gains (losses) on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of net realized investment gains (losses) for 2014, 2013 and 2012, is as follows:
Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily convertible securities which are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains and losses. Our portfolio of trading securities had a fair value of $20,928 and $12,427 at December 31, 2014 and 2013, respectively.
We have evaluated the near-term prospects of the issuers of our equity securities in relation to the severity and duration of the unrealized loss which resulted in the recognition of a $4 OTTI loss in our Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2012. There were no OTTI losses on equity securities recognized in 2014 or 2013. Our largest unrealized loss greater than 12 months on an individual equity security at December 31, 2014 was $54. We have no intention to sell any of these securities prior to a recovery in value, but will continue to monitor the fair value reported for these securities as part of our overall process to evaluate investments for OTTI recognition.
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, 2014 and 2013 was reasonable.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may
reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.
(1) Annuity accumulations represent deferred annuity contracts that are currently earning interest.
The fair value of securities that are categorized as Level 2 is determined by management after reviewing non-binding fair value quotes obtained from independent pricing services and brokers. These fair value quotes are corroborated by other market observable data. Such estimated fair values do not necessarily represent the values for which these securities could have been sold at the reporting date.
The following table provides a summary of the changes in fair value of our Level 3 securities for 2013:
(1) Realized gains are recorded as a component of earnings, whereas unrealized gains (losses) are recorded as a component of comprehensive income.
The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Non-qualified Deferred Compensation Plan and United Fire Group Supplemental Executive Retirement and Deferral Plan (collectively the "Executive Retirement Plans"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plans. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of December 31, 2014, the cash surrender value of the COLI policies was $918, which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.
(1) In 2013, a reduction in our direct IBNR reserves caused a corresponding reduction in ceded IBNR reserves. This factor, coupled with a lack of significant large losses exceeding our reinsurance retentions resulted in negative loss and loss settlement expenses ceded for the year.
Refer to Note 5 "Reserves for Losses and Loss Settlement Expenses" for an analysis of changes in our overall property and casualty insurance reserves.
The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves for 2014, 2013 and 2012 (net of reinsurance amounts):
The significant drivers of the favorable reserve development in 2014 were our long-tail liability lines, workers compensation, and automobile (both liability and physical damage). Much of the favorable long-tail liability development came from loss adjustment expense and is attributed to our litigation management initiative. Workers' compensation favorable development was due to the combination of claim reserve decreases along with favorable changes affecting loss adjustment expense. Changes in reserve development patterns have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial auto liability continues to benefit from loss control and re-underwriting initiatives over the past two years as well as favorable changes affecting loss adjustment expense as reserve development patterns also showed a redundancy in reserves along with less need for IBNR claim reserves.
In 2012, we experienced favorable reserve development for reserves established for claims that occurred in prior years. The majority of this favorable reserve 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 2012 was the other liability line. The favorable reserve 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, 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.
NOTE 6. STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDENDS AND RETAINED EARNINGS RESTRICTIONS
Statutory capital and surplus in regards to policyholders at December 31, 2014, 2013 and 2012 and statutory net income for the years then ended are as follows:
State laws and regulations generally limit the amount of funds that an insurance company may distribute to a parent as a dividend without Commissioner approval. As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2014, our insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $39,587 in dividend payments without prior approval. At December 31, 2014, we were in compliance with applicable state laws and regulations. These restrictions will not have a material impact in meeting our cash obligations. In addition, United Fire Group, Inc. maintains a credit agreement, as discussed in Part II, Note 14 "Credit Facility", which permits us to borrow up to an aggregate principal amount of $125,000.
We paid dividends to our common shareholders of $19,680, $17,484 and $15,269 in 2014, 2013 and 2012, respectively. Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only
At December 31, 2014, United Life had net admitted assets, on a statutory basis, of $1,635,364, $218,711 in excess of its legal reserve requirement. Therefore, any restriction on funds deposited by United Life with the Iowa Insurance Commissioner would not materially affect its financial position or results of operations and its cash flows are sufficient to meet its operational requirements. Under the material transaction and dividend standards described above, United Life would be able to enter into an affiliate transaction and/or pay a dividend of $5,567 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 2014, 2013 and 2012. Statutory accounting principles primarily differ from GAAP in that policy acquisition and certain sales inducement costs are charged to expense as incurred, goodwill is amortized, life insurance reserves are established based on different actuarial assumptions and the values reported for investments, pension obligations and deferred taxes are established on a different basis.
We are directed by the state insurance departments' solvency regulations to calculate a required minimum level of statutory capital and surplus based on insurance risk factors. The risk-based capital results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. Both United Life and United Fire & Casualty Company and its property and casualty insurance subsidiaries and affiliate had statutory capital and surplus in regards to policyholders well in excess of their required levels at December 31, 2014.
The significant components of our net deferred tax liability at December 31, 2014 and 2013 are as follows:
Our investment policy and objective for the pension plan is to generate long-term capital growth and income, by way of a diversified investment portfolio along with appropriate employer contributions, which will allow us to provide for the pension plan's benefit obligation.
The investments held by the pension plan at December 31, 2014 include the following asset categories:
(1) Cash and cash equivalents balance as a percent of total plan assets exceeded the target allocation in 2013 as we were in the process of reducing the number of external investment managers and moving funds between managers in early 2014.
The investment return expectations for the pension plan are used to develop the asset allocation based on the specific needs of the pension plan. Accordingly, equity securities comprise the largest portion of our pension plan assets, as they yield the highest rate of return. The United Life annuity, which is the fourth largest asset category and was originally written by our life insurance subsidiary in 1976, provides a guaranteed rate of return. The interest rate on the group annuity contract is determined annually.
The following tables provide a summary of the changes in fair value of the pension plan's Level 3 securities:
In October 2014, the Society of Actuaries finalized a new mortality table and a new mortality improvement scale. These updated tables reflect improved life expectancies and an expectation that the trend will continue. We have reviewed these updated tables and have updated the mortality assumptions based on this information and also based on research provided by our external actuaries. We will continue to monitor mortality assumptions and make changes as appropriate to reflect additional research and our resulting best estimate of future mortality rates.
We have an employee stock ownership plan (the "ESOP") for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the ESOP upon completion of one year of service, meeting the hourly employment requirements and attaining 21 years of age. Contributions to the ESOP are made at our discretion. When made, these contributions are based upon a percentage of total payroll and are allocated to participants on the basis of compensation. We can make contributions in stock or cash, which the trustee uses to acquire shares of our stock to allocate to participants' accounts. As of December 31, 2014 and 2013, the ESOP owned 214,637 and 220,468 shares of United Fire common stock, respectively. Shares owned by the ESOP are included in shares issued and outstanding for purposes of calculating earnings per share, and dividends paid on the shares are charged to retained earnings. We made contributions to the ESOP of $250 and $100 in 2014 and 2012, respectively. We did not make any contributions to the ESOP in 2013.
The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of United Fire common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of United Fire common stock issuable at any time and from time to time pursuant to the Stock Plan, United Fire Group, Inc. Stock Plan, which amended and restated the 2008 Stock Plan (as
Options granted pursuant to the Stock Plan are granted to buy shares of United Fire's common stock at the market value of the stock on the date of grant. All outstanding option awards vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the Stock Plan are granted at the market value of our common stock on the date of the grant. Restricted stock awards fully vest after 5 years from the date of issuance, unless accelerated upon the approval of the Board of Directors, at which time United Fire common stock will be issued to the awardee. All awards are generally granted free of charge to the eligible employees of United Fire as designated by the Board of Directors.
The Board of Directors has the authority to determine which non-employee directors receive awards, when options and restricted stock shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement (subject to limits set forth in the plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Plan.
Intrinsic value is the difference between our share price on the last day of trading (i.e., December 31, 2014) 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 $790, $1,383 and $229 in 2014, 2013 and 2012, respectively.
The analysis below details the award activity for the restricted stock awards outstanding at December 31, 2014:
We have two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance segment has seven domestic locations from which it conducts its business. The life insurance segment operates from our home office. Because all of our insurance is sold domestically, we have no revenues allocable to foreign operations. The accounting policies of the segments are the same as those described in Note 1 to our Consolidated Financial Statements. We analyze results based on profitability (i.e., loss ratios), expenses and return on equity.
The following table sets forth our net premiums earned by segment before intersegment eliminations:
The following table sets forth certain data for each of our business segments and is reconciled to our Consolidated Financial Statements. Depreciation and amortization expense and property and equipment acquisitions for 2014, 2013 and 2012 are reported in the property and casualty insurance segment.
At December 31, 2014, we were obligated under noncancelable operating lease agreements for office space, vehicles, computer equipment and office equipment. Most of our leases include renewal options, purchase options or both. These provisions may be exercised by us upon the expiration of the related lease agreements. Rental expense under our operating lease agreements was $7,040, $6,521 and $6,017 for 2014, 2013 and 2012, respectively. Our most significant lease arrangement is for office space for our regional office in Galveston, Texas. This lease expired in November 2014. The monthly lease payments for this office space total approximately $175.
In December 2011, United Fire entered into a credit agreement with a syndicate of financial institutions as lenders. KeyBank National Association is the administrative agent, lead arranger, sole book runner, swingline lender, and letter of credit issuer, and Bankers Trust Company is the syndication agent. The four-year credit agreement provides for a $100,000 unsecured revolving credit facility that includes a $20,000 letter of credit subfacility and a swing line subfacility in the amount of up to $5,000.
Our major classes of intangible assets are presented in the following table:
The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2014, 2013 and 2012:
We have audited the accompanying consolidated balance sheets of United Fire Group, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
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, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, 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.