United Fire Group (UFCS) 2002年年度報告「NASDAQ」.pdf

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1、Contents Introduction.1 3 Comparative Financial Highlights.Selected Firlaricial Lhta.3 Thc Chairmans Report.18 Managciiimts Discussion arid Analysis of Final-icial Cordition:ind Kcsults of Opcratioris.20.1)rscription of Business.35 Market for Kegistrants Coriiniori Eqiity arid Related Stockholder Ma

2、tters.42 Report of Independent Auditors.43 Consolidated Balance Sheets.44 Consolidated Stateiiierits of Incomc.45 Chisoliciated Statements of Stockholders Equity.46 Consolidated Statciiicrits of Cash Flows.47 Notcs to Consolidated Financial Statements.48 Directors arid Executivc OfEcers.72 Annual Me

3、etilzg The 2002 iiiiul stockholdt.r ineeting will be held on May 21,2003,at 10 A.III.in the Coinpmys hoiiic office building in Cedar Rapids,low.Thc u s t 3 1 notice and proxy material will be miled to stockholdcrs in acivance of the meeting.A copy of Forin 10-K filed with the Securities md Exclimgc

4、Commision is available to ctock-lioldcrs upon reqiiest to:Corpor&e Secretdry Uriitcd Fire Pr Casualty Coiiipaiiy 1 18 Sccotid Avenue SE Kegistra-and Traiisfcr Agcnt Chnputcrshare Investor Services 2 North LaSalk Street Chicago,Tllinoi 60602 I PO.13ox 73009 I 5 Cedar Rapid$,IOWA 52407-3909 Telephoiie

5、:3 1 0-309-5700/I What makes a good leader?I Comparative Financial Highlights Years Erided Dccembcr 31 2002 200 1 Total Assets$2,15 9,475$1,85 1,839 Net Preiiiitiiiis Earned 417,286 372,010 Nrt liiconir 20,786 24,093 Basic arid Diluted Eariiirirrs Per Common Share 1.76 2.40 Cash Dividends lleclarcd

6、Per Cnrnnmn Share 0.73 0.72 420 1.900 I,flu0 1 0 4 0 70 2 GROWTH IN ASSETS(in tnillionc)GROWTH IN PREMIUM INCOME(It1 tnlIIiIt1)Selected Financial Data Years Ended llcccriiber 3 1 2002 200 1 2000 1999 1998 Total accetc$2,159,475$1,851,839$1,674,109$1,407,716$1,250,594 Redeeiiiable preferred ctock 65,

7、113-Opera ti rig rcvciits lremiumi carncd 417,286 372,019 333,365 273,U5 1 245,727 Irives trn en t i ri come,net 105,553 4 8,cjo 9 86,867 75,317 67,928 Realized investment gains(losscs),net(13,801)(186)(2,0S2)2,936 22,796 Commission and other iriconie 1,839 2,210 2,429 1,912 1,815 Nct iiicoiiie 20,7

8、86 24,093 15,527 15,384 23,677 Preferred stock dividcrids and accretions 3,100-Basic arid clduted earning pcr 0 1 1 1 1 on share I.76 2.40 1.55 1.53 2.28 Cash dividends declared oer conmion share 0.73 0.72 0.71 0.68(3.67 The sclcctcd financial data lierein has been dcrivcd from the fiiiaiicial state

9、ments of United Fire arid its subsidiarics.The data should l x rcad in coi?jtiriction with“The Chairmans Keport,”“Managements lhcussion and Ailalysis of Financial Condition and Results of Operations”and the“Consolidated Firiaricial Statenients and rclatcd Notes.”3 EARNINGS PEK COMMON SHARE 3 Ask Sue

10、 Uallard hout her role in Uniteds hugely succcdul Pdcesetter carnpaign,and shell try to convince you that she,herself,lixl nothing to do with it.“It wx the committee,”she says.“It was the support John Rife gave us.It was the help we got from the e-business and communications departments.It was the r

11、esponse and participation of all our caring employees.I just helped.”Her claim that she“just helped”doesnt begin to account for the gigantic 63 percent increase in employee giving to United Way It certainly doesnt explain the coordination of dozens of contests and activities.And it doesnt even come

12、close to describing her role in creating the campaigns spirit of fun.Soriieoiie had to pull it all together,and that someone was Sue.United WAY recognized her achievement by iiaiiiiiig her its“Campaign Coordinator of the Year.”Chairing UF(;s aiiriual United Way campaign is nothing new for Sue,who to

13、ok on that responsibility three years ago.This years cai-1-1-paign,however,was“so extra-special,”she says,because of the companys rolc;IS Pacesetter for the seven-county fund drive.“Our people wcre all so generous.It was such n good feeling.And the cmipaiiy gave us all the tools arid resoirces to ru

14、n a good campaign.”Among those resources were the prizes for UFGs unique“early bird drawing.”Pledge cards were distributed 011 a Friday;employees returning them by Monday noon wcrc cligible for the drawing.Prizes included a day ofT with pay,and a night in a downtown hotel.More than 70 percent of the

15、 employees returned pledges in timc to cludif;j for the drawing.The company parking lot was the scene of another popular activity that combined fun with fuiidraising.All UFG people were invit-ed to a complementary cookout.“It was a beautiful August day,”Sue recalls,“and we had brats and harnburgers.

16、1)onations were riot required,but were accepted-and this was a very successful event.“I think our employees really wanted to meet the challcngc of being the Pacesetter company.Theyre proud that werc a leader in the coinmtiriity.”4 price to pay,he fccls,for fine friendships arid the satisfaction of h

17、elping his neighbors.Scott had his fathers exarnplc to follow.His dad had been a vol-unteer firc-man for 15 years,and dways spoke highly of thc relatioiishIps that came from that service.So when Scott and his family moved to Atkins,Iowa,in 1988,it was only natural that he would say ycs when he was a

18、sked to help.For Scott,howevcr,there was additional training to become yual-ified as an EMT:120 hours of formal classroom instruction,48 hours of El work and alTlbulancc“ride time,”a national exam and a field day practical exam,covering bleeding,shock management,and medical and trauma assessment.The

19、res also 24 hours of coiitinuirig education every two years-and thats just the basic EMT requirement.Scott has gone beyond that.Hc has taken specialized training to qualie him for“lnterrnediate”certification,allowing him to administer 1Vs.This level requires an additional 12 hours of continuing educ

20、ation.In addition,theres about eight hours of training each month for the fire department,on both fire fighting and medical topics.Each volunteer wears a pager,and agrees to stay iii town 011 one specific weckend every six wccks,as well as being available during the week.Thc volunteers respond to su

21、ch things as car accideiits and medical emergencies,as well as fires.“The scariest medical emergencies are those involving childrcn.Most of us havc kids,aiid these cases are hard to deal with.Theres always a personal connection.But the training helps you react to the situation and know what to do.Th

22、e personal traiirila conies later.”Fortunately,Atkins is a srriall comniunity-1,SO(:)population-arid serious,traumatic events are rare.And fortunately for Atkins,there are people like Scott Minkel,who thinks of all the hours aiid expertise he contributes as tjust being a good neighbor.”6 opportunity

23、 to set ai1 example,to help Nick find the right direction.For Nick,who livcs with his mother,Mark is“a good role model in my life.I can talk to him,tell him things-it really helps me.”Mark and Nick gct together a couple of times a wcck,doing things Nick likes best-shooting pool,going to movies,arid

24、eatin6 out-espccially potutoes olP at Taco Johns,Nicks favorite.“We havc a good time,”Nick says.“I just like hanging out with him.”For Mark,trying to nuke a diffkrcnce in Nicks life brings with it a special responsibility.It isnt always easy to give the Iiiost helpful answers,to keep a young person

25、headed in the right direction.Hut the Big Urotliers/Big Sisters program providcs testing,training arid backup.It begins with psychological testing for prospective“Uig Brothers”and one-on-one interviews with the caseworker,which help in assuring the right adult-child match.Then theres specific traini

26、ng to hclp the adult rccog-nize and deal with sexual abuse.Arid always,theres the caseworker to help iron out any problems that may arise.Mark first became intcrested in the program when lie was work-ing in Peoria in 1999.He and his“littlc brother”there have kept in touch by c-mail since Mark moved

27、to Cedar Rapids.Nick is Marks sec-ond little brother;thc program matched the two last fall.Mark himself is R djvorccd parent with an 1 1-year-old daughter-“the best daughter in the world”-who lives miles away.“I wish I could be with her more,he says.He has four brothers and sisters,all of whom remai

28、n closc.“I feel good about my life,”he says.“I have a strong Liith.1 1 1 1 not extraverted-a bit on the shy side,in fact-and being a big brother gives me a lot of satisfaction.“1 have everything I need.1 like sharing.”8 in that area.This year,Mike taught a five-week unit called“Our City”to third gra

29、ders at Viola Gibson elementary school in Cedar Rdpids.He has taught classes from second to cighth grades in the past.His five chil-drcn-two in college,one in high school,one in third grade and one in second-have all been in his cla,giving hiin an opportunity to know thcir fricnds.And he has taught

30、iiiariy times without a child of his own in the group.“I try to tie in the relevance of their schoolwork to everyday life,”Mike says.“I want them to understaid the d u e of life-long educa-tion,so theyll never stop learning,”Junior Achievement is a n in-school economic education program ficilitated

31、by business volunteers.It currently serves 13,512 students in 85 elerncntary,middle and high schools in four counties-with 823 vol-unteers.“Its a wonderful program,arid I would highly recommend it to anyone who is thinking about making a civic cornrnitrnent,”Mike says.His own cormiiitnient to JA res

32、ulted thrre years ago in an invita-tion to scrvc on the board of directors,of which he is now president.He enjoys that work,too,but his first love is working directly with children.In addition to the time he spends on Junior Achirvement,Mike is involved in youth sports,coaching kids basketball,baseb

33、all arid soccer teams for the past 12 years.He has coached two national chaiqionship soccer teams.His philosophy is simple:Have fun and play hard.At the parent level,his formula is“F Squared”:fun and fi1nda-nientals.“All the issucs are parent issues,”he says.“I just want the kids to learn the game a

34、nd have a good time.”His favorite activity is coaching second grade girls soccer,and anyone who has ever watched such a game can understarid why.“Thcy look at the clouds,they chase buttcr-flies,”he says.“Thcy havr a good time.”Jackie Volz gives her Pony League softball temi her time,her cncour=igeii

35、ieiit,her appreciation for thc gmie and her sense of fun-but what she wmts iiiost to give them IS some-thing theyll use all their lives:an understanding of what it nieaiis to be a team member.“I warit them to recognizc that they have to rely oii their tcam-mates.Teamwork is what makes the game.When

36、they get older,theyll need that skill.”Jackie was coaxed into coaching last spring by her 13-year-old daughter,Kacey,who said,“If you dont do it,Morn,we cant have a team.”It was a somewhat rocky beginning,but she soon discovered that shc could ask for help from almost anyone in town.It probably didn

37、t hurt that although slie is not a Norway,Iowa,native herself,she is mar-ried to one.“Norway is such a big baseball town-Ive never seen so many people so big on one thing,”she says.“Theyrc very supportive,riot criti-cal.They know all the rulcs.All you have to do is ask!”Thc girls start their season

38、in mid-April arid from then on,its practice two nights a wcck and soine Saturdays.They play eight rcgilar games,two each week during June,capping off the season with a Fourth of July tournament.“I was really surprised last year,”Jackie says.Chis this age are going through a lot of changes in their l

39、ives,aiid things dont always go smoothly for thein.But we pulled together,and by the end of the season,we were having a blast!”The three-month season adds up to a lot of hours for Jackie,who also has a son,Matt,IS,and another daughter,Nicole,IO.With her work,her home,and all the childrens activities

40、,she is one busy morn.Nearly 20 girls will participate this year,and Jackie is looking forward to having a good time with them.“I love the game,slie says.“And I want every girl to play.When a parent disagrees with this,1 just say,Relax.Your child is having fun and learning to play the game.Its riot

41、for you-its for the kids.”12“In leading young people.you cant lecture them.Theyre not alwayspaying attention to what youre saying,but theyre always watching.”developer,the zoning and planning cornmission,aiid the City Council.Six years later,she was elected to the Council and has bcen instruinental

42、in its adoption of a land-use plan.In the process,Jean has learncd that one person cant nix akdale Uoulevard plan-and seeing it happen.Ive worked hard to get design standards in place.Its a remarkable cxperience.The challenge now,shc says,is the struggle to find resources.“Cities arc in a real bind

43、right now,”she says.“Most cities have had to cut back services.Coralvilles growth allows it to just keep even.1 believe that whatever money the city has after essentials are taken care of should be spent on revenue-producing economic dcvclopment.”Not everyone agrees with her.“Im not a politician-I d

44、ont do that part well,”Jean says.“I cant play the game.Some people wont rock the boiit-they wont take a stand.But I feel that this is one area where I have an opportunity to imke a diflkreticc,and I do love that!”15 Called to wrve i n Operdtioii Irqi Freedom,Iowa National Guard riieiiibers John Andc

45、rcori IV and Kevin Hulett ire among the thourands of Aiiiericms who n e meeting this challenge with determination and commi tnient.Facing the possibility that her husband may soon be OTI his way to the Middle East,Marie Anderson says,“Were both OK with this.We believe this needs to be done.We try to

46、 roll with the piiiiches and not think too much about the downside.”John,who earned his wings and was a pilot during an eight-year stint in the Army,is 37 years old.He joined the National Guard in 2001.lrcviously qualified to fly the OH 58,he was sent to flight school for instruction on thc CH 46 Ch

47、inook helicopter,often called“the work-horse of the Ariiiy.”Thc C:H 46 can carry troops and supplics,and Johns unit at Fort Campbell,Kentucky,supports the Fourth Infantry Division.yohn says his army hat is back 011,”Marie reports.Thcir uight-year-old son,John T.AridersoiiV,is doing well,she says.“He

48、 asks a lot of questions about military equipment,arid he plays with his toy soldiers a lot more these days.”For Kevin Hulett,theres no uncertainty about where hell be-and that brings its own kind of anguish.As the senior officer stationed in Iowa City,Kevin can go home every night to his wife,Alcxi

49、s,and sons Jake,eight,and Trevor,six.Hut Kevins duties include troop deployment,and that brings;til agony all its own.“Its really hard to stay here,lie says.“1 have good friends that Ive literally put in trucks and sent abroad.I have e-mail conversations with them.Id much rather be there myself.”Kev

50、in,who is 36,has bcen a mernber of the National Chard for 17 years.He enlisted as an equipment operator with a cornbat engineer unit,went to OCS,worked his way up through the ranks and has lxen a major for five years.He served six months in Germany during Operation llcsert Storm and three months on“

51、Forward Sentry”airport duty after September 1 1.He llas also been called up in times of natural disastcrs.Wc at United are proud of thc contributions Kevin and John arc making as members of our countrys all-volunteer military forces.16 k n moments o f comfort and John T.Anderson IV Warrant Oficer 3,

52、Iowa Army Na Corporate Pilot,The Chairmads Report A TALE OF TWOCOMPANIES nce upon a time therc were two coiiipanirs headquartered in a siriall rrlidwestern city nestled among the rolling cornfields of eastern Iowa,right in the heart of Grant Wood country,and 0 whose stocks were traded on NASDAQ.One

53、was a high-flying telecom with billions of dollars in debt and no carnings;the other was a stodby little insurance company which ended the year with over$100 million in cash arid during 2002 increased the book valuc of its common stock by$1.14 per share to$28.94.Ones stock was orice touted by some o

54、f the highest paid aiialysts 011 Wall Street;the stock of the other wasnt followed by anyone.(Well,now two analysts do.)One is emerging from bankruptcy and has a fleet of four jets;the other,which recently bought a 12-year-old Kmg Air airplane,earned$1 7,686,000,and it also once again increased its

55、dividend.You are a stockholdcr in at least one of these corporations.Much has been written about the failures of many stock analysts but there was one who in our opinion had it just about right.He lived a long time ago and was a Greek slave.His iaiiie was Aesop.His classic treatise 011 investing was

56、 entitled“The Tortoise and the Hare.”2002 saw a sip&cant improvcrnent in our property and casualty underwriting results as our combined ratios,both GAAP and statutory,improved by about three points to 102 pcrcent.Irriprovenrients were made in both the loss ratio arid expense ratio.Net prenliunis wri

57、tten increased 14 percent to$418,347,OOO.This increase was almost cntirely the result of higher premiums,as our policy count actually decreased.We continue to reduce our writings of personal lines,which now comprise only 1.4 percent of our direct book of business.Once again we have a storm to tell y

58、ou about.It was Hurricane Lili,which struck Lafayette and central Louisiana on October 3,2002,resulting in$9,791,000 in losses to us arid adding about three points to our loss ratio.After we had dodged the bullet with Isadore,which was aimed right for New Orleans,only eight days later we fiiced Lili

59、,which blew through Cajun country.On September 4,2002,we were notified that a small distributor of buildcrs supplies that American Indemnity insured a couple years back in the eighties,becanie another victim of the asbestos litigation.The thing that makes thc case noteworthy was that this hstributor

60、 was thc 120th defendant in the 122nd anierided petition filed in a lawsuit originating many years ago.While we doubt that adding another defen-dant will increase one iota what the victims will rcceive for their injuries,we are confident that it will iricrrase what the attorneys rcccive for handing

61、the case;and we have to occasionally wonder if that isnt the driving force behind our judicial systeni-to maxir-nizc the compensation for attorneys.In our continuing effort to reduce operating expenses,we consolidated our Lincoln Regional Office 18 into Cedar liapids on August 1,2002.Our Lincoln o&c

62、e dates back to our acquisition of the Protective Fire&Casualty Company in January 1981,and inany of our employecs there had been with the Protcctive.They had bccri good,loyal employees,and that made the decision difficult.Still,it did not makc economic sense to maintain a fully statTed separate fac

63、ility only 350 miles from Cedar R a p i d s.As the stock market had another bad year and people lost faith in their mutual funds,the dcmand for annuities soarcd.At$223,452,000,our annuity writings exceedcd our projections by 40 percent.Thc down side to all this business is that with interest rates f

64、illling,it becarnc increiisingly difxcult to invc-st all that iiioiiey and iiiaintain our spreads.Even after investing$397,025,000 we cnded the year with well over$1 C)0,000,000 in cash.However,we can think of a lot worse things to have than cash.Concerns over credit quality also made the investment

65、 environrrient difficult,and with the economy not doing wcll and the war with Iraq,these concerns are ongoing.During the year we took write-downs on ninc different bond issuers totaling$13,320,000,a record for your company.The largest of these was WorldCoiri,which we wrote down by$5,536,000.These wr

66、ite-downs anlourit to less than 1 perccnt of our total boiid portfolio,which is a substaritially siiialler percentage than imost insurance companies.Chi May 6,2002,your company sold 2,760,000 shares of convertible preferred stock,raising$69,000,000.This was its third public offering.The first was in

67、 197 1 when$1,6S0,000 was raised arid the second was in 186,when we raised$17,250,000.Of the three,this was by&ir the rriost successful.In f k t,we have been told it was what the S.E.C.refers to as a“hot issue.”Who would have thought that a little two-bit insurance company fiom Ckdar Rapids,Iowa,wou

68、ld have a“hot issue”?Tf you turn to page 43 you will sce we havc a new auditor,Ernst&Young LLI?With thc demise ofArthur Andersen LLY,we(like all their clients)had to find new auditors.Actidly it wasnt much of a coinpetition.With only R very limited number of accounting firms really capable of doing

69、S.E.C.work(plus the fact that your conipny,unlike many publicly traded coiiipanies,has for a numbcr of years used and interids to continue to use different accouiiting firms for its audit,tax and iiiteriial audit work)we didnt have much from which to c1ioose.A it is,we arc currently using three of t

70、he“big four.”At your Boards meeting on February 21,2OO3,TOTTI Marshall submitted his resignation.Torn has been a director for nearly 20 years and has chaired the Audit Committee.He gave age as his reason,but 1 suspect it was Sarbanes-Oxley.Since Congress passed this law,audit committee iriectings ha

71、ve becomc a lot longer and the job of C:hairrnan a lot riiorc demanding.As mentioned earlior,at its meeting ori Noveiiibcr 15,2002,your Uoard increased the dividend on your companys comiioii stock by 3 percent to 75,cents for 2003.19.-._._I-MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

72、AND RESULTS OF OPERATIONS he following financial discussion should be read in conjunc-T tion with our Consolidated Financial Stateriierits and Notes thereto which CRTI be found on subsequent pages of this report.This discussion nlay contain forward-loohng statements about oiir operations,anticipated

73、 performance and other sin-ilar matters.The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of I933 and the Securities Act of 1034 for fomm-looking statements.The forward-loolung statements arc riot historical fxts and involve risks arid uncertainties

74、 that could cause actual results to differ rriaterially fi-om those expected and projected.Such for-ward-looking statements arc based on current expectations,estimates,forecasts and projections about the industry in which we operate,ri-ianagements beliefi arid assumptions made by nlanageriiem.Words

75、such as“expects,”“anticipates,”“intends,”“plans,”“believes,”“continues,”“seeks,”“estimates,”“predicts,”“sliould,”“could,”“iilay,”“will continue,”“might”arid variations of such words arid sindar expressions are intended to identify such fonvard-loolung statements.These staterimits are not guarantees

76、of futurc perforriiarice a11d involve risks,uncertainties and assuriiptions that are difficult to predict.Therefore,actual outcomes arid results illuy hffer materially from what is expressed in such forward-lookmg statements.Among the factors that could cause our actual out-conies and results to dif

77、fer are the following:uricertainties with respect to loss reserving;the occurrciice of catastrophic events or other insured or reinsured events with a frequency or sever-ity exceeding our estiniates;thc actual amourit of new and renewal business and demand for our products arid services;the competit

78、ive environment in whic ti we operate,including price,product and service competition;developments in domestic arid global financial markets that could affect our investment portfolio arid financing plans;impact of regdatory actions on our corisolidated financial statements;uncertain ties relating t

79、o government and regulatory policies;legal develop-ments;changing rates of inflation,intcrcst rates aiid other economic conditions;a continuation or worsening of global economic conhtions;a continuation of or a slow recovery from the United States recession;our relationship with our agencies;the val

80、uation of invested assets;the recovery of deferred acquisition costs;or our relationship with our rein-surers.These are representative of the risks,uncertainties and assuniptions that could cause actual outcomes arid results to differ materially from what is expressed in forwasci-loohng statements.R

81、eaders are cautioned riot to place uridue reliance on thcse forward-looklng statements,which speak ordy as of their dates.Except as required under the federal securities laws and the rules arid regulations of the Securities and Exchange Comiilission,we do not have any intention or obligation to upda

82、te publicly any forward-loolung statements,whether as a result of new information,futurc events or otherwise.RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,2002 and 2001 Net operating mcoirie,which exclude net realized gains and losses,for the year ending December 31,2002,increased by$5,543,0

83、(30 to$29,757,000,compared with$24,2 14,OOO in 2001.This was$2.66 per share,after providing for the dividend on the convertible preferred stock,compared with$2.4 1 per share in 2001.Factors contributing significant-ly to the changc in net operating irizoine included a decrease in the property and ca

84、sualty segments accounting principles generally accepted in the Uiiited States combined ratio to 101.8 pcrcent in 2002,coniparrd to 104.6 percent in 2001,and irtiprovenient in the life scgnicnts operating results.Net income(net operating income plus after-tax net real-izcd gains arid losses on secur

85、ities)was$20,786,000,or$1.76 per share after providing for the dividend on the convertible prefcrred stock issued in 2002,comparcd with$24,093,000 or$2.40 per share in 2001.Net inconic was reduced by pre-tax net realized investinem losses of$13,801,000 in 2002,coni-pared to pre-tax riet realized inv

86、estment losses of$186,000 in 2001,The increase in net realized investmmt losses in 2002 was due to 311 increase in write-downs resulting from other-than-temporary inipirinent losses.In 2002,our largest iiivest-rnent write-down was Worldcorn Tric.,which we wrote down in the secorid quarter,resulting

87、in pre-tax charges of$5,536,000.Throughout 2002,cight other securities were written down,which rcsultcd in adhtional pre-tax charge to net income of$7,790,0OO.Wc also incurred$475,000 of net reahzed losses on securities that we sold during 2002.20 Net premiuins earned increased by$45,267,000,or 12.2

88、 percent,to$41 7,286,000,prirnarily as tlie result of prcnliurri rate increases in the property and casualty segment.During the 1990s and into 2000,the property axid casualty insurance and reinsurance industry was characterized by CXCSS capacity,which resulted in highly competitive market conchions

89、as evj-deiiced by declining prerxium rates.Beginning in 2000,capac-ity in the property and casualty market began to contract as companies withdrew from tlie business or ceased operations.In response to iiiarkct conditions,rnany insurance and reinsur-ance companies,including our companies,began to in

90、crease prices.We are continuing to request approvd for prerniurn rate increases in the first quarter of 2003.We do not know when the property and casualty market will turn,leading to a Icvel-irig or decline of iiisurance pricing.It is our intention to con-tinue to seek approval for premium rates tha

91、t are adequate.Losses and settleinent expenses increascd by$2S,65 1,WO,or 9.5 percent,to$295,980,000 in 2002,due prirnarily to an increase in the severity of noricatastrophc losses.Although the number of xioncatastrophe claims decreased by 5,723,or 12.4 percent,in 2002,the average noncatastrophe dir

92、ect loss and loss adjustment expense per claim was$6,386 in 2002,corn-pared to$4,829 in 2001.Ihring 2002,WE experienced a decrease in estimated losses for property aiid casualty claim that occurred in prior years,as described in“Property and casualty insurancc segment”below.he-tax catastrophe losscs

93、 decreased from$26,959,000 in 2001 to$18,003,000 in 2002.W had exposure to 2.5 catastrtl-plies that occurred in 2002,arid 23 that occurred in 2001.Our largest catastrophe loss in 2002 was Hwricaiie Lili,which occurred on October 3,2002 and resulted in pre-tax direct losses arid loss adjustrnent expe

94、nses of$9,791,000 in 2002.Because our catastrophe reiiisurance retention in 2002 was$7,500,0(:)0 plus 5 percent of losses in excess of$7,5(:)O,OOO for a catastrophic event,our net exposure to Hurricane L&i was$7,614,000.Incurrcd losses related to Hurricane Isidore,which occurred on September 26,2002

95、,were$4h9,000 in 2002.We attempt to reduce our potential impact of future cat-astrophes through geographic distribution of risks,reduction of our cxposui-e in catastrophe-prone areas and utilization of reinsurance.We define catastrophes to include events that cause$25,000,000 or inore in industry-wi

96、de direct insured losses to property and that affect a significant nuiiiber of insureds arid insurers.Ths is the same definition uthzed by the Insurance Services CMice,a supplier of property arid casualty statistical data.At United Fire,we also include iii our catastrophe totals,those events we beli

97、eve are,or w i l l be,material to our opera-tions,either in amount or in nurnber of claim counts.Uecausc the occurrence and severity of catastrophes are inherently unpredictable,historical results of operations may not be iiidica-tive of fiiture rcsults of operations.Claim h x i catastrophic events

98、could reduce our net income,cause substantial volatllity in our financial results for any fiscal quarter or year or otherwise adversely affect our financial conhtion or results of operations.In 2001,wc incurred losses of$6,892,000 related to the events of Septenibcr 11,2001.During 2002,we incurred a

99、n additional$390,000 h r this loss.We have no reservcs out-staiiding as of L)ecernber 31,2002,for the September 13 events.We consider the September 11 attacks on the World Trade Center to be onc event.However,if the judicial system determines that these attacks shorild be considered rnultiple events

100、,we estimate,based upon information currently available to us,that our pre-tax losses would incrcase by approximately$3,000,000.Other underwriting expenses and amortization together increased in 2002 by$10,857,000,or 9.0 percent,to$131,401,000,primarily as the result of the growth in net pre-nliu ni

101、s written.Net investment iriconie increased by$6,644,()00,or 6.7 percent,to$105,553,000 between 2001 and 2002.Despite the depressed interest rate eiiviroiuiient that existed in the United States throughout 2002,annuity deposits arid premium receipts haw led to growth in our investment portfolio,thus

102、 lcadiiig to the increase in investment income.Interest on policyholder accounts iiicreascd to$51,735,000 in 2002,coriipared to$48,213,000 in 2001.We lowered interest-crec3itirig rates on new deposits throughout 2002.M u c h of the growth in interest crdted was primarily a result of the interest cre

103、dited on existing account balances,where the interest crediting rates are higher than the current rates.Property and casualty insurance segment Net income in the property and casualty insurance segrncnt was$17,473,000 in 2002,coinpared to$15,559,000 in 2001.The segrncnts net income benefited from xi

104、 iiicreasc in net preiiziurns earned driven by ai increase in premium rates,iniprovement in the accounting principles generally acceptcd in the United States loss and expense ratios,and decreased cat-astrophe losses.Net written pretiliurris increased by 14.3 percent,from$366,138,000 in 2001 to$41 8,

105、347,001)in 2002.We are focus-ing our growth efforts on our coiimiercial lines of business,where we are most profitable.Net prcriiul-ris written increased in the cotmnerc:i;il lines by$h1,225,000,or 21-3 percent,in 2002,a i d dccreased in the personal lines by$3,339,000,or 5.2 percent,in 2002.During

106、2002,we inipleriientcd rate increas-es of up to 25 percent in many of our commercial lines of business.We also irnpleiiiented rate increases in many of our personal lines of business,but we reduced the riuniber of per-sonal lines policies in force.Direct premiums written were$442,832,000 in 2002,cor

107、n-pared to$375,597,000 in 2001.Texas remains our largc-st state in terms of direct premium volume,with direct premiums written of$63,971,000.Iowa is our second largest state,with direct premiums written of$s7,856,C)Oi).Our assumed preini-urns written decreased between 2001 and 2002 from$1 5,708,000

108、to$1 0,766,000 clue to the rumoff of several assumed reinsurance contracts.Ceded prer-niuil-is written increased from$25,167,000 in 2001 to$35,25 1,000 in 2002.To control costs resulting from 21 higher reinsurance rates in 2002,we increased 0111 retention levels.For our property arid casualty lines

109、of business,our rctcntion for 2002 was$1,250,000,which iicans we liad rciti-surancc for any single claim over$1,2.50,000.Our loss reten-tion was$1,000,000 for losscs that pertain to years 1095 through 2001 and$7SO,OOO or less for losses that pertain to years prior to IOOS.We also incrcascd our loss

110、retention levels for the total direct loss we may incur from a single catastrophe.In 2002,we increased the total direct loss we could incur from a single catastrophe,after rcinsurancc,to$7,500,000 plus 5 per-cent of losses in excess of$7,500,000.From 1993 to 2001,tlie limit was$5,000,000.Begiiiiiiii

111、g Jsnuary 1,2003,we increased OUT retention for ariy single claim to$1,500,000,but we did riot change our cat-astrophe retention of$7,500,000.Our reinsurance contracts limit or exclude coverage for losses sustained as a rrsult of terrorist activities.The Terrorism lhsk Insurance Act of2002 was passe

112、d by Congress aiid signed into law by the President 011 November 20,2002.The Act defines a“ccrtified”act of terrorism as“an act that is certified by tlie Secretary of tlic Treasury as resulting in aggregate losscs in excess of$5,000,000,is a violent act or dangerous to tiurnan life,property or infra

113、structure,and is committed by an individ-ual(s)iicting on behalf of ariy foreign pcrsoti or interest as part of an cFort to coerce the civilian population of tlie Urliterl States or to influcncc the policy or affect the conduct of the United States Goveriimerit by coercion.”The Act requires us to of

114、fer covcragc for ccrtificd acts of terrorism on all polices issued or renewed through I3eceinber 3 1,2004.In 2002,our net prenliuins earned grew to$389,413,000 from$346,582,000 in 2001.This growth was driven by the increase in our preiilitrrii rates arid was concentrated in our col-imiercial liabili

115、ty lines,wherr ratc increases were as high as 25 percent.Because preiiiuiiis arc recorded in earnings over the life of a policy,we expect the growth in net prernjuxns written to result in contiiiued growth in this category of net prenliul-iis eariied into 2003.Losses aiid settlement expenses iricurr

116、cd in 2002 totaled$280,021,000,reflecting losses and settlement expenses of$291,077,000 resulting from losscs that occurred in 2002 and favorable dcvclopmcnt of$1 1,OS6,000 on losses that occurred prior to 2002.The Civorable developriierit restilted from a re-estimation of loss rcscrvcs established

117、at necerniber 3 1,2001,in cach of our lines of business except other liability.The defi-ciency in the other liability line of business of$1 2,788,C)OO resulted from a nurnbcr of large other liability losses reported to us in 2002 fi)r accident years 1097 through 2001.The defi-ciency in thc other lia

118、bility linc of busiiiess was more than off-set by the redundancics in our other lines of business.Losses and scttlcnient expenses incurred in 200 1 totaled$256,145,000,reflecting$303,182,000 of losses that occurred in 2001 and$47,037,000 of hvorable development on losscs that occurred prior to 2001.

119、In 2001,tlic favcxhle develop-ment was conccntrated in our commercial automobile liabili-ty and other liability lilies of business for accidents occurring 22 in years 1998 through 2000.Our reserving process,wlzicl-i coritributed to the favorable dcvclopmcnt in 2002 and 2001,is presented under“lcserv

120、es”later in this discussion.C.)ur liability lines of business arc coi-sidcrcd long-tail lines of business due to the length of time that may elapse before claims are finally settled.Therefore,we may not know our final developerit on individual clairns for inany years.Our estimates for losses,particu

121、larly in these Iong-tail lincs,arc dependent upon many fictors,such as our esti-mate of the severity of the claim,tlie legal eiivironnient,iriflatiori aiid inehcnl costs.We consider all of these fictors,RS well as others,in estii-natimig our loss reserves.As coriditioiis or trends with respect to th

122、ese fiictors change,we cliarige our esti-mate for loss reserves accordingly.In 2002,our f:ivorablc development was attributable to sav-ings of approximately$1,858,000 from workers compensation r-ncdical bill reviews,comparcd to approxir-nately$1,290,000 in 2001;savings of approximately$2,795,000 fi-

123、oiii the use of alternative dispute resolution in 2002,cornpared to approxi-mately$3,930,000 in?001;recoupnieiit of approximately$3,358,001)from salvage and subrogation in 2002,con,ipared to approxiinatel y$5,643,000 i ti 200 1 and suvi ngs of approxi-rnately$3,045,000 in 2002 attributable to both t

124、he payiiierit of claims for less than the amounts reserved and from reduc-tions in loss reserves due to adrlitiol-la1 inforl-mtion on inclivid-iial claims that we received after the reserves for those clairiis had been established,cornpared to npproxiointely$36,174,000 in 200 1.The additiorlal Livor

125、able iiifori-nation we consider is 11 niqu e to ea cli claim.SLI cli info r mation includes facts that reveal we have 110 coverage ob1ig:ition for a particular claim,changes in applicable laws that reduce our liability or coverage exposure on a particular claim,facts that implicate other par-ties i1

126、s being liable oii a particular clniiii aiid hvorable court rulings that decrease the likelihood that we would be liable for R particular claiiii.Adhtional inforniatiol-i relating to severity also is unique to each claim.For cxariiplc,we may Icarn dur-ing the course of n claim that bodily iiljiiries

127、 are less severe than origiiially believed or that daiilage to a structure is niere-ly cosmetic iristend of structural,as origirlally reported.For 2001,the developriieiit of our loss reserves in many of tlie categories discussed above was affected by adjustments in reserves illadc with rcspcct to th

128、e book of business acquired in our purcliasr ofAmerican Indemnity Financial C hporation in Aupst 1999.Following this purchase,we begnn a detailed review of riiaiiy of the case reserves established for this busi-ness.This review was uiidrrtakrn both as part of our assimila-tion of the c;iw reservcs i

129、nto our own reserves and as a result of our belief upon completing an initial overview of rcscrvcs tllat miny claims had insufficient reserves.We liad sonic of our most experienced claims pcrsoIincl conduct this initial review.The rcscrvc changes made were based on the judgment of claim professional

130、s experienced in evaltiatiiig bodily injury aiid property daiiage claims arid knowledgcablc about thc Icpl cnvironment,including trerids in tlie geographical area involved.We also hctored in our actual experience with the American Iriderrlriity book of business as we began to settle the losses and r

131、eview additioiial claims riot a part of the initial reserve review.As a result,we increased reserves the last yuar-ter of 1999 in this book of business by approximately$10,000,000.Through Uecember 31,2001,we had cxpcri-cnccd redundancies of approximately$3,900,000 relating to this reserve increase.W

132、e bclicvc most of this redundancy has occurred due to tlie application of our aggressive claims lxan-dlirig and scttlcnicnt philosophy 0 1 1 the iiiilated claims.As of 1 kcember 3 1,2002,we bclicvc the American lndcninity companies losses arc reserved in accordance with our loss reserving phi losoph

133、y,and that rcduri dancics cxpcricn ccd i ti 2002 of$1,297,00O on these claims are due to the saviiigs fac-tors described in the preceding paragraph.Conhtions and trends that have historically affected the prior years loss development of reserves may not necessarily occur in the future.Despite our hi

134、story of favorable develop-ment on prior years reserves,our ciirrerit reserves for claims may prove to be inadequate,which coiild have a miterial impact on oiir net income aiid stockholders equity.As a measure of our underwriting profitability,we calculate a“combined ratio,”which is the sum of two r

135、atios,the loss ratio and the expense ratio.We calculate the combined ratio on both an accounting principles generally accepted in the United States basis slid a stattitory basis,which is a more coii-srrvative basis of accouiitiiig and one which is required in the reports that we file with the state

136、insurance departments in the states in which we art.domiciled.We utilize the statutory basis of accounting for coinparativc purposes when we cornpare oiir results with those of other property arid casualty insurance companies.On a statutory basis of accounting,tlie loss ratio is calculated by chidin

137、g riet losses and net loss acljjustment expeiises incurred by net preiiiuris earned,because losses occur over the life of a policy.On a statutory basis ofaccount-itig,the expense ratio is stated as a percentage of premiurris written rather than preiniurns earned,because most unc1t.r-writing expenses

138、 are paid when policies are written and arc not amortized over the policy period.The statutory undcr-writing profit Iilargiri is the extent to which the conibined ratio is less than 100 percent.In 2002,our statutory combined ratio was 101.9 percent,which compares fivorably with the indus-try statuto

139、ry coiiibiiied ratio of 105.7 percent,as estimated by A.M.Best Conipmy,a leahng iiisuraiice industry rating agency arid data provider.Our statutory combined ratio w a s 104.7 percent in 2001.Without the enect of catastrophes,our statu-tory combined ratio was 97.3 percent in 2002 aiid 97.0 per-cent i

140、n 2001.Uiider accouii ting principles generally accepted i ti the United States,the loss ratio is cor-nputcd in thc sanic manner as under the statutory basis of accounting,but the expmse ratio is determined by matching underwriting expenses to the period when iiet preniiuriis were earned,rather than

141、 by when net preiiiiuiiis were written.In 2002,our conibincd ratio,cal-culated on the basis of accounting principles generally accept-ed in the Urlited States,was 101.8 percent,coiiipreed to 104.6 percent in 2001.Witliout the effect of catastrophes,our coin-bincd ratio calculated according to accoui

142、itiiig principles gen-erally accepted in the United States WAS 97.2 percent in 2002 arid 96.8 percent in 2001.We review the net loss ratio to mmurr our profitability by lint.and make pricing and underwriting decisions based upon these rrsults.Thr riet loss ratio was 71.9 percent in 2002,74.4 percent

143、 in 2001 arid 74.2 percent in 2000.11-1 the following table,we present thc net loss ratio for each of the last three years for each of our lines of busjness.The information in the table below is presented in accordance with accounting priti-ciples generdy accepted in tlie Uriited States.Yew,ended Tl

144、ec emhrr 31 2002 2001 2000 Losses&Loss L.0sscs pr Loss Losscs sr Loss Adjustment Adjustriiciit Acljtistrricrit Premium Expenses Loss Preiijiuni Bxpcriscs Loss Prcrniurn Expcnscs Loss(1cillur.s in I housund.$J Earned Inciirred Ratio E:irricd liicurrcd Ratio Earricd Iricurrcd Ratio Cc mi n 1erci:iI li

145、 11 es:Fire and allied lines$104,342$65,027 62.3Yo$83,522$(34,751 77.5%)$70,443 f 47,921 67.9%Other liability 83,668 61,835 73.9 67,663 37,622 55.6 56,951 35,134 61.7 Au tornobile 76,273 52,500 68.8 64,390 43,101 66.9 53,137 43,403 81.7 Workrrs coiiipensation 31,137 31,567 101.4 3,475 25,369 86.1 25

146、,858 16,844 h5.1 Fidrlity and surety 21,917 1,853 8.5 20,481 3,536 17.3 1 8,087 2,h85 14.8 Mi scell an eoiis 866 505 58.3 658 516 78.4 41 1 484 94.7 Total romiiierrial lines$318.203$213,287 67.0”h I 266.189$174,895 65.7%$225,097$146,471 h5.1f%)Personal linrs:Autoiiiobilr$34,424$28,808 83.7%8 33,826

147、I 25,963 7 6.x$32,185 B 21,7c)o 67.4)Fire and allied lines 27,299 30,271 110.9 28,292 3 1.362 1 10.9 26,68 I 25,MJ 93.8 Mlscrllanrous 672 467 69.5 77 1 782 101.4 769(4,388)f570.6)Total pcrwial llric$62,395$59,546 95.4%$62,883 f 48,107 92.4%)$50,635 f 42,352 71.0%Reiusura n ce Total$8,815$7,188 81.5%

148、8 17,504 I 23,143 132.2%$22,539$37,345 lh4.7%1$389,413$280,021 71.9%8 346,582 I 250,i 45 73.w$:31)7,27 I I 226,I M 7w%1 23 Within the conltnercial lines of business,our best perform-irig line continues to be fidelity and surety,with a loss ratio of 8.5 percent in 2002,aiid 17.3 percent in 2001.Our s

149、urety products provide protecticin against loss due to nonpedor-niaiice,such as a construction bond that protects owiiers against nonpayment by general contractors of material suppli-ers and subcontractors.Our fidelity products generally provide insurance against loss of nioncy or other property due

150、 to the fraud or dishonesty of employees.Despite poor experience in the surety industry,we have continued to show profitability in this line ofbusiness.A majority of the industry losses have been in the area of financial gmrantees,policies which were widely written by the national surety cotnpanics

151、throughout the 1990s.Diic to our very limited writing of financial glrarantees,we have had mirimal losses incurred from this type of bond.Because of the industrys poor experience,many of the nation-al surety con-ipanies have raised their surety prcrniurn rates,while we id some other regional insuimc

152、c companies have initiated niorc modest ratc iricrcases and term changes,which has eriablcd 11s to obtain additional,favorable surrty accounts.Our other liabhty line of insurance covers businesses for my liability for bodily injury arid property damage arising from gencral business operations,accide

153、nts on their premises aiid products manufxtured or sold.Tlie 2002 loss ratio for this line of business was 73.9 percent,conipared to 55.6 percent jti 20C)l.The deterioration between years was due to a manber of large losses reported to LIS in 2002.Many of these losses relat-cd to prior accident year

154、s.A siriall portion of these losses were the result of construction defect claims,primarily for residen-tial general and subcontractors.This particular type of claim involves allegations of defective work on construction projects.The claims typically involve numerous parties and insurers.Our reserve

155、s for construction defect claims are based upon inforination that is currently availablc to us,as well as our past loss experience,and tlic curiunt legd environrncnt.Future judicial arid rugiilatory actions concerning coristructioii defect liability creates uiiccrtainty as to our ultimate liability

156、for these types of claims.Typically,other liability claims have a siLgnificaiit amount of loss adjustmcnt expense associated with them,and because our loss reserves in this line increased,so did our reserve for loss acljustiiient expenses.The to our experience in this line in 2002,we also increased

157、our other liability reserves for losses that have been incurred,but not yet reported to us;such reserves are estimates that are calculated using our historical cxperience by line of business.Our conmiercial automobile insurance covers physical damage to an insureds vehicle as well as liabilities to

158、third par-ties.Automobile physical daiiage insurance covers loss or damage to vehiclcs frorii collision,vandalism,fire,theft,flood or other causes.Automobile liability iiisuraiice covers bocbly injury,darnage to property resulting frorn automobile acci-dents caused by die insured or tininsured or un

159、derinsured motorists and the legal costs of defending the insured a,winst lawsuits.Our policy is to write only standard automobile 24 insurance.We do riot write coverage for large fleets of auto-mobiles.Our experjerice in this line has deteriorated,as mea-sured by the increased loss ratio of 66.9 pe

160、rcent in 2001 to 68.8 percent in 2002,due primarily to an increase in the sevcr-ity of losses.Our commercial fire and allied line of insurance covers loss-cs to an insureds property,including its contents,as a result of weather,fire,theft or other causes.We provide this coverage through a variety of

161、 business policies.The loss ratio for this line of business in-iproved to 62.3 percent in 2002,coinpared to 79.5 percent in 2001.The iniprovement in this line of business was due priimrily to prenlium rate increases and a decrease in the frequency of nol-icatastrophe losses.Workers cornpensation con

162、tinues to be a poorly porforni-ing line of commercial business.The loss ratio deteriorated to 102.4 percent in 2002,from 86.1 percent in 2001.W contin-ue to write this line of biisinrss as part of an overall COnlfnOr-cia1 ac*coi.int.The deterioration in 2002 w a s primarily the result of XI increase

163、 in severity of claims,coupled with mod-est prerniurn rate increases.Intense competition in the work-ers cornpensation line,as well as state insurance departl-nent regulation of rates,has resulted in lower preiiiurn ratc increases in this line of business when compared to our other cominercial lines

164、 of business.Our reinsurance line of business ill-iproved in 2002,with a net loss ratio of 81.5 percent,compared to 132.2 percent in 2001.The majority of the impact from the September 11 cveiits is iricluded in the 2001 results.In 2002,we incurred assumed losses aiid expenses of$6,858,000,cornpared

165、with 526,210,000 in 2001.The itqxovcriieiit resirltcd primarily from a reduced number of contracts arid exposure in assumed reinsurmce business.We continue to have exposure,primarily c:atastrophe coverages,related to the asstimcd reinsurance con-tracts written prior to 2001,as well as to the sinall

166、number of assunird reinsurance contracts that we have continued to undenvrite.We believe that as of Deccniber 31,2002,our loss reservcs established for the assumed reinsurance business are appropriate.We anticipate that we will decrease the assumed loss reserves each year as the iiorireiiewed assume

167、d reinsurance contracts continue to run oftand the losses are paid out.The deterioration in the loss ratio h r our personal lines of business was the result of an increase in the severity of both catastrophe arid noncatastrophe losses.Through selective undenvritjng,we have reduced our number of pers

168、onal lines policies in force by 22,984,or 18 percent,in 2002,In 2002,our personal lines rcpresented 16.3 percent of our direct prop-erty and casualty prerniuins written,coinpared to 17.9 percent in 2001.Thc expense ratio was 29.9 percent in 2002,conipared to 30.7 percent in 2001.We experienced this

169、stability in our expense ratio as a result of maintaining steady underwriting expenses while seeing growth in prel-niunis written arid earned.We anticipate that the closiiig of our branch oftice in Lincoln,Nebraska,during the third quarter of 2002 will con-tribute to further improver-nent in our exp

170、ense ratio.Reserves Losses and loss adjustment expenses incurred represent actual payments made and changes in estimated future payi-nents to be niade,includng expenses requircd to scttlc both reported and tinreported losses.For reported losses,we establish reserves based upon policy provisions,acci

171、dent hcts,injury or daiiiage exposure,trends in the legal system,historical results aiid other factors.For unreported losses,we establish reserves for each line of business based on the probable iiiiiiber axid nature of losses,deterniined on the basis of historical arid statistical infor-mation.Chcc

172、 we have cstablished reserves,we closely moiii-tor and adjust them as losses dcvclop.We regularly review our reserve calculatioiis aiid,as required by state law,we engage an independent actuary to render opinions as to the adequacy of the statutory reserves we establish.We fle the actuarial opin-ion

173、s in those states where we are licensed.There are no mate-rial differences between our statutory reserves and those established under accounting principles generally accepted in the United States.To establish loss arid loss adjustment expense reserves,we iiiake estimates aiid assuriiptioiis that a f

174、 k t the amounts of assets,liabhties,revenues and expenses reported in our finan-cial statements.Actual results could differ materially from those estimatcs.Thc estimate of thcsc rcscrvcs is subjective arid com-plex and requires us to make estimates about the future payout of claims,which is inheren

175、tly uncertain.When we establish and adjust reserves,we do so based on our knowledge of the circuriistarices and fncts of claims.Upon notice of a claim,we establish a case reserve for losses based on the claiiiis informa-tion reported to us at that time.Subsequently,we conduct an investigation of eac

176、h reported claim,which allows us to more fully understand the factors contributing to the loss arid our potential exposure.This investigation may exterid over a long period of tirne.As our investigations of claims develop arid as our claims persoiinel identify trends in claims activity,we refine ari

177、d adjust our estimates of case reserves.To evaluate aiid refine our overall reserving process,we track and mcinitor all claims until they are settled and paid in full arid all salvage and subrogation claims are resolved.For incurred but riot reported losses,we estiiriate the amount of reserves for e

178、ach line of business on the basis of his-torical arid statistical iiiforination.We consider historical pat-teriis of paid xid reported claim,iridiistry data,and the probable number arid nature of losses arising from claims that have occurred but have not yet been reported for a given acci-dent year.

179、Over the course of the last 10 accident years,our reserves for losses and loss adjustment expenses have exceeded ow incurred losses and loss adjustment expenses.Because estab-lishing reserves is inherently uncertain,an analysis of factors affecting reserves can produce a range of reasonable estimate

180、s.Our philosophy is to cstablish reserves that are appropriate and reasonable,but assume a pessimistic view of potential out-comes.Generally,our best estimate of reserves is slightly above the midpoint of a range of reasonable estimates.We believe that it is appropriate and reasonable to establish a

181、 best estimate within a range of reasonable estimates for use in determining reserves.We believe the use of a range of rcasonablc reserves is especially effective when we are reserving for clairris for bodi-ly injury,disabilities and similar claim,for which settlements aiid verdicts can vary widely.

182、Our reserving philosophy iiuy result jn favorable dcvclopnicnt in succeeding years that will decrease loss and loss adjustment expenses for prior year claims in the year of adjustment.While we realize that this philoso-phy,coilpled with what we believe to bc aggressive arid suc-cessful claims rriana

183、geriierit arid settlement practices,has resulted in year-to-year redundancies in reserves,we belicvc our approach is better than experiencing year-to-year uncer-tainty as to the adequacy of our reserves.Overafl,the hctors contributing to our ycar-to-year rcdun-daricy iricltide the following:Our phil

184、osophy is to establish reserves that arc appropriate and reasonable,but asstline a pessimistic view of potcntial outcomes;We use claims negotiation to control the size of settlements;We assunie that wc have liability for all claims,even though the issue ofliability may in some cases be resolved in o

185、ur favor;We focus on loss prevention services to eriharice workplace safety and to prevent accidents and&less;We promote claims iixinageriieiit services to encourage return-to-work programs,case iiianageinent by mirses for serious injuries arid r-nanagcriicnt of medical provider ser-vices and bihngs

186、;arid We use programs aiid services to help prevent fraud and to assist in favorably resolving cases.Ashcstos and environmental losses At December 31,2002,we established$1,632,000 in asbestos and environmental loss reserves,compared to$1,107,000 at llecernbcr 31,2001.The estimation of loss reserves

187、for ervi-ronrrieritd claims arid claims related to long-term exposure to asbestos and other substances is one of the most difficult aspects of establishing reserves,especially given the inhercnt uncertainties surrounding such claims.Although we record our best estimate of loss and loss adjustment ex

188、pense reserves,because of die significant uncertainties involvcd and the likeli-hood that these uncertainties will not be resolved for maiy years,the ultimate,amounts paid upon settlement of such claims may be more or less tliari the amount of the reserves.Mold losses The existence of certain airbor

189、ne mold spores resulting from moisture trapped in corifiried areas has been alleged to cause severe health aiid environmental hazards.We have current and potential future exposure to mold claims in both our conl-rriercd and personal lines of business.While mold is i l poten-tial problem in several s

190、tates,Texas has been at the forefront of mold insurance issues.Our Texas hotneowners policies contain a iiiold exclusion aiid our Texas corrlrriercial property policies include a$25,000 limitation with respect to clairiis arising 25 from mold.We have also rcccivrd approval for a total mold exclusion

191、 for oiir coiimiercial general liability policies.As rnar-ket conditions pernit,we plan to iiiiplenient any coverage reforms permitted by the Texas Ikpartnient of Insurance that would rnable us to reduce our cxposure in Texas to claiiiis related to-riold.We bclieve that it is unlikely that any such

192、loss would have a material advcrsr effect on our financial condi-tion or our cash flows.Howevcr,due to the uncertainty of future changes in Texas regulation,we cannot estimate our fiiturc probable liability for mold claims.Also,as case law expands,wr rriay be suhject to tnold-rrlated losses beyorid

193、those intended by policy coverage and not addressed by exclu-sioriary or limiting language.Loss reserve additions arising from firture unfavorable judicial trends caiinot br reasonably estimated at the present time.Lije insurance segment Our life insurance segments operating earnings arc derived pri

194、marily from prein i urn reveiiu es and investment i ri come,reduced by interest credited,benefits to policyholders aiid expenses.In 2002,our life insurance segment recorded nrt operating income of$1 1,221,000,coniparcd to net operating income of$9,88C,Oc)O jti 200 1.Net iiicornc recorded by the life

195、 segment for 2002 was$3,33 3,000 conipard to$8,534,(3C)C)for 2001.The change in net incornc was attributable primarily to growth in net invest-nierit income,o&et by an increase in net realized investrncnt lossrs.Net invrstment incomr earned increased by$7,127,000,or 10.1 percent,jti 2002 to$77,809,0

196、00.Despite depressed interest rates,annuity deposits increased our life seg-ments investment portfolio,leading to the increase in invest-nient cariiings.The increase in net realized investiiient losses was priiilarily duc to investiiient writc-downs of$1 1,X36,00C)in 2002 versus investment writc-dow

197、iis of$3,503,000 in 2OO1.Net prciiiuriis earned by the life segment in 2002 totaled$27,873,000,compared to$25,437,000 in 2001.Annuity deposits collcctrd are not rcflrcted in net prcmiums earned.Rather,revcnurs for annuities consist of policy surrender charges and itivcstmeiit income earned.In 2002,a

198、riiiuity deposits were$223,452,000,compared to$1 63,l 15,000 in 200 1.Amiiiity deposits;ire invested and recorded as liabilities,referred to AS future policy benefits.In 2002,we credited interest of$51,735,000 to our fixed annuity aiid univrrsal life policyholder accounts,compared to$48,213,000 in 2

199、001.We estathsh our interest crediting rates basrd upon current iilarket conditions arid maintain a“spread”by crediting rates on our policyholder account balances that are less than thc Lxtio of iiet investment iricomc to average invested assets.We dccrrased intercst-crediting rates during 2002 and

200、2001 for new deposits.The increase in our expisr for interest on policyholders accounts in 2002 was primarily a result of the interest credited on existing account balances.We do not write vari;ible annuity products or variable iiisuranco products.Our fixed annuity products expose us to the risk tha

201、t changes in interest rates could reduce our spread and the rate of return that we are able to earn on our investments.13ecause of tlie poor perfbrrnancc of the market during 2002,our spread has been reduced due to the decreased rate of return carned on funds invested in 2002.We have significant amo

202、unts of annuities up for rcnrwal beginning in 2004.Because of cur-rent iiiarkct conditions,and the resulting low interest rates,thrre exists a risk of notirenewal of thcse annuities.Uccause of the magnitude ofal-inuities wc have at risk,our finaiicial results could be significantly affected.However,

203、we have historically been able to overcoiiir various iilarket conditions in maintain-ing and growing our annuity business.Investnitnt operations Our primary investment strategy is to invest in assets that wdl rncct irrlriiediate and long-term insurance obligations and maximize after-tax retiirris wi

204、th appropriate risk cliversifica-tion.Cas11 received from insurance operations is invested in primarily high quality investment grade corporate and niunic-ipal fixed income or cquity securities.Total invested assets increased$207,187,000,or 13.7 per-cent,to$1,722,036,000 at December 31,2002,compared

205、 to Deceinber 31,2001.Of this growth,$35,301,000 was attrib-utable to changes in tlie riiarket prices of our securities Ged as;Ivailable-for-sale,wlicli are reported at fnir value.The unrealized appreciation from these investmerits is reported net of tax as a separate componeiit of stockholders equi

206、ty.The fair value of securities in our investment portfolio miy fluctuate dcpeding on general economic arid market conditions or events relating to a particular issuer of securities.Because the changes in the fair value of available-for-sale securities and otlicr invested asscts in our investment po

207、rtfolio are reflected in our financial statements,fluctuations in fiiir value could r d t in unrealized investment losses,thereby affecting our stockholders equity.At December 31,2002,$1,3c)8,636,000,or 88 percent,of our fixed maturities were classified as available-for-sale,coiii-pared to$1,142,h14

208、,0C)O or 83 percent at Deceniher 31,2001.During 2002,we added trading securities to our port-folio.Our trading securities consist primarily of convertible redceniable preferred securities,which are recordrd at fair value,with any changes in fair value recognized in earnings.Our reniaining fixed rria

209、turitirs are classified as held-to-maturity and arc rrported at amortized cost.As of December 31,2002,87 percent of our fixed nxiturities were investment grade,as defined by the National Association of Instirancc Comnissioners Sccurities Valuation Of%ce,and had riitiiigs of Class 1 or Class 2,The co

210、mposition of our investment portfolio at Deccinber 3 1,2002,is presented in the table on the following page in accordancr with accounting principles generally accepted in the Unitcd States.26 Pi-operty&C:astialty Iiisurancc Scgriicrit T,i fe In surmce Segnieiit Total Pcrcent of Icrccnt of fel-cellt

211、of(L)o/ars in 1 hocrsll/dss)Total Total Total Fixed nlattirities$410,551 79.3%)$1,172,406 98.0%1$1,588,957 92.2%Equity securities 05,485 18.2 4,009 0.3 99,494 5.8 Morrgagc loans-12,109 1.o 12,109 0.7 Policy loxis-7,330 0.7 7,930 0.5 0 t h long-tern1 iiivestiiieiits I 1,871 2.2-11,821 0.7 Short-term

212、investments 1.575 0.3 150-1,725 0.1$1.722.036 100.0%I hral%535.432.100.0%0 1.I 90.h04 100.0%,Available-for-sale and trnding Gxrd mrituntirs arr r;irrird:it fliir valuc,whilc hclcl-to-maturity Gxrd maturities w c cmicd at arriordzrd cost.Net invcctnicnt iiiccmie iiicredsed by$6,644,000,or 0.7 percent

213、,to$1 OS,SS3,000 betwrrii 2001 cmd 2002.More than 95 percent of our investment income originates from interest on fixed iiiaturities.Our remaining invrstment income is drrived from dividends 011 equity securities,interest on other long-trrm investments,interest o i mortgage loans,interest 011 policy

214、 loans and rent eariied froiii teiimts in our homc office.The average invcstment yield,which is iiivestnieiit income divided by average invested assets,was 6.4 percent in 2002,coinpxed to 6.7 percent in 2001.We attribute the decrease between years to the reinvestiiieiit of procccds from maturing fix

215、ed iilaturities and tlie investment of ticw funds at lower investment yirlds diiriiig 2002 due to market conditions.We recorded net rralized losses 011 securities off1 3,801,000 in 2002,cc)mparcd to nrt realized losses of$186,c)OO in 2001 The 2W2 net loss included other-than-tei-ripory asset impairm

216、ents of$13,326,000 related to noninvcstmcnt grade corporate bonds,which we recognized in 2002.Scc“Critical Accounting lolicics”later in this discussion fix a presentation of oiir iiiipairment policy,Wc rcgularly review thr otlier-than-temporarily impaired securities for appropriatr valuation.Based 0

217、11 the existing status and condition of thrsr securities,wr do riot currently anticipate additional losscs,but continued credit deterioration of some securities is possible,which may result in further writr-downs.Federal income taxes Our effective federal income tax rate of 20.2 perceiit WAS less th

218、an the applicable kcleral tax rate of 35 percent due primar-ily to our portfolio of tax-exeiiipt securities.In 2001,our rfkctive rate was 15.8 percent.The change bctwccn years in cffcctivr rates w a s driven priniarily by two fnctors:during XO2,we held a snlaller portfolio oftax-exenipt securities t

219、han in NO1 and in 2001,we eliminated;I deferred tax liability of$1,143,000.We had established the dcfcrred tax liability in coriiirction with a receniber 31,2001,our loss reserves establishrd for the assumed reinsurance business were appro-priate.Wc anticipate that we will decrease the assumed loss

220、reserves each year as the norirenewed assumed reinsurance contracts arc further into the run-off period.Othrr lialility insurance covers businesses for liability for bodily injury and property damage arising from general busi-ness operations,accidents on their premises and products man-ufactured or

221、sold.Our:loss ratio in the other liabhty line of business was favorable when coriipared with our other lines of business.C3m loss ratio was S5.h percent in 2001 and 61.7 per-cent in 2000.Appropriate pricing and restrictive underwriting guidelines contributed to the favorable results in the other lia

222、-bility line of business.Thc loss ratio for our workers compensation line of busi-ness deteriorated to 86.1 percent in 2001,from 65.1 percent in 2000.Results in 2000 wcrc unusually favorable because we settlcd many workers compensation cases fivorably,which led to lower payments than were reserved.I

223、n 2001,the frequency and severity of the claims reported to LIS increased,atid many of our workers compensation cases had not settled favorably.Wc careftilly continued to underwrite this line of business and further tightened our eligibility guidelines.Our fidelity and surety bond business had some

224、deteriora-tion in 2001 when conipaIed to 2000.The loss ratio was 17.3 percent in 2001 and 14.8 percent in 2000.This line continued to be our most profitable.Howcvcr,for the past several years a soft surety insurance market and competitive pressures had contributed to depressed rates for this line of

225、 business.In 2001,we initiated rate increases and stricter underwriting guicielines to address the conditions in this line.The personal lines loss ratio deteriorated,or increased,to 92.4 percent in 2001 compared to 71.0 percent in 2000.ln 2001,we experienced a greater number of fire losses than in 2

226、000.In 2000,our homeowners business was negatively affected by a llailstorni that swept through the New Orleans area in January 2000.In 2001,our expense ratio improved to 30.7 percent,coni-pared to 33.5 percent in 2000.Through a consolidation of functions we were able to reduce underwriting cxpenses

227、 incurred relative to premiums written.Lijc insurance segment In 2001,our life insurance segment recorded net income of$8,534,000,coIiipared to net income of$5,717,000 in 2000.The results were driven in both years primarily by invest-ment results.Net investment income earned in 2001 was$70,682,000,c

228、ompared to$61,468,0OO in 2000.Annuity 29 deposits increased our life segments investment portfolio,leahng to higher investment earnings.In 2001 and 2000,a sniall number of fixed maturities held by the life scgiiient were written down as a result of otlier-than-temporary declines in niarkct value.The

229、se write-downs were the pri-mary reason for net rcalizcd losses,after tax,of$I,346,OOO rucorded in 2001 and$3,089,00(:)recorded in 2000.Net prcrniunx earned by the life segment in 2001 totaled$25,437,000,compared to$26,094,000 in 2000.In 2001,annuity deposits were$1 63,l 1.5,000,compared to$165,181,

230、000 in 2000.Investment results Premium rate incrcascs and new annuity deposits resulted in adhtional funds to be invested in 2001.This led to growth in our iiivestrnent portfolio and resulted in an increase in net investment incornc carned during tlie year.In 2001,net invest-ment income was$s)8,909,

231、000,compared to$86,867,000 in 2000,an increase of 14 percent.The investment yield,which is investment income divided by average invested assets,was 6.7 percent in 2001 and 6.6 percent in 2000.In 2001 arid 2000,wc wrote down a small amount of holdings in our fixed income portfolio as a result of othc

232、r-In 2001,we crehted interest of$48,213,OOO to annuity arid universal life policyholder accounts,comparcd to$42,410,000 in 2000.We decreased interest-crediting rates during 2001 for new deposits,The increase in our expense for interest on pol-icyholders accounts for the year was primarily a result o

233、f the interest crehted on existing account balances.The composition qf our investment por$lio at December 3 1,2001,is presented in the-Wowing table in accordance with acrountirg princi-ples yenerally accwted in the linited States.than-temporary declines in market value and recognized a net realized

234、loss,before tax,of$3,841,000 in 2001 and$2,932,000 in 2000.We continued to review thc other-than-temporarily impaired securities for appropriate valuation on an ongoing basis.Property&Casualty Insurance Segment Life Insurance Segment Total Percent of Percent of Percent of(Dollars in Thousads)Total T

235、otal Total Fixcd maturities$376,433 76.3%$1,007,797 C)X.h%$1,384,230 91.4%Equity securitics 104,715 21.2 5,642 0.6 110,357 7.3 Policy loans-8,201 0.8 8,201 0.5 Other long-term invcstrrients 10,l hh 2.1 150-1 O,31 h 0.7 Short-term investments 1,745 0.4-I 1,745 0.I Total$493,059 100.0%$1,021,79C)100.0

236、%$1,514,849 100.0%Available-for-sale fixed maturities are carricd at fair value,wlde hcld-to-matui-ity fixed imturitics are carried at miortized cost.Federal income taxes In 2001,our effective income tax rate of 16 percent was less than the applicable federal tax rate of 35 percent due priniar-ily t

237、o our portfolio of tax-exempt securitics and a reduction in deferred tax liabhties.In 2001,we clininated a deferred tax liabhty of$1,143,OC)C),which we had established in connection with a Revenue Agent Review and other tax contingencies related to tlie 1999 pur-chase ofAmerican Indeilmity Financial

238、 Corporation.The liev-enue Agent Review had been settled,and we believe that the reserve for other tax contingencies was unnecessary at Decem-ber 31,2001.The effect of the elimination was a reduction of deferred tax liabhties and a reduction in federal incornc tax expense of$1,I 43,000.At December 3

239、1,2001,we had$26,605,000 of net operat-ing loss carryforwards acquired in the purchase of American Indermiity Financial Corporation in Aupst 1999.The udza-tiori of these net operating losses is linlited by the Internal Revenue Code.The net operating losses began to expire prior to our purchase of Am

240、erican Indemnity Financial Corpora-tion and will continue to expire in various future years through 201 9.Realization of the deferred tax asset associated with the net operating loss carryforwards is dependent on generating sufficient taxable income to utilize the net operat-ing losses prior to thei

241、r expiration.Due to uncertainty of the realizable value of the defcxrcd tax asset,we recorded a valuation allowance of$8,934,000.The valuation allowance recorded on our dcfcrred tax asset dccreased$2,436,000 from 2000,due pririiarily to the utiliza-tion of net operating loss carryforwards.In thc fut

242、ure,if we can usc the net operating losses acquired in the purchase ofhiier-ican Indemnity Financial Corporation,the related reduction in tlie valuation allowance will be recorded as a reduction to our intangible asset until the intangible asset has been eliminated,at which point the reduction in th

243、e allowance will reduce fed-eral income tax expense.LIQUIDITY Cash flow and liquihty is primarily derived from operating cash flows.We invest preniuxns and annuity deposits in assets maturing at regilar intervals to meet our obligations to pay policy benefits,claims and claim adjusting expenses.Our

244、oper-ating activities provided net cash of$58,670,000 in 2002,compared to$24,612,000 in 2001.The incrcase in cash pro-vided by operating activities was primarily due to growth in 30 pen-iiurm We also have sigiificant cash flows frorri sales of irivestrnents and scheduled and unscheduled investment s

245、ecu-rity maturities,redcrnptions and prepayments.These cash flows totaled$209,285,000 in 2002 and$209,254,000 in 2001,wliich were sufficient for our cash flow needs.If our operating and irivestment cash flows had iiot been sufficient to support our operations,we have short-tcrm investments that we c

246、ould utilize for this purpose.We may also borrow LIP to$20,000,000 on a bank line of credit.We did not utilize our line of crcdit during 2002 or 2001.Under tlie terins of our crcdit agree-ment,interest 011 outstanding notes is p;iyable at the lenders prevailing prime ratc,minus 1 percent.We invest f

247、iiiids available for short-term cash needs,pri-marily in money market accounts,which are classified as cash equivalents.At December 31,2002,our cash and cash eyuiva-lents included$28,837,000 related to these money market accounts,conipred to$46,1 13,000 at December 31,2001.Financing activities provi

248、ded cash of$215,607,000 in 2002,coinpared to$1 15,907,000 in 2001.A majority of this increase resulted from net proceeds of$64,884,000 related to the issuance of 2,760,000 shares of convertible preferred stock on May 6,2002.Of tlie net proceeds,$30,000,000 was invested in our life imurance subsidiar

249、y during 2002.Because of the cur-rent unsettled nature of the financial markets,most of the net proceeds arc stdl being held in cash or short-term securities.Other cash provided by firiaricirig activities included annuity and universal life deposits,less withdrawals,of$1 60,hhS,OOO in 2002,compared

250、to$123,132,000 in 2001.REDEEMABLE PREFERRED STOCK Kedeeniable preferred stock totaling$65,113,000 consists of 2,760,000 shares of 0.375 percent Convertible Preferred Stock,Series A,issued at$25 per share in May of 2002.Divi-dends paid and accrued on our preferred stock in 2002 totaled$2,S71,000.Our

251、preferred stock is chscussed further in Note 11 of the Notes to Consolidated Financial Statements.STOCKHOLDERS EQUITY Stockholders equity iricreased from$278,988,000 at I Iccenilxr 31,2002,to$290,433,000 at December 31,2002,an increase of 4 percent.Increases to stockholders equity iiicluded net inco

252、me of$20,786,000 arid net unrealized irivestment appreciation of$2,752,000,after tax We also issued 1,525 sharcs of conmion stock as the result of the exercise of stock options,which increased stockholders equity by$36,000.Conmion and pre-ferred stockholder dividends and preferred stock accretion of

253、$10,403,000 decreased stockholders equity,as chd a change in the ii-fininitini pension liability,after tax,of$1,726,000.The miniinurn pension liability rcsultcd from a decrease in the dis-count rate and a less than expected return on pension Hook value per share at December 31,3003,was$28.94,con-par

254、ed to$27.80 at rIcccd3er 31,2001.As of December 31,2002,we had authorization granted by the board of directors to repurchase 89,210 shares of our cotiiniori stock.In 2002,we rcpiirchased 468 shares of our cormnori stock,all of which were distributed to employees as awards.We did not retire any sharc

255、s of our comiiori stock in 2002.CRITICAL ACCOUNTING POLICIES Critical accounting policies are defined as those that arc reflrc-tive of significant judgmcnts and uncertainties,aid potentially result in materially difkent results under different assuniptioiis and conditions.Our discussion arid arialys

256、is of our results of operations and financial conchtion are based upon our Con-solidated Financial Statements,which we have preparcd in accordance with accounting principles generally accepted in the United States.As we prepare these firiaricial stateinerits,we must make estimates aiid assurnptions

257、that affect the reported amounts of assets arid liabilities,thc disclosure of contingent assets and liabilities at the date of the financial statements and tlie reported amounts of revenues and expenses during the report-ing period.We evaluate our estimates on an ongoing basis.We base our estimates

258、on historical experience arid on other assumptioris that we believe to be rcasonable under the circurn-stances.Actual results could diffor from those estiimtes.We believe that our most critical accounting policies are as follows.1 Izvcstm cwts We contiiiiially riionitor the difTerercnce between oir

259、cost basis and the estimated fair value of oiir irivestinents.Our accciunt-ing policy for impairment recognition requires other-than-teniporary impairrncnt charges to be recorded when we determine that it is more likely than iiot that we will bc unalde to collect d l amounts due according to the cor

260、itractud terms of the investment.Tmpairrncnt charges on iiivestiiieiits arc rccordcd based 0 1 1 the fnir value of the investments at the mea-surement date,and are iiicluded in net realized pins and losses.Factors considered in cvaluating whether 3 decline in vdue is othcr than temporary include:the

261、 length of time and the extent to which the fair value has been less than cost;the financial conditions and near-term prospects of the issuer;and our intent and ability to retain the irivestrnent for a period of time suficicnt to allow for any anticipated recovery.Dfil;.rrd Policy A rquiciticn Ch-ts

262、-We defcr and amortize policy acquisition costs,including cornuissions,premium taxes and other variable costs incurred in connection with writing our property and casualty liries of business,over the life of tlie policies written.We assess the recoverability of deferred policy acquisition costs on a

263、 cliar-terly basis.We do not coiisider anticipated investment income in determining the recoverability of these costs.The loss and loss adjustment expense ratio we use to estiiiiate the rccovcr-abhty of costs is based primarily on the assiiriiptioii that the future loss aid loss adjustrncnt expense

264、ratio wdl approximate that of the recent past.Such adjjustments are rccordcd through operations in the period idcntified.Actual results could hffer materially from such estimates,requiring adjustments to the recorckd deferred policy acquisition cost asset.PrtlpYty a d C:nsrrulty brs14udnr.r SqPnerzt

265、 3 1 n&r.rrc.d 1)oliry Acqukition costs-I,!$?hurunct L%ylWtlt We defer and amortize policy acquisition costs,with interest,on traditional life iiisurancr policies,over the anticipated prernium-paying period of the related policies in relation to anticipated premium iiicoriie on those policies.We use

266、 the retrospective deposit method to defer and amortize policy acquisition costs related to investment cori-tracts aiid universal life contracts.Under the retrospective deposit method,we amortize acquisition costs in proportion to the present value of expected gross profits from investment,mortality

267、 aiid expense margins aiid surrender charges.Actual gross profits can vary from our estimates,resulting in increases or decreases in the rate of amortization.We periodically review these estimates and evaluate the recoverabhty of the deferred acquisition cost asset.When appropriate,we revise our ass

268、uiiiptions 011 thc csti-mated gross profits of these contracts,and we re-estimate arid adjust cuniulative amortization for our books of business by a cumulative charge or crcdit to income.A material adverse deviation in certain critical assuiiiptions,including surrender rates,mortality experience,or

269、 investment performance,would negatively affect our reported deferred policy acquisition cost asset,earnings and stockholders equity.Fi4ture Policy Ber1Cfit.s and hsses,Claims and Set flewwrit Expems-Property and Cusuolty 1nscrrum.r Segmwt Our most significant estimates relate to our reserves for pr

270、oop-erty and casualty losses and lo djustment expenses.We estab-lish reserves for the estimated total unpaid cost of losses arid loss adjustinent expcnscs for events that have already occurred and for those claims that have been incurred but not reported to us.Our estiinate of these reserves is subj

271、ective and complex and is based on our estimates about the future payout of clainis,which are inherently uncertain.When we establish reserves,we do so based on our knowledge of the circurn-stances and claim facts.We continually review our rcscrves,and as experience develops and additional informatio

272、n becomes known,we adjust the reserves.Such adjustments are recorded through operations in the period identified.Because of the high degree of uncertainty involved in establishing reserves,revisions to recorded reserves could have a material impact on our results of opcrations in the period recogniz

273、ed.h t u r e P o l i c y Bcnt$ts a i d Losses,Claims and Settlement Expetrses-Lif;,Inswrarice Segment The reserves reflected in our Corisolidatcd Financial State-ments are calculatcd in accorclance with accounting principles generdy accepted in the United States.We calculate our annuity aiid uiiiver

274、sal life policy deposits in accordance with Statement of Financial Accountixig Standards No.97,“Accounting arid Keporting by Insurance Enterprises for Ccrtain Long-Duration Contracts and for Realized Gains and Losses on the Sale of Investments.”Under Statement of Finan-cial Accounting Standards No.9

275、7,a benefit reserve is estab-lished at the time of policy issuance in an amount equal to the dcposits received.Subsequently,the benefit reserve is adjusted 3 2 for any additional deposits,intercst crehted and partial or complete withdrawals.Statutory reserves for the life insurance segment arc.based

276、 upon applicable Iowa insurance laws.Reserves deteriiiried fox statutory purposes are based upon mortality rates and interest rates specified by state law.Our life insurance subsidiarys reserves meet or exceed the riinir-num statutory requirer-ncnts.A l l of our reserves are developed and aiialyzed

277、annually by independent consulting actuaries.Lkfirwd Incorne%xes We we required to establish a valuation allowance for the por-tion of any deferred tax et that rnanagcment believes may not be realized.We have recorded a valuation allowance of$8,386,(:)00 for deferred tax assets relating to American

278、Indern-nity Financial Chrporation net operating loss carryforwards,which can only be used to offset future taxable income of the property aiid casualty iiisiiraiice segment.Stork-Bared Conipensation We have elected to account for our stock options under Accounting Principles Board Opinion No.25 in a

279、ccounting for our stock option plan.Under Accounting Principles Board Opinion No.25,no compensation expense is recognized for grants of options to employees and directors at an exercisc price equal to or greater than the market price of the stock on the date of grant.Accordingly,based on our grants

280、to einployees in 2002 aid 2001,no compensation expense has been rccopized.l+nsioiz Expense nnd Liabilities We use an outside actuarial service to provide a calculation to determine our pension liability,which we include in our Consolidated Balance Sheet in a liability line labeled“Accrued expenses a

281、nd other liabilities.”Wc provide assump-tions to our actuaries for the expected long-term rate of retiirii arid the discount rate.The expected long-term rate of return or1 pension plan assets considers expected capital mar-ket returns over a long-term horizon,inflation rate assump-tioris and actual

282、returns on plan ets.Lower market interest rates and plan asset returns have resulted in declines in pen-sion plan assct perforl-nance and funded status.As a result,the expected return on plaii assets was reduced to 8.1)percent(froil-i 8.25 pcrceiit for 2OO2 expense recognition)aid the discount rate

283、was reduced to 6.75 pcrccnt(from 7.25 percent at the previous tneasurement date).Both the expected rate of return arid the discount rate impact our current and future pension expense arid pension liability.The decrease in the expected rate of return arid the discount rate will increase pension expen

284、se in 2003.We do not know what the expected long-term rate ofreturn will be in the future;it will depend upon market interest rates.If our current assump-tions for the expected long term-rate of retiirri and the discount rate prove to be too high,our future expenses and liabilities related to our pe

285、nsion plan will increase.Posfretiremerrt Betit$Expense and Liah The expense and liabilities related to postretirement benefits art.calculated based upon a mirriber of actuarial assumptions,the most significant of which are the discount rate and the expected long-term health care trend rate.The disco

286、unt rate we u&ze for deterruining postretirement benefit expense and liability is the same as that used for our pension plan.When we estimate the cxpccted long-term health care trend rate,we consider industry trends,our actual health care cost experience and our future benefit structure.For measurem

287、ent purposes,a 12.0 percent annual rate of increase in the per capita cost of covered health care benefits is assuriicd for 2003.The rate is assurned to decrease gradually each year to a rate of 5.25 pcr-cent for 2010 and remain at that level thcrcaftcr.For dental claims,a 5.25 percent annual rate o

288、f increase was assurned for 2002,decreasing gradually to 4.75 percent for 2005 arid there-after.If either current assumptions for either the&count rate prove to be too high,and/or the expected long-term lcalth care trend rates prove to be too low,our fuhire expenses and liabili-ties related to our p

289、ostretirement benefit plan will increase.REGULATION The irisuraiice industry is governed by the individual state insurance departments.A U of the insurance departments of the statcs in which wc are domicilcd have adopted thc codification of insurance statutory accounting principles,efective January

290、1,200 1.Previously,these principles were prescribed in a variety of publications,as well as state laws,regulations and general administrative rules.The effect on our statutory financial state-rnents as ofJanuary 1,2001,was an increase to statutory poli-cyholders surplus of$1 0,300,000.This change do

291、es not affect the financial statorncnts in this report that arc bascd on accounting principles generally accepted in the United States.Although,pursuant to cochfication rules,we iiiay use permitted statutory practices with approval fi-om the irisurarice depart-mcnts in our states of dornicile,we do

292、not use any statutory permitted practices.The National Association of Insurance Cornmissioners anniially calculates a number of financial ratios to assist state insurance regulators in monitoring the financial condition of insurance companies.A“usual range”of results for each ratio is benclinmk.Depa

293、rture from the“usual range”on fiiur or more of the ratios could lead to inquiries from individual state insurance department to certain aspects of a companys business.None of our insurance companies lxad four or more ratios outside of the“usual range”at December 31,2002.To coniply with solvency regi

294、lations of the individual state insurance departments,we are required to calculate a min-1 1 1 1 1 1 1 1 capital requirement based on insurance risk factors.The risk-based capital results are used to identify companies that require regulatory attention or the initiation of rcgylatory action.At llece

295、mber 31,2002,both our life insurar-ice segment and our property and casualty insurance segnient had capital well in excess of the required levels.We arc not aware of any othor current recomrnendatiotis by tlie National Association of Insurancc Cornmissioners or other regulatory authorities in the st

296、ates in which we conduct busi-ness that,if or when iniplcmcnted,would hiive a inaterial ctTcct on our liquidity,capital resources or operations.RATING AGENCIES Our financial strength is regularly reviewed by independent rating agencies,who assigri a rating bascd upon items such as results of operati

297、ons,capital resources and tninirnum policy-holders surplus requirements.Our fail-uly of property arid casualty insurers has received a group rating of“A”(Excellent)froin A.M.Hest Cornpany.Within tlie group,all of our property and casualty insurers havc an“A”(Excellent)rating,except two insurance sub

298、sicharies that are in a run-off status,whch are rated“B+.,Our life irisurancc subsidiary has received an“A-”(Excellent)rating from A.M.Hest Cornpany,According to A.M.Best Conipany,companies rated“A”and“A-”havc,“an excellent abhty to meet their ongoing obligations to policyholders.”A.M.Best Conipany

299、assigned a“bbb”rating to our coiivertible preferred stock issue.Standard&Poors issued an“A”rating to United Fire&Casualty C:otnpany,Addison Insurance Company,Lafayette Insurance Company,United Fire&Iriderrinity Company,United Fire Lloyds,and United Life Insurance Compmy.According to Standard&Poors,a

300、n insurer rated“A”has“strong financial security charactcristics,but is somewhat more likely to be affected by adverse business conhtions than arc insurers with highcr ratings.”A Standard&Poors Insurer Financial Strength Rating is Standard&Poors current opin-ion of the crechtworthiness of an insurer

301、with respect to its ability to pay under its insuraiice policies and contracts in accordance with their terins.Standard&.Ioors assigned a“BBB+”rating to our convertible preferred stock issuc.NEW ACCOUNTING STANDARDS See Note 1 ofthe Notes to Consolidated Financial Statements for a dcscription of rcc

302、cntly issued accounting pronounce-rrients.We believe that the impact of adopting new accounting pronounceiients wlll not materially affkct our financial condi-tion 01-results of operations.MARKET RISK Our rriairi objectives in nianaging our investment portfolio are to imxinize after-tax investment i

303、ncome and total investrncnt returmwe develop our investinent strategies based OTI a tiutii-bcr of factors,including estimated duration of reserve liabili-ties,short-and long-term liquidity needs,projected tax status,general econornic conditions,expected rates of inflation and regulatory requirements

304、.We tiinnage our portfolio based on irivestriient guidelines approved by our inanagemen t.Our iiivestrrient portfolio is subject to market risk arising from potential changes in the value of the securities we hold in our portfolio.Market risk includes interest rate risk,liquid-ity risk,foreign excha

305、nge risk,credit risk and equity price risk.Our primary market risk is exposure to interest rate risk.Inter-est rate risk is the price sensitivity of a fixed income security or portfolio to changes in interest rates.We also have limited exposure to equity price risk and foreign exchange risk.The acti

306、ve management of market risk is integral to ow operations.Potential changes in the value of our investimnt 3 3 portfolio due to the market risk factors noted above are ana-lyzed within the overall context of asset arid liabhty rnanagc-mcnt.A technique we use in the managenient of our iiivestment and

307、 reserve portfolio is tlie calculation of duration.Our actuaries estimate the payout pattern of our rcscrvc lia-bilities to determinu their duration,which is the present value of the weighted average payiiients expressed in years.A target diiratiori is then established for our investment portfolio s

308、 o that at any given timo tho cstimated cash flowing into the investment portfolio will rnatch the estiillated cash flowing out of the reserve portfolio.Om chief invcstment officer then structures tlie investtnent portfolio to meet tlie target duration to achieve tlie required cash flow,based on liq

309、uihty and mar-kot risk factors.Duration relates primarily to our life insurance segment because the long-term nature of the scgnmts reserve liabili-ties increases the iniportance of projecting estinuted cash flows over an uxtrndrd time frame.At llecernbcr 31,2002,our life segrncnt had$895,870,000 in

310、 deferred annuity liabilities that Lire specifically allocated to fixed maturities.We marrage the life segment invcstments by focusing on matching the duration of tlie irlsrestments to that ofthr deferred ariritiity obligations.Tho dtrration for the invcstnicnt portfolio must take into consider-atio

311、n interest rate risk.This is accomplished through the usc of sensitivity analysis,which measures the price seiisitivity of the fixed maturities to changes in interest rates.Tlie alternative val-uations of the irivestrrierit portfolio given the various hypo-thetical interest rate changcs utilized by

312、the sensitivity analy-sis allow mailagerrierit to revaluc tho potential cash flow from the investrnent portfolio under varying r-narkct interest rate scenarios.Duration can then be recalculated at the differing levels of projected cash inflows.Amounts set forth in the table below detail the niateria

313、l impact of hypothetical interest rate changes on the fair value of certain core fixed incotnc investments held at Decernbor 31,2002.The sensitivity analysis me:isures the change in fair val-ues arising from inmiehate changes in selected interest rate scenarios.We erriployed hypothetical parallel sh

314、ifts in the yiold curve of plus or rrliiius 101)and 200 basis points in tlie sir-nu-lations.Additionally,based upon thc yiold curve shifts,we ernploy in the simriiilatiori estimates of prcpayment speeds for mortgage-related products arid the likolihood of call or put options being exercised.Accordin

315、g to this analysis,at current levels of intercst rates,the duration of the investments support-ing the deferred annuity liabhties is 0.35 years shorter than tlie projected duration of tlie liabilities.If interest rates increase by 100 basis points,this difference would be expected to narrow to 0.34

316、years.The selection of a 100-basis-point increase in interest rates should not be construed as a prehctioii by our management of filture rnarkct cvents,but rather as an iflustra-tion of the potential iiripact of an event.Sensitivity Analysis-Interest Rate Risk-200 BP-100 BP Base+IO0 BP+200 BP Asset:

317、Estinlated fair valuc of fixed niaturities 96 1,931,873$1,850,270$1,778,787$1,700,5530$1,624,492 To the extent actual results differ froin the assumptions uti-lized,our duration arid rate increase measures could be signif-icantly affected.Adhtionally,our calculation assunics that the current relatio

318、nship between short-term and long-torm inter-est rates w d remain coristaiit over time.As a result,thcse cal-culations may not fully capture tlie impact of nonparallel changes in the relationship between short-term and long-term interest rates.Foreip currency exchange rate risk arises froni the poss

319、i-bility that changes in foreign currency exchange rates will affect the fair value of Giiaiicial instrurrients.We have limited foreign currency exchange rate risk in our traiisactions with foreign reinsurcrs relating to the settlement of amounts due to or from foreign reinsurers in the normal cours

320、e of business.We consider this risk to be irnrnatcrial to our operations.Equity price risk is the potentid loss arising from changes in the fair value of equity securities.Our exposure to this risk relates to our equity socurities portfolio and covered call options we have written to gcncrate additi

321、onal portfolio iiicol-ne.Wc do not uthze the options,or any other derivatives for hedging pur-poses.We minimize the market risk associated with our covered call options by writing covered call options on conmion stocks that arc held in our irivestrrierit portfoljo and that arc“out of the money,”whic

322、h means we write the options above the stocks market value at tlie time the option is written.If the market price of the underlyng coninion stock wcro to decline,it would be unusual for the option to be exercised since the exercise price would be hglier than tlie market pricc.At Deceiiiber 31,2002,w

323、e had 110 open covered call options.34 DESCRIPTION OF BUSINESS he term“United Fire,”“we,”“us,”or“our”refer to United?:ire Casualty Coinpany or United Fire&Casualty Corn-pany and its consolidated subsidiaries arid&ate,as die context requires.We are engaged in thc business of writing property arid cas

324、ualty insurance and life insurance.We are an Iowa corporation incorporated in January 1946.Our principal executive office is located at 118 Second Avenue SE,PO.Box 73909,Cedar Rapids,Iowa 52407-3909.Telephone:3 19-399-5700.arid the following companies:Our property and casualty segment includes Unitc

325、d Fire Addison Insurmce Company an Illinois propcrty and casu-alty insurer;Lafayctte Insurance Company,a Lotiisiana prop-erty and casualty insurer;arid American Indemnity Financial Corporation,a Iklaware holding conipany,a l l of whch are wholly owned by United Fire&C:asualty Conipany.American Indcn

326、inity Financial Corporation owns substan-tially all of American liidenmity Company,a Texas proper-ty and casualty insurer.American lndeninity Company has two wholly owned insurance subsidiarios,Texas General Indemnity Company,a Colorado property and casualty insurer,and United Fire&Irideninity Conip

327、any,a Texas property and casualty insurer.United Fire Lloyds,a Texas property and casualty insurer,is an af6liate of and opera-tionaLly and financially controlled by United Fire&Iiideriiriity Company.Lafayette Insurance Chnpaniy is the sole owner of insurance Brokers&Managers,Inc.,a Louisiana genera

328、l agency.Our life insurance segment consists of United Life Insurance Company,a wholly owned subsihary of United Fire&Casualty Company A table reflecting prcmiunis,operating results and assets attributable to our scgmcnts is included in Note 12 of the Notes to Coiisolidated Financial Statements.All

329、intercornpany balances lave been eliminated in consolidation.As of llecernbcr 31,2002,we cmployed 700 full-time e111ployees.minster,Colorado,a suburb of Denver;New Orleans,Louisiana;arid Galvcston,Texas.We are licensed as a property arid casualty insurer in 41 states,primarily in the Midwest,West an

330、d South.Approximtely 1,140 independent agencies represent United Fire and our property arid casualty subsidiaries.Our life insurance subsidiary is licensed in 26 states,priniarily in the Mdwest and West,and is rcpre-serited by approximately 1,330 indeperiderit agencies.Our regional offices are staff

331、ed with underwriting,claims and marketing representatives and administrative technicians,all of whom provide support and assistance to the independent agencics.Also,home office st&technicians and specialists pro-vide support to the subsiharies,regional offices and indepcn-dent agencies.We use illari

332、ageriieiit reports to monitor subsidiary and regional offices for overall results and confor-nity to our policies.We compete in the United States property and casualty insurance market with more than 3,200 other insurers.The industry is highly competitive,with insurers competing on the basis of serv

333、ice,price and coverage.Because we rely heavily on independent agencies,we utilize a profit-sharing plan as an incentive for agents to place high-quahty property and casualty business with us.In 2003,we estimate property and casualty agencies will receive profit-sharing commissions of$13,149,000,based on business the agencies did in 2002.Our life insurance segment also operates in a highly con-peti