STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDENDS AND RETAINED EARNINGS RESTRICTIONS

Statutory capital and surplus in regards to policyholders at December 31, 2012, 2011 and 2010 and statutory net income for the years then ended are as follows:



	Statutory Capital and Surplus		Statutory Net Income
2012
Property and casualty ⁽¹⁾	$	585,986	$	34,468
Life, accident and health	158,720		7,420
2011
Property and casualty ⁽¹⁾	$	565,843	$	10,529
Life, accident and health	167,164		6,180
2010
Property and casualty ⁽¹⁾	$	594,308	$	52,803
Life, accident and health	158,379		13,443


(1)	Because United Fire & Casualty Company owns United Life Insurance Company, the property and casualty statutory capital and surplus includes life, accident and health statutory capital and surplus, and therefore represents our total consolidated statutory capital and surplus.

Our property and casualty and life insurance subsidiaries are required to prepare and file statutory-basis financial statements in conformity with the National Association of Insurance Commissioner’s (“NAIC”) Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. The accounting principles used to prepare these statutory-basis financial statements follow prescribed or permitted accounting practices that differ from GAAP. Prescribed statutory accounting principles include state laws, regulations and general administrative rules issued by the state of domicile, as well as a variety of publications and manuals of the NAIC. Permitted accounting practices encompass all accounting practices not prescribed, but allowed by the state of domicile. No material permitted accounting practices were used to prepare our statutory-basis financial statements during 2012, 2011 and 2010. Statutory accounting practices primarily differ from GAAP in that policy acquisition and certain sales inducement costs are charged to expense as incurred, goodwill is amortized, certain fair value adjustments related to the acquisition of Mercer Insurance Group are recorded for GAAP and not recorded for statutory accounting, life insurance reserves are established based on different actuarial assumptions and the values reported for investments, pension obligations and deferred taxes are established on a different basis.

We are directed by the state insurance departments’ solvency regulations to calculate a required minimum level of statutory capital and surplus based on insurance risk factors. The risk-based capital results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. Both United Life and United Fire & Casualty Company and its property and casualty insurance subsidiaries and affiliate had statutory capital and surplus in regards to policyholders well in excess of their required levels at December 31, 2012.

As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance operating subsidiaries in order to pay dividends to its common stockholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. Based on these restrictions, at December 31, 2012, our insurance operating subsidiaries are able to make a maximum of $31,649 in dividend payments without prior approval. These restrictions will not have a material impact in meeting our cash obligations. We paid dividends of $15,269, $15,507 and $15,774 in 2012, 2011 and 2010, respectively. In 2012, United Fire & Casualty Company paid dividends to United Fire Group, Inc. totaling $26,950. In 2012, United Fire & Casualty Company received dividends from American Indemnity Financial Corporation, United Fire & Indemnity Company, United Fire Lloyds and United Life Insurance for $1,750, $1,500, $500 and $16,000, respectively. In 2011, United Fire & Casualty Company received dividends from Addison Insurance Company, American Indemnity Financial Corporation, and Lafayette Insurance Company for $3,000, $1,700 and $6,750, respectively. In 2010, United Fire & Casualty Company received a dividend from United Life for $15,000. These intercompany dividend payments are eliminated for reporting in our Consolidated Financial Statements.