• The resolution of regulatory issues and litigation pertaining to and arising out of Hurricane Katrina.

• The valuation of invested assets.

• The valuation of pension and other postretirement benefit obligations.

• The valuation and recovery of deferred policy acquisition costs.

• The maintenance of strong relationships with our independent agents.

• The maintenance of strong relationships with our reinsurers.

• The adequacy of the reinsurance coverage that we purchase.

• The adequacy of premiums that are charged to our policyholders.

These are representative of the risks, uncertainties and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (the "SEC"), we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. Our discussion and analysis of our results of operations and financial condition is based upon our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting estimates are: the valuation of investments; the valuation of reserves for losses, claims, and loss settlement expenses; the valuation of reserves for future policy benefits; and the calculation of the deferred policy acquisition costs asset. These critical accounting estimates are more fully described in our Management's Discussion and Analysis of Results of Operations and Financial Condition presented in our Annual Report on Form 10-K for the year ended December 31, 2008.

OVERVIEW AND OUTLOOK
Our Business
We operate property and casualty and life insurance businesses, marketing our products through independent agents. Although we maintain a broad geographic presence that includes most of the United States, more than half of our property and casualty premiums were written in Iowa, Texas, Missouri, Louisiana and Colorado for the nine-month period ended September 30, 2009. Approximately three-fourths of our life insurance premiums were written in Iowa, Nebraska, Minnesota, Wisconsin and Illinois for the nine-month period ended September 30, 2009.
We conduct our operations through two distinct segments: property and casualty insurance and life insurance. We manage these segments separately because they generally do not share the same customer base, and they each have different pricing and expense structures. We evaluate segment profit or loss based upon operating and investment results. Segment profit or loss described in the following sections of the Management's Discussion and Analysis is reported on a pre-tax basis.
Financial Overview
The insurance market continued to be challenging in the third quarter of 2009; however our total stockholders' equity increased by $39.1 million or 6.1 percent from December 31, 2008. The increase was primarily the result of an improvement in both the fixed income and equity markets, which led to an increase in our unrealized investment gains. Book value per share increased from $24.10 at December 31, 2008 to $25.60 at September 30, 2009.
In our property and casualty segment, pricing remained fairly level in the third quarter despite a continuation of soft market conditions. As pricing pressure continues, our underwriters are committed to implementing modest rate increases on accounts with difficult exposures or adverse loss experience, as well as declining underpriced business.
For the third quarter of 2009, we recorded realized investment gains of $1.9 million with no investment write-downs as compared to realized losses of $4.2 million, with $5.9 million of investment write-downs, in the third quarter of 2008, which may be a sign that the investment markets are steadying. With a less active hurricane season in 2009 than in 2008, our catastrophe losses dropped significantly, bringing them closer to what we have historically incurred in the third quarter of a year. However, Hurricane Katrina litigation continued to have an impact on our results of operations, which is explained in further detail in the following sections of Item 2.
Loss settlement expenses decreased in the third quarter of 2009 and the frequency and severity of construction defect claims stabilized from the second quarter of 2009. This is a result of some of the initiatives taken to address construction defect claims, such as providing increased loss control on accounts and monitoring costs related to outside attorneys.
Our life insurance segment, from an operational standpoint, performed well and contributed net income, which helped offset the net loss of the property and casualty segment. The life insurance segment has focused on increasing our life insurance sales in order to better diversify our portfolio of products. For the first nine months of 2009, life insurance sales increased 7.3 percent. For the first nine months of 2009, annuity sales also continued to grow, increasing 35.1 percent as consumers continued to choose investment products with less risk and guaranteed returns.

Hurricane Katrina
Hurricane Katrina made landfall in New Orleans, Louisiana, on August 29, 2005, causing an estimated $80 billion in damages. Over 95 percent of our policyholders in the New Orleans area suffered damage from Hurricane Katrina, with over 11,000 claims reported. Our total loss and loss settlement expenses inception to date, net of reinsurance, from Hurricane Katrina claims are $289.2 million through September 30, 2009. In the first nine months of 2009, our loss and loss settlement expenses from Hurricane Katrina litigation was $38.3 million, of which $19.0 million was incurred from an increase in our incurred but not reported ("IBNR") reserves. The primary reason for this reserve increase is the continuing unfavorable legal environment related to insurers of Hurricane Katrina claims in Louisiana.
Our results of operations continue to be hindered by losses related to Hurricane Katrina. Without Hurricane Katrina losses, our combined ratio would have been 107.4 percent in the third quarter of 2009, compared with 129.0 percent in the third quarter of 2008, and 103.9 percent for the first nine months of 2009, compared with 107.0 percent for the same period of 2008.
Conducting business under our subsidiary company, Lafayette Insurance Company, in the state of Louisiana has put us at a considerable disadvantage in regard to our Hurricane Katrina claims litigation. Because Lafayette Insurance Company is domiciled in Louisiana, we are subject to the jurisdiction of the state court system, with limited access to the federal court system. Hurricane Katrina was, and remains, the single largest catastrophe loss in our company's history. Four years later, we continue to feel the impact of Hurricane Katrina as litigation surrounding the event progresses through the legal system.
In August 2009, we were notified by the U.S. Court of Appeals for the Fifth Circuit sitting in New Orleans that our appeal of a $21.0 million award to a commercial policyholder, which was awarded in June 2008, had been denied. On appeal, we raised several issues, including the coinsurance clause on the policy, the fact that the award exceeded the policy limits and excessive penalties were awarded with no consideration or offset for flood damage. While we strongly believed that these issues were meritorious, we will not be challenging the court's ruling further, as we feel it is unlikely that the U.S. Supreme Court would grant a review of the case.
We recorded the final settlement of this litigation, which included additional interest and penalties awarded by the appellate court and the settlement of an additional claim that was not included in the original lawsuit, in August 2009. We paid the policyholder a total of $28.9 million, of which $10.8 million, net of reinsurance, was incurred in 2008 in response to the initial verdict, and $6.7 million, net of reinsurance, was incurred in 2009.
Legal developments involving Louisiana Citizens Property Insurance Corporation ("Louisiana Citizens"), which provides insurance for individuals and businesses unable to secure coverage through the voluntary insurance market, have contributed to the unfavorable legal climate for insurers in Louisiana. This publicly funded insurance plan has the ability to issue assessments to insurance companies doing business in Louisiana, including us, to fund its operations. In the third quarter of 2009, Louisiana Citizens settled a class action lawsuit for $18.0 million involving Orleans Parish policyholders whose claims resulted from Hurricane Katrina. In August 2009, Louisiana Citizens announced its decision to appeal a $95.0 million judgment in favor of policyholders in Jefferson Parish whose claims resulted from Hurricanes Katrina and Rita. These judgments and settlements against Louisiana Citizens could result in large assessments in future years against insurance companies who do business in Louisiana. These cases also set a standard for class action certification and settlement expectations among policyholders and plaintiff's attorneys.
In an unrelated case in April 2009, the Louisiana Supreme Court refused to hear Louisiana Citizens' appeal of an intermediate appellate court ruling effectively extending the time for a policyholder to file a lawsuit related to Hurricane Katrina losses. The Louisiana Citizens policyholder filed suit in February 2008, nearly two and a half years after Hurricane Katrina.

The Louisiana Fourth Circuit held that the policyholder's deadline for filing suit would not expire until after she was notified that she could no longer participate in the class action litigation. The decision in this case has the potential to increase the number of lawsuits filed against insurance companies who are or were the subject of class action litigation that was either dismissed or had the class participants more narrowly defined. Subsequent to this decision, few additional lawsuits have been filed against our company, and it is possible that we will receive additional lawsuits in the future due to this decision.
For further discussion of our legal proceedings, refer to Note 1-Legal Proceedings in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q.
In the four years that have passed since Hurricane Katrina, we have taken numerous steps to reduce our exposure in the New Orleans area, including significantly reducing our total insured values, purchasing additional reinsurance coverage and implementing substantial rate increases. Our modeled expected average annual loss in Louisiana has been reduced by over 60.0 percent. We will continue to closely monitor our exposure in Louisiana and may reduce it further in the future.
We are also in the process of depopulating our Louisiana domiciled subsidiary, Lafayette Insurance Company. On January 1, 2010, we will cease writing business through Lafayette in the state of Louisiana. We will continue to provide personal and commercial insurance in Louisiana under United Fire & Casualty Company and our subsidiary, United Fire & Indemnity Company. All current Lafayette Insurance Company policyholders in Louisiana will be offered the opportunity to renew their policy under either United Fire & Casualty Company or United Fire & Indemnity Company, unless the policyholder has not paid their premium or the policy is being nonrenewed for a specific underwriting reason, such as failure to comply with loss control recommendations.
By no longer doing business under Lafayette in Louisiana, we will have access to the federal court system if we so choose. If we continued to do business in Louisiana under Lafayette, we would be required to use the state court system for all cases, which has proven to be a challenging legal environment in recent years.

RESULTS OF OPERATIONS
Consolidated Financial Highlights

                               Three Months Ended September 30,                Nine Months Ended September 30,
(In Thousands)                2009             2008            %              2009             2008            %

Revenues
Net premiums earned       $    120,759       $ 128,017          -5.7 %    $    358,751       $ 374,234          -4.1 %
Investment income, net
of investment expenses          27,786          25,192          10.3            78,416          81,091          -3.3
Realized investment
gains (losses)                   1,925          (4,154 )       146.3           (14,716 )        (4,364 )      -237.2
Other income                       231             326         -29.1               559             709         -21.2

                          $    150,701       $ 149,381           0.9 %    $    423,010       $ 451,670          -6.3 %


Benefits, Losses and
Expenses
Losses and loss
settlement expenses       $    115,167       $ 120,267          -4.2 %    $    291,803       $ 288,456           1.2 %
Future policy benefits           6,101           6,696          -8.9            15,363          17,902         -14.2
Amortization of
deferred policy
acquisition costs               29,015          32,481         -10.7            87,216          97,036         -10.1
Other underwriting
expenses                         9,170           7,810          17.4            27,626          20,298          36.1
Disaster charges and
other related
expenses, net of
recoveries                        (793 )           484        -263.8            (1,339 )         4,237        -131.6
Interest on
policyholders'
accounts                        10,630           9,844           8.0            30,799          30,507           1.0

                          $    169,290       $ 177,582          -4.7 %    $    451,468       $ 458,436          -1.5 %

Loss before income
taxes                     $    (18,589 )     $ (28,201 )        34.1      $    (28,458 )     $  (6,766 )      -320.6
Federal income tax
benefit                         (8,433 )       (11,375 )        25.9           (16,238 )        (8,544 )       -90.1

Net Income (Loss)         $    (10,156 )     $ (16,826 )        39.6 %    $    (12,220 )     $   1,778        -787.3 %

Property and Casualty Insurance Segment Results

                                            Three Months Ended September 30,              Nine Months Ended September 30,
(In Thousands)                                 2009                   2008                  2009                   2008
Net premiums written (1)                 $        102,113       $        111,895      $        337,175       $        356,407

Net premiums earned                      $        109,749       $        117,278      $        328,421       $        345,644
Losses and loss settlement expenses              (110,738 )             (116,536 )            (279,411 )             (278,275 )
Amortization of deferred policy
acquisition costs                                 (26,292 )              (29,354 )             (79,434 )              (88,076 )
Other underwriting expenses                        (6,741 )               (5,389 )             (20,667 )              (14,021 )

Underwriting loss                        $        (34,022 )     $        (34,001 )    $        (51,091 )     $        (34,728 )

Investment income, net of
underwriting expenses                               8,452                  7,124                23,582                 25,184
Realized investment gains (losses)                  1,040                  1,724                (7,308 )                3,056
Other income (loss)                                    74                    (32 )                 119                    (61 )
Disaster charges and other related
expenses, net of recoveries                           793                   (484 )               1,339                 (4,237 )

Loss before income taxes                 $        (23,663 )     $        (25,669 )    $        (33,359 )     $        (10,786 )


GAAP Ratios:

Net loss ratio (without catastrophes)                68.7 %                 68.1 %                67.4 %                 62.0 %
Hurricane Katrina litigation - effect
on net loss ratio                                    23.6                      -                  11.7                    3.1

Net loss ratio with Hurricane Katrina                92.3 %                 68.1 %                79.1 %                 65.1 %


Other catastrophes - effect on net
loss ratio                                            8.6                   31.3                   6.0                   15.4

Net loss ratio                                      100.9 %                 99.4 %                85.1 %                 80.5 %

Expense ratio (2)                                    30.1                   29.6                  30.5                   29.6

Combined ratio                                      131.0 %                129.0 %               115.6 %                110.1 %

(1) Please refer to the Statutory and Other Non-GAAP Financial Measures section of this report for further explanation of this measure.

(2) The GAAP expense ratio does not include disaster charges and other related expenses, net of recoveries.

Net premiums earned decreased by $7.5 million or 6.4 percent and $17.2 million or 5.0 percent for the three- and nine-month periods ended September 30, 2009, due primarily to reduced premiums from continuing competition and pricing pressure in the insurance market, as well as the nonrenewal of business that did not meet our underwriting or pricing guidelines. Our premium writings have also been affected by the downturn in the economy, specifically related to our surety business and the residential contracting business in our western states. In the third quarter of 2009, the insurance marketplace remained competitive, especially in the commercial lines business of non-coastal areas. There was a minimal decrease in premium levels for our commercial lines business, with all regions continuing to experience downward pressure on renewal premiums for medium and large commercial accounts, as well as smaller accounts in some instances. In our personal lines business, we had an average of mid-single-digit percentage increases in our rate levels. Recently we received approval for a double-digit percentage increase on homeowners insurance rates in Louisiana. While this rate increase will increase the premium level of homeowners accounts in Louisiana, it is also likely to result in a decrease in the number of new and renewal policies.
Our new business writings have been successful; however, we have observed a slight decrease in the overall pricing levels for new business during the three-months ended September 30, 2009. Though the decreases in our premium levels were relatively modest, premium levels have been decreasing gradually in most lines of business since the third quarter of 2004. We have been able to renew a growing number of accounts at a higher rate or premium level in 2009, which has historically indicated that the market may be improving. Our policy retention rate remained strong in both the personal and commercial lines of business, with approximately 80.0 percent of our policies renewing for the nine-months ended September 30, 2009. This rate has decreased slightly from the six-months ended June 30, 2009 as our underwriters continue to focus on writing good business at an adequate price, preferring quality to volume.

Losses and loss settlement expenses improved by 5.0 percent for the three-months ended September 30, 2009, as compared with the same period in 2008. This is a result of a considerable decrease in our pretax catastrophe losses, which totaled $9.5 million and $36.7 million, excluding loss development on Hurricane Katrina claims litigation, for the three-month periods ended September 30, 2009 and 2008, respectively. Catastrophe losses were higher than expected in the three-months ended September 30, 2008 due to an active hurricane season, which included Hurricanes Gustav and Ike. For the first nine months of 2009, losses and loss settlement expenses increased 0.4 percent due specifically to construction defect and products liability claims. Overall, claims frequency has decreased, while claims severity continues to trend slightly upward, specifically in our commercial auto and commercial general liability lines of business.
Amortization of deferred policy acquisition costs decreased 10.4 percent and 9.8 percent in the three- and nine-month periods ended September 30, 2009, respectively, as compared with the same periods of 2008. The decrease in premiums written and corresponding unearned premium have resulted in a reduction of the deferred acquisition costs asset and related amortization. The deterioration in our property and casualty underwriting results led to an increase in other underwriting expenses in the three- and nine-month periods ended September 30, 2009, as we expensed more acquisition costs in 2009 as compared to the same periods in 2008. The extent to which underwriting expenses are deferred to future periods is dependent upon our loss ratio. The following tables display our premiums earned, losses and loss settlement expenses and loss ratio by line of business for the three- and nine-month periods ended September 30, 2009 and 2008. Three Months Ended September 30,

                                                   2009                                                  2008
                                               Losses & Loss                                         Losses & Loss
(In Thousands)               Premiums           Settlement             Loss        Premiums           Settlement             Loss
Unaudited                     Earned         Expenses Incurred        Ratio         Earned         Expenses Incurred        Ratio
Commercial lines
Other liability (1)          $  29,336      $            23,437          79.9 %    $  34,091      $            27,272          80.0 %
Fire and allied lines (2)       26,047                   47,836         183.7         27,450                   37,010         134.8
Automobile                      24,750                   19,598          79.2         25,671                   15,833          61.7
Workers' compensation           13,205                    9,022          68.3         12,952                   11,550          89.2
Fidelity and surety              5,455                     (436 )        (8.0 )        5,497                    1,024          18.6
Miscellaneous                      217                       47          21.7            218                      166          76.1

Total commercial lines       $  99,010      $            99,504         100.5 %    $ 105,879      $            92,855          87.7 %


Personal lines
Fire and allied lines (3)    $   5,644      $             6,262         110.9 %    $   5,322      $            21,433         402.7 %
Automobile                       3,325                    3,882         116.8          3,160                    2,517          79.7
Miscellaneous                       93                       38          40.9             84                     (157 )         N/A

Total personal lines         $   9,062      $            10,182         112.4 %    $   8,566      $            23,793         277.8 %

Reinsurance assumed              1,677                    1,052          62.7 %        2,833                     (112 )        (4.0 )%

Total                        $ 109,749      $           110,738         100.9 %    $ 117,278      $           116,536          99.4 %

(1) "Other liability" is business insurance covering bodily injury and property damage arising from general business operations, accidents on the insured's premises and products manufactured or sold.

(2) "Fire and allied lines" includes fire, allied lines, commercial multiple peril and inland marine.

(3) "Fire and allied lines" includes fire, allied lines, homeowners and inland marine.

Commercial Lines
For the three months ended September 30, 2009, the loss ratio for our fire and allied lines was 183.7 percent compared to 134.8 percent for the same period of 2008. The deterioration in this line was driven by additional losses incurred for Hurricane Katrina claims litigation. In the automobile line of business, our loss ratio was 79.2 percent for the three months ended September 30, 2009, as compared to 61.7 percent for the same period of 2008. The deterioration in this . . .