We write both commercial and personal lines of property and casualty insurance. We focus on our commercial lines, which represented ~~92.3~~92.6 percent of our ~~direct~~ property and casualty insurance premiums ~~written~~earned for the year ended December 31, ~~2006.~~ 2007. Our personal lines represented 7.4 percent of our property and casualty insurance premiums earned for the year ended December 31, 2007.

Our primary commercial ~~lines~~policies are tailored business packages that include the following coverages: fire and allied lines, other liability, automobile, workers’ compensation and surety.

Our personal lines ~~which represented 7.7 percent of our direct property and casualty premiums written for the year ended December 31, 2006,~~ consist primarily of automobile and fire and allied lines ~~coverage,~~coverages, including homeowners.

~~The table below is~~ For a ~~summary~~more detailed discussion of our ~~property~~products, see the “Results of Operations” section of Part II, Item 7, “Management’s Discussion and ~~casualty direct premiums written by major category.~~

~~(1) “Fire~~Analysis of Financial Condition and ~~allied lines” includes fire, allied lines, commercial multiple peril and inland marine.~~Results of Operations.”

(2) “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.

~~(3) “Fire and allied lines” includes fire, allied lines, homeowners and inland marine.~~Financial information

The following table shows loss ratios, expense ratios and combined ratios on a statutory basis for the periods indicated for us and for the property and casualty insurance industry. Industry ratios were obtained from A.M. Best Company.

(3) Please refer to the Non-GAAP financial measures section of this report for further explanation of this measure.

The following table shows our loss ratios, expense ratios and combined ratios for the periods indicated, presented in accordance with U.S. generally accepted accounting principles (“GAAP”). Industry ratios are unavailable because they are not normally calculated in accordance with GAAP.

The following table displays information for our property and casualty insurance segment presented in accordance with GAAP. Amounts shown are prior to intersegment eliminations.

Our property and casualty insurance segment experiences some seasonality with regard to premiums written, which are generally highest in January and July and lowest during the fourth quarter. Although we experience some seasonality in our premiums written, premiums are earned ratably over the period of coverage. Losses and loss settlement expenses incurred tend to remain consistent throughout the year, with the exception of when a catastrophe occurs. Catastrophes inherently are unpredictable and can occur at any time during the year from man-made or natural disaster events that include, but which are not limited to, hail, tornadoes, hurricanes and windstorms.

United Life Insurance Company underwrites all of our life insurance business. Our principal life insurance products are single premium annuities, universal life products and traditional life (primarily single premium whole life insurance) products. Single premium annuities (approximately 8083 percent);, traditional life products (approximately 1210 percent);, and universal life products (approximately 7 percent) comprised our ~~2006~~2007 life insurance premium revenues, as determined on the basis of statutory accounting principles. We also underwrite and market other traditional products, including term life insurance and whole life insurance. Additionally, we offer an individual disability income rider that may be attached to our life insurance products. We do not write variable annuities or variable insurance products.

Statutory accounting principles require us to recognize deposits for policyholders on universal life and annuity products as premiums when they are collected. Under GAAP, we are required to recognize these deposits as policyholder liabilities.

Life insurance in force, before ceded reinsurance, totaled ~~$4.3~~$4.5 billion and ~~$4.2~~$4.3 billion as of December 31, ~~2006~~2007 and ~~2005,~~2006, respectively. Traditional life insurance products ~~represent~~represented 59 percent and 56 percent of our insurance in force at December 31, 2007 and 2006, ~~and 52 percent of insurance in force at December 31, 2005.~~respectively. Universal life insurance ~~represents~~represented 38 percent and 40 percent of insurance in force at December 31, 2007 and 2006, respectively.

The following table displays information for our life insurance segment presented in ~~force at December 31, 2005.~~accordance with GAAP. Amounts shown are prior to intersegment eliminations.

Our property and casualty insurance companies follow the industry practice of reinsuring a portion of their exposure by ceding to reinsurers a portion of the premium received and a portion of the risk under the policies ~~reinsured.~~written. We purchase reinsurance to reduce the net liability on individual risks to predetermined limits and to protect us against catastrophic losses from a single catastrophe, such as a hurricane or tornado. We do not engage in any reinsurance transactions classified as finite risk reinsurance. In ~~2006,~~2007, we ceded written premiums of ~~$47.0~~$41.0 million, which was ~~9.0~~8.0 percent of our direct and assumed written premium.

We use many reinsurers, both domestic and foreign, which helps us to avoid concentrations of credit risk associated with our reinsurance. Our principal reinsurers include ~~Employers Reinsurance Corporation,~~ QBE Reinsurance Corporation, ~~Hanover~~Hannover Ruckversicherungs, Platinum Underwriters Re, AXA Corporate Solutions Insurance Company, Partner Reinsurance Company of the United States and ~~Hartford Steam~~Mutual Boiler ~~& Inspection.~~

We have several treaties that provide us with reinsurance coverage. Our reinsurance ~~programs limit~~program limits the risk of loss that we retain by reinsuring direct risks in excess of our stated retention. ~~The following table shows~~For a ~~summary~~more detailed discussion of our ~~primary~~ reinsurance ~~treaties. Retention amounts reflect the accumulated retentions and co-participation of all layers of a treaty.~~

~~(1) For 2006, $20.0 million of the property catastrophe reinsurance coverage applied only to specific named perils.~~program, see Part II, Item 8, Note 5, “Reinsurance.”

The ceding of insurance does not legally discharge us from primary liability under our policies, and we must pay the loss if the reinsurer fails to meet its obligation. We periodically monitor the financial condition of our reinsurers to confirm that they are financially ~~responsible.~~stable. We believe that all of our reinsurers are in acceptable financial condition. At December 31, ~~2006~~2007, there were no reinsurance balances for which ~~collectibility~~collection is at risk that would result in a material impact on our Consolidated Financial Statements. ~~In accordance with GAAP and industry practice, we~~We account for premiums, ~~both~~ written and earned, and losses incurred net of reinsurance ceded.

In ~~addition, in~~ the event that we ~~incurred~~incur catastrophe losses covered by our reinsurance ~~programs,~~program, our catastrophe reinsurance ~~program~~treaty would provide one guaranteed reinstatement at ~~100~~100.0 percent of the original premium. We also purchase reinsurance from the Florida Hurricane Catastrophe ~~Fund (“FHCF”).~~Fund. The level of reinsurance protection obtained through this fund is immaterial to our operations.

The Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) was signed into law by President Bush on December 27, 2007. TRIPRA extended, with modifications, The Terrorism Risk Insurance Act of 2002 (“TRIA”) ~~provided a temporary Federal backstop on losses from certified terrorism events from foreign sources~~ and ~~was effective until December 31, 2005.~~ The Terrorism Risk Insurance Extension Act of 2005 (“TRIA Extension Act”) ~~extends TRIA, with modifications, for an additional two years through~~, previously set to expire on December 31, 2007. TRIA and TRIA Extension Act coverage included most direct commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an ~~insurer. The TRIA Extension Act continued with these coverages, but~~insurer, with exclusions for commercial automobile insurance, burglary and theft insurance, surety insurance,

professional liability insurance and farm owners multiple peril insurance. ~~Each~~TRIPRA continues these TRIA and TRIA Extension Act coverages while eliminating the previous distinction between foreign (covered) and domestic (not covered) acts of terrorism. Under TRIPRA, each insurer has a deductible amount, which is ~~calculated as a percentage~~20.0 percent of the prior year’s direct commercial lines earned premiums for the applicable lines of business, and ~~a 10.0~~retention of 15.0 percent ~~retention~~ above the ~~deductible for 2006 (15.0 percent in 2007).~~deductible. The ~~percentage~~percentages used in the TRIPRA deductible ~~calculation increases from 17.5 percent in 2006 to 20.0 percent in 2007.~~and retention calculations remained constant between 2007 and 2008. No insurer that has met its deductible shall be liable for the payment of any portion of that amount that exceeds the annual $100 billion aggregate loss cap specified in ~~TRIA.~~TRIPRA. TRIA has provided, and ~~the TRIA Extension Act~~TRIPRA will continue to provide, marketplace stability. As a result, coverage for terrorist events in both the insurance and reinsurance markets is often available. ~~This act also increased the aggregate net loss that must be incurred in order for the government coverage to be triggered.~~ The amount of aggregate losses necessary for an act of terrorism to be certified by the U.S. Secretary of Treasury, the Secretary of State and the Attorney General ~~increased from $5 million to $50 million effective April 1, 2006. This aggregate threshold increased to~~was $100 million for ~~2007.~~2007 and remains the same for 2008. Our TRIA deductible was ~~approximately $54.1 million for 2006 and will be approximately~~ $65.4 million for ~~2007.~~2007 and our TRIPRA deductible will approximate $66.8 million for 2008. Our catastrophe reinsurance treaty does not provide coverage for our terrorism exposure.

Historically, we have acted as a reinsurer, assuming both property and casualty reinsurance from other insurance or reinsurance companies. Most of the business we have assumed is property reinsurance, with an emphasis on catastrophe coverage. ~~Most~~The majority of our assumed reinsurance business expired on or before December 31, 2000. We limit our exposure on our remaining assumed reinsurance contracts through selective renewal. However, we still have exposure related to the assumed reinsurance contracts that we have elected to continue writing and those that are in runoff status. In ~~2006,~~2007, we assumed written premiums of ~~$19.0~~$16.9 million.

Our life insurance company purchases reinsurance to limit the dollar amount of any one risk of loss. On standard individual life cases where the insured is age 65 or ~~less,~~younger, our retention is $.2 million. On standard individual life cases where the insured is age 66 or older, our retention is $.1 million. Our accidental death benefit rider on an individual policy is reinsured at 100 percent, up to a maximum benefit of $.3 million. Our group coverage, both life and accidental death and dismemberment, is reinsured at 50 percent. Catastrophe excess reinsurance coverage applies when three or more insureds die in a catastrophic accident. For catastrophe excess claims, we retain the first $1.0 million of ultimate net loss and the reinsurer agrees to indemnify us for the excess up to a maximum of $5.0 million. We supplement this coverage when appropriate with “known concentration” coverage. Known concentration coverage is typically tied to a specific event and time period, with a threshold of a minimum number of lives involved in the event, minimum event deductible (company’s retention) and a maximum payout. In ~~2006,~~2007, we ceded ~~written~~earned premiums of ~~$1.9~~$1.7 million, which was 54.9 percent of our direct and assumed ~~written premium.~~earned premiums.

The ceding of insurance does not legally discharge United Life Insurance Company from primary liability under its policies. United Life Insurance Company must pay the loss if the reinsurer fails to meet its obligations. United Life Insurance Company’s primary reinsurance companies are Generali USA Life Reassurance Company, American United Life Insurance Company, Hannover Life Reassurance Company of America and RGA Reinsurance Company. We periodically monitor the financial condition of our reinsurers to confirm that they are financially ~~responsible.~~stable. We believe that all of our reinsurers are in acceptable financial condition. At December 31, ~~2006~~2007 and ~~2005,~~2006, there were no reinsurance balances for which ~~collectibility~~collection is at risk that would result in a material impact on our Consolidated Financial Statements.

The life insurance segment began assuming credit life and accident and health insurance in 2002. We discontinued this practice in 2004. We ~~continue to~~ have an immaterial exposure related to our assumed reinsurance contracts that are in a runoff status.

State insurance laws require our property and casualty companies to maintain reserves for losses and loss settlement expenses with respect to both reported and unreported losses. Loss reserves are estimates at a given time of the ultimate amount expected to be paid on losses that are, in fact, incurred. Reserves for loss settlement expenses are intended to cover the actual cost of investigating losses and defending lawsuits arising from losses. We revise these reserves based on analysis of historical results and management’s review of past claims. We base estimates of losses on facts and circumstances known at the time those estimates are made.

Loss reserves have two components: reserves for reported losses and reserves for incurred but not reported losses (“IBNR”). We estimate reserves for reported losses in one of two ways. For some classes of reported losses under $5,000, we base reserves upon a preset schedule determined by averaging similar claims paid over a recent twelve-month period. Annually, we revise the preset schedule in response to changes in experience or as investigations progress and further information is received. We establish other reserves for reported losses on an individual case basis. Our claims personnel establish, review and revise the reserves on expected losses based on a variety of factors, including the type of claim, our knowledge of the circumstances surrounding each loss, the policy provisions relating to the type of loss, trends in the legal system and other factors.

For IBNR losses, we estimate the amount of reserves for each line of business on the basis of historical and statistical information. We consider historical patterns of paid and reported claims and the probable number and nature of losses arising from occurrences that have not yet been reported.

The process of estimating loss reserves involves a considerable degree of judgment by our claims personnel. Because reserves are estimates of the amount we expect to pay based on facts and circumstances known at any given time, we continuously review our loss reserves. During the claims settlement period, which may extend over a long

period of time, primarily for long-tail lines such as workers’ compensation and general liability, our claims personnel may become aware of additional facts regarding claims and trends that cause us to refine and adjust our estimates of ultimate liability. Consequently, actual ultimate settlements may deviate significantly from the estimates reflected in our Consolidated Financial Statements. Refer to the Critical Accounting Policies section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a more detailed discussion of our loss reserves.

We do not discount reserves based on the time value of money. However, we consider inflation in the reserving process by reviewing cost trends, loss settlement expenses and historical reserving results and likely future economic conditions.

The table on the following page shows the calendar year development of net loss and loss settlement expense reserve liabilities and payments for our property and casualty companies for the years 1997 through 2005. The top line of the table shows the estimated net liability for unpaid losses and loss settlement expenses recorded at the end of each of the indicated years. This liability represents the estimated amount of losses and loss settlement expenses for losses arising in all prior years that are unpaid at the end of each year, including an estimate for our IBNR losses, net of applicable ceded reinsurance. The first portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the losses for individual years. Conditions and trends that have affected development of the liability in the past may not necessarily exist in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on this table. The second portion of the table displays cumulative net losses and loss settlement expenses paid for each of the years indicated. The third portion of the table displays the reinsurance recoverable, the re-estimated amount of reinsurance recoverable and the resulting gross liabilities.

~~United Fire & Casualty Company~~Property and ~~Subsidiaries~~casualty insurance segment

~~The table on the previous page illustrates a year-to-year cumulative redundancy in our net reserves~~Reserves for ~~liability for unpaid~~ losses and loss settlement ~~expenses. Because establishing reserves is inherently uncertain, an analysis~~expenses (“loss reserves”) are management’s best estimates at a given point in time of ~~factors affecting reserves can produce a range of reasonable estimates. We believe that our redundancies are the result of a variety of factors, including:~~what we expect to pay for claims, based on facts, circumstances and historical trends then known.

The determination of ~~property and casualty insurance and reinsurance~~ reserves, particularly those relating to liability lines of insurance, reflects significant judgment factors. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we would take action that could include increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. As required by state law, we engage an independent actuary ~~Regnier Consulting Group,~~ to render an opinion as to the adequacy of the statutory reserves we establish. The actuarial opinion is filed in those states where we are licensed. There are no material differences between our statutory reserves and those established under GAAP. Refer to the Critical Accounting Estimates section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a more detailed discussion of our loss reserves.

We do not discount loss reserves based on the time value of money. However, we consider inflation in the reserving process by reviewing cost trends, loss settlement expenses, historical reserving results and likely future economic conditions.

The table on the following page illustrates the change in our estimate of reserves for loss and loss settlement expenses for our property and casualty companies for the years 1998 through 2006. The first section shows the amount of the liability, as originally reported, at the end of each calendar year in our Consolidated Financial Statements. These reserves represent the estimated amount of losses and loss settlement expenses for losses arising in all prior years that are unpaid at the end of each year, including an estimate for our IBNR losses, net of applicable ceded reinsurance. The second section displays cumulative amount of net losses and loss settlement expenses paid for each year with respect to that liability. The third section shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the losses for individual years. The last section compares the latest re-estimate with the original estimate. Conditions and trends that have affected development of loss reserves in the past may not necessarily exist in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on this table.

We are subject to the negative effects of interest rate fluctuations and other market changes, to declines in value due to market valuations and to declines in credit quality related to individual investments held in our investment portfolio. Some of our products, principally fixed annuities, expose us to the risk that changes in interest rates will reduce our “spread,” which is the difference between the amounts that we are required to pay under the contracts and the rate of return we are able to earn on our investments intended to support our obligations under the contracts.

In periods of increasing interest rates, we may not be able to replace our invested assets with ~~higher yielding~~higher-yielding assets to the extent needed to fund the higher rates we must pay with respect to our interest-sensitive products to keep them competitive. Consequently, we may have to accept a lower spread and thus lower profitability, or face a decline in sales and loss of existing contracts and related assets. In periods of declining interest rates, we have to reinvest the cash we receive as interest or return of principal on our investments in ~~lower yielding~~lower-yielding instruments than previously available. Moreover, borrowers may prepay fixed income securities, commercial mortgages, and mortgage-backed securities in which we have invested in order to borrow at lower market rates, exacerbating this risk. Because we are entitled to reset the interest rates on our annuities only at limited, pre-established intervals and because many of our policies have guaranteed interest rates, our spreads could decrease and potentially become negative.

Due to the reinvestment risk described above, a decline in market interest rates available on investments could also reduce our return from investments of capital that do not support particular policy obligations, which could also have a material adverse effect on our results of operations. The adverse effect on us offrom fluctuations in interest

rates may be exacerbated because we currently maintain, and intend to continue to maintain, a large portion ~~(approximately 86.9~~(85.7 percent at December 31, ~~2006)~~2007) of our investment portfolio in fixed income securities, including our portfolio of preferred debt trading securities. The fair value of these investments generally increases or decreases in an inverse relationship with changes in interest rates. We classify ~~most (approximately 97.6~~the majority (98.5 percent, at December 31, ~~2006)~~2007) of our fixed income securities as available-for-sale. We must report the value of those investments at their current fair value. Accordingly, fluctuations in interest rates may result in fluctuations in the valuation of our fixed income investments, which ~~could~~would affect our stockholders’ equity.

~~Increases~~Fluctuations in interest rates may cause increased surrenders and withdrawals from our life insurance and annuity products. In periods of ~~increasing~~rising interest rates, policy loans and surrenders and withdrawals of life insurance policies and annuity contracts may increase as policyholders seek to buy products with perceived higher returns. For example, due to an increasing interest ~~rate environment~~rates on alternative investments, we experienced surrenders and withdrawals on our annuity products oftotaling $152.8 million in 2007 compared to $159.6 million in 2006, representing a 65.1 percent increase compared to surrenders and withdrawals in 2005. This process may lead to a net outflow of cash from our business. Such outflows may require us to sell invested assets at a time when the prices of those assets are lower than our cost because of current market interest rates, which may result in realized investment losses. In addition, unanticipated2006. These withdrawals and terminations ~~also~~ may require us to accelerate the amortization of deferred policy acquisition costs, which would increase our expenses in the current period.

The fair value of securities in our investment portfolio may fluctuate depending on general economic and market conditions or events relating to a particular issuer of securities. Changes in the fair value of securities in our investment portfolio could result in realized or unrealized investment losses, thereby affecting our stockholders’ equity.

We are exposed to the chance that issuers of bonds that we hold will not be able to pay principal or interest when it is due. Credit defaults and impairments may cause write-downs in the value of the bonds we hold. Pervasive deterioration in the credit quality of issuers, changes in interest rate levels and changes in interest rate spreads between types of investments could significantly affect the value of our invested assets and our earnings.

The financial results of companies in the property and casualty insurance industry historically have been cyclical in nature, characterized by periods of severe price competition and excess underwriting capacity, or soft markets, followed by periods of high premium rates and shortages of underwriting capacity, or hard markets. We expect these cycles to continue. Rates for property and casualty insurance are influenced primarily by factors that are outside of our control, including market and competitive conditions and regulatory issues. Soft market conditions could require us to reduce premiums, limit premium increases, or discontinue offering certain of our insurance products in one or more states, resulting in a reduction in our premiums written and in our profit margins and revenues, which could adversely affect our financial results.

~~Our profitability, like the profitability of other companies in the industry, can be affected significantly by other factors, including:~~

The demand for property and casualty insurance can also vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases. Fluctuations in demand and competition could produce underwriting results that would have a negative impact on our results of operations and financial condition. In addition, our investment returns, and thus our profitability, may also be adversely affected from time to time by conditions affecting a specific investment and, more generally, by stock and other market fluctuations and general economic, market, and political conditions. Our ability to make a profit on insurance products, fixed annuities, and products with guaranteed interest features depends in part on the returns on investments supporting our obligations under these products. As previously described, the value of specific investments may fluctuate substantially.

The insurance industry is highly competitive. In our property and casualty business and in our life business, we compete, and will continue to compete, with dozens of major U.S. and non-U.S. insurers and smaller regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies, and diversified financial services companies. Some of our competitors have far greater financial and marketing resources than we do. Our premium revenue and our profitability could decline if we lose business to competitors offering similar or better products at or below our prices. We price our insurance products based on estimated profit margins, and we do not expect to be able to significantly reduce our current estimated profit margins in the near future. Many of our competitors, however, are better capitalized than we are and may be able to withstand significant reductions in their profit margins. If our competitors decide to target our policyholder base by offering lower-priced insurance, we may not be able to respond competitively, which could reduce our revenue and our profitability.

From time to time, political events and positions affect the insurance market, including efforts to suppress rates to a level that may not allow us to reach targeted levels of profitability. For example, when our loss ratio compares favorably to that of the industry, state regulatory authorities may resist or delay our efforts to raise rates in the future, even if the property and casualty industry generally is not experiencing regulatory resistance to rate increases. Such resistance affects our ability in all product lines to obtain approval for rate changes that may be required to achieve targeted levels of profitability and returns on equity. Our ability to afford reinsurance required to reduce our catastrophe risk in designated areas may be dependent upon the ability to adjust rates for its cost. State

~~regulatory authorities may also impose rate rollbacks or require us to pay premium refunds to policyholders, affecting our profitability.~~

In addition to regulating rates, certain states have enacted laws that require a property-liability insurer conducting business in that state to participate in assigned risk plans, reinsurance facilities, and joint underwriting associations or require the insurer to offer coverage to all consumers, often restricting an insurer’s ability to charge the price it might otherwise charge. In these markets, we may be compelled to underwrite significant amounts of business at lower than desired rates, possibly leading to an unacceptable return on equity. Laws and regulations of many states also limit an insurer’s ability to withdraw from one or more lines of insurance in the state, except pursuant to a plan that is approved by the state insurance department. Additionally, certain states require insurers to participate in guaranty funds for impaired or insolvent insurance companies. These funds periodically assess losses against all insurance companies doing business in the state. Our operating results and financial condition could be adversely affected by any of these factors.

We are subject to extensive supervision and regulation by the states in which we operate. Our ability to comply with these laws and regulations and obtain necessary and timely regulatory action is and will continue to be critical to our success and ability to earn profits.

~~Examples of state regulations that pose particular risks to our ability to earn profits include the following:~~

Compliance with these state laws and regulations requires us to incur administrative costs that decrease our profits. These laws and regulations may also prevent or limit our ability to underwrite and price risks accurately, obtain timely rate increases necessary to cover increased costs, discontinue unprofitable relationships or exit unprofitable markets, and otherwise continue to operate our business profitably. In addition, our failure to comply with these laws and regulations could result in actions by state or federal regulators, including the imposition of fines and penalties or, in an extreme case, revocation of our ability to do business in one or more states. Finally, we could face

individual, group and class-action lawsuits by our policyholders and others for alleged violations of certain state laws and regulations. Each of these regulatory risks could have a negative effect on our profitability.

We are currently monitoring developments with respect to various state facilities such as guaranty funds, Louisiana Citizens Property Insurance Corporation, Florida Citizens Property Insurance Corporation, Alabama Insurance Underwriting Association, Texas FAIR Plan, Texas Windstorm Insurance Association and Mississippi Windstorm Underwriting Association. The ultimate impact of Hurricanes Katrina, Rita and Wilma on these facilities is currently uncertain but could result in the facilities recognizing a financial deficit or a financial deficit greater than the level currently estimated. Already, we have been levied assessments by some of these states. They may have the ability to assess participating insurers additional amounts if, and when, financial deficits occur, adversely affecting our results of operations. While these facilities are generally designed so that the ultimate cost is borne by policyholders, the exposure to assessments and the availability of recoupments or premium rate increases from these facilities may not offset each other in our financial statements. Moreover, even if they do offset each other, they may not offset each other in financial statements for the same fiscal period due to the ultimate timing of the assessments and recoupments or premium rate increases, as well as the possibility of policies not being renewed in subsequent years. Related to the 2005 and 2004 hurricane seasons we were assessed a total of $6.1 million by state facilities through December 31, 2006, of which we have been able to recoup from policyholders $3.1 million.

In addition to the foregoing discussion of state regulations posing particular risks to our profitability, our insurance company and our subsidiaries and affiliate are subject to other state laws and regulations in the states where they do business. These regulations involve, among other things:

These and other state laws and regulations also impose administrative burdens and risks upon our operations that could similarly affect our profitability. Regulatory authorities enforcing these statutes are concerned primarily with the protection of policyholders rather than stockholders.

The insurance (and insurance brokerage) industry has ~~recently~~ become the focus of increased scrutiny by regulatory and law enforcement authorities, as well as class action attorneys and the general public, relating to allegations of improper special payments, price-fixing, bid-rigging, improper accounting practices, improper claims handling and other alleged misconduct, including the practices surrounding the placement of insurance business and misrepresentation in the scope of coverage. Formal and informal inquiries have been made of a large segment of the industry, and a large number of companies in the industry have received or may receive subpoenas, requests for information from regulatory authorities or other inquiries relating to these and similar matters. ~~These~~While we have no reason to believe that we will be targeted, these efforts are expected to result in both enforcement actions and proposals for new state and federal regulation, which may have a negative ~~affect~~effect on our results of operations and financial condition.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number and/or size of claims. Examples of these issues include:

In addition, we have been the target of a number of class action lawsuits arising from Hurricane Katrina relating to allegations of improper claims settlement practices, misrepresentations in the scope of coverage and other matters. It is difficult to predict the outcome of these ~~investigations, proceedings and~~ lawsuits, whether they will expand into other areas not yet contemplated, and whether activities and practices currently thought to be lawful will be characterized as ~~unlawful and what form new regulations will have when finally adopted.~~unlawful. It is also difficult to predict the impact, if any, on our business and financial ~~condition, if any, of this increased regulatory and law enforcement action and~~condition. However, rulings adverse to us in pending litigation ~~with respect to the insurance industry.~~

Under current federal and state income tax law our life insurance and annuity products receive favorable tax treatment. This favorable treatment may give these products a competitive advantage over other non-insurance products. Congressarising from ~~time to time considers legislation that~~Hurricane Katrina would reduce or eliminate the favorable policyholder tax treatment currently applicable to life insurance and annuities. Congress also considers proposals to reduce the taxation of certain products or investments that may compete with life insurance and annuities. Legislation that increases the taxation on insurance products or reduces the taxation on competing products could lessen the advantage or create a disadvantage for certain of our products making them less competitive. Such proposals, if adopted, couldlikely have a material adverse effect on our financial position, as well as on our results of operations.

Please refer to Part I, Item 3, “Legal Proceedings” for further discussion on our class action and individual lawsuits.

Examples of state regulations that pose particular risks to our ability to earn profits include the following:

charge. In these markets, we may be compelled to underwrite significant amounts of business at lower than desired premium rates, possibly leading to an unacceptable return on equity. While these facilities are generally designed so that the ultimate cost is borne by policyholders, the exposure to assessments and our ability to recoup these assessments through adequate premium rate increases may not offset each other in our financial statements. Moreover, even if they do offset each other, they may not offset each other in our financial statements for the same fiscal period due to the ultimate timing of the assessments and recoupments or premium rate increases. Additionally, certain states require insurers to participate in guaranty funds for impaired or insolvent insurance companies. These state funds periodically assess losses against all insurance companies doing business in the state. Our operating results and financial condition could be adversely affected by any of these factors.

Compliance with these state laws and regulations requires us to incur administrative costs that decrease our profits. These laws and regulations may also prevent or limit our ability to underwrite and price risks accurately, obtain timely premium rate increases necessary to cover increased costs, discontinue unprofitable relationships or exit unprofitable markets, and otherwise continue to operate our business profitably. In addition, our failure to comply with these laws and regulations could result in actions by state or federal regulators, including the imposition of fines and penalties or, in an extreme case, revocation of our ability to do business in one or more states. Finally, we could face individual, group and class action lawsuits by our policyholders and others for alleged violations of certain state laws and regulations. Each of these regulatory risks could have a negative effect on our profitability.

Security breaches and other improper accessing of data in our facilities, networks or databases could result in loss or theft of data and information or systems’ interruptions that may expose us to liability and have an adverse impact on our business. Moreover, any compromise of the security of our data could harm our reputation and business. There can be no assurances that we will be able to implement security measures adequate to prevent every security breach.

Third-party rating agencies assess and rate the claims-paying ability of insurers and reinsurers based on criteria established by the agencies. Our property and casualty insurers have been assigned a financial strength rating of “A”

(Excellent) from A.M. Best Company since 1994 (except for one insurance subsidiary that is in a runoff status, which A.M. Best has designated as NR-3 (Rating Procedure Inapplicable)). Our life insurance subsidiary has been assigned a financial strength rating of “A-” (Excellent) from A.M. Best since 1998. A.M. Best historically has rated our property and casualty companies on a pooled basis. However, beginning in 2006, our companies were rated on a group basis, consistent with rating guideline changes A.M. Best recently adopted. These financial strength ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength and quality of insurers and reinsurers. These ratings are not evaluations directed to potential purchasers of our common stock and are not recommendations to buy, sell or hold our common stock. These ratings are subject to change at any time and could be revised downward or revoked at the sole discretion of the rating agency. Downgrades in our financial strength ratings could adversely affect our ability to access the capital markets or could lead to increased borrowing costs in the future. Perceptions of our company by investors, producers, other businesses and consumers could also be significantly impaired.

We believe that the rating assigned by A.M. Best is an important factor in marketing our products. Our ability to retain our existing business and to attract new business in our insurance operations depends largely on our ratings by this agency. Our failure to maintain our ratings, or any other adverse development with respect to our ratings, could cause our current and future independent agents and insureds to choose to transact their business with more highly rated competitors. If A.M. Best downgrades our ratings or publicly indicates that our ratings are under review, it is likely that we would not be able to compete as effectively with our competitors and our ability to sell ~~such products~~insurance policies could decline. If that happens, our sales and earnings would decrease. For example, many of our agencies and insureds have guidelines that require us to have an A.M. Best financial strength rating of “A-” or higher. A reduction of our A.M. Best ratings below “A-” would prevent us from issuing policies to a majority of our insureds or other potential insureds with similar ratings requirements. In addition, a ratings downgrade for our property and casualty insurers by A.M. Best below “A” would constitute an event of default under our credit facility.

As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk that we and our insurance company subsidiaries and affiliate underwrite. The availability and cost of reinsurance is subject to market conditions that are beyond our control. The availability and cost of the reinsurance we purchase may affect the level of our business and profitability. Although we purposely work with several reinsurance intermediaries and reinsurers, we may be unable to maintain our current reinsurance facilities or obtain other reinsurance facilities in adequate amounts and at favorable premium rates. Moreover, there may be a situation in which we have more than two catastrophic events within one policy year. Because our current catastrophe reinsurance program only allows for one automatic reinstatement at an additional reinstatement premium, we would be required to obtain a new catastrophe reinsurance policy to maintain our current level of catastrophe reinsurance coverage. Such coverage may be difficult to obtain, particularly if it is necessary to do so during hurricane season following the second catastrophe. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposure to risk would increase or, if we are unwilling to bear an increase in net risk exposures, we would have to reduce the amount of risk we underwrite.

Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, it does not relieve us of our liability to our policyholders. Our ability to collect reinsurance recoverables may be subject to uncertainty. Our losses must meet the qualifying conditions of the reinsurance contract. Reinsurers must also have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Particularly, following a major catastrophic event, our inability to collect a material recovery from a reinsurer on a timely basis, or at all, could ~~result~~have a material adverse effect on our liquidity, operating results and financial condition.

The following states provided 54.4 percent of the direct premium volume in the ~~surrender~~property and casualty insurance segment in 2007: Texas (13.3 percent), Iowa (13.0 percent), Colorado (10.7 percent), Louisiana (8.8 percent) and Missouri (8.6 percent). The following states provided 74.8 percent of ~~some existing contracts~~the direct statutory premium volume in the life insurance segment in 2007: Iowa (40.4 percent), Minnesota (10.4 percent), Wisconsin (8.9 percent), Nebraska (7.7 percent) and ~~policies.~~Illinois (7.4 percent). Our revenues and profitability are subject to the prevailing regulatory, legal,

economic, political, demographic, competitive, weather and other conditions in the principal states in which we do business. Changes in any of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on us compared to companies that are more geographically diversified. In addition, ~~changes~~our exposure to severe losses from localized natural perils, such as hurricanes or hailstorms, is increased in those areas where we have written a significant amount of property and casualty insurance policies.

The insurance industry is highly competitive. In our property and casualty insurance business and in our life insurance business, we compete, and will continue to compete, with many major U.S. and non-U.S. insurers and smaller regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies, and diversified financial services companies. Some of our competitors have far greater financial and marketing resources than we do. Our premium revenue and our profitability could decline if we lose business to competitors offering similar or better products at or below our prices. We price our insurance products based on estimated profit margins, and we would not be able to significantly reduce our current estimated profit margins in the ~~federal estate tax laws~~near future. Some of our competitors, however, are better capitalized than we are and may be able to withstand significant reductions in their profit margins. If our competitors decide to target our policyholder base by offering lower-priced insurance, we may not be able to respond competitively, which could ~~negatively affect the demand for the types of life insurance used in estate planning.~~reduce our revenue and our profitability.

We are an insurance company domiciled in the State of Iowa and, as a result, we are subject to Iowa insurance laws restricting our ability to pay dividends to our stockholders, including laws establishing minimum solvency and liquidity standards and laws that prohibit us from paying dividends except from the earned profits arising from our business. Our ability to pay dividends also depends upon the surplus and earnings of our subsidiary insurance companies and the ability of our subsidiary insurance companies to pay dividends to us. Payments of dividends by our subsidiary insurance companies are restricted by state insurance laws similar to those laws that restrict our payment of dividends. As a result of these restrictions, at times we may not be able to pay dividends on our common stock, or we may be required to seek prior approval from the applicable regulatory authority before we can pay any such dividends. In addition, the payment of dividends by us is within the discretion of our board of directors and will depend on numerous factors, including our financial condition, our capital requirements and other factors that our board of directors considers relevant.

The trading price of our common stock may fluctuate substantially due to a variety of factors, ~~certain~~some of which are beyond our control and may not be related to our operating performance. These fluctuations could be significant and could cause ~~you to lose~~a loss of part or ~~all of your investment~~the entire amount invested in our shares of common stock. Factors that could cause fluctuations include, but are not limited to, the following:

Our articles of incorporation and bylaws, as well as applicable laws governing corporations and insurance companies, contain provisions that could impede an attempt to replace or remove our management or prevent the sale of our company that, in either case, stockholders might consider being in their best interests. For example:

Further, the insurance laws of Iowa and the states in which our subsidiary insurance companies are domiciled prohibit any person from acquiring direct or indirect control of us or our insurance company subsidiaries, generally defined as owning or having the power to vote 10.0 percent or more of our outstanding voting stock, without the prior written approval of state regulators.

These provisions of our articles of incorporation and bylaws, and these state laws governing corporations and insurance companies, may discourage potential acquisition proposals. These provisions and state laws may also delay, deter or prevent a change of control of our company, in particular through unsolicited transactions that some or all of our stockholders might consider to be desirable. As a result, efforts by our stockholders to change the direction or our company’s management may be unsuccessful, and the existence of such provisions may adversely affect market prices for our common stock if they are viewed as discouraging takeover attempts.

Based upon the number of shares of our common stock outstanding as of December 31, ~~2006~~2007, our largest stockholder will have a beneficial interest in, and the power to vote or control the disposition of, approximately ~~18.9~~14.2 percent of our issued and outstanding common stock. He is in a position to strongly influence the outcome of substantially all corporate actions requiring stockholder approval, including mergers involving our company, sales of all, or substantially all, of our assets and the adoption of amendments to our articles of incorporation. Also, he may have interests different than, or adverse to, those of our other stockholders.

We own two buildings (a five-story office building and an eight-story office building in which part of the first floor is leased to tenants) and related parking facilities in Cedar Rapids, Iowa, that we use as our home office. The two buildings are connected by a skywalk. We also lease additional adjacent office space in Cedar Rapids. Our regional locations in Westminster, Colorado, and Galveston, Texas, conduct operations in leased office space. Our claims office in Metairie, Louisiana, also operates in leased office space. The table below shows a brief description of our owned and leased office space.

In the aftermath of Hurricane Katrina, United Fire & Casualty Company and our Louisiana property and casualty insurance subsidiary, Lafayette Insurance Company, as well as many other insurers in the Louisiana marketWe have been named as ~~defendants~~a defendant in ~~litigation commenced~~various lawsuits, including actions seeking certification from the court to proceed as a class action suit and actions filed by ~~policyholders. Some~~individual policyholders, relating to disputes arising from damages that occurred as a result of ~~these policyholders are seeking relief~~Hurricane Katrina in ~~their own right and other suits~~2005. As of December 31, 2007, there were in excess of 400 such cases pending, approximately 20 of which were styled as class actions. These cases have been filed ~~seeking class certification.~~in both Louisiana state courts and federal district courts. These ~~suits allege various improprieties in the~~cases involve, among other claims, ~~settlement process. This litigation is either immaterial or in the early stages and we can not at this time make a determination~~disputes as to the ~~ultimate outcome~~amount of reimbursable claims in particular cases, as well as the scope of insurance coverage under homeowners and commercial property policies due to flooding, civil authority actions, loss of use and business interruption. Certain of these cases also claim a breach of duty of good faith or ~~effect~~violations of Louisiana insurance claims-handling laws or regulations and involve claims for punitive or exemplary damages while other cases claim that under Louisiana’s so-called “Valued Policy Law”, the insurers must pay the total insured value of a home that is totally destroyed if any portion of such damage was caused by a covered peril, even if the principal cause of the loss was an excluded peril. Other cases challenge the scope or enforceability of the water damage exclusion in the policies.

Several actions pending against various insurers, including us, were consolidated for purposes of pretrial discovery and motion practice under the caption In re Katrina Canal Breaches Consolidated Litigation, Civil Action No. 05-4182 in the United States District Court, Eastern District of Louisiana. On November 27, 2006, the Federal District Court issued an Order in these consolidated cases denying our motion to dismiss. The Court held that the flood exclusions utilized in the forms of homeowners and commercial lines policies issued by us and a number of other insurance carriers were ambiguous because such exclusions did not specify that they applied to flooding caused by negligent acts or omissions as well as to flooding caused by natural incidents such as Acts of God. The plaintiffs in these cases claim, among other things, that the efficient proximate cause of their losses was the third-party negligence of Orleans Levee District. They claim that the Levee District was negligent in the maintenance of the canal walls or in its failure to warn the plaintiffs and others of the impending water intrusion. On August 2, 2007 the United States Court of Appeals, Fifth Circuit, issued an opinion reversing the District Court and finding the water damage exclusion to be unambiguous and enforceable. The plaintiffs in these cases have sought review in the United States Supreme Court.

Cases interpreting the water damage exclusion are also proceeding in the Louisiana state court system. A state trial court decision that adopted the legal reasoning of the (now reversed) Federal District Court was upheld by a divided Louisiana Court of Appeals. That court agreed with the trial court that the flood damage exclusion in a commercial property policy was ambiguous. The Louisiana Supreme Court has accepted this case for review. Activity in much of the hurricane-related litigation is at a standstill pending a decision by the Louisiana Supreme Court.

We intend to vigorously defend the flood exclusion matter and other cases related to losses incurred in connection with Hurricane Katrina. While we believe that the flood exclusion at issue is unambiguous and enforceable, the Louisiana Supreme Court could rule that our flood exclusions do not exclude losses from flooding caused by third-party negligence, that such negligence was the efficient proximate cause of such flooding, or that such an exclusion is inapplicable where any portion of a loss is attributable to a covered peril. Such a ruling would likely have a material adverse effect on our financial position, or operating results. While we believe the claims have been handled consistent with the policy language and the applicable law, the litigation environment for insurers involved in hurricane litigation in Louisiana courts is not favorable. Several recent court rulings in Louisiana and neighboring states were adverse to insurers and have received considerable publicity. These developments present challenges to all insurers involved in hurricane litigation. We maintain that because we were not a party to that litigation these decisions should not directly impact us, and that other decisions should and will be corrected in the appellate courts. However, the litigation seeking class relief, and the numberas well as on our results of ~~potential members of any class certified, could potentially create a material obligation for us.~~

operations. We have established our loss and loss settlement expense reserves ~~for all claims in litigation commensurate with our evaluation~~on the assumption that the flood exclusion will be found to be enforceable and effective to exclude losses caused by third-party negligence, as well as by Acts of God, and that the application of the ~~potential outcome of those claims.~~Valued Policy Law will not result in our having to pay damages for perils not otherwise covered. We believe that, in the aggregate, these reserves should be adequate. However, the wave of litigation faced by us and other insurers is unprecedented so it is difficult to accurately predict an outcome. Additionally, many of the persons who will be involved in the determination of factual and legal issues were themselves affected by Hurricane Katrina, complicating the defense of these claims. Ourour evaluation of these claims and the adequacy of ~~our~~ recorded reserves may change ~~should~~if we encounter adverse developments in the further defense of these claims.

We consider all of our other litigation pending at December 31, ~~2006,~~2007, to be ordinary, routine, and incidental to our business.

There were no matters submitted to a vote of the shareholders during the fourth quarter of ~~2006.~~2007.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

United Fire’s common stock is traded on the NASDAQ Stock Market under the symbol UFCS. On February 1, ~~2007,~~2008, there were ~~956~~929 holders of record of United Fire common stock. Such number of record holders does not reflect shareholders who beneficially own common stock in nominee or street name. The table below sets forth the high and low bid quotations for our common stock for the calendar periods indicated. These quotations reflect interdealer prices without retail markups, markdowns, or commissions and may not necessarily represent actual transactions.

Our policy has been to pay quarterly cash dividends, and we intend to continue that policy. The table below shows the quarterly cash dividends declared in ~~2006~~2007 and ~~2005.~~2006. Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We have paid dividends every quarter since March 1968.

State law permits the payment of dividends only from statutory accumulated earned profits arising from business operations. Furthermore, under Iowa law we may pay dividends only if after giving effect to the payment we are either able to pay our debts as they become due in the usual course of business or our total assets would be equal to or more than the sum of our total liabilities. Our subsidiaries are also subject to similar state law restrictions on dividends.

Information about securities authorized for issuance under equity compensation plans is incorporated by reference from Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management.”

In August 2007, our Board of Directors authorized us to repurchase an up to an additional 600,000 shares of our common stock, raising our total repurchase authorization to 687,167 shares. The following table shows the authorizations and stock repurchases made during the fourth quarter. For a more detailed discussion of our stock repurchase plan, refer to the “Financial Overview” section of Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following graph compares the cumulative total stockholder return on our common stock for the last five fiscal years with the cumulative total return of the Russell 2000 Index, the SNL Insurance Company Index and the SNL Property & Casualty Insurance Index, assuming an investment of $100 in each of the above at their closing prices on December 31, ~~2001,~~2002, and reinvestment of dividends.

The following table shows the raw data used in the Total Return Performance graph above.

The selected financial data herein has been derived from the consolidated financial statements of United Fire and its subsidiaries and affiliate. The data should be read in conjunction with Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and ~~the~~Part II, Item 8 “Consolidated Financial Statements and Related Notes.” The 2004 and prior amounts reflect the retroactive effects of our December 15, 2004, one-for-one stock dividend.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying Consolidated Financial Statements. It includes the following sections:

This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about our company, the industry in which we operate, and beliefs and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “continues,” “seeks,” “estimates,” “predicts,” “should,” “could,” “may,” “will continue,” “might,” “hope” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Among the factors that could cause our actual outcomes and results to differ are:

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.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Part ~~II,~~I, Item 1A “Risk Factors” of this document.

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 are written in Iowa, Texas, Colorado, Louisiana and ~~more than~~Missouri. Approximately three-fourths of our life insurance premiums are written in ~~five states. Our primary focus for our property~~Iowa, Minnesota, Wisconsin, Nebraska and casualty insurance operations is on our core commercial lines business. Through disciplined underwriting and strong agency relationships, we have traditionally emphasized writing good business at an adequate price, preferring quality to volume. Our goal of consistent profitability is supported by these business strategies.

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. Additional segment information is presented in Part II, Item 8, Note 11 “Segment Information” to the Consolidated Financial Statements.

~~Financial Overview~~Our revenue is primarily composed of premiums and investment income. Major categories of expenses include losses and loss settlement expenses, changes in reserves for future policy benefits, operating expenses and interest on policyholders’ accounts. Through disciplined underwriting and strong agency relationships, we have traditionally emphasized writing good business at an adequate price, preferring quality to volume. Our goal of consistent profitability is supported by these business strategies.

~~Despite weather forecasters’ early predictions of a very active Atlantic hurricane season similar to that endured~~Our business is cyclical in ~~2004~~nature and ~~2005, the 2006 season was relatively quiet~~is influenced by ~~comparison – although average from a historic perspective. There were only nine named storms~~many factors, including price competition, economic conditions, interest rates, weather-related events and ~~five hurricanes (two major) during the 2006 season, with no~~other catastrophes including natural (for example hurricanes and ~~only three tropical storms making landfall~~tornados) and man-made disasters, state regulations, court decisions and changes in the United States. Forecasters’ original predictions proved inaccurate in part due to the unexpectedly early and rapid development of the El Nino phenomenon in the Pacific Ocean. An El Nino happens when waters warm in the Pacific, affecting the atmosphere and increasing westerly winds across the North American continent. As a result, Atlantic hurricanes are weakened and pushed away from the United Stateslaw.

East Coast. Four of this season's five hurricanes – Florence, Gordon, Helene and Isaac – started to track westward across the Atlantic toward the United States, only to be turned northward and sent out to sea to dissipate.

Even though we experienced a less active than predicted 2006 hurricane season, the financial effects of Hurricanes Katrina and Rita continued to impact us during 2006. We incurred pre-tax charges of approximately $32.0 million related to those storms during the year.

In the aftermath of Hurricane Katrina, United Fire & Casualty Company and our Louisiana property and casualty insurance subsidiary, Lafayette Insurance Company, along with many other insurers in the Louisiana market, were named as a defendant in litigation. Refer to Part I, Item 3 “Legal Proceedings” for a discussion of this litigation and its relationship to our operations.

Based on the experience of the 2004 and 2005 hurricane seasons, the two prominent catastrophe modeling companies made significant changes to their catastrophe models in 2006. These changes resulted in widely divergent results for the same or similar scenarios run through each company’s catastrophe model. Insurance companies, reinsurers, rating agencies and state insurance agencies all rely heavily on these models when assessing the adequacy of catastrophe reinsurance coverage. Divergent model results for the same or similar catastrophe scenarios make it more difficult for us to accurately assess our catastrophe reinsurance coverage needs. Despite the increased variability in catastrophe modeling results experienced during the year, the revised models have generally produced more severe estimates of the probable maximum loss generated by catastrophic events. This has generally led to an increased demand for catastrophe reinsurance coverage, resulting in increases in catastrophe reinsurance pricing and decreases in catastrophe reinsurance availability.

To reduce the financial impact of future catastrophes, we have increased our catastrophe reinsurance coverage and implemented revised underwriting guidelines and policy terms in the Gulf Coast region. For 2006 we increased our catastrophe reinsurance program limit from $125.0 million to $185.0 million. For 2007, we ~~again increased our catastrophe reinsurance program limit from $185.0~~attained record net income of $111.4 million, compared to ~~$200.0 million. We increased our retention from $10.0 million in 2005 to $15.0~~$88.1 million in 2006 and ~~to $20.0~~$9.0 million in ~~2007. Estimated premium for~~2005. The strength of our underwriting and overall financial results in 2007 can be attributed to a relatively low level of claim activity related to catastrophes during the ~~program increased from approximately $6.0 million in 2005 to $14.0 million in 2006 and to $16.7 million in 2007.~~year. We also reduced our exposure by decreasing the number of policies we write in the Gulf Coast region and utilizing stricter underwriting standards, all while maintaining our overall level of premium volume in the region through significant rate increases.

Despite the lingering effects of the recent active hurricane seasons on the reinsurance market as a whole, we renewed our core reinsurance program for our property and casualty business for 2007 with very little change in pricing or coverage. Availability was not a significant issue for either our core or catastrophe reinsurance programs. Refer to the Reinsurance section in Part I, Item 1 “Business” for a more detailed discussion of our property and casualty reinsurance program.

The reinsurance program for our life insurance subsidiary remained largely unchanged in 2006 from 2005. The retention on our standard individual life cases remained the same at $.2 million for insureds ages 65 or less and $.1 million for insureds ages 66 or older. For catastrophe excess claims we continue to retain $1.0 million of the ultimate net loss, and we are indemnified for the excess up to a maximum of $5.0 million. Refer to the Reinsurance section of Part I, Item 1 “Business” for a more detailed discussion of our life reinsurance program.

~~Our property and casualty insurance segment performed well in 2006.We continued our emphasis on~~emphasized writing quality business – one of our company’s core objectives – and ~~continued to have excellent~~had favorable results in our non-catastrophe ~~business. This~~claim activity in each of the past three years. Our results in 2005 were significantly impacted by losses from Hurricane Katrina. Additional development on Hurricane Katrina losses continued to impact our results in 2006.

An additional measure of our results is the ~~fifth year in~~combined ratio. The property and casualty insurance industry uses the combined ratio as a ~~row~~measure of ~~decreased non-catastrophe claims frequency. However, we did experience increased claims frequency~~underwriting profitability. The combined ratio is the sum of the loss ratio (losses and ~~severity related to several large fires and Midwest storms that we experienced during~~loss settlement expenses incurred as a percent of net premiums earned) plus the ~~year. On~~expense ratio (underwriting expenses as a percent of net written premiums, if calculated on a statutory basis, ~~our~~or net earned premiums, if calculated on a GAAP basis). A combined ratio ~~without catastrophes~~below 100 percent generally indicates a profitable book of business. Our GAAP combined ratio was ~~76.9~~81.3 percent, 87.9 percent and 111.3 percent in 2007, 2006 and 2005, respectively. Our statutory combined ratio was 82.1 percent, 89.7 percent and 112.5 percent in 2007, 2006 and 2005, respectively. The statutory combined ratio for the property and casualty industry is projected by A.M. Best to be 95.6 percent for ~~2006 compared with 67.4~~2007. The industry statutory combined ratio was 92.4 percent ~~for 2005. The insurance industry as a whole experienced non-catastrophe combined ratios of 91.6 percent (estimated)~~ in 2006 and ~~94.1~~101.2 percent in 2005.

~~As previously discussed,~~In the wake of record losses related to Hurricane Katrina and Hurricane Rita, we ~~are making several changes~~disclosed in 2006 that we intended to ~~address~~reduce our property exposures in the Gulf Coast region, particularly in Louisiana, as a way to mitigate the catastrophe risk associated with this business. During 2007 we took steps to reduce our exposure in the Gulf Coast, ~~region. We have no plans to withdraw completely from~~including the ~~Gulf Coast market, however we are taking steps to~~

~~reduce our exposure; including~~implementation of stricter underwriting guidelines and policy terms, as well as significant premium rate increases in catastrophe-prone areas. These steps have reduced our probable maximum loss due to catastrophe ~~prone areas.~~in the Gulf Coast area by over 40 percent from pre-Hurricane Katrina levels. With the exposure reduction in Louisiana and increased catastrophe reinsurance protection, we believe that ~~we are in a position where~~ we would not exceed our catastrophe reinsurance coverage limits for any future catastrophes similar in magnitude and intensity to Hurricane Katrina, which was the costliest catastrophe in the history of our company.

Beginning in 2005, the property and casualty industry entered into a soft market, characterized by increased price competition and excess underwriting capacity. During ~~2006,~~the three years ended 2007, we have experienced an increasing rate of competition, which has resulted in decreasing levels of premium pricing in many of our lines of insurance and in many of the geographic areas in which we write, with the exception of coastal areas. The significant losses that the insurance industry suffered due to Hurricane Katrina created hard market conditions in the Gulf Coast region in both personal and commercial lines. However, many insurers, ourselves included, also experienced an increase in prices for property catastrophe reinsurance coverage.

We anticipate that the soft market and more competitive pricing environment will continue through 2008 and beyond. In order to mitigate the effects of a soft insurance market, we will focus on retaining good business and writing quality new business. We intend to capitalize on the strength of our existing agency relationships by emphasizing our highly educated and experienced underwriting staff and our ability and willingness to underwrite and accept unique risks. To aid in policy retention, ~~for~~we provide our ~~core lines~~agents with superior customer service, which includes personally answering the telephone instead of ~~business.~~forcing agents to wade through a series of automated telephone prompts. We ~~are optimistic~~will continue to foster personal relationships with our agents by offering cost effective loss control programs and computer systems automation that ~~during~~simplifies and speeds up the process of quoting and writing policies. In 2007, our top 500 agencies generated approximately 88 percent of our underwriting profits. Therefore, the majority of our efforts will be focused on these most profitable agents. In 2008, we will evaluate the potential benefits of entering into additional niche markets.

During 2007, we ~~will achieve premium growth through a combination of new business and retention. However, we continue to experience pressure on pricing, particularly~~began writing workers’ compensation in ~~non-coastal areas and with respect to premium accounts over $.1 million. We continue to look for opportunities with new and existing agencies~~states where we ~~can forge profitable business with substantial premium production. We also are working~~had previously not offered this line of insurance. Currently, workers’ compensation insurance premiums account for approximately 10.0 percent of our direct premiums. In 2008, we plan to increase our ~~average agency size,~~writing of workers’ compensation business as a companion line to our other commercial insurance policies. We are developing new underwriting tools and loss control services that will allow us to more effectively evaluate and mitigate risks, improving profitability in ~~terms~~this line of ~~premium volume,~~business.

A lingering challenge from Hurricane Katrina remains policyholder litigation. United Fire & Casualty Company and our Louisiana property and casualty insurance subsidiary, Lafayette Insurance Company, along with many other insurers in the Louisiana market, are named defendants in litigation generated by ~~adding new agencies~~this catastrophe. Refer to Part I, Item 3 “Legal Proceedings” for a discussion of this litigation and ~~increasing premium volume in existing agencies.~~its potential impact to our operations.

~~Our life insurance segment produced~~The strong results ~~in 2006. Although we experienced statutory premium growth in~~and steady income produced by our life insurance segment has historically helped offset the volatility of our property and casualty insurance earnings due to the cyclical nature of the property and casualty insurance business. In order to maintain profitability within our life insurance segment we will continue to diversify our product offerings in response to industry needs. In 2007 we introduced a new universal life product that combined the most popular features of and replaced our two existing universal life products. Our new universal life product includes a disability income rider with an increased monthly disability income benefit from $1,500 to $2,500. During 2007 we continued to see annuity withdrawals exceed new annuity deposits – although at a slower rate than experienced during ~~the year, this growth was offset by an increase in annuity withdrawals.~~2006. The current interest rate environment presents a challenge to maintaining a profitable interest rate ~~spread. As a result, we lowered~~spread for our annuity ~~rates in January 2007 and~~business. We will continue monitoring annuity withdrawals closely to determine if ~~future~~interest rate adjustments ~~are necessary.~~become necessary in the future. Despite these challenges, we ~~are~~remain optimistic about the future of our life insurance business.

In August 2007, we ~~are introducing a new universal life product. In an effort to address the evolving needs~~announced that our Board of the marketplace, this new product will combine the popular features of our two existing universal life products in addition to disability income riders, and increasing the disability income benefit from $1,500 to $2,500. We believe this new universal life product will allowDirectors authorized us to ~~further solidify our market position.~~

~~During the second quarter of 2006, we completed~~repurchase up to an ~~offering of~~additional 600,000 shares of our common stock, ~~priced~~bringing our total repurchase authorization to 687,167 shares. Under this share repurchase program, we may purchase our common stock from time to time through open market or privately negotiated transactions. The amount and timing of stock repurchases is determined at ~~$28.00 per share. Pursuant~~the discretion of management and depends on a number of factors, including the price of our common stock, general market and economic conditions, and corporate and regulatory requirements. The share repurchase program will be in effect for two years, but may be modified or discontinued by us at any time.

We are faced with the challenge of balancing the capital adequacy requirements established by A.M. Best with market expectations regarding returns on equity investment. We currently consider our stock to ~~this offering,~~be undervalued and, therefore, a good investment opportunity for our capital resources. During the last two quarters of 2007, we ~~issued 4.025 million~~repurchased 497,500 shares of our ~~$3.33? par value~~ common stock ~~resulting in proceeds (net of $5.7 million in underwriting expenses) of $107.0 million.~~

~~Our stockholders’ equity as of December 31, 2006, includes an after-tax charge of $10.2 million related~~and returned them to the impact of a new benefit plan accounting standard issued by the Financial Accounting Standards Board (“FASB”) during 2006. SFAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans” requires us to recognize the funded status of ~~our defined benefit pension and other postretirement plans in our statement of financial position effective December 31, 2006.~~authorized but unissued shares. For a more detailed ~~discussion~~accounting of the ~~adoption of SFAS No. 158,~~shares repurchased under this program, refer to Part II, Item ~~8, Note 1 “Significant Accounting Policies.~~5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

On February 15, 2008, our Board of Directors authorized us to repurchase up to an additional 500,000 shares of common stock. As of February 15, 2008, our remaining repurchase authorization is 689,667 shares.

Enterprise risk management (“ERM”) is a methodology that helps an organization assess and manage its overall exposure to risk. ERM has gained the attention of the insurance industry in recent years. ERM begins as a capital preservation process that helps insurers identify, quantify and manage risks from all sources that exist throughout the corporation, including risks arising from investments, underwriting, and operations. ERM considers the accumulation and diversification of risk and utilizes a company’s past experience to help evaluate future business plans and manage risk.

In ~~2006,~~2007, we ~~took steps to formalize~~continued formalizing our ERM ~~function.~~processes. We employ a multi-disciplinary approach to risk identification and evaluation – from claims to underwriting to financial to investments. Members of our ERM committee include our ~~Chief Operating Officer, Chief Financial Officer, Senior Vice President, Vice President~~chief executive officer, chief financial officer, executive vice president, vice president of ~~Claims, Vice President~~claims, vice president of ~~Corporate Underwriting, Chief Investment Officer, Vice President~~corporate underwriting, chief investment officer and ~~General Manager~~vice president/chief operating officer of our life insurance subsidiary (United Life Insurance Company), and United Life Insurance Company’s independent actuary. This committee met several times during the year to ~~establish a~~review the structure for our risk management process. ~~We anticipate that this committee will meet on a quarterly basis to review the ERM process.~~

During its meetings, ~~in 2006,~~ the ERM committee discussed the risks that our company faces, as well as the controls that are in place to mitigate those risks. These are not new ideas – management has actively and successfully managed risks

United Fire & Casualty Company and Subsidiaries

throughout our company’s history. ~~The committee’s initial efforts were directed at enhancing the documentation of risks and controls.~~ Collectively, the committee has identified two broad categories of risk faced by our company – insurance risk and operational risk. Types of insurance risks generally include, but are not limited to,

~~United Fire & Casualty Company and Subsidiaries~~

those risks associated with geographical concentrations of property insured, business mix, catastrophe modeling, underwriting practices, loss reserving practices, policy pricing, and the actions of our competitors. Types of operational risks we face generally include, but are not limited to, those risks associated with business continuity planning, information technology, executive succession planning, regulatory and legal compliance, diversification of investments and the application of accounting policies and procedures. ~~The committee also identified certain steps that it can take to further enhance~~

ERM issues are discussed both during our quarterly Board of Directors meetings and at our semi-annual managers meetings. At these meetings, directors and managers are updated on ERM issues and the ongoing efforts of the ERM ~~process.~~committee. The work of our ERM committee has led to the development of new tools designed to aid in the evaluation and mitigation of underwriting risks.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

Consolidated Results of Operations	(Dollars in Thousands)							% Change				(Dollars in Thousands)							% Change
Years ended December 31	2006		2005			2004		2006 vs. 2005		2005 vs. 2004		2007		2006		2005			2007 vs. 2006		2006 vs. 2005
Revenues
Net premiums earned	$	503,122	$	495,516		$	492,291	1.5	%	0.7	%	$	505,763	$	503,122	$	495,516		0.5	%	1.5	%
Investment income, net		121,981		118,847			111,474	2. 6	%	6.6	%		122,439		121,981		118,847		0.4	%	2. 6	%
Realized investment gains		9,965		4,540			4,060	119.5	%	11.8	%		9,670		9,965		4,540		-3.0	%	119.5	%
Other income		532		702			300	-24.2	%	134.0	%		654		532		702		22.9	%	-24.2	%
Total Revenues	$	635,600	$	619,605		$	608,125	2.6	%	1.9	%	$	638,526	$	635,600	$	619,605		0.5	%	2.6	%

Benefits, Losses and Expenses
Loss and loss settlement expenses	$	292,789	$	392,228		$	272,882	-25.4	%	43.7	%	$	260,714	$	292,789	$	392,228		-11.0	%	-25.4	%
Increase in liability for future policy benefits		19,737		17,666			12,125	11.7	%	45.7	%		15,666		19,737		17,666		-20.6	%	11.7	%
Amortization of deferred policy acquisition costs		126,898		115,473			110,963	9.9	%	4.1	%		136,805		126,898		115,473		7.8	%	9.9	%
Other underwriting expenses		21,525		32,955			40,960	-34.7	%	-19.5	%		22,918		21,525		32,955		6.5	%	-34.7	%
Interest on policyholders' accounts		49,159		54,727			56,386	-10.2	%	-2.9	%		43,089		49,159		54,727		-12.3	%	-10.2	%
Total Benefits, Losses and Expenses	$	510,108	$	613,049		$	493,316	-16.8	%	24.3	%	$	479,192	$	510,108	$	613,049		-6.1	%	-16.8	%

Income before income taxes		125,492		6,556			114,809	N/A		N/A			159,334		125,492		6,556		N/A		N/A
Federal income tax expense (benefit)		37,407		(2,488	)		35,992	N/A		N/A			47,942		37,407		(2,488	)	N/A		N/A
Net Income	$	88,085	$	9,044		$	78,817	N/A		N/A		$	111,392	$	88,085	$	9,044		N/A		N/A

Basic EPS	$	3.37	$	0.22		$	3.68	N/A		N/A		$	4.04	$	3.37	$	0.22		N/A		N/A
Diluted EPS	$	3.36	$	0.22		$	3.34	N/A		N/A			4.03		3.36		0.22		N/A		N/A

Our overall operating results have improved over the past three years. In 2007, we experienced a lower-than-normal level of catastrophe losses and continued to experience favorable results in most of our lines of business. Results in 2006 and 2005 were negatively impacted by Hurricane Katrina losses. The results in 2006 and 2005 without the impact of Hurricane Katrina were favorable, attesting to the quality of our core book of business. In addition, our life segment provided a steady stream of pre-tax income in each of the three years; $20.3 million in 2007, $21.9 million in 2006 and $21.4 million in 2005.

There has been slow growth in our net premiums earned over the past three years. Moderate increases in property and casualty premiums have been offset by moderate decreases in life insurance premiums. In the property and casualty segment, competitive market conditions have led to pricing reductions. Premium writings also decreased in 2007 as a result of our planned reduction of property exposures in Louisiana. However, some of this decrease was offset by pricing increases, specifically in hurricane-exposed regions.

United Fire & Casualty Company and Subsidiaries

The commercial lines pricing environment continues to be competitive, with an average of mid-single digit percentage decreases in premium. In nearly every geographic location in which we do business, we are experiencing pricing pressure on renewal accounts, especially midsize and large accounts. The personal lines pricing environment also continues to be very competitive both in the auto and homeowners lines of business, with an average of mid-single digit percentage decreases in non-catastrophe exposed states.

Fortunately, we have been successful in retaining a high percentage of our quality accounts, so despite pricing reductions on these accounts they have continued to be profitable. In addition, we have been able to write new business, which has also been profitable.

Net investment income has increased moderately since 2005. In the life segment, our investment portfolio has decreased due to an outflow of annuity funds. Cash generated from operating results in the property and casualty segment has led to an increase in investable funds. During 2006 and 2007 we shortened the duration of our portfolio due to the interest rate environment. Over the past two years, short-term rates of return have generally exceeded long-term rates. Despite this recent short-term emphasis, we have actively managed the duration of our portfolio to attain an appropriate matching of assets to liabilities.

Property and casualty insurance segment

Property & Casualty Segment Results of Operations
(Dollars in Thousands)									% Change
Years ended December 31	2007		2006			2005			2007 vs. 2006		2006 vs. 2005

Net premiums written ⁽¹⁾	$	470,402	$	476,402		$	453,683		-1.3	%	5.0	%
Net premiums earned	$	473,134	$	467,031		$	456,147		1.3	%	2. 4	%
Loss and loss settlement expenses		245,845		278,504			375,858		-11.7	%	-25.9	%
Amortization of deferred policy acquisition costs		123,420		118,756			106,348		3.9	%	11.7	%
Other underwriting expenses		15,378		13,269			25,536		15.9	%	-48.0	%
Underwriting income (loss)	$	88,491	$	56,502		$	(51,595	)	56.6	%	209.5	%

Investment income, net		43,363		40,225			34,741		7.8	%	15.8	%
Realized investment gains		7,099		6,986			2,013		1.6	%	247.2	%
Other income (loss)		59		(108	)		—		N/A		N/A
Income (loss) before income taxes	$	139,012	$	103,605		$	(14,841	)	34.2	%	798.1	%

(1) Please refer to the Non-GAAP financial measures section of this report for further explanation of this measure.

Combined Ratio (GAAP Basis)							Increase (Decrease) in Ratios
Years ended December 31	2007		2006		2005		2007 vs. 2006		2006 vs. 2005

Loss ratio	52.0	%	59.6	%	82.4	%	-7.6	%	-22.8	%
Expense ratio	29.3	%	28.3	%	28.9	%	1.0	%	-0.6	%
Combined ratio ⁽¹⁾	81.3	%	87.9	%	111.3	%	-6.6	%	-23.4	%
Combined ratio (without catastrophes) ⁽¹⁾	78.3	%	75.1	%	66.2	%	3.2	%	8.9	%

(1) Please refer to the Non-GAAP financial measures section of this report for further explanation of this measure.

The property and casualty insurance segment reported ~~net~~pretax income of ~~$88.1~~$139.0 million ~~or $3.37 per share,~~in 2007 and $103.6 million in 2006, compared ~~to net income~~with a pretax loss of $14.8 million in 2005 of $9.0 million, or $.22 per share (after providing for the dividend and accretion on convertible preferred stock). Net income in 2004 was $78.8 million, or $3.68 per share (after providing for the dividend and accretion on convertible preferred stock). Diluted earnings were $3.36 per share, $.22 per share and $3.34 per share for 2006, 2005 and 2004, respectively.

2005. The ~~deterioration~~improvement in the ~~2005~~2007 and 2006 results compared to ~~2004 and the improvement in net income from~~ 2005, ~~to 2006~~ was primarily due to the significant impact Hurricane Katrina and Hurricane Rita had on our loss experience during ~~2005.~~

~~Summary of Operations By Segment~~

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, which is reported on a pre-tax basis in the following sections of the Management’s Discussion and Analysis. Detailed segment information is presented in Part II, Item 8, Note 10 to the Consolidated Financial Statements.

~~United Fire & Casualty Company and Subsidiaries~~

~~Property and casualty insurance segment~~

Property & Casualty Segment Results of Operations

(Dollars in Thousands)

% Change
Years ended December 31
2006

2005

2004

2006
vs. 2005

2005
vs. 2004

Net premiums written
$
476,402

$
453,683

$
461,988

5.0
%

-1.8
%
Net premiums earned
$
467,031

$
456,147

$
456,888

2. 4
%

-0.2
%
Loss and loss settlement expenses

278,504

375,858

256,241

-25.9
%

46.7
%
Amortization of deferred policy acquisition costs

118,756

106,348

98,579

11.7
%

7.9
%
Other underwriting expenses

13,269

25,536

34,767

-48.0
%

-26.6
%
Underwriting income (loss)
$
56,502

$
(51,595
)
$
67,301

209.5
%

-176.7
%

Investment income, net

40,225

34,742

29,018

15.8
%

19.7
%
Realized investment gains

6,986

2,012

2,119

247.2
%

-5.0
%
Other income (loss)

(108
)

—

—

N/A

N/A

Income (loss) before income taxes
$
103,605

$
(14,841
)
$
98,438

798.1
%

-115.1
%

Underwriting Ratios (GAAP Basis)

Increase
(Decrease) in Ratios
Years ended December 31
2006

2005

2004

2006
vs. 2005

2005
vs. 2004

Net loss ratio
59.6
%

82.4
%

56.1
%

-22.8
%

26.3
%
Expense ratio
28.3
%

28.9
%

29.2
%

-0.6
%

-0.3
%
Combined ratio
87.9
%

111.3
%

85.3
%

-23.4
%

26.0
%
Combined ratio (without catastrophes)
75.1
%

66.2
%

81.1
%

8.0
%

-14.9
%

The property and casualty insurance segment reported pretax income of $103.6 million in 2006 and $98.4 million in 2004, compared with a pretax loss of $14.8 million in 2005. The deterioration in the 2005 results compared to 2004 and the improvement in net income from 2005 to 2006 was primarily due to the impact Hurricane Katrina and Hurricane Rita had on our loss experience during 2005. In 2006, we recorded $59.8 million in catastrophe losses, compared with $197.1 million in 2005 and $19.2 million in 2004. Hurricanes Katrina ($31.7 million) and Rita ($.3 million) contributed $32.0 million of the catastrophe losses in 2006. In contrast, Hurricanes Katrina ($178.2 million) and Rita ($10.9 million) contributed $189.1 million of the catastrophe losses in 2005. The financial impact from these hurricanes was realized largely on our homeowners, allied lines and commercial multiple peril lines of business.

United Fire & Casualty Company and Subsidiaries

In the five years prior to 2005, our average catastrophe net losses incurred each year were approximately $21.0 million. In 2005, we incurred $197.1 million in catastrophes. Of this, $178.2 million was attributable to Hurricane Katrina. In 2006, our catastrophe losses totaled $59.8 million, with $31.7 million related to Hurricane Katrina development. In 2007, we incurred $14.1 million in catastrophe losses, with $6.3 million from Hurricane Katrina. In the months following Hurricane Katrina, we made the decision to reduce our property exposures along the Gulf Coast. Due to regulatory constraints, we were required to wait until 2007 to initiate our plan. In 2007, we exceeded our goal of reducing our property exposures in Louisiana, reducing the exposure by one-third. This planned reduction contributed to the flat growth in premium revenue between 2006 and 2007. In addition, premium growth was mitigated due to pricing declines, as a result of soft market conditions. Over the past two years, competitive pressure has led to pricing reductions in many of our lines of business, and in most areas in which we write, with the exception of catastrophe exposed areas. Since Hurricane Katrina, we have significantly increased our pricing in hurricane-exposed regions.

Without the impact of catastrophes, our results have been favorable. Over the past three years, there has been some deterioration in our combined ratio (without catastrophes), due primarily to pricing conditions. Also negatively impacting our non-catastrophe results in 2007 was an increase in claims frequency in the commercial auto line of business and an increase in claims severity in the other liability line of business. Further discussion about these lines as well as our other lines of business, are included in subsequent sections of this report.

Net investment income is discussed on a consolidated basis in a following section of this report.

Premiums

(Dollars in Thousands)										% Change
Years ended December 31	2007			2006			2005			2007 vs. 2006		2006 vs. 2005
Direct premiums written	$	494,541		$	504,420		$	474,668		-2.0	%	6.3	%
Assumed premiums written		16,907			19,000			15,088		-11.0	%	25. 9	%
Ceded premiums written		(41,046	)		(47,018	)		(36,073	)	-12.7	%	30.3	%
Net premiums written ⁽¹⁾	$	470,402		$	476,402		$	453,683		-1.3	%	5.0	%
Net premiums earned		473,134			467,031			456,147		1.3	%	2.4	%

(1) Please refer to the Non-GAAP financial measures section of this report for further explanation of this measure.

During 2006 and 2007, despite the soft market conditions, our retention rates of quality accounts have remained high. We attribute this success to our relationships with our agents and a superior level of customer service. We also sought to increase our level of business through new policyholders. We initiated and increased writings in four southern states in 2007 and added many new accounts in some of our Midwestern states. The new business has been generated through our existing independent agency force. In 2007, we targeted the workers’ compensation line of business for growth and were able to increase revenues for this line. We are working on a program of new underwriting tools, to be implemented in 2008 that we anticipate will contribute to the profitability in the workers’ compensation line of business.

Over the past three years, our commercial lines of business has accounted for over 90 percent of premium revenue. We do not anticipate that our current mix of business (commercial lines/personal lines) will change materially.

Since 2000, we have had only five active accounts in our assumed business and a number of assumed contracts that are in run-off. Late in 2006, ~~over 2005 and 2004 primarily due~~we made the decision to cancel one of the largest remaining assumed contracts. This decision was made in response to an exposure base that was in excess of our risk tolerance levels as compared to the ~~funds received and invested from our May 2006 common stock offering.~~

Our underwriting expense ratio, determined on a GAAP basis, was 28.3 percent in 2006, 28.9 percent in 2005 and 29.2 percent in 2004. The improvement is primarily attributable to an increase in the level of underwriting costspremium we were able to ~~defer~~collect. In 2007, premium writings were down by 11.0 percent as a result of this decision. During 2008, there will be additional reductions in assumed business as the cancelled contract expires.

Net premiums earned are decreased by ceded premiums that we pay to reinsurers. In 2005, we paid an $8.0 million reinstatement premium for our catastrophe reinsurance coverage, due to the fact that we had exceeded our reinsurance limits of $125.0 million on Hurricane Katrina. In 2006, ~~as allowed under GAAP.~~premium rates for our catastrophe and excess of

United Fire & Casualty Company and Subsidiaries

(Dollars in Thousands)

% Change

Years ended December 31
2006

2005

2004

2006
vs. 2005

2005
vs. 2004

Direct premiums written
$
504,420

$
474,668

$
478,840

6.3
%
-0.9
%
Assumed premiums written

19,000

15,088

11,339

25. 9
%
33.1
%
Ceded premiums written

(47,018
)

(36,073
)

(28,191
)
30.3
%
28.0
%
Net premiums written
$
476,402

$
453,683

$
461,988

5.0
%
-1.8
%
Net premiums earned

467,031

456,147

456,888

2.4
%
-0.2
%

~~In 2006,~~loss reinsurance increased substantially because of the significant losses incurred by reinsurers as a result of Hurricane Katrina and other catastrophes. Pricing of ceded reinsurance did not increase materially in 2007. Rather, the reduction in ceded premiums written in 2007, was due to the lower level of direct premiums ~~written increased when compared with 2005,~~written.

Losses and Loss Settlement Expenses

Each year, our results are impacted not only by losses that occur in the current year, but also by development on losses that have occurred in prior years. The development, which can have either a favorable or unfavorable impact on earnings, is due to ~~an increase in~~paying losses at amounts different than what we reserved, or to changing loss reserve estimates based on new information that becomes available to us. For the ~~amount of new business our existing agents produced, additional new business from agents who began writing with us during the year and from greater policy retention. In 2005,~~past ten years, we have experienced a ~~decrease~~net redundancy due to losses that occurred in ~~direct written premiums compared to 2004~~prior years. In 2007, we incurred losses of $245.8 million, of which $291.0 million were from losses that occurred in 2007. We had favorable development from prior years’ losses of $45.2 million. The redundancy was realized in each of our lines of business, with the exception of homeowners, which was attributable to ~~the rate decreases implemented in 2005 in response to the increased level of competition that existed in the property and casualty insurance market.~~ Hurricane Katrina development.

In 2006, and 2005, we continued to de-emphasize our personal lines of business, which resulted in a reduction in personal lines premiums earned. We intend to continue growing our commercial lines of business, which is where we have historically been most profitable. Our focus on commercial lines is reflected in premiums written from our commercial lines of business, which accounts for over 90.0 percent of our direct premium writings for all years presented.

Assumed premiums written increased over the past three years, with $19.0 million recorded in 2006, $15.1 million recorded in 2005 and $11.3 million recorded in 2004. The increase in assumed premiums written is attributable to a larger amount of written premium collected from the ceding insurer due to implementation of rate increases.

Ceded premiums written have increased considerably in both 2005 and 2006 in response to the severe hurricanes recently experienced in the Gulf Coast region. In 2005, we paid an $8.0 million reinstatement premium as a result of claims originating from Hurricane Katrina. In 2006, premium rates for our catastrophe reinsurance coverage increased considerably due to the 2005 hurricane season.

~~The property and casualty insurance segment in 2006 had~~ loss and loss settlement expenses incurred ofwere $278.5 million, with $303.5 million of loss and loss settlement expenses that occurred in ~~2005~~2006 and a redundancy of $25.0 million ($62.2 million without the adverse development on Hurricane Katrina claims) on losses that occurred prior to 2006, which resulted from settling or re-estimating claims for less than reserved for at December 31, 2005. Due to Hurricane Katrina, our homeowners, allied lines and commercial multiple peril lines of business experienced a reserve deficiency, while our remaining lines of business experienced reserve redundancies for the year.

In 2005, ~~losses~~loss and loss settlement expenses incurred were $375.9 million, which was comprised of $453.4 million that was attributable to losses that occurred in 2005 as offset by a $77.5 million redundancy on losses that occurred prior to 2005. This redundancy resulted from settling or re-estimating claims for less than reserved for at December 31, 2004. We experienced a ~~loss~~ reserve redundancy in each of our lines of business, with the exception of fidelity and surety.

Losses and loss settlement expenses incurred in 2004 totaled $256.2 million, reflecting losses and loss settlement expenses of $294.8 million on losses that occurred in 2004 and a redundancy of $38.6 million on losses that occurred prior to 2004. We experienced a redundancy in each of our lines of business, with the exception of other liability. The adverse development in our other liability line of business was affected by construction defect losses and related legal costs.Loss Reserves

We discuss our reserving process, which contributed to the favorable development of loss reserves in 2007, 2006 ~~2005~~ and ~~2004,~~2005, under “Critical Accounting ~~Policies.~~Estimates.” The majority of our business consists of short duration contracts. However, we consider our workers’ compensation and other liability lines of business to be 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

~~United Fire & Casualty Company and Subsidiaries~~

final development on individual claims for many years. Our estimates for losses, particularly in these long-tail lines, are dependent upon many factors, such as the legal environment, inflation and medical costs. We consider all of these factors, as well as others, in estimating our loss reserves. As conditions or trends with respect to these factors change, we change our estimate for loss reserves accordingly.

The following table illustrates the primary components of the net loss redundancy we experienced in our reserves for 2007, 2006 ~~2005~~ and ~~2004.~~2005.

(Dollars in Thousands)
Years ended December 31	2006			2005		2004		2007			2006			2005
Savings from:
Salvage and subrogation	$	13,516		$	6,669	$	4,370	$	11,637		$	13,516		$	6,669
Alternative dispute resolution		8,360			10,939		12,482		8,847			8,360			10,939
Workers' compensation medical bill review		2,071			1,560		1,469		4,113			2,071			1,560
Other		38,269			58,316		20,266		29,322			38,269			58,316
		62,216			77,484		38,587		53,919			62,216			77,484
Adverse development from Hurricane Katrina		(37,251	)		—		—		(8,718	)		(37,251	)		—
Net redundancy	$	24,965		$	77,484	$	38,587	$	45,201		$	24,965		$	77,484

United Fire & Casualty Company and Subsidiaries

Salvage is the sale of damaged goods, for which the insured has been indemnified for and for which the insured has transferred title to the insurance company. Salvage reduces the cost incurred for property losses. Subrogation also reduces the costs incurred for a loss by seeking payment from other parties involved in the loss and/or from the other parties’ insurance company. Alternative dispute resolution facilitates settlements and reduces defense and legal costs through processes such as mediation and arbitration. Workers’ compensation medical bill review is a system designed to detect duplicate billings, unrelated and unauthorized charges and coding discrepancies, as well as it ensures that we are billed for medical services according to the fee schedule designated by each state in which we have claims.

Our “other” redundancy is attributable to both the payment of claims in amounts other than the amounts reserved and changes in loss reserves due to additional information on individual claims that we received after the reserves for those claims had been established. The additional information we consider is unique to each claim. Such information may include facts that reveal we have no coverage obligation for a particular claim, changes in applicable laws that reduce our liability or coverage exposure on a particular claim, facts that implicate other parties as being liable on a particular claim and favorable court rulings that decrease the likelihood that we would be liable for a particular claim. Also, additional information relating to severity is unique to each claim. For example, we may learn during the course of a claim that bodily injuries are less severe than originally believed or that damage to a structure is merely cosmetic instead of structural.

The table on the following page depicts our net loss ratio for 2007, 2006 and 2005.

United Fire & Casualty Company and Subsidiaries

Years ended December 31

2006

2005

2004

(Dollars in Thousands)
Net
Premiums
Earned

Net Losses &
Loss Settlement
Expenses Incurred

Net Loss
Ratio

Net
Premiums
Earned

Net Losses &
Loss Settlement
Expenses Incurred

Net Loss
Ratio

Net
Premiums
Earned

Net Losses &
Loss Settlement
Expenses Incurred

Net Loss
Ratio

Commercial lines:

Other liability⁽¹⁾
$
130,358

$
38,754

29.7
%

$
121,529

$
37,822

31.1
%

$
111,603

$
74,192

66.5
%
Fire and allied lines⁽²⁾

124,862

106,889

85.6

122,662

172,351

140.5

133,781

64,792

48.4

Automobile

95,443

55,422

58.1

93,740

42,269

45.1

93,357

51,747

55.4

Workers’ compensation

42,079

31,160

74.1

39,084

24,566

62.9

35,792

29,153

81.5

Fidelity and surety

22,021

7,741

35.2

25,202

11,670

46.3

25,345

5,498

21.7

Miscellaneous

867

134

15.5

813

216

26.6

822

128

15.6

Total commercial lines
$
415,630

$
240,100

57.8
%

$
403,030

$
288,894

71.7
%

$
400,700

$
225,510

56.3
%

Personal lines:

Fire and allied lines⁽³⁾
$
20,511

$
22,005

107.3
%

$
21,240

$
61,363

288.9
%

$
22,705

$
11,806

52.0
%
Automobile

16,427

7,771

47.3

20,421

9,458

46.3

25,268

16,554

65.5

Miscellaneous

332

502

N/A

528

1,086

N/A

457

(1,261
)
N/A

Total personal lines
$
37,270

$
30,278

81.2
%

$
42,189

$
71,907

170.4
%

$
48,430

$
27,099

56.0
%

Reinsurance assumed
$
14,131

$
8,126

57.5
%

$
10,928

$
15,057

137.8
%

$
7,758

$
3,632

46.8
%

Total
$
467,031

$
278,504

59.6
%

$
456,147

$
375,858

82.4
%

$
456,888

$
256,241

56.1
%

Years ended December 31			2007						2006						2005
(Dollars in Thousands)	Net Premiums Earned		Net Losses & Loss Settlement Expenses Incurred		Net Loss Ratio		Net Premiums Earned		Net Losses & Loss Settlement Expenses Incurred		Net Loss Ratio		Net Premiums Earned		Net Losses & Loss Settlement Expenses Incurred		Net Loss Ratio
Commercial lines:
Other liability ⁽¹⁾	$	136,704	$	55,354	40.5	%	$	130,358	$	38,754	29.7	%	$	121,529	$	37,822	31.1	%
Fire and allied lines ⁽²⁾		117,494		65,773	56.0			124,862		106,889	85.6			122,662		172,351	140.5
Automobile		99,004		63,509	64.1			95,443		55,422	58.1			93,740		42,269	45.1
Workers’ compensation		48,359		32,408	67.0			42,079		31,160	74.1			39,084		24,566	62.9
Fidelity and surety		21,848		2,121	9.7			22,021		7,741	35.2			25,202		11,670	46.3
Miscellaneous		851		413	48.5			867		134	15.5			813		216	26.6
Total commercial lines	$	424,260	$	219,578	51.8	%	$	415,630	$	240,100	57.8	%	$	403,030	$	288,894	71.7	%

Personal lines:
Fire and allied lines ⁽³⁾	$	21,117	$	12,434	58.9	%	$	20,511	$	22,005	107.3	%	$	21,240	$	61,363	288.9	%
Automobile		13,764		8,561	62.2			16,427		7,771	47.3			20,421		9,458	46.3
Miscellaneous		311		353	N/A			332		502	N/A			528		1,086	N/A
Total personal lines	$	35,192	$	21,348	60.7	%	$	37,270	$	30,278	81.2	%	$	42,189	$	71,907	170.4	%

Reinsurance assumed	$	13,682	$	4,919	36.0	%	$	14,131	$	8,126	57.5	%	$	10,928	$	15,057	137.8	%

Total	$	473,134	$	245,845	52.0	%	$	467,031	$	278,504	59.6	%	$	456,147	$	375,858	82.4	%

(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.

United Fire & Casualty Company and Subsidiaries

Commercial Lines

The net loss ratio in our commercial lines of business ~~improved from~~was 51.8 percent in 2007, 57.8 percent in 2006 and 71.7 percent in ~~2005 to 57.8 percent in 2006.~~2005. In ~~2005,~~our commercial property lines, the ~~net loss ratio deteriorated from 56.3 percent in 2004 to 71.7 percent. These fluctuations were~~improvement was due primarily ~~attributable to increased losses from Hurricanes Katrina and Rita in 2005.~~

Our other liability line of insurance covers businesses for bodily injury liability and property damage arising from general business operations, accidents on their premises and products manufactured or sold. We reported a net loss ratio in this line of 29.7 percent in 2006, 31.1 percent in 2005 and 66.5 percent in 2004. We experienced significant growth in net premiums earned of 7.3 percent in 2006, 8.9 percent in 2005 and 15.0 percent in 2004 due to premium rate increases each year. Further contributing to the ~~improvement~~lower catastrophe losses experienced in ~~this line has been~~2007 and 2006 as compared to the ~~decreased level~~losses experienced from Hurricane Katrina in 2005. The 2006 results in these lines were impacted by further development from Hurricane Katrina losses. Our commercial liability lines of ~~loss frequency we have experienced~~business were not impacted materially by Hurricane Katrina. Across all of our commercial lines, pricing reductions impacted our results over ~~this period.~~the past three years, to varying degrees.

Commercial Fire and Allied Lines

Commercial fire and allied lines insurance covers losses to an insured’s property, including its contents, from weather, fire, theft or other causes. We provide this coverage through a variety of business policies. The net loss ratio for our commercial fire and allied lines was 56.0 percent in 2007, 85.6 percent in 2006 and 140.5 percent in ~~2005~~2005. The improvement in our 2007 results was due to a lower number of fires and ~~48.4 percent~~storms occurring during the year as well as better catastrophe results than in ~~2004.~~prior years. The ~~2005~~deterioration in the 2006 and ~~2006~~2005 results were ~~impacted by losses from Hurricane Katrina and Hurricane Rita. Hurricanes Katrina and Rita resulted in~~a result of net catastrophe losses and loss settlement expenses ~~totaling $126.1~~from Hurricanes Katrina and Rita, which totaled $19.6 million and ~~$19.6~~$126.1 million in this line of business during ~~2005~~2006 and ~~2006,~~2005, respectively. Also, ~~premium rates~~pricing in our commercial property lines of business ~~have also~~ decreased during 2007 and 2006, with the exception of catastrophe-prone areas along the Gulf Coast, primarily in Louisiana.

Other Liability

Our other liability line of insurance covers businesses for bodily injury liability and property damage arising from general business operations, accidents on their premises and products manufactured or sold. We reported a net loss ratio in this line of 40.5 percent in 2007, 29.7 percent in 2006 and 31.1 percent in 2005. The deterioration in the net loss ratio in 2007 was primarily related to increased severity. We had several large liability losses in 2007, but have detected no trends as to cause of loss or geographic location. We also experienced an increase in net premiums earned of 4.9 percent in 2007 over 2006, compared to an increase of 7.3 percent in 2006 over 2005, as a result of pricing initiatives in this particular line of business.

Commercial Automobile

Our commercial automobile insurance covers physical damage to an insured’s vehicle, as well as liabilities to third parties. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft, flood or other causes. Automobile liability insurance covers bodily injury, damage to property resulting from automobile accidents caused by the insured, uninsured or underinsured motorists and the legal costs of defending the insured against lawsuits. Our company policy is to write only standard automobile insurance and we do not write coverage for large fleets of automobiles. Our net loss ratio in commercial automobile was 64.1 percent in 2007, 58.1 percent in 2006 and 45.1 percent in ~~2005 and 55.4~~2005. The deterioration in this line during 2007 was primarily due to a 3.8 percent increase in ~~2004.~~claim frequency as compared to 2006. The deterioration in this line during 2006 was primarily due to an increase in claim ~~severity experienced in 2006 over 2005. The improvement in this line during 2005 resulted primarily from a reduction in loss frequency.~~severity.

Workers’ Compensation

Our net loss ratio in the workers’ compensation line of business was 67.0 percent in 2007, 74.1 percent in 2006 and 62.9 percent in ~~2005~~2005. We consider our workers’ compensation business to be a companion product; we rarely write stand-alone workers’ compensation policies. Our workers’ compensation insurance covers primarily small- to mid-size accounts. The improvement in results in 2007 was due to lower severity, a slight decrease in our frequency and ~~81.5 percent~~improvements in ~~2004.~~our medical review programs. The deterioration in workers’ compensation in 2006 was primarily due to an increase in claim severity.

During 2007, we introduced our workers’ compensation business into states where we had not previously written our workers’ compensation line and increased premium writings in states where we were already offering workers’

United Fire & Casualty Company and Subsidiaries

compensation insurance. The challenges facing workers’ compensation insurance providers include the state regulatory climates in some states that make it difficult to obtain appropriate premium rate increases and inflationary medical costs. We ~~consider~~believe that our underwriting expertise, loss control service and medical review programs will enable us to be profitable in the workers’ compensation line of business. Currently, we have a project underway to introduce predictive modeling analytics into our workers’ compensation ~~business to be a companion product;~~underwriting process, which we do not write stand-alone workers’ compensation policies. Our workers’ compensation insurance covers primarily small- to mid-size accounts. The deterioration in this line during 2006 was primarily due to an increase in claim severity experienced in 2006 over 2005. The improvement in this line during 2005 resulted primarily from a reduction in loss frequency.anticipate will further enhance our profitability.

Fidelity and Surety

Our surety products guarantee performance and payment by our bonded principals. Our contract bonds protect owners from failure to perform on the part of our principals. In addition, our surety ~~policies~~bonds protect material suppliers and subcontractors from nonpayment by our contractors. When surety losses occur, our loss is determined by estimating the cost to complete the remaining work and to pay the contractor’s unpaid bills, offset by contract funds due to the contractor, reinsurance and the value of any collateral to which we may have access. The net loss ratio in this line was 9.7 percent in 2007, 35.2 percent in 2006 and 46.3 percent in ~~2005~~2005. The improvement in 2007 as compared to 2006 was the result of stricter underwriting guidelines, as well as a decrease in frequency and ~~21.7 percent~~severity. In 2007, there were no new claims that exceeded our $1.5 million reinsurance retention level, compared to three such claims in ~~2004.~~2006 and four such claims in 2005. The 2006 and 2005 underwriting results were adversely impacted primarily by ~~four~~ bonded principals ~~defaulting~~that defaulted on their bonded obligations after a determination was made that they did not have the financial wherewithal to complete the bonded projects, ~~and~~which required us to pay the outstanding obligations associated with those projects. In response to ~~these losses,~~the poor performance in the surety line of business, we ~~have improved~~continue to improve our underwriting discipline by, among other things, requiring principals to provide more frequent ~~audited~~ financial statements, requiring principals to maintain higher levels of capitalization, limiting bonding on those principals showing signs of inadequate cash flow and requiring additional indemnity and collateral.

~~Net premiums earned from the surety line of business were $22.0 million~~ Our changes have resulted in ~~2006, $25.2 million~~a slight reduction in ~~2005~~premium revenue in both 2007 and $25.3 million in 2004, while losses were $7.7 million in 2006, $11.7 million in 2005 and $5.5 million in 2004. The decreases in premiums earned are attributable to the more disciplined underwriting approach implemented in response to the severe losses incurred in 2005. The revision in our underwriting procedures is also evidenced by improvement in our loss experience in 2006.

~~United Fire & Casualty Company and Subsidiaries~~Personal Lines

In our personal lines business, the net loss ratio was 60.7 percent in 2007, 81.2 percent in 2006 and 170.4 percent in ~~2005 and 56.0 percent~~2005. The improvement in ~~2004. The 2005 and 2006~~the 2007 results ~~were impacted by Hurricane~~is due primarily to the effect that Hurricanes Katrina and ~~Hurricane Rita. Premium~~Rita had on our 2006 and 2005 results. The competitive market conditions also impacted our results in each of these years. During 2007, premium pricing in our personal ~~lines~~auto line of business decreased, ~~on an aggregate basis during~~while in 2006 and ~~2005.~~2005, pricing decreased in each of our lines of personal insurance business. In both fire and allied lines (including homeowners) and automobile, our policy counts decreased in both 2007 and 2006. In our homeowners business, the premium reduction due to the loss of business was more than offset by the significant increases in premium pricing in hurricane-exposed regions.

In 2006, we introduced our Signature Premier Homeowners Program in Illinois, Iowa, Minnesota, Missouri, South Dakota, Wisconsin, Indiana, Nebraska and New Mexico. During 2007, we launched this product in North Dakota, Wyoming and Texas. In 2008, we plan to offer this insurance coverage in Colorado. While the product is still new, we have been pleased with the increase in the number of policies that we have issued and with the overall results.

Catastrophe Reinsurance

While we purchase catastrophe reinsurance to protect ourselves against severe hurricanes, Hurricane Katrina resulted in a level of damage that we did not foresee and did not consider when we evaluated our reinsurance coverage for 2005. This resulted in a level of reinsurance coverage that did not adequately protect us from the devastation of Hurricane Katrina. During 2007 and 2006, in addition to strengthening our underwriting guidelines in the Gulf Coast region and reducing our exposure in Louisiana, we also evaluated and modified our catastrophe reinsurance coverage to lessen the impact of future catastrophes in this region. Refer to Part I, Item 1, “Reinsurance,” and Part II, Item 8, Note 5, “Reinsurance” for a more detailed discussion of our reinsurance programs.

United Fire & Casualty Company and Subsidiaries

Assumed Reinsurance

Our assumed reinsurance line of business improved in 2007 and 2006, ~~ending~~reporting net loss ratios of 36.0 percent and 57.5 percent, respectively. The improvement in 2007 results was due to improved catastrophe loss development during the ~~year with a~~year. In 2005, the net loss ratio ~~of 57.5~~was 137.8 percent. The line deteriorated in 2005, ending the year with a net loss ratio of 137.8 percent, compared with 46.8 percent in 2004. Assumed losses increased by $11.4 million between 2004 and 2005. The deterioration in the 2005 net loss ratio compared to 2004 and the improvement in our net loss ratio from 2005 to 2006 was primarily due to the impact Hurricane Katrina and Hurricane Rita had on our assumed loss experience during 2005. In recent years, we have significantly reduced the level of our assumed reinsurance business. This decrease in assumed reinsurance business continued in 2007 with premium writing decreasing by 11.0 percent as the result of the cancellation of a large assumed contract. We anticipate more reductions in 2008 and in the future as the cancelled contract expires. We continue to have exposure, primarily with respect to catastrophe coverage related to the runoff business, as well as to the small number of assumed reinsurance contracts that we have continued to underwrite.

Other Underwriting Expenses

Our other underwriting expenses increased between 2007 and 2006, which was attributable to an increase in benefit expenses, an increase in accounts receivable charged off and a fixed level of operating expenses on flat premium revenue growth.

Life insurance segment

Life Insurance Segment Results of Operations	(Dollars in Thousands)							% Change				(Dollars in Thousands)						% Change
Years ended December 31	2006		2005			2004		2006 vs. 2005		2005 vs. 2004		2007		2006		2005		2007 vs. 2006		2006 vs. 2005
Revenues
Net premiums written(1)	$	33,267	$	33,944		$	29,111	-2. 0	%	16.6	%	$	31,447	$	33,267	$	33,944	-5.5	%	-2. 0	%
Net premiums earned	$	36,091	$	39,369		$	35,403	-8. 3	%	11.2	%	$	32,629	$	36,091	$	39,369	-9.6	%	-8. 3	%
Investment income, net		81,756		84,105			82,456	-2. 8	%	2.0	%		79,076		81,756		84,105	-3.3	%	-2. 8	%
Realized investment gains		2,979		2,528			1,941	17.8	%	30.2	%		2,571		2,979		2,528	-13.7	%	17.8	%
Other income		640		702			300	-8.8	%	134.0	%		595		640		702	-7.0	%	-8.8	%
Total Revenues	$	121,466	$	126,704		$	120,100	-4.1	%	5.5v	%	$	114,871	$	121,466	$	126,704	-5.4	%	-4.1	%

Benefits, Losses and Expenses
Loss and loss settlement expenses	$	14,285	$	16,370		$	16,641	-12.7	%	-1.6	%	$	14,869	$	14,285	$	16,370	4.1	%	-12.7	%
Increase in liability for future policy benefits		19,737		17,666			12,125	11.7	%	45.7	%		15,666		19,737		17,666	-20.6	%	11.7	%
Amortization of deferred policy acquisition costs		8,142		9,125			12,384	-10.8	%	-26.3	%		13,385		8,142		9,125	64.4	%	-10.8	%
Other underwriting expenses		8,256		7,419			6,193	11.3	%	19.8	%		7,540		8,256		7,419	-8.7	%	11.3	%
Interest on policyholders’ accounts		49,159		54,727			56,386	-10.2	%	-2.9	%		43,089		49,159		54,727	-12.3	%	-10.2	%
Total Benefits, Losses and Expenses	$	99,579	$	105,307		$	103,729	-5.4	%	1.5	%	$	94,549	$	99,579	$	105,307	-5.1	%	-5.4	%
					��
Income Before Income Taxes	$	21,887	$	21,397		$	16,371	2.3	%	30.7	%	$	20,322	$	21,887	$	21,397	-7.2	%	2.3	%

Annuity deposits	$	145,345	$	65,367		$	50,755	122.4	%	28.8	%	$	161,482	$	145,345	$	65,367	11.1	%	122.4	%
Annuity surrenders and withdrawals		159,569		96,628			72,841	72.1	%	32.7	%		152,829		159,569		96,628	-4.2	%	65.1	%

~~Pre-tax income recorded by~~1. Please refer to the Non-GAAP financial measures section of this report for further explanation of this measure.

Our life insurance segment ~~increased~~produced a steady stream of pre-tax income since 2005; however, revenues and expenses decreased in all three years. Net premium earned decreased in 2006 due to a combination of factors. These factors include a decrease in interest on policyholders’ accounts, which is attributable to the impact of the net decrease in annuities in 2006; decreases in loss and loss settlement expenses, due to lower mortality rates; and a decrease in amortization of deferred policy acquisition costs, due to lower levels of deferrable expenses experienced in recent years. These results were somewhat offset by a decrease in premiums earned,2007 due to a decrease in the sales of single premium whole life insurance and the run-off of credit life insurance. We intend to continue offering single premium whole life insurance and are developing a plan to give more focus to the marketing of this product. Net investment income also decreased in each of the three years presented, due to both declining invested assets and market interest rates. Investment results are discussed on a consolidated basis in a following section of this report.

United Fire & Casualty Company and Subsidiaries

~~traditional premium and a runoff of our credit life business, which~~The fixed annuity deposits that we ceased writing in 2004; and a decrease in investment income, which reflects the impact that recent increases in the level of annuity surrenders and withdrawals has had on our level of assets available for investment. The increase in income for 2005,collect are not reported as ~~compared with 2004, was due mainly to an increase in~~ net premiums earned ~~which was the result of marketing initiatives pursued in 2005 and 2004, that led to increased sales of single premium whole life and term products.~~

~~We do not report annuity deposits collected as net premiums earned.~~under GAAP. Instead, we invest annuity deposits and record them as future policy benefits. ~~Revenues for~~The revenue that is generated from fixed annuity products ~~consist~~consists of policy surrender charges and investment income earned. ~~In 2006,~~The difference between the yield we earn on our investment portfolio and the interest we credit on our fixed annuities is known as the investment spread. The investment spread is a major driver of the profitability for all of our annuity products.

Our annuity deposits ~~were $145.3 million, compared with $65.4 million~~grew by 11.1 percent in ~~2005~~2007 and ~~$50.8 million~~by 122.4 percent in ~~2004. The increased level~~2006.The increasing levels of annuity deposits since 2005 is primarily due to an increase in renewals of existing annuities during 2006 ~~resulting from~~and 2007. Beginning in 2005, we began to experience an increase in ~~our interest rates that enhanced~~ the ~~desirability~~amount of ~~our annuities compared to other investment options available to our annuitants. The increase in the life insurance segment’s~~ annuity ~~deposits were more than offset by~~ surrenders and ~~withdrawals of $159.6 million~~withdrawals. This activity increased significantly in 2006, ~~$96.6 million~~and then decreased slightly in ~~2005~~2007. We attribute the level of annuity surrenders and ~~$72.8 million in 2004. The increase is due~~withdrawals to the perceived attractiveness of other interest rate products, primarily bank CDs. We have the ability to adjust the rates that we credit on fixed annuity products; however, we did not raise our crediting rates to a point where our investment spread was compromised.

The reduction in annuity balances was the primary contributor to the decrease in interest on policyholders’ accounts, each year since 2005, as well as a decline in credited interest rates on in force annuity contracts.

The increase in amortization of deferred policy acquisition costs in 2007 was due primarily to changes in our annuity assumptions, with the largest component attributable to a change in our policy lapse assumption. We increased our assumption in response to the increased level of annuity surrenders in recent years and our expectations about the interest rate environment. Amortization of deferred policy acquisition costs decreased in 2006 compared to 2005, due to a decrease of volume in our credit life and health insurance. We stopped writing new business in these lines of insurance in 2004. Refer to “Critical Accounting Estimates” in this section for a more detailed discussion of our life segment’s deferred policy acquisition costs.

Investment results

(Dollars in Thousands)							% Change										% Change
As of and for the years ended December 31	2006		2005		2004		2006 vs. 2005		2005 vs. 2004		2007		2006		2005		2007 vs. 2006		2006 vs. 2005

Investment income, net	$	121,981	$	118,847	$	111,474	2.6	%	6.6	%	$	122,439	$	121,981	$	118,847	0.4	%	2.6	%
Net realized investment gains		9,965		4,540		4,060	119.5	%	11.8	%		9,670		9,965		4,540	-3.0	%	119.5	%
Net unrealized gains, after tax		93,519		86,440		103,715	8.2	%	-16.7	%		85,579		93,519		86,440	-8.5	%	8.2	%
Other-than-temporary investment impairments		406		1,208		308	-66.4	%	292.2	%		105		406		1,208	-74.1	%	-66.4	%

~~The increases in~~Over the past three years, our investment income ~~we have experienced are attributable primarily to~~has increased by 3.0 percent as a result of a 7.4 percent increase in the ~~increases in~~average invested assets which has offset the depressed market interest rates and the contraction of our ~~invested assets.~~annuity business during this period. More than 8080.0 percent of our investment income originates from interest on fixed maturities. We derive our remaining investment income from dividends on equity securities, ~~interest on~~income from other long-term investments, interest on mortgage loans, interest on policy loans, interest on short-term investments and cash and cash equivalents and rent earned from tenants in our home office. The average investment yield, which is investment income divided by average invested assets, was 5.5 percent in 2007, 5.7 percent in 2006 and 5.8 percent in ~~2005 and 5.7 percent in 2004.~~2005.

As of December 31, 2006, we recorded net unrealized gains, after tax, of $93.5 million, compared to $86.4 million in 2005 and $103.7 million in 2004. The decline in 2005 was driven primarily by the decrease in the fair value of our available-for-sale fixed maturity portfolio, which resulted primarily from changes in interest rates, not from changes in the credit quality of the issuers of these securities. We consider any unrealized losses to be temporary, and we have the positive intent and ability to hold our fixed maturity securities for a period of time that is sufficient to allow for the recovery in fair value that we expect to occur. We also believe that the unrealized losses on our equity portfolio are temporary. The largest unrealized loss, after tax, on any single investment security at December 31, 2006 was $1.0 million.

Changes in unrealized gains do not affect net income and earnings per common share but do impact comprehensive net income, stockholders’ equity and book value per common share. We record unrealized losses subsequently identified as other-than-temporary impairments as a component of netNet realized investment gains ~~and losses. We recorded~~in 2007 were primarily due to cash received as a result of transactions that impacted companies whose securities we held. The increase in net realized ~~investment~~ gains ~~on securities of $10.0 million in 2006, $4.5 million in 2005 and $4.1 million in 2004. The significant increase in realized gains on securities~~ in 2006, compared to 2005, ~~and 2004~~ is primarily attributable to the sale of our property and casualty insurance subsidiary, American Indemnity Company, in 2006, which resulted in a realized gain of $3.4 million.

As of December 31, 2007, we recorded net unrealized gains, after tax, of $85.6 million, ~~or $0.08 per share, after-tax.~~

~~The~~compared to $93.5 million in 2006 ~~2005~~ and ~~2004 amounts reported as~~$86.4 million in 2005. In each of the three years, our portfolio of equity securities was the largest contributor to net ~~realized investment~~unrealized gains. In 2007, depressed stock prices resulted in the decrease in unrealized gains, included other-than-temporary impairments of $.4 million, $1.2 million and $.3 million, respectively. Refer to “Critical Accounting Policies” in this section for a presentation of our impairment policy.

particularly in our holdings in financial equity securities. We attribute the decreased stock prices to general market conditions.

Refer to “Critical Accounting Estimates” in this section for a detailed discussion of our policy for recording other-than-temporary impairment charges.

Changes in unrealized gains do not affect net income and earnings per common share but do impact comprehensive income, stockholders’ equity and book value per common share. We record unrealized losses subsequently identified as other-than-temporary impairments as a component of net realized investment gains. The amounts reported as net realized investment gains in 2007, 2006 and 2005 included other-than-temporary impairments of $.1 million, $.4 million and $1.2 million, respectively. Refer to “Critical Accounting Estimates” in this section for a presentation of our impairment policy.

Our effective federal income tax expense rate of 30.1 percent for 2007, 29.8 percent for 2006 and federal income tax benefit rate of 37.9 percent for 2005 ~~were less than~~varied from the applicable federal income tax expense rate of 35.0 percent, due primarily to our portfolio of tax-exempt securities and, in 2007 and 2006, the reduction in valuation allowance resulting from the utilization of a portion of the net operating loss related to American Indemnity Financial Corporation.

As of December 31, ~~2006,~~2007, we have ~~a deferred tax asset for~~ net operating loss carryforwards (“NOL”) totaling ~~$18.8~~$17.2 million, all of which was acquired as part of our purchase of American Indemnity Financial ~~Corporation. These~~Corporation in 1999. Such net operating ~~loss carryforwards~~losses are currently available to offset future taxable income of our property and casualty companies. NOLs totaling $.8 million and $5.5 million expire ~~from 2009 through 2018, with $11.1 million expiring from 2009 through 2011. We are required to establish a valuation allowance for any portion~~in 2010 and 2011, respectively.

Upon the purchase of ~~the gross deferred tax asset that we believe may not be realized. At December 31, 2006,~~American Indemnity Financial Corporation, we recorded a valuation allowance against the NOLs due to our determination that we may not be able to fully realize the benefits of the NOLs. At December 31, 2007 and 2006, the valuation allowance was $5.6 million and $6.2 million, ~~that relates to those net operating loss carryforwards that can only be used to offset future income of the property and casualty insurance segment. As~~respectively. Upon review each year, when we ~~determine~~have determined that the benefit of ~~these net operating losses can~~the NOLs could be realized, ~~we will record~~ the ~~related reduction~~decrease in the ~~deferred tax asset~~ valuation allowance has been recorded as a reduction to ~~our~~ current federal income tax expense.

~~In September 2006,~~ The NOLs were not utilized in 2005 due to an operating loss caused by the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires the recognition of the overfunded or underfunded status of pension plans and other postretirement plans as an asset or liability on the balance sheet, with changes occurring duringlosses from Hurricane Katrina. In future years, ~~reflected through~~decreases to the ~~accumulated other comprehensive income portion of stockholders’ equity, net of tax, effective December 31, 2006. However, SFAS No. 158 does not change the amount of net periodic benefit cost~~valuation allowance will continue to be recognized as a ~~component of~~reduction to current period operations. SFAS No. 158 also requires the measurement of the funded status of a plan to match that of the date of our year-end Consolidated Financial Statements, eliminating the use of earlier measurement dates that were previously permissible; we currently utilize December 31 as the measurement date for plan assets and obligations and, therefore, comply with this requirement. The adoption of SFAS No. 158 resulted in the recognition of an after-tax charge of $10.2 million on our Consolidated Balance Sheets at December 31, 2006. Refer to Part II, Item 8, Note 1 “Significant Accounting Policies,” for a more detailed discussion of the impact of SFAS No. 158 on our Consolidated Financial Statements.

Our main objectives, while maintaining an acceptable level of risk, in managing our investment portfolio are to maximize both after-tax investment income and total investment returns. We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation and regulatory requirements. We manage our portfolio based on investment guidelines approved by our management, which comply with applicable statutory regulations.

The composition of our investment portfolio at December 31, ~~2006,~~2007, is presented in the following ~~table in accordance with GAAP.~~table.

(1) Available-for-sale fixed maturities are carried at fair value, while held-to-maturity fixed maturities are carried at amortized cost.

At December 31, ~~2006, our invested assets, primarily fixed maturity securities, increased $41.7~~2007, $1,812.8 million, or 2.0 percent, from December 31, 2005. The increase in invested assets we experienced during 2006 is primarily the result of investing net proceeds from our second quarter common stock offering ($107.0 million) and our year-to-date operating cash flows ($104.5 million), which was somewhat offset by investment sales and maturities utilized to fund our net cash outflows from our non-traditional life business ($76.5 million). The changes in our total reported invested asset balance are summarized in the following table.

~~(1) Pursuant to GAAP, changes in the fair value of both our portfolio of trading securities and limited liability partnership investments are recognized currently in earnings.~~

~~(2) In connection with the sale of our subsidiary, American Indemnity Company, we disposed of $4.3 million in U.S. treasury notes.~~

~~At December 31, 2006, $1,808.2 million, or 97.6~~98.5 percent, of our fixed maturities were classified as available-for-sale, compared with ~~$1,777.1~~$1,808.2 million, or ~~96.1~~97.6 percent, at December 31, ~~2005.~~2006. We classify our remaining fixed

maturities as held-to-maturity ~~which are reported~~or trading. We record held-to-maturity securities at amortized ~~cost, or trading.~~cost. We record trading securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings. As of December 31, ~~2006, 93.7~~2007, 95.1 percent of our fixed maturities were investment grade, as defined by the National Association of Insurance Commissioners’ Securities Valuation Office, with ratings of Class 1 or Class 2.

Our sources of cash inflows are premiums, annuity deposits, sales, calls or maturity of investments, and investment income. Historically, we have generated substantial cash inflows from operations because cash from premium payments is usually received in advance of cash payments made to ~~generate enough~~settle losses. When investing the cash ~~to adequately meet its long- and short-term obligations as they come due. Our operating cash needs consist primarily~~generated from operations, we invest in securities with maturities that approximate the anticipated timing of ~~paying insurance loss~~payments for losses and loss settlement expenses of the underlying insurance policies. The majority of our assets are invested in fixed maturities.

Our uses of cash include losses and ~~day-to-day~~loss settlement expenses, annuity withdrawals, commissions, premium taxes, income taxes, operating ~~expenses. We~~expenses, dividends, and investment purchases. Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of catastrophe losses are ~~able~~inherently unpredictable and could increase our liquidity requirements.

Liquidity measures our ability to generate sufficient cash flows to meet ~~these~~our short- and long-term cash ~~requirements through the receipt of insurance premiums and investment income.~~

As of December 31, 2006, our cash and cash equivalents totaled $255.0 million, compared with $162.8 million at December 31, 2005. Net cash provided by operations varies with our underwriting profitability. As our profitability from insurance operations increased between 2005 and 2006, our net cash from operations increased from $53.7 million in 2005 to $104.5 million in 2006. Cash flows from underwriting operations, tax refunds received and reinsurance recoveries received related to Hurricanes Katrina and Rita contributed to the increase in cash and cash equivalents in 2006.

obligations. We have significant cash ~~flows~~inflows from sales of investments and scheduled and unscheduled investment security maturities, redemptions and prepayments. These investing cash flows totaled $408.0 million, $372.1 million ~~in 2006~~ and $289.2 million in 2007, 2006 and 2005, respectively, which together with cash flows from operations were sufficient for our cash flow needs in both years.

If our operating and investing cash flows had not been sufficient to support our operations, we may also borrow up to $50.0 million on a bank line of credit. Under the terms of our credit agreement, interest on outstanding notes is payable at the lender’s prevailing prime rate, minus 1.0 percent. We did not ~~borrow against~~utilize our line of credit ~~during~~in 2007 or 2006, ~~or 2005.~~other than to secure letters of credit utilized in our reinsurance operations. As of December 31, 2007 and 2006, $.2 million of the line of credit was allocated for that purpose.

Net cash provided by financing activities for 2006 was $17.9 million, compared with net cash used of $12.7 million for 2005. This increase was the result of a combination of factors. The completion of our common stock offering in May 2006 resulted in proceeds (net of underwriting expenses) of $107.0 million. Offsetting this is an increase in the amount of net cash outflows resulting from surrenders

United Fire & Casualty Company and withdrawals, of our fixed annuities and universal life contracts. Net cash used in these activities totaled $76.5 million and $1.3 million for 2006 and 2005, respectively. The increase in withdrawals is described in the life insurance segment discussion. Dividend payments to our common shareholders totaled $13.2 million in 2006, compared with $12.0 million paid to common and preferred shareholders in 2005. The increase in dividend payments in 2006 compared to 2005 is due to an increased number of shares outstanding as a result of our common stock offering and an increase in the dividend amount paid per share in the fourth quarter of 2006.Subsidiaries

We invest funds available for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At December 31, ~~2006,~~2007, our cash and cash equivalents included ~~$48.6~~$110.5 million related to these money market accounts, compared with ~~$44.3~~$48.6 million at December 31, ~~2005.~~2006.

The insurance laws of the states and jurisdictions where we and our insurance subsidiaries and affiliate are domiciled restrict the timing and the amount of dividends we pay, or our subsidiaries and affiliate pay, without prior regulatory approval. In 2007, 2006 and 2005, United Fire received $4.0 million in dividends from its subsidiary, United Life Insurance Company. Pursuant to the sale of American Indemnity Company in May 2006, we implemented a plan of corporate reorganization. Part of this plan entailed the distribution of the majority of American Indemnity Company’s net assets to United Fire & Casualty Company. This distribution was recognized by United Fire as a $34.7 million intercompany ~~dividend.~~dividend in 2006. Also, in 2007, United Fire received an $8.0 million dividend from American Indemnity Financial Corporation.

Our cash flow activity for the past three years is summarized in the following table.

As of December 31, 2007, our cash and cash equivalents totaled $252.6 million, compared with $255.0 million at December 31, 2006. In 2007 and 2006, our cash position was higher than historical levels. This was attributable to the flat to inverted yield curve. As short-term rates were equal to or higher than long-term rates over the past two years, we shortened the duration of our portfolio and invested in short-term money markets.

Net cash provided by operations varies with our underwriting profitability. Favorable underwriting results in each year contributed to an increase in our cash position. Additional increases to cash in 2006 included tax refunds and reinsurance recoveries received which related to Hurricanes Katrina and Rita.

Net cash outflows from investing activities have decreased each year since 2005. In May 2006, we received $107.0 million in net proceeds from the issuance of 4,025,000 shares of common stock. We subsequently invested a portion of these funds, keeping some of the proceeds in cash and cash equivalents. In 2007, we repurchased 497,500 shares of common stock, which reduced our investing purchase activity, compared to 2006.

Net cash flows from financing activities have been impacted by a combination of factors. Cash outflows associated with our life insurance segment’s annuity portfolio have increased in connection with the increased level of surrenders and withdrawals experienced in recent years. Net cash used in these activities totaled $61.7 million, $76.5 million and $1.3 million for 2007, 2006 and 2005, respectively. The increase in withdrawals is described in the “Life Insurance Segment” section. During 2007, pursuant to Board authorization, we repurchased 497,500 shares of common stock, which used cash totaling $16.1 million. Dividend payments to our common shareholders totaled $15.3 million in 2007, compared with $13.2 million in 2006 and $12.0 million in 2005, as we have increased the amount of our dividend per common share each year. Additionally, in 2006, we had proceeds (net of underwriting expenses) of $107.0 million due to the completion of our common stock offering.

Stockholders’ equity increased from ~~$500.2 million at December 31, 2005, to~~ $680.8 million at December 31, 2006, to $751.5 million at December 31, 2007, an increase of ~~36.1~~10.4 percent, which resulted primarily from net income of ~~$88.1 million, net proceeds from our common stock~~$111.4 million. Decreases to stockholders’

offering and the issuance of stock from exercise of stock options of $107.4 million and an increase in net unrealized appreciation of $7.1 million. The increase in common stock is due primarily to the stock offering of 4,025,000 shares. Decreases to stockholders’ equity included dividends paid of ~~$13.2~~$15.3 million, a reduction in net unrealized appreciation on investments of $7.9 million, net of tax, and the ~~after-tax charge to initially apply SFAS No. 158 at December 31, 2006,~~change in underfunded status of ~~$10.2 million.~~our employee benefit plans of $3.9 million, net of tax. Book value per share at December 31, ~~2006,~~2007, was ~~$24.62,~~$27.63, compared with ~~$21.20~~$24.62 at December 31, ~~2005.~~ 2006.

As of December 31, ~~2006,~~2007, we had authorization from the ~~board~~Board of ~~directors~~Directors to repurchase ~~87,167~~an additional 189,667 shares of our common stock. On February 15, 2008, our Board of Directors authorized us to repurchase up to an additional 500,000 shares of common stock. As of February 15, 2008, our repurchase authorization is 689,667 shares.

The table below shows our contractual obligations and commitments, including our estimated payments due by period at December 31, ~~2006.~~2007.

(1) This projection of our obligation for future policy benefits considers only actual future cash outflows. The future policy benefit reserves presented on the consolidated balance sheet is the net present value of the benefits to be paid, less the net present value of future net premiums.

We do not discount loss and loss settlement expense reserves, which represent our estimate, based upon our historical payout patterns, of the amount and timing of the ultimate settlement and administration of claims. Both the timing and amount of actual payments may vary from the payments as indicated.Future policy benefits

Payment amounts for future policy benefit reserves must be actuarially estimated and are not determinable from the contract. The projected payments illustrated above are based on the assumption that the holders of our annuities and life insurance policies will withdraw their account balances from our company upon the expiration of their contracts. Actual cash withdrawals could bediffer significantly ~~less than~~from these ~~amounts,~~estimates, depending upon the interest rate environment at the time of the contract expirations.

The amounts presented are estimates of the dollar amounts and time periods in which we expect to pay out our gross loss and loss settlement expense reserves. These amounts are based upon historical payment patterns and may not represent the actual future payments because the actual timing of the estimated future payments may vary from the stated contractual obligation. See “Critical Accounting Estimates: Loss and Loss Settlement Expenses – Property and Casualty Insurance Segment” in this section for further discussion.

Our operating lease obligations are primarily for the rental of office space, vehicles, computer equipment and office equipment.

At December 31, ~~2006,~~2007, we have no off-balance sheet obligations or commitments.

Critical accounting ~~policies~~estimates are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our results of operations and financial condition on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these

Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for 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. We believe that our most critical accounting ~~policies~~estimates are as follows.

Upon acquisition, we classify investment securities as held-to-maturity, available-for-sale, or trading. We record investments in held-to-maturity fixed maturities at amortized cost. We record available-for-sale fixed maturities, trading securities, equity securities, short-term investments and other long-term investments at fair value. We record mortgage loans ~~and short-term investments~~ at amortized cost and policy loans at the ~~actual~~outstanding loan amount ~~loaned to the policyholder.~~due from policyholders.

In most cases, we use quoted market prices to determine the fair value of fixed maturities, trading securities, equity securities and short-term investments. Where quoted market prices ~~were unavailable,~~are not available, we ~~based~~base fair value on estimated realizable value. For other long-term investments that primarily consist of holdings in limited partnership funds, we ~~used~~use the value determined by the various fund managers. We exclude unrealized appreciation or depreciation on investments carried at fair value, with the exception of trading securities, from net income and report it, net of applicable deferred income taxes, as a component of accumulated other comprehensive income in stockholders’ equity.

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires us to record other-than-temporary impairment charges when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in market value of the equity security will not occur in a reasonable amount of time. We include impairment charges on investments in net realized gains and losses based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which 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 investment for a period of time sufficient to allow for any anticipated recovery. As of December 31, ~~2006,~~2007, we had a number of securities where fair value was less than our cost. The total unrealized depreciation on these securities totaled $17.6 million at December 31, 2007, compared with $14.2 million at December 31, ~~2006, compared with $16.6 million at~~2006. At December 31, ~~2005.~~2007, the largest unrealized loss, after tax, on any single fixed maturity or equity investment was $1.4 million. Our rationale for not recording other-than-temporary impairments on these securities is discussed in Part II, Item 8, Note 2, “Summary of Investments.”

Deferred Policy Acquisition Costs – Property and Casualty Insurance Segment

We record an asset for deferred policy acquisition costs, such as commissions, premium taxes and other variable costs incurred in connection with the writing of our property and casualty lines of business. As of December 31, 2007 and 2006, we ~~have~~reported $58.3 million in deferred policy acquisition ~~costs, compared with $52.8 million at December 31, 2005.~~costs. This asset is amortized over the life of the policies ~~written.~~written, generally one year. We assess the recoverability of deferred policy acquisition costs on a quarterly basis by line of business. This assessment is performed by comparing recorded unearned premium to the sum of unamortized deferred policy acquisition costs and estimates of expected losses and loss settlement expenses. If the sum of these costs exceeds the amount of recorded unearned premium, that is, the line of business is expected to generate an operating loss, the excess is recognized as an offset against the asset established for deferred policy acquisition costs. This offset is referred to as a premium deficiency charge. If the amount of the premium deficiency charge is greater than the unamortized deferred policy acquisition cost asset, a liability will be recorded for the excess.

To calculate the premium deficiency charge, we estimate expected losses and loss settlement expenses by using an assumed loss and loss settlement expense ratio which approximates that of the recent past. This is the only assumption we utilize ~~to calculate the premium deficiency charge.~~in our calculation. Changes in this assumption can have a significant impact on the amount of premium deficiency charge calculated. We do not consider anticipated investment income in determining the recoverability of deferred costs.

The following table illustrates the hypothetical impact on the premium deficiency charge recorded at December 31, ~~2006~~2007 of reasonably likely changes in the assumed loss and loss settlement expense ratio utilized for purposes of this calculation. The entire impact of these changes would be recognized through income as other underwriting expenses. The base amount indicated below is the actual premium deficiency charge recorded as of December 31, ~~2006.~~

Actual future results could differ materially from our current estimates, requiring adjustments to the recorded deferred policy acquisition cost asset. Such adjustments are recorded through income in the period the adjustments are identified. Due to changes in the estimated recoverability of our deferred policy acquisition costs, the premium deficiency charge calculated at December 31, 2006 decreased $7.3 million from the premium deficiency charge calculated at December 31, ~~2005 and the~~2005. There was an immaterial change in premium deficiency ~~charge calculated at~~between December 31, ~~2005 decreased $4.8 million from the premium deficiency charge calculated at~~2007 and December 31, ~~2004. These decreases~~2006. A decrease in the premium deficiency charge ~~allowed~~allows us to defer comparatively more underwriting costs period over period, resulting in a relatively larger deferred acquisition cost ~~asset balances.~~asset. The changes in the estimated recoverability of our deferred policy acquisition costs are attributable to improvement in our underwriting experience over the recent past.

We record a deferred asset for our life insurance segment’s policy acquisition costs. At December 31, ~~2006,~~2007, we had ~~$77.4~~$70.7 million in deferred policy acquisition costs related to our life insurance segment, compared to ~~$65.6~~$77.4 million at December 31, ~~2005.~~2006. Substantially the entire asset relates to our universal life and investment (i.e. annuity) contracts, hereafter referred to as non-traditional business.

We defer and amortize policy acquisition costs, with interest, on traditional life insurance policies, over the anticipated premium-paying period of the applicable policies.

We defer ~~and amortize~~ policy acquisition costs related to non-traditional ~~business; we~~business and amortize these ~~policy acquisition~~ costs in proportion to the present value of estimated expected gross profits. The components of gross profit include investment spread, mortality and expense margins and surrender charges. We periodically review estimates of expected profitability and evaluate the need to “unlock” or revise the amortization of the deferred policy acquisition cost asset. The primary assumptions utilized when estimating future profitability relate to interest rate spread, mortality experience and policy lapse experience. The table below illustrates the impact that a reasonably likely change in our assumptions used to estimate gross profit would have on the deferred policy acquisition cost asset for our non-traditional business recorded as of December 31, ~~2006.~~2007. The entire impact of the changes illustrated would be recognized through income as an increase or decrease to amortization expense.

A material change in these critical assumptions could ~~negatively~~have a negative or ~~positively affect~~positive effect on our reported deferred policy acquisition cost asset, earnings and stockholders’ equity.

The deferred policy acquisition costs in connection with our non-traditional business are adjusted with respect to estimated gross profits as a result of changes in the net unrealized gains or losses on available-for-sale fixed maturity securities allocated to support the block of fixed annuities and universal life policies. That is, because we carry fixed maturity securities available-for-sale at aggregate fair value, we make an adjustment to deferred policy acquisition costs equal to the change in amortization that would have been recorded if we had sold such securities at their stated aggregate fair value and reinvested the proceeds at current yields. We include the change in this adjustment, net of tax, as a component of accumulated other comprehensive income. This adjustment offset deferred policy acquisition costs by $8.0 million at December 31, 2007, compared with $4.1 million at December 31, ~~2006, compared with $13.3 million at December 31, 2005.~~

Loss and Loss Settlement Expenses – Property and Casualty Insurance Segment

~~We establish reserves~~Reserves for ~~property and casualty~~ losses and loss settlement expenses are established for ~~three basic categories: (1) case basis, (2) IBNR~~all incurred claims without discounting for the time value of money. Before credit for reinsurance recoverables, these reserves were $496.1 million in 2007 and ~~(3) loss settlement expenses.~~$518.9 million in 2006. We purchase reinsurance to mitigate the impact of large losses and catastrophic events. Loss reserves ceded to reinsurers was $38.8 million in 2007 and $40.6 million in 2006. Our reserves ~~for each of these three categories of losses~~ by line of business as of December 31, ~~2006,~~2007, were as follows.

(1) “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.

For each of our lines of business, with respect to reported claims, we establish reserves on a case-by-case basis. Our experienced claims personnel estimate these case-based reserves using adjusting guidelines established by management. Our goal is to set the case-based reserves at the ultimate expected loss amount as soon as possible after information about the claim becomes available.

Estimating case reserves is subjective and complex and requires us to make estimates about the future payout of claims, which is inherently uncertain. When we establish and adjust reserves, we do so based on our knowledge of

the circumstances and facts of the claim. Upon notice of a claim, we establish a ~~case~~ reserve ~~for losses~~ based on the claim information reported to us at that time. Subsequently, we conduct an investigation of each reported claim, which allows us to more fully understand the factors contributing to the loss and our potential exposure. This investigation may extend over a long period of time. As our investigation of a claim develops, and as our claims personnel identify trends in claims activity, we refine and adjust our estimates of case reserves. To evaluate and refine our overall reserving process, we track and monitor all claims until they are settled and paid in full, with all salvage and subrogation claims being resolved.

Most of our insurance policies are written on an occurrence basis which provides coverage if a loss occurs in the policy period, even if the insured reports the loss many years later. For example, some general liability claims are reported 10 years or more after the policy period, and the workers’ compensation coverage provided by our policies pays unlimited medical benefits for the duration of the claimant’s injury up to the lifetime of the claimant. In addition, final settlement of certain claims can be delayed for years or decades due to litigation or other reasons. Reserves for these claims require us to estimate future costs, including the effect of judicial actions, litigation trends and medical cost inflation, among others. Reserve development can occur over time as conditions and circumstances change in years after the policy was issued.

Our loss reserves include amounts related to both short-tail and long-tail lines of business. “Tail” refers to the time period between the occurrence of a loss and the ultimate settlement of the claim. A short-tail insurance product is one where ultimate losses are known and settled comparatively quickly; ultimate losses under a long-tail insurance product are sometimes not known and settled for many years. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary from the reserves initially established. Accordingly, long-tail insurance products can have significant implications on the reserving process.

Our short-tail lines of business include fire and allied lines, homeowners, commercial property and inland ~~marine and surety.~~marine. The amounts of the case-based reserves that we establish for claims in these lines depend upon various factors, such as

individual claim facts (including type of coverage and severity of loss), company historical loss experience and trends in general economic conditions (including changes in replacement costs, medical costs and inflation).

For short-tail lines of business, the estimation of case-basis loss reserves is less complex than for long-tail lines because claims are generally reported and settled shortly after the loss occurs and because the claims relate to tangible property. Because of the relatively short time from claim occurrence to settlement, actual losses typically do not vary greatly from reserve estimates.

Our long-tail lines of business include workers’ compensation and ~~general~~other liability. ~~Certain~~In addition, certain product lines such as personal and commercial auto, ~~and~~ commercial multi-peril and surety include some long-tail coverages and some short-tail coverages. For many liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long-tail liability classes has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail classes is more complex and subject to a higher degree of variability than for short-tail classes.

The amounts of the case-based reserves that we establish for claims in ~~these~~ long-tail lines depends upon various factors, including individual claim facts (including type of coverage, severity of loss and underlying policy limits), company historical loss experience, legislative enactments, judicial decisions, legal developments in the awarding of damages, changes in political attitudes and trends in general economic conditions, including inflation. As with the short-tail lines of business, we review and make changes to long-tail case-based reserves based on continually evolving facts as they become available to us during the claims settlement process. Our adjustments to case reserves are reflected in the financial statements in the period that new information arises about the claim. Examples of facts that become known that could cause us to change our case-based reserves include, but are not limited to: evidence that loss severity is different than previously assessed, new claimants who have presented claims and the assessment that no coverage exists.

Incurred but not reported (“IBNR”) reserves are estimated liabilities, which we establish because claims are not always reported promptly upon occurrence and because the assessment of existing known claims may change over time with the development of new facts, circumstances and conditions.

For both our short-tail and long-tail lines of business, we establish our reserves for IBNR claims by applying a factor to our current pool of in-force premium. This factor has been developed through a historical analysis of company experience as to what level of IBNR should be established to achieve an adequate IBNR reserve relative to our existing loss exposure base. Unique circumstances or trends which are evident as of the end of a given period may require us to refine our IBNR reserve calculation. ~~For example, as of December 31, 2005 we refined our IBNR reserve calculation to consider the impact of Hurricane Katrina.~~ This methodology for establishing our IBNR reserve has consistently resulted in aggregate reserve levels that management believes are reasonable in comparison to the reserve estimates prepared by Regnier Consulting Group, ~~our~~an independent ~~consulting actuary.~~actuary which we utilize.

For our short-tail lines of business, IBNR constitutes a small portion of the overall reserves. This is because claims are generally reported and settled shortly after the loss occurs. In our long-tail lines of business, IBNR constitutes a relatively higher proportion of total reserves, because, for many liability claims, significant periods of time may elapse between the initial occurrence of the loss, the reporting of the loss to us and the ultimate settlement of the claim.

Loss settlement expense reserves include amounts ultimately allocable to individual claims, as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. We do not establish loss settlement expense reserves on a ~~by claim~~claim-by-claim basis. Instead, we examine the ratio of loss settlement expenses paid to losses paid over the most recent three-year period, by line. We use these factors and apply them to open reserves, including IBNR reserves. We develop these factors annually, each December and use them throughout the year, unless development patterns or emerging trends warrant adjustments to the factors.

Generally, the loss settlement expense reserves for long-tail lines are a greater portion of the overall reserves, as there is often substantial legal fees and other costs associated with the complex liability claims that are associated

with long-tail lines. Because short-tail lines settle much more quickly and the costs are easier to determine, loss settlement expense reserves for short-tail claims constitute a smaller portion of the total reserves.

The estimation of assumed and ceded reinsurance loss and loss settlement expense reserves is subject to the same factors as the estimation of ~~insurance~~ loss and loss settlement expense reserves. In addition to those factors, which give rise to inherent uncertainties in establishing ~~insurance~~ loss and loss settlement expense reserves, there exists a delay in our receipt of reported claims due to the procedure of having claims first reported through one or more intermediary insurers or reinsurers.

In establishing an estimate of loss and loss settlement reserves, management uses a number of key assumptions. They are as follows:

Due to the inherent uncertainty in the loss reserving process, management believes that there is a reasonable chance that modification to the key assumptions listed above could individually, or in aggregate, result in reserve levels that are misstated either above or below the actual amount for which the related claims will eventually settle.

Due to the ~~formula based~~formula-based nature of our IBNR and ~~LAE~~loss settlement expense reserve calculations, changes in the key assumptions utilized to generate these reserves can result in a quantifiable impact on our reported results. ~~The tables below illustrate how reasonably likely~~It is not possible to isolate and measure the potential impact of just one of these factors, and future loss trends could be partially impacted by all factors concurrently. Nevertheless, it is meaningful to view the sensitivity of the reserves to potential changes in ~~each~~these variables. To demonstrate the sensitivity of ~~these key~~reserves to changes in significant assumptions, ~~could individually~~the following example is presented. The amounts reflect the pre-tax impact ~~our pre-tax reported results~~on earnings from a hypothetical percentage change in the calculation of IBNR and ~~financial position.~~loss settlement expense reserves. The impact ~~of concurrent changes in~~to pre-tax earnings would be a decrease if the ~~assumptions utilized is not illustrated.~~reserves were to be adjusted upwards. The impact to pre-tax earnings would be an increase if the reserves were to be adjusted downwards. We believe that the changes presented are reasonably likely based upon an analysis of our historical IBNR and ~~LAE~~loss settlement expense experience.

We are unable to reasonably quantify the impact of changes in our key assumptions utilized to establish individual case-basis reserves on our total reported reserve because the impact of these changes would be unique to each specific case-basis reserve established. However, based on historical experience, we believe that aggregate case-basis reserve volatility levels of five percent and ten percent can be attributed to the ultimate development of our case-basis reserves. The table ~~on the following page~~below details the impact of this development volatility on our reported case-basis reserves.

The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards. The impact to pre-tax earnings would be an increase if the reserves were to be adjusted downwards.

In ~~2006,~~2007, we did not change our key assumptions. In estimating our ~~2006~~2007 loss and loss settlement expense reserves, we did not anticipate future events or conditions that were inconsistent with past development patterns.

Our key assumptions are subject to change as actual claims occur and as we gain additional information about the variables that underlie our assumptions. Accordingly, management reviews and updates these assumptions periodically to ensure that the assumptions continue to be valid. If necessary, management makes changes not only in the estimates derived from the use of these assumptions, but also in the assumptions themselves. Due to the inherent uncertainty caused by using assumptions, loss and loss settlement expense reserve estimates are not exact, and using assumptions can result in estimated losses and loss settlement expenses that may differ materially from the actual losses and loss settlement expenses that subsequently emerge. These differences may be favorable or unfavorable.

Based upon our comparison of carried reserves to actual claims experience over the last several years, we believe that using company historical premium and claims data to establish reserves for losses and loss ~~and~~ settlement expenses results in adequate and reasonable reserves. Based upon this comparison, we believe that our total recorded loss reserves at December 31, ~~2006,~~2007, are unlikely to vary by more than 10 percent of the recorded amounts, either positively or negatively. Historically, our reserves have had an average variance of less than 10 percent of recorded amounts, with our reserves booked as of December 31, ~~2005~~2006 and ~~2004,~~2005, generating reserve redundancies of 9.4 percent and 4.5 percent in 2007 and ~~17.8 percent in~~ 2006, ~~and 2005,~~ respectively. These redundancies are discussed in detail in the “Results of Operations” ~~sections of this discussion.~~section.

Significant change to the estimated reserves could have a material impact to our results of operations or financial position. An increase or decrease in reserve estimates would result in a corresponding decrease or increase in financial results. The following table details the pre-tax impact on our property and casualty insurance segment’s financial results and financial condition of reasonably likely changes in our reserve development. Our lines of

business that have historically been most susceptible to significant volatility in reserve development have been shown separately ~~below~~ and utilize hypothetical levels of volatility of five percent and ten percent. Our other, less volatile, lines have been aggregated and utilize hypothetical levels of volatility of three percent and five percent.

We are required by state law, to engage an independent actuarial firm to render opinions as to the reasonableness of the statutory reserves we establish. There are no material differences between our statutory reserves and those established under GAAP.

During ~~2005~~2007 and 2006, we engaged the services of Regnier Consulting Group, Inc. as our “independent actuarial firm” for the property and casualty insurance segment. We anticipate that this engagement will continue in ~~2007.~~2008.

It is management’s policy to utilize staff adjusters to develop our estimate of case-basis loss reserves. IBNR and loss settlement expense reserves are established through various formulae that utilize pertinent, recent company historical data. The calculations are supplemented with knowledge of current trends and events that could result in adjustments to the level of IBNR and loss settlement expense reserves. In addition, management consults with ~~its independent actuary,~~ Regnier Consulting Group throughout the year as deemed necessary. Management annually compares our estimate of total loss reserves to point estimates prepared by Regnier Consulting Group by line of business to ensure that our estimates are within the actuary’s acceptable range. Regnier Consulting Group performs

an extensive review of loss and loss settlement expense reserves at each year end using generally accepted actuarial guidelines to ensure that the recorded loss reserves appear reasonable. If the carried reserves ~~are~~were deemed unreasonable, we would adjust reserves. In ~~2006~~2007 and ~~2005,~~2006, after considering the actuary’s range of reasonable point estimates, management believed that carried reserves were reasonable and therefore did not make adjustments to reserves.

Regnier Consulting Group uses four projection methods in its actuarial analysis by line of our loss and loss settlement expense reserves. Based on the results of the projection methods, the actuaries select a point estimate of the reserves. They then compare this point estimate to our carried reserves to obtain an estimate of the adequacy of the carried reserves and to validate the reasonableness of the carried reserves. The four methods utilized by Regnier Consulting Group are: paid loss development; reported loss development; Bornhuetter-Ferguson based on paid losses; and Bornhuetter-Ferguson based on reported losses.

Based on the results of the four different projection methods, a reasonable range of net reserves from ~~$473.1~~$394.5 million to ~~$538.3~~$497.3 million has been calculated. Our ~~carried~~net reserves for losses and loss settlement expenses as of December 31, ~~2006~~2007 were ~~$518.9~~$457.3 million.

We do not view the result of a single projection method as superior over the results of a combination of projection methods. That is, our actuary has not selected one method to determine the reserves. The results of Regnier Consulting Group’s use of various methods, in conjunction with their actuarial judgment, leads to the actuarially-determined estimate of the reserves. The impact of reasonably likely changes in the reserving variables is implicitly considered in Regnier Consulting Group’s use of several reserving methods.

Future Policy Benefits and Losses, Claims and Loss Settlement Expenses – Life Insurance Segment

We ~~calculate~~establish reserves for amounts that are payable under traditional insurance policies, including traditional life insurance, disability income, and income annuities. Reserves are calculated as the ~~reserves reported in our Consolidated Financial Statements~~present value of future benefits expected to be paid, reduced by the present value of future expected premiums. Our estimates use methods and underlying assumptions that are in accordance with ~~GAAP.~~GAAP and applicable actuarial standards. The key assumptions that we utilize in establishing reserves are mortality, morbidity, policy lapse, renewal, retirement, investment returns, inflation, and expenses. Assumptions are established when the policy is issued. If actual experience is less favorable than assumptions, we may need to increase our reserves, resulting in a charge to policyholder benefits and claims.

Liabilities for future policy benefits for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.

Other policyholder reserves include claims that have been reported but not settled and claims incurred but not reported on life and disability income insurance. We ~~account~~use our own historical experience and other assumptions such as any known or anticipated developments or trends to establish reserves for these unsettled or unreported claims. The effects of changes in our ~~annuity and~~estimated reserves are included in the results of operations in the period in which the changes occur.

Our reserves for universal life ~~policy deposits in accordance with SFAS No. 97, “Accounting~~ and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses on the Sale of Investments.” Under SFAS No. 97, a benefit reserve is established at the time of policy issuance in an amount equal to the deposits received. Subsequently, the benefit reserve is adjusted for any additional deposits, interest credited and partial or complete withdrawals. Reserves determined for statutory purposesdeferred annuity contracts are based upon ~~mortality rates~~the policyholders’ current account value. Acquisition expenses are amortized in relation to profits forecast based upon current best estimates of anticipated premium income, investment earnings, benefits and ~~interest rates specified by Iowa state law. Our life insurance subsidiary’s~~expenses.

Annually, we review our estimates of unearned revenue liabilities and deferred policy acquisition cost assets and compare them with actual experience. Differences between actual experience and the assumptions that we used in the pricing of policies, guarantees and riders and in the establishment of the related reserves ~~meet or exceed~~result in variances in profit and could result in losses. The effects of the ~~minimum statutory requirements. All of our~~changes in such estimated reserves are developed and analyzed annually by Griffith, Ballard and Company, our independent consulting actuaries. At December 31, 2006, we recorded future policy benefits of $1,233.3 million, compared with $1,285.6 million at December 31, 2005.

~~We are subject to regulation and supervision~~included in ~~each of~~ the states where our insurance companies are domiciled and licensed to conduct business. State insurance department commissioners regulate such matters as licenses, standards of solvency, premium rates, policy forms, investments, security deposits, accounting policy, form and content of financial statements, reserves for unpaid loss and loss settlement expenses, reinsurance, minimum capital and surplus requirements, dividends to shareholders, periodic examinations and annual and other report filings. In general, such regulation is for the protection of policyholders rather than shareholders.

State regulators have the authority to approve or deny our premium rates to ensure that they are not excessive or discriminatory. Because of this regulatory constraint, it is sometimes difficult to receive an adequate premium rate on our products, which can result in unsatisfactory underwriting results.

Despite strict oversight by state insurance regulators, insurance companies occasionally become insolvent. Each of our insurance companies is required to participate in state guaranty fund associations, whose purpose is to protect the policyholders of insolvent insurance companies. Guaranty fund associations assess solvent insurers to pay the claims of insolvent insurers. The assessments are based proportionately upon each solvent insurance company’s share of written premiums in the applicable state. Most state guaranty fund associations allow solvent insurers to

recoup the assessments paid through rate increases, surcharges or premium tax credits. However, there is no assurance that we will ultimately recover these assessments. At December 31, 2006, we have a $1.0 million accrual for state guaranty fund assessments.

State insurance regulators also establish insurance funds to provide insurance coverage to those insureds unable to obtain insurance through the voluntary insurance market. In response to the hurricane activity during 2005 and 2004, several of these state insurance funds levied substantial assessments to insurers writing insurance in hurricane-affected areas. These state insurance funds assessed us over $8.1 million including Louisiana ($4.9 million), Mississippi ($2.6 million), Florida ($0.4 million) and Texas ($0.1 million), which increased our reported losses and loss settlement expenses during 2005. The terms of some of these assessments allowed us to recoup the amounts assessed through surcharges to policyholders applied to insurance policies written in the state over a one-year period. Through December 31, 2006 we have recouped $3.1 million of these 2005 assessments through policyholder surcharges. The $2.6 million assessment by the State of Mississippi did not allow us to recoup the amount assessed from policyholders. However, we did receive a $2.4 million refund on this assessment during 2006. The assessment amounts recouped and refunded positively impacted our 2006 operating results. During 2006, we paid another $0.4 million in hurricane assessments from state insurance funds. We anticipate being able to recoup all or part of these assessments through future surcharges to policyholders during 2007.

Our insurance companies are subject to state laws and regulations that require investment portfolio diversification and that limit the amount of investment in certain categories. Noncompliance may cause nonconforming investments to be nonadmitted in measuring statutory surplus and, in some instances; states may require us to sell the nonconforming securities.

The National Association of Insurance Commissioners annually 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 used as a benchmark. Departure from the “usual range” on four or more of the ratios could lead to inquiries from individual state insurance departments as to certain aspects of a company’s business. None of our insurance companies had four or more ratios outside the “usual range” at December 31, 2006. In addition to the financial ratios, we are also required to calculate a minimum capital requirement for each of our insurance companies based on individual company insurance risk factors. These “risk-based capital” results are used to identify companies that require regulatory attention or the initiation of regulatory action. At December 31, 2006, all of our insurance companies had capital well in excess of the required levels.

We are not aware of any other current recommendations by the National Association of Insurance Commissioners, federal government, or other regulatory authorities in the states in which we conduct business that, if or when implemented, would have a material effect on our liquidity, capital resources or operations.

~~Our financial strength is regularly reviewed by independent rating agencies who assign a rating based upon items such as~~ results of operations ~~capital resources and minimum policyholders’ surplus requirements.~~

Our family of property and casualty insurers has received a group rating of “A” (Excellent) from A.M. Best Company. Within the group, all of our property and casualty insurers have an “A” (Excellent) rating, except one insurance subsidiary that is in a runoff status, which A.M. Best has designated as NR-3 (Rating Procedure Inapplicable). Our life insurance subsidiary has received an “A-” (Excellent) rating from A.M. Best Company. According to A.M. Best Company, companies rated “A” and “A-” have “an excellent ability to meet their ongoing obligations to policyholders.”

Standard & Poor’s issued an “A-” rating to United Fire & Casualty Company, Addison Insurance Company, Lafayette Insurance Company, United Fire & Indemnity Company, United Fire Lloyds and United Life Insurance Company. According to Standard & Poor’s, an insurer rated “A” or “A-” has “strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings.” A Standard & Poor’s Insurer Financial Strength Rating is Standard & Poor’s current opinion of the

~~creditworthiness of an insurer with respect to its ability to pay under its insurance policies and contracts in accordance with its terms.~~

~~An insurer’s solvency rating is one of the primary factors evaluated by those~~ in the ~~market to purchase insurance. A poor rating would indicate that there is an increased likelihood that~~period in which the insurer could become insolvent and therefore not be able to fulfill its obligations under the insurance policies it issues. The level of an insurer’s solvency rating can affect its level of premium writings, the lines of business it can write and the market value of its shares of stock.changes occur.

In recent years, rating agencies have been reevaluating the methodology they utilize when rating an insurance company’s financial strength. The main focus of this reevaluation process has centered on whether or not solvency models currently utilized in determining an insurer’s financial strength contain enough flexibility and sophistication to accurately rate a specific insurer’s financial condition. We believe that the level of standardization inherent in current solvency models utilized by rating agencies may impair the model’s ability to generate an appropriate rating.

Refer to Part II, Item 8, Note 1 “Significant Accounting Policies” for a description of recently issued accounting pronouncements not effective for reporting purposes at December 31, ~~2006.~~2007. We believe that the new accounting pronouncements, when adopted, will not materially affect our financial condition or results of operations.

We believe that disclosure of certain non-GAAP measures enhances investor understanding of our financial performance. The non-GAAP financial measures we utilize in this report are ~~net~~ premiums written, catastrophe losses and ~~statutory~~ combined ratio. These are statutory financial measures prepared in accordance with statutory accounting rules, as prescribed by the National Association of Insurance Commissioners’ Accounting Practices and Procedures Manual.

Premiums writtenis a measure of our overall business volume. Net premiums written are comprised of direct and assumed premiums written, net of what we are charged for reinsurance policies. Direct premiums written is ~~a statutory accounting measure representing~~ the amount of premiums charged for policies issued during the ~~period.~~period, Assumed premiums written is consideration or payment we receive in exchange for reinsurance we provide to other insurance companies. We report these premiums as revenue as they are earned over the underlying policy period. We report ~~net~~ premiums written applicable to the unexpired term of a policy as unearned ~~premium.~~premium subject to reinsurance. We evaluate ~~net~~ premiums written as a measure of business production for the period under review.

Catastrophe ~~losses:~~losses Autilize the designations of the Insurance Services Office (“ISO”) and are reported with loss and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is a single unpredictable incident or series of closely related incidents causing severe insured ~~losses. Catastrophes~~losses that cause $25.0 million or more in industry-wide direct insured losses to property and that affect a significant number of insureds and insurers (“ISO catastrophes”). We also include as catastrophes those events we believe are, ~~by their nature, unpredictable.~~or will be, material to our operations, either in amount or in number of claims made. The frequency and severity of catastrophic losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance segment, we evaluate performance both including and excluding catastrophe losses. The Insurance Services Office (ISO), a supplier of property and casualty statistical data, defines as catastrophes those events that cause $25.0 million or more in industry-wide direct insured losses to property and that affect a significant number of insureds and insurers (“ISO catastrophes”). We use this definition, but we also include as catastrophes those events we believe are, or will be, material to our operations, either in amount or in number of claims made. For the years ended December 31, ~~2006~~2007 and ~~2005,~~2006 losses from non-ISO catastrophes totaled ~~$.9~~less than $.4 million and ~~$.6~~$.9 million, respectively. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in periodic earnings.

~~Statutory combined ratio:~~Combined ratio ~~The combined ratio~~ is a commonly used financial measure of underwriting performance. ~~Generally, a~~A combined ratio below 100 percent generally indicates a profitable book of business. The combined ratio is the sum of two separately calculated ~~ratios:~~ratios, the loss and loss settlement expense ratio (referred to as the “net loss ratio”) and the underwriting expense ratio (the “expense ratio”). When prepared in accordance with GAAP, the net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premium earned. The expense ratio is calculated by dividing ~~nondeferred~~non-deferred underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. When prepared in accordance with statutory accounting principles, the net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premium ~~earned. The~~earned; the expense ratio is calculated by dividing underwriting expenses by net premiums written.

Our consolidated balance sheet includes a substantial amount of assets and liabilities whose fair values are subject to market risk. Market risk includes interest rate risk, foreign exchange risk, credit risk and equity price risk. Our primary market risk is exposure to interest rate risk. Interest rate risk is the price sensitivity of a fixed maturity security or portfolio to changes in interest rates. We also have limited exposure to equity price risk and foreign exchange risk.

We invest in interest rate sensitive securities, primarily fixed maturity securities. While it is generally our intent to hold our fixed maturity securities to maturity, we have classified a majority of our fixed maturity portfolio as available-for-sale. ~~In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” our~~Our available-for-sale fixed maturity securities are carried at fair value on the balance sheet with unrealized gains or losses reported net of tax in accumulated other comprehensive income.

Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of fixed maturity securities. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.

The active management of market risk is integral to our operations. We analyze potential changes in the value of our investment portfolio due to the market risk factors noted above within the overall context of asset and liability management. A technique we use in the management of our investment and reserve portfolio is the calculation of duration. Our actuaries estimate the payout pattern of our reserve liabilities to determine their duration, which is the present value of the weighted average payments expressed in years. We then establish a target duration for our investment portfolio so that at any given time the estimated cash generated by the investment portfolio will match the estimated cash flowing out of the reserve portfolio. ~~Our chief investment officer structures~~We structure the investment portfolio to meet the target duration to achieve the required cash flow, based on liquidity and market risk factors.

Duration relates primarily to our life insurance segment because the long-term nature of ~~the segment’s~~these reserve liabilities increases the importance of projecting estimated cash flows over an extended time frame. At December 31, ~~2006,~~2007, our life insurance segment had ~~$888.7~~$827.8 million in deferred annuity liabilities that were specifically allocated to fixed maturities. We manage the life insurance segment investments by focusing on matching the duration of the investments to that of the deferred annuity obligations. The duration for the investment portfolio must take into consideration interest rate risk. This is accomplished through the use of sensitivity analysis, which measures the price sensitivity of the fixed maturities to changes in interest rates. The alternative valuations of the investment portfolio, given the various hypothetical interest rate changes utilized by the sensitivity analysis, allow management to revalue the potential cash flow from the investment portfolio under varying market interest rate scenarios. Duration can then be recalculated at the differing levels of projected cash flows.

Amounts set forth in Table 1 detail the material impact of hypothetical interest rate changes on the fair value of certain core fixed maturity investments held at December 31, ~~2006.~~2007. The sensitivity analysis measures the change in fair values arising from immediate changes in selected interest rate scenarios. We employed hypothetical parallel shifts in the yield curve of plus or minus 100 and 200 basis points in the simulations. Additionally, based upon the yield curve shifts, we employ estimates of prepayment speeds for mortgage-related products and the likelihood of

call or put options being exercised within the simulations. According to this analysis, at current levels of interest rates, the duration of the investments supporting the deferred annuity liabilities is ~~1.32~~0.15 years ~~longer~~shorter than the projected duration of the liabilities. If interest rates increase by 100 basis points, the projected duration of the liabilities would be ~~0.49~~0.34 years shorter than the duration of the investments supporting the liabilities. The selection of a 100-basis-point increase in interest rates should not be construed as a prediction by our management of future market events, but rather as an illustration of the potential impact of an event.

To the extent actual results differ from the assumptions utilized, our duration and interest rate ~~increase~~ measures could be significantly affected. As a result, these calculations may not fully capture the impact of nonparallel changes in the relationship between short-term and long-term interest rates.

Equity price risk is the potential loss arising from changes in the fair value of equity securities. Our exposure to this risk relates to our equity securities portfolio and covered call options that we write from time to time to generate additional portfolio income. The carrying values of our ~~common~~ equity securities are based on quoted market prices as of the balance sheet date. Market prices of ~~common~~ equity securities, in general, are subject to fluctuations that could cause the amount to be realized upon sale or exercise of the instruments to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of the issuer of securities, the relative price of alternative investments, general market conditions and supply and demand imbalances for a particular security.

~~Table 2~~The following table details the effect on fair value for a positive and negative 10 percent price change on our equity portfolio.

Foreign currency exchange rate risk arises from the possibility that changes in foreign currency exchange rates will affect the fair value of financial instruments. We have limited foreign currency exchange rate risk in our transactions with foreign reinsurers relating to the settlement of amounts due to or from foreign reinsurers in the normal course of business. We consider this risk to be immaterial to our operations.

The Notes to Consolidated Financial Statements are an integral part of these statements.

(1) The change in net unrealized appreciation is net of reclassification adjustments and income ~~taxes (refer to Note 13).~~taxes.

(2) The adjustment of minimum pension liability is net of income ~~taxes (refer to Note 13).~~taxes.

(3) ~~Per share amounts reflect the retroactive effects of our December 15, 2004, one-for-one stock dividend.~~

~~(4)~~ The recognition of the underfunded status of employee benefit plans is net of reclassification adjustments and income ~~taxes (refer to Note 13).~~taxes.

~~(5)~~(4) The amounts reported are net of underwriting ~~expenses (refer~~expenses.

The Notes to ~~Note 15).~~Consolidated Financial Statements are an integral part of these statements.

United Fire & Casualty Company and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2007, 2006 and 2005

(Dollars in Thousands)	2007			2006			2005
Cash Flows From Operating Activities
Net income	$	111,392		$	88,085		$	9,044
Adjustments to reconcile net income to net cash provided by operating activities:
Net bond premium (discount) accretion	$	(506	)	$	1,682		$	897
Depreciation and amortization		3,573			3,478			3,747
Stock-based compensation expense		1,377			1,234			—
Realized investment gains		(9,670	)		(9,965	)		(4,540	)
Net cash flows from trading investments		2,066			(6,184	)		5,343
Deferred income tax expense		2,429			9,963			711
Changes in:
Accrued investment income		(48	)		1,849			(3,064	)
Premiums receivable		5,630			(11,034	)		3,109
Deferred policy acquisition costs		2,932			(6,704	)		(2,977	)
Reinsurance receivables		8,068			72,618			(93,676	)
Prepaid reinsurance premiums		2,933			(2,563	)		107
Income taxes receivable/payable		2,916			30,334			(41,563	)
Other assets		(1,864	)		6,024			(4,388	)
Future policy benefits and losses, claims and loss settlement expenses		(9,442	)		(77,057	)		186,430
Unearned premiums		(6,847	)		9,110			(7,997	)
Accrued expenses and other liabilities		(9,812	)		(5,512	)		944
Deferred income taxes		(467	)		(488	)		460
Other, net		1,120			(413	)		1,103
Total adjustments	$	(5,612	)	$	16,372		$	44,646
Net cash provided by operating activities	$	105,780		$	104,457		$	53,690
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	3,689		$	2,400		$	5,720
Proceeds from call and maturity of held-to-maturity investments		17,520			28,448			14,885
Proceeds from call and maturity of available-for-sale investments		326,345			263,538			230,978
Proceeds from short-term and other investments		60,454			77,683			37,592
Purchase of available-for-sale investments		(318,725	)		(330,173	)		(434,026	)
Purchase of short-term and other investments		(103,967	)		(67,043	)		(36,981	)
Net purchases and sales of property and equipment		(1,648	)		(4,972	)		(1,912	)
Net cash used in investing activities	$	(16,332	)	$	(30,119	)	$	(183,744	)
Cash Flows From Financing Activities
Policyholders’ account balances:
Deposits to investment and universal life contracts	$	217,691		$	206,783		$	131,590
Withdrawals from investment and universal life contracts		(279,417	)		(283,233	)		(132,882	)
Issuance of common stock		836			107,425			717
Repurchase of common stock		(16,078	)		—			—
Redemption of preferred stock		—			—			(142	)
Payment of cash dividends		(15,293	)		(13,196	)		(12,013	)
Tax benefit from issuance of common stock		333			137			—
Net cash (used in) provided by financing activities	$	(91,928	)	$	17,916		$	(12,730	)
Net Change in Cash and Cash Equivalents	$	(2,480	)	$	92,254		$	(142,784	)
Cash and Cash Equivalents at Beginning of Year		255,045			162,791			305,575
Cash and Cash Equivalents at End of Year	$	252,565		$	255,045		$	162,791

The Notes to Consolidated Financial Statements are an integral part of these statements.

United Fire & Casualty Company and Subsidiaries

~~Consolidated Statements of Cash Flows~~

~~Years Ended December 31, 2006, 2005 and 2004~~

(Dollars in Thousands)

2006

2005

2004

Cash Flows From Operating Activities

Net income

$
88,085

$
9,044

$
78,817

Adjustments to reconcile net income to net cash provided by operating activities:

Net bond premium (discount) accretion

$
1,682

$
897

$
(182
)
Depreciation and amortization

3,478

3,747

3,909

Stock-based compensation expense

1,234

—

—

Realized investment gains

(9,965
)

(4,540
)

(4,060
)
Net cash flows from trading investments

(6,184
)

5,343

(1,969
)
Deferred income tax expense (benefit)

9,963

711

(3,008
)
Changes in:

Accrued investment income

1,849

(3,064
)

(373
)
Premiums receivable

(11,034
)

3,109

(1,555
)
Deferred policy acquisition costs

(6,704
)

(2,977
)

2,238

Reinsurance receivables

72,618

(93,676
)

(2,022
)
Prepaid reinsurance premiums

(2,563
)

107

483

Income taxes receivable/payable

30,334

(41,563
)

5,886

Other assets

6,024

(4,388
)

1,668

Future policy benefits and losses, claims and loss settlement expenses

(77,057
)

186,430

59,489

Unearned premiums

9,110

(7,997
)

(1,675
)
Accrued expenses and other liabilities

(5,512
)

944

3,212

Deferred income taxes

(488
)

460

400

Other, net

(413
)

1,103

1,432

Total adjustments

$
16,372

$
44,646

$
63,873

Net cash provided by operating activities

$
104,457

$
53,690

$
142,690

Cash Flows From Investing Activities

Proceeds from sale of available-for-sale investments

$
2,400

$
5,720

$
11,541

Proceeds from call and maturity of held-to-maturity investments

28,448

14,885

38,583

Proceeds from call and maturity of available-for-sale investments

263,538

230,978

220,303

Proceeds from short-term and other investments

77,683

37,592

41,896

Purchase of available-for-sale investments

(330,173
)

(434,026
)

(354,768
)
Purchase of short-term and other investments

(67,043
)

(36,981
)

(70,380
)
Net purchases and sales of property and equipment

(4,972
)

(1,912
)

1,639

Net cash used in investing activities

$
(30,119
)
$
(183,744
)
$
(111,186
)
Cash Flows From Financing Activities

Policyholders’ account balances:

Deposits to investment and universal life contracts

$
206,783

$
131,590

$
119,041

Withdrawals from investment and universal life contracts

(283,233
)

(132,882
)

(95,802
)
Issuance of common stock (net of underwriting expenses)

107,425

717

626

Redemption of preferred stock

—

(142
)

—

Payment of cash dividends

(13,196
)

(12,013
)

(14,858
)
Tax benefit from issuance of common stock

137

—

—

Net cash (used in) provided by financing activities

$
17,916

$
(12,730
)
$
9,007

Net Change in Cash and Cash Equivalents

$
92,254

$
(142,784
)
$
40,511

Cash and Cash Equivalents at Beginning of Year

162,791

305,575

265,064

Cash and Cash Equivalents at End of Year

$
255,045

$
162,791

$
305,575

Index of Notes to Consolidated Financial Statements		Page
Note 1.	Significant Accounting Policies	61
Note 2.	Summary of Investments	68
Note 3.	Fair Value of Financial Instruments	74
Note 4.	Short-Term Borrowings	75
Note 5.	Reinsurance	75
Note 6.	Reserves for Loss and Loss Settlement Expenses	77
Note 7.	Statutory Reporting, Capital Requirements, and Dividends and Retained Earnings Restrictions	78
Note 8.	Federal Income Tax	79
Note 9.	Employee Benefits	80
Note 10.	Stock Options	83
Note 11.	Segment Information	85
Note 12.	Quarterly Financial Information (Unaudited)	87
Note 13.	Earnings and Dividends Per Common Share	87
Note 14.	Comprehensive Income	88
Note 15.	Lease Commitments	89

~~The Notes to Consolidated Financial Statements are an integral part of these statements.~~

United Fire & Casualty Company and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

Nature of operations, principles of consolidation and basis of reporting

The Consolidated Financial Statements have been prepared on the basis of ~~U.S. generally accepted accounting principles (“GAAP”),~~GAAP, which differ in some respects from those followed in preparing our statutory reports to insurance regulatory authorities. Our stand-alone financial statements submitted to insurance regulatory authorities are presented on the basis of accounting practices prescribed or permitted by the insurance departments of the states in which we are domiciled (“statutory accounting practices”).

We are engaged in the business of writing property and casualty insurance and life insurance.

The accompanying Consolidated Financial Statements include United Fire & Casualty Company (“United Fire”) and its wholly owned subsidiaries: United Life Insurance Company, Lafayette Insurance Company, Addison Insurance Company, American Indemnity Financial Corporation, United Fire & Indemnity Company and Texas General Indemnity Company. United Fire Lloyds, an affiliate of United Fire, has also been included in consolidation. All intercompany balances have been eliminated in consolidation.

United Fire Lloyds is organized as a Texas Lloyds plan, which is an aggregation of underwriters who, under a common name, engage in the business of insurance through a corporate attorney-in-fact. United Fire Lloyds is financially and operationally controlled by United Fire & Indemnity Company, its corporate attorney-in-fact, pursuant to three types of agreements: trust agreements between United Fire & Indemnity Company and certain individuals who agree to serve as trustees; articles of agreement among the trustees who agree to act as underwriters to establish how the Lloyds plan will be operated; and powers of attorney from each of the underwriters appointing a corporate attorney-in-fact, who is authorized to operate the Lloyds plan. Because United Fire & Indemnity Company can name the trustees, the Lloyds plan is perpetual, subject only to United Fire & Indemnity Company’s desire to terminate it.

United Fire & Indemnity Company provides all of the statutory capital necessary for the formation of the ~~Texas~~ Lloyds plan by contributing capital to each of the trustees. The trust agreements require the trustees to become underwriters of the Lloyds plan, to contribute the capital to the Lloyds plan, to sign the articles of agreement and to appoint the attorney-in-fact. The trust agreements also require the trustees to pay to United Fire & Indemnity Company all of the profits and benefits received by the trustees as underwriters of the Lloyds plan, which means that United Fire & Indemnity Company has the right to receive 100 percent of the gains and profits from the Lloyds plan. The trustees serve at the pleasure of United Fire & Indemnity Company, which may remove a trustee and replace that trustee at any time. Termination of a trustee must be accompanied by the resignation of the trustee as an underwriter, so that the trustee can obtain the capital contribution from the Lloyds plan to reimburse United Fire & Indemnity Company. By retaining the ability to terminate trustees, United Fire & Indemnity Company possesses the ability to name and remove the underwriters.

In May 2006, we closed on the sale of our subsidiary, American Indemnity Company, a Texas domiciled property and casualty insurance company that is licensed in 26 states and the District of Columbia. The sale involved only American Indemnity Company and did not affect the business of any of our other Texas subsidiaries or operations at our Gulf Coast Regional Office in Galveston, Texas. American Indemnity Company had not written or renewed any policies of insurance since November 2003 and was sold as a “shell” company with no liabilities and only the capital assets necessary to maintain its licenses. The sale of American Indemnity Company resulted in a realized gain of $3,401,000, or $0.08 per share after-tax, which has been recorded in the 2006 results of our property and casualty insurance segment.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the

~~United Fire & Casualty Company and Subsidiaries~~

reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include investments, deferred policy acquisition costs and future policy benefits and losses, claims and loss settlement expenses.

United Fire & Casualty Company and Subsidiaries

Property and casualty insurance business

Premiums are reported in income on a daily pro rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the unexpired term of policies in force.

Certain costs of underwriting new business, principally commissions, premium taxes and variable underwriting and policy issue expenses, have been deferred. Such costs are being amortized as premium revenue is being recognized. Policy acquisition costs deferred in 2007, 2006 and 2005 were $123,362,000, $124,307,000 and ~~2004 were $124,307,000,~~ $111,802,000, ~~and $100,944,000,~~ respectively. Amortization of deferred policy acquisition costs in 2007, 2006 and 2005 totaled $123,420,000, $118,756,000 and ~~2004 totaled $118,756,000,~~ $106,348,000, ~~and $98,579,000,~~ respectively. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, losses and expenses to be incurred and certain other costs expected to be incurred as the premium is earned.

To establish loss and loss settlement expense reserves, we make estimates and assumptions about the future development of claims. Actual results could differ materially from those estimates, which are subjective, complex and inherently uncertain. When we establish and adjust reserves, we do so given our knowledge at that time of the circumstances and facts of known claims. To the extent that we have overestimated or underestimated our loss and loss settlement expense reserves, we adjust the reserves in the period in which such adjustment is determined.

Life insurance business

On whole life and term insurance (traditional business) premiums are reported as earned when due and benefits and expenses are associated with premium income in order to result in the recognition of profits over the lives of the related contracts. On universal life and annuity policies (non-traditional business), income and expenses are reported when charged and credited to policyholder account balances in order to result in the recognition of profits over the lives of the related contracts. We accomplish this by means of a provision for future policy benefits and the deferral and subsequent amortization of life policy acquisition costs. We do not write variable annuities or variable life insurance products.

The costs of acquiring new life business, principally commissions, certain variable underwriting, agency and policy issue expenses, have been deferred. These costs are amortized to income over the premium-paying period of the related traditional policies in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue and over the anticipated lives of non-traditional policies in proportion to the ratio of the expected annual gross profits to the expected total gross profits. Policy acquisition costs deferred in 2007, 2006 and 2005 were $10,511,000, $9,295,000 and ~~2004 were $9,295,000,~~ $6,648,000, ~~and $7,780,000,~~ respectively. Amortization of deferred policy acquisition costs in 2007, 2006 and 2005 totaled $13,385,000, $8,142,000 and ~~2004 totaled $8,142,000,~~ $9,125,000, ~~and $12,384,000,~~ respectively. The expected premium revenue and gross profits are based upon the same mortality and withdrawal assumptions used in determining future policy benefits. For non-traditional policies, changes in the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs. The effect on the amortization of deferred policy acquisition costs for revisions to estimated gross profits is reported in earnings in the period such estimated gross profits are revised.

The ~~change in the~~ effect on deferred policy acquisition costs that results from the assumed realization of unrealized gains (losses) is recognized with an offset to unrealized investment appreciation (depreciation) as of the balance sheet dates. As of December 31, 2007, pre-tax adjustments decreased deferred policy acquisition costs by $3,831,000. As of December 31, 2006, ~~2005 and 2004, pretax~~pre-tax adjustments increased deferred policy acquisition costs by ~~$9,188,000, $27,669,000 and $5,229,000, respectively.~~$9,188,000.

Liabilities for future policy benefits for traditional products are computed by the net level premium method, using interest assumptions ranging from 4.5 percent to 6.0 percent and withdrawal, mortality and morbidity assumptions appropriate at the time the policies were issued. Accident and health reserves are stated at amounts determined by

~~United Fire & Casualty Company and Subsidiaries~~

estimates on individual claims and estimates of unreported claims based on past experience. Liabilities for universal life and investment contracts are stated at policyholder account values before surrender charges. Liabilities for traditional immediate annuities are based primarily upon future anticipated cash flows using statutory mortality and

United Fire & Casualty Company and Subsidiaries

interest rates, which produce results that are not materially different from GAAP. Liabilities for deferred annuities are carried at the account value.

~~Investments~~

Investments in held-to-maturity fixed maturities are recorded at amortized cost. We have the ability and positive intent to hold these investments until maturity. Available-for-sale fixed maturities, trading fixed maturities, equity securities and other long-term investments are recorded at fair value. Mortgage loans and short-term investments are recorded at cost. Policy loans are recorded at the actual amount loaned to the policyholder. Included in investments at December 31, 2006 and 2005, are securities on deposit with, or available to, various regulatory authorities as required by law, with carrying values of $1,389,654,000 and $1,439,783,000, respectively.

Realized gains or losses on disposition of investments are included in the computation of net income. Cost of investments sold is determined by the specific identification method. Changes in unrealized appreciation and depreciation, with respect to available-for-sale fixed maturities and equity securities, are reported as a separate component of accumulated other comprehensive income, less applicable income taxes.

In 2006, 2005 and 2004, we impaired certain holdings in our investment portfolio as a result of other-than-temporary declines in market value and recorded a pretax realized loss of $406,000, $1,208,000 and $308,000, respectively. We continue to review all of our investment holdings for appropriate valuation on an ongoing basis. Refer to Note 2 “Summary of Investments” in this item for a discussion of our accounting policy for impairment recognition.

~~Reinsurance~~

Premiums earned and losses and loss settlement expenses incurred are reported net of reinsurance ceded. Ceded insurance business is accounted for on a basis consistent with the original policies issued and the terms of the reinsurance contracts. Refer to Note 5 “Reinsurance” in this item for a discussion of our reinsurance operations.

~~Cash and cash equivalents~~

For purposes of reporting cash flows, cash and cash equivalents include cash, nonnegotiable certificates of deposit with original maturities of three months or less and money market accounts. Negative cash balances are reported as a component of accrued expenses and other liabilities.

We made payments for income taxes of $25,306,000, $37,903,000 and $32,714,000 during 2006, 2005 and 2004, respectively. In addition, we received refunds totaling $27,844,000 in 2006, due to an overpayment of 2005 tax. There were no significant payments of interest in 2006, 2005 and 2004, other than interest credited to policyholders’ accounts.

~~Property, equipment and depreciation~~

Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the underlying assets. Depreciation expense totaled $3,418,000, $3,687,000 and $3,849,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

~~Amortization of intangibles~~

Our intangibles are composed entirely of agency relationships, which are being amortized by the straight-line method over periods of up to 10 years. We regularly review the carrying value of our intangibles for impairment in the recoverability of the underlying asset, with any impairment being charged to operations in the period that the

~~United Fire & Casualty Company and Subsidiaries~~

~~impairment was recognized. We did not recognize an impairment write-down to the carrying value of our intangibles in 2006, 2005 or 2004.~~

Amortization expense totaled $60,000 for each of the three years ended December 31, 2006, 2005 and 2004. We reduced the carrying value of our intangibles by $512,000 in 2004 as a result of an adjustment to the deferred tax asset valuation allowance related to the acquisition of American Indemnity Financial Corporation. Refer to Note 8 “Federal Income Tax” in this item for further discussion.

~~Income taxes~~

We file a consolidated federal income tax return. Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders’ equity and do not impact income tax expense.

~~Contingent liabilities~~

In the aftermath of Hurricane Katrina, United Fire & Casualty Company and our Louisiana property and casualty insurance subsidiary, Lafayette Insurance Company, as well as many other insurers in the Louisiana market have been named as defendants in litigation commenced by policyholders. Some of these policyholders are seeking relief in their own right and other suits have been filed seeking class certification. These suits allege various improprieties in the claims settlement process. This litigation is either immaterial or in the early stages and we can not at this time make a determination as to the ultimate outcome or effect of this litigation on our financial position or operating results. While we believe the claims have been handled consistent with the policy language and the applicable law, the litigation environment for insurers involved in hurricane litigation in Louisiana courts is not favorable. Several recent court rulings in Louisiana and neighboring states were adverse to insurers and have received considerable publicity. These developments present challenges to all insurers involved in hurricane litigation. We maintain that because we were not a party to that litigation these decisions should not directly impact us, and that other decisions should and will be corrected in the appellate courts. However, the litigation seeking class relief, and the number of potential members of any class certified, could potentially create a material obligation for us.

We have established reserves for all claims in litigation commensurate with our evaluation of the potential outcome of those claims. We believe that, in the aggregate, these reserves should be adequate. However, the wave of litigation faced by us and other insurers is unprecedented so it is difficult to accurately predict an outcome. Additionally, many of the persons who will be involved in the determination of factual and legal issues were themselves affected by Hurricane Katrina, complicating the defense of these claims. Our evaluation of these claims and the adequacy of our recorded reserves may change should we encounter adverse developments in the defense of these claims.

In addition, we are a defendant in legal actions arising from normal business activities. Management, after consultation with legal counsel, is of the opinion that any liability resulting from these actions will not have a material impact on our financial condition and operating results.

~~Stock-based compensation~~

Pursuant to our adoption of SFAS No. 123(R), “Share-Based Payment” on January 1, 2006, we now recognize stock-based compensation expense on options granted under our stock option plans. This expense is based on the fair value of the respective stock award and is recognized ratably over the underlying vesting period. We utilized the modified-prospective method prescribed by SFAS No. 123(R) in transitioning to this new accounting treatment for stock-based compensation expense. This method requires that stock-based compensation expense be recorded for all stock options granted subsequent to January 1, 2006 and all unvested stock options that existed upon the adoption of SFAS No. 123(R) in 2006.

~~United Fire & Casualty Company and Subsidiaries~~

As allowed by SFAS No. 123(R), we have continued to utilize the Black-Scholes option pricing method to establish the fair value of options granted under our stock option plans. Our determination of fair value of stock-based payment awards on the date of grant using this option-pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the expected volatility in our stock price, the expected dividends to be paid over the term of the awards, the risk-free interest rate and actual and projected employee stock option exercise activity. Any changes in these assumptions may materially affect the estimated fair value of the equity-based award.

Prior to the adoption of SFAS No. 123(R), we presented the tax benefit of stock option exercises as an operating cash flow. Upon the adoption of SFAS No. 123(R), tax benefits resulting from tax deductions in excess of compensation cost recognized for those options are classified as financing cash flows. This change in presentation did not have a material impact on the amounts reported in the accompanying consolidated statement of cash flows for the year ended December 31, 2006.

For the year ended December 31, 2006, we recognized stock-based compensation expense under SFAS No. 123(R) of $1,175,000, which resulted in a $.03 decrease in our basic and diluted earnings per share. As of December 31, 2006, we have approximately $3,553,000 in stock-based compensation that has yet to be recognized through our results of operations pursuant to SFAS No. 123(R). This compensation will be recognized as the underlying stock options vest over a term of five years. Prior to January 1, 2006, the reporting of pro forma stock-based compensation was limited to disclosure in the notes to the Consolidated Financial Statements. Pro forma net income was $8,653,000 and $78,590,000 for the years ended December 31, 2005 and 2004, respectively. These amounts include $391,000 and $227,000 in pro forma stock-based compensation expense (net of the related tax effects), which would have resulted in a $0.02 and $0.01 decrease in pro forma basic and diluted earnings per share for the years ended December 31, 2005 and 2004, respectively.

~~Employee benefit obligations~~

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires the recognition of the overfunded or underfunded status of pension plans and other postretirement plans as an asset or liability on the balance sheet, with changes occurring during future years reflected through the accumulated other comprehensive income portion of stockholders’ equity, net of tax, effective December 31, 2006. However, SFAS No. 158 does not change the amount of net periodic benefit cost to be recognized as a component of current period operations. SFAS No. 158 also requires the measurement of the funded status of a plan to match that of the date of our year-end Consolidated Financial Statements, eliminating the use of earlier measurement dates that were previously permissible; we currently utilize December 31 as the measurement date for plan assets and obligations and, therefore, comply with this requirement. The adoption of SFAS No. 158 resulted in the recognition of an after-tax charge of $10,168,000 on our consolidated balance sheet at December 31, 2006.

~~United Fire & Casualty Company and Subsidiaries~~

~~The table below displays the impact that SFAS No. 158 had on our Consolidated Financial Statements for December 31, 2006.~~

Incremental Effect of SFAS No. 158 on our Consolidated Balance Sheets at December 31, 2006

(Dollars in Thousands)

Before Application
of SFAS No. 158

Adjustments

After Application
of SFAS No. 158

Assets:

Prepaid pension benefits ⁽¹⁾

$
8,054

$
(8,054
)
$
—

Total assets

2,784,121

(8,054
)

2,776,067

Liabilities:

Liability for pension benefits ⁽²⁾

$
—

$
7,774

$
7,774

Liability for health and dental benefits ⁽²⁾

14,809

(185
)

14,624

Deferred income taxes

49,439

(5,475
)

43,964

Total liabilities

2,093,145

2,114

2,095,259

Stockholders' Equity:

Accumulated other comprehensive income

$
93,519

$
(10,168
)
$
83,351

Total stockholders' equity

690,976

(10,168
)

680,808

~~(1)~~

~~Reported as a component of other assets.~~

~~(2)~~

~~Reported as a component of accrued expenses and other liabilities.~~

~~New accounting standards~~

In July 2006, FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” was issued to clarify accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as the derecognition of a tax position previously recognized in the financial statements. FIN 48 also prescribes expanded disclosure requirements for unrecognized tax benefits recorded. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt this interpretation effective January 1, 2007 and do not expect the adoption of FIN 48 to have a material impact on our Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurement. Where applicable, SFAS No. 157 simplifies and codifies fair value related guidance previously issued within GAAP. Although SFAS No. 157 does not require any new fair value measurements, its application may, in certain instances, change current practice. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently reviewing SFAS No. 157 to determine its impact on our Consolidated Financial Statements upon adoption.

In September 2005, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts.” SOP 05-1 provides guidance on accounting by insurance companies for deferred policy acquisition costs on internal replacements made primarily to contracts defined by SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” as short-duration and long-duration life insurance contracts, and by SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gain and Losses from the Sale of Investments,” as investment contracts. The SOP defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. ~~This SOP is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We will adopt~~Our adoption of SOP 05-1 effective January 1, 2007, ~~and do~~did not ~~expect it to~~ have a material impact on the amounts reported for deferred life policy acquisition costs in our Consolidated Financial Statements.

Investments

Investments in held-to-maturity fixed maturities are recorded at amortized cost. We have the ability and positive intent to hold these investments until maturity. Available-for-sale fixed maturities, trading securities, equity securities and other long-term investments are recorded at fair value. Mortgage loans are recorded at cost. Policy loans are recorded at the outstanding loan amount due from policyholders. Included in investments at December 31, 2007 and 2006, are securities on deposit with, or available to, various regulatory authorities as required by law, with fair values of $1,356,649,000 and $1,389,654,000, respectively.

In 2007, 2006 and 2005, we impaired certain holdings in our investment portfolio as a result of other-than-temporary declines in market value and recorded a pre-tax realized loss of $105,000, $406,000 and $1,208,000, respectively. We continue to review all of our investment holdings for appropriate valuation on an ongoing basis. Refer to Note 2 “Summary of Investments” in this item for a discussion of our accounting policy for impairment recognition.

Reinsurance

Cash and cash equivalents

We made payments for income taxes of $50,513,000, $25,306,000 and $37,903,000 during 2007, 2006 and 2005, respectively. In addition, we received refunds totaling $7,783,000 and $27,844,000 in 2007 and 2006, respectively, due to carryback of losses and the overpayment of 2005 tax. There were no significant payments of interest in 2007, 2006 and 2005, other than interest credited to policyholders’ accounts.

United Fire & Casualty Company and Subsidiaries

Property, equipment and depreciation

Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the underlying assets. Depreciation expense totaled $3,513,000, $3,418,000 and $3,687,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

Amortization of intangibles

Amortization expense totaled $60,000 for each of the three years ended December 31, 2007, 2006 and 2005.

Income taxes

In June 2006, FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” was issued to clarify accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as the derecognition of a tax position previously recognized in the financial statements. FIN 48 also prescribes expanded disclosure requirements for unrecognized tax benefits recorded. Our adoption of this interpretation effective January 1, 2007, had no impact on our consolidated financial position.

We have recognized no liability for unrecognized tax benefits at January 1, 2007 or at any time during 2007. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.

We file income tax returns under U.S. federal and various state jurisdictions. We are no longer subject to U.S. federal income tax examination by tax authorities for years before 2004 and state income tax examination for years before 2002. There are no ongoing examinations of income tax returns by federal or state tax authorities.

Contingent liabilities

We have been named as a defendant in various lawsuits, including actions seeking certification from the court to proceed as a class action suit and actions filed by individual policyholders, relating to disputes arising from damages that occurred as a result of Hurricane Katrina in 2005. As of December 31, 2007, there were in excess of 400 such cases pending, approximately 20 of which were styled as class actions. These cases have been filed in both Louisiana state courts and federal district courts. These cases involve, among other claims, disputes as to the amount of reimbursable claims in particular cases, as well as the scope of insurance coverage under homeowners and commercial property policies due to flooding, civil authority actions, loss of use and business interruption. Certain of these cases also claim a breach of duty of good faith or violations of Louisiana insurance claims-handling laws or regulations and involve claims for punitive or exemplary damages, while other cases claim that under Louisiana’s so-called “Valued Policy Law”, the insurers must pay the total insured value of a home that is totally destroyed if

United Fire & Casualty Company and Subsidiaries

any portion of such damage was caused by a covered peril, even if the principal cause of the loss was an excluded peril. Other cases challenge the scope or enforceability of the water damage exclusion in the policies.

Several actions pending against various insurers, including us, were consolidated for purposes of pretrial discovery and motion practice under the caption In re Katrina Canal Breaches Consolidated Litigation, Civil Action No. 05-4182 in the United States District Court, Eastern District of Louisiana. On November 27, 2006, the Federal District Court issued an Order in these consolidated cases denying our motion to dismiss. The Court held that the flood exclusions utilized in the forms of homeowners and commercial lines policies issued by us and a number of other insurance carriers were ambiguous because such exclusions did not specify that they applied to flooding caused by negligent acts or omissions as well as to flooding caused by natural incidents such as Acts of God. The plaintiffs in these cases claim, among other things, that the efficient proximate cause of their losses was the third-party negligence of Orleans Levee District. They also claim that the Levee District was negligent in the maintenance of the canal walls or in its failure to warn the plaintiffs and others of the impending water intrusion. On August 2, 2007 the United States Court of Appeals, Fifth Circuit, issued an opinion reversing the District Court and finding the water damage exclusion to be unambiguous and enforceable. The plaintiffs in these cases have sought review in the United States Supreme Court.

We intend to vigorously defend the flood exclusion matter and other cases related to losses incurred in connection with Hurricane Katrina. While we believe that the flood exclusion at issue is unambiguous and enforceable, the Louisiana Supreme Court could rule that our flood exclusions do not exclude losses from flooding caused by third-party negligence, that such negligence was the efficient proximate cause of such flooding, or that such an exclusion is inapplicable where any portion of a loss is attributable to a covered peril. Such a ruling would likely have a material adverse effect on our financial position, as well as on our results of operations. We have established our loss and loss settlement expense reserves on the assumption that the flood exclusion will be found to be enforceable and effective to exclude losses caused by third-party negligence, as well as by Acts of God, and that the application of the Valued Policy Law will not result in our having to pay damages for perils not otherwise covered. We believe that, in the aggregate, these reserves should be adequate. However, our evaluation of these claims and the adequacy of recorded reserves may change if we encounter adverse developments in the further defense of these claims.

We consider all of our other litigation pending at December 31, 2007, to be ordinary, routine, and incidental to our business.

Stock-based compensation

Pursuant to our adoption of SFAS No. 123(R), “Share-Based Payment” on January 1, 2006, we recognize stock-based compensation expense on options granted under our stock option plans ratably over the underlying vesting period which is five years. This expense is based on the fair value of the respective stock award and is recognized ratably over the underlying vesting period. We utilized the modified-prospective method prescribed by SFAS No. 123(R) in transitioning to this new accounting treatment for stock-based compensation expense. This method requires that stock-based compensation expense be recorded for all stock options granted subsequent to January 1, 2006 and all unvested stock options that existed upon the adoption of SFAS No. 123(R) in 2006.

We utilize the Black-Scholes option pricing method to establish the fair value of options granted under our stock option plans. Our determination of the fair value of stock-based payment awards on the date of grant using this option-pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the expected volatility in our stock price, the expected dividends to be paid over the term of the awards, the risk-free interest rate and actual and projected employee stock option exercise activity. Any changes in these assumptions may materially affect the estimated fair value of the award.

United Fire & Casualty Company and Subsidiaries

For the years ended December 31, 2007 and 2006, we recognized stock-based compensation expense of $1,377,000 and $1,175,000, respectively, which resulted in a $.03 decrease in our basic and diluted earnings per share for both years. As of December 31, 2007, we have approximately $4,188,000 in stock-based compensation expense that has yet to be recognized through our results of operations. This compensation will be recognized as the underlying stock options vest over a term of five years. Prior to January 1, 2006, the reporting of pro forma stock-based compensation expense was limited to disclosure in the notes to the Consolidated Financial Statements. Pro forma net income was $8,653,000 for the year ended December 31, 2005. This amount included $391,000 in pro forma stock-based compensation expense (net of the related tax effects), which would have resulted in a $0.02 decrease in pro forma basic and diluted earnings per share for the year ended December 31, 2005.

Employee benefit obligations

The table below displays the impact that SFAS No. 158 had on our Consolidated Financial Statements for December 31, 2006.

Incremental Effect of SFAS No. 158 on our Consolidated Balance Sheets at December 31, 2006
(Dollars in Thousands)	Before Application of SFAS No. 158		Adjustments			After Application of SFAS No. 158

Assets:
Prepaid pension benefits ⁽¹⁾	$	8,054	$	(8,054	)	$	—
Total assets		2,784,121		(8,054	)		2,776,067

Liabilities:
Liability for pension benefits ⁽²⁾	$	—	$	7,774		$	7,774
Liability for health and dental benefits ⁽²⁾		14,809		(185	)		14,624
Deferred income taxes		49,439		(5,475	)		43,964
Total liabilities		2,093,145		2,114			2,095,259

Stockholders' Equity:
Accumulated other comprehensive income	$	93,519	$	(10,168	)	$	83,351
Total stockholders' equity		690,976		(10,168	)		680,808

(1)	Reported as a component of other assets.

(2)	Reported as a component of accrued expenses and other liabilities.

The underfunded status of our employee benefit plans increased by $5,746,000 in 2007, which resulted in a decrease of $3,938,000 (net of tax of $2,121,000) to accumulated other comprehensive income as of December 31, 2007.

United Fire & Casualty Company and Subsidiaries

New accounting standards

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure and report many financial instruments and certain other assets and liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities the opportunity to reduce the complexity in accounting for financial instruments and to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We have elected not to report any financial assets or liabilities at fair value under SFAS No. 159 on January 1, 2008.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurement. Where applicable, SFAS No. 157 simplifies and codifies previously issued guidance on fair value. Although SFAS No. 157 does not require any new fair value measurements, its application may, in certain instances, change current practice. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Our adoption of SFAS No. 157 effective January 1, 2008, will not have any impact on the amounts reported in our Consolidated Financial Statements. However, we are currently evaluating the impact that the adoption of SFAS No. 157 will have on the disclosures made in our Consolidated Financial Statements.

United Fire & Casualty Company and Subsidiaries

NOTE 2. SUMMARY OF INVESTMENTS

A reconciliation of the amortized cost (cost for equity securities) to fair values of investments in held-to-maturity and available-for-sale fixed maturity and equity securities as of December 31, ~~2006~~2007 and ~~2005,~~2006, is as ~~follows.~~follows:

December 31, 2006	(Dollars in Thousands)
December 31, 2007									(Dollars in Thousands)
Type of Investment	Cost or Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value			Cost or Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value
HELD-TO-MATURITY
Fixed maturities
Bonds:
United States government:
Collateralized mortgage obligations	$	3,954	$	72	$	—	$	4,026	$	2,911	$	69	$	—	$	2,980
Mortgage-backed securities		979		89		—		1,068		794		81		—		875
States, municipalities and political subdivisions		29,653		871		76		30,448		20,131		520		70		20,581
All foreign bonds		2,001		38		—		2,039		2,000		12		—		2,012
All other corporate bonds		8,076		72		14		8,134		1,507		26	0	—		1,533
Total Held-to-Maturity Fixed Maturities	$	44,663	$	1,142	$	90	$	45,715	$	27,343	$	708	$	70	$	27,981
AVAILABLE-FOR-SALE
Fixed maturities
Bonds:
United States government:
Collateralized mortgage obligations	$	21,040	$	193	$	5	$	21,228	$	19,826	$	598	$	12	$	20,412
Mortgage backed securities		3		—		—		3
Mortgage-backed securities										3		—		—		3
All other government		165,050		107		5,051		160,106		147,402		439		2,398		145,443
States, municipalities and political subdivisions		395,376		9,922		358		404,940		524,841		11,882		390		536,333
All foreign bonds		52,732		594		317		53,009		37,354		773		202		37,925
Public utilities		287,858		6,050		1,427		292,481		249,812		7,053		762		256,103
Corporate bonds:
Collateralized mortgage obligations		235		—		62		173		125		—		58		67
All other corporate bonds		865,586		16,867		6,165		876,288		807,552		19,338		10,366		816,524
Total Available-For-Sale Fixed Maturities	$	1,787,880	$	33,733	$	13,385	$	1,808,228	$	1,786,915	$	40,083	$	14,188	$	1,812,810
Equities
Equity securities
Common stocks:
Public utilities	$	11,123	$	9,547	$	274	$	20,396	$	7,884	$	6,261	$	178	$	13,967
Bank, trust and insurance companies		12,840		74,763		28		87,575		13,610		58,658		576		71,692
All other common stocks		41,492		43,951		436		85,007		42,403		52,028		2,596		91,835
Nonredeemable preferred stocks		230		—		1		229		230		—		4		226
Total Available-for-Sale Equity Securities	$	65,685	$	128,261	$	739	$	193,207	$	64,127	$	116,947	$	3,354	$	177,720
Total Available-for-Sale Securities	$	1,853,565	$	161,994	$	14,124	$	2,001,435	$	1,851,042	$	157,030	$	17,542	$	1,990,530

United Fire & Casualty Company and Subsidiaries

December 31, 2006	(Dollars in Thousands)
Type of Investment	Cost or Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value
HELD-TO-MATURITY
Fixed maturities
Bonds:
United States government:
Collateralized mortgage obligations	$	3,954	$	72	$	—	$	4,026
Mortgage-backed securities		979		89		—		1,068
States, municipalities and political subdivisions		29,653		871		76		30,448
All foreign bonds		2,001		38		—		2,039
All other corporate bonds		8,076		72		14		8,134
Total Held-to-Maturity Fixed Maturities	$	44,663	$	1,142	$	90	$	45,715
AVAILABLE-FOR-SALE
Fixed maturities
Bonds:
United States government:
Collateralized mortgage obligations	$	21,040	$	193	$	5	$	21,228
Mortgage-backed securities		3		—		—		3
All other government		165,050		107		5,051		160,106
States, municipalities and political subdivisions		395,376		9,922		358		404,940
All foreign bonds		52,732		594		317		53,009
Public utilities		287,858		6,050		1,427		292,481
Corporate bonds:
Collateralized mortgage obligations		235		—		62		173
All other corporate bonds		865,586		16,867		6,165		876,288
Total Available-For-Sale Fixed Maturities	$	1,787,880	$	33,733	$	13,385	$	1,808,228
Equity securities:
Common stocks:
Public utilities	$	11,123	$	9,547	$	274	$	20,396
Bank, trust and insurance companies		12,840		74,763		28		87,575
All other common stocks		41,492		43,951		436		85,007
Nonredeemable preferred stocks		230		—		1		229
Total Available-for-Sale Equity Securities	$	65,685	$	128,261	$	739	$	193,207
Total Available-for-Sale Securities	$	1,853,565	$	161,994	$	14,124	$	2,001,435

United Fire & Casualty Company and Subsidiaries

December 31, 2005

(Dollars in Thousands)

Type of Investment

Cost or
Amortized Cost

Gross
Unrealized
Appreciation

Gross
Unrealized
Depreciation

Fair Value

HELD-TO-MATURITY

Fixed maturities

Bonds:

United States government:

Collateralized mortgage obligations

$
4,518

$
135

$
—

$
4,653

Mortgage-backed securities

1,342

140

—

1,482

All other government

1,200

8

—

1,208

States, municipalities and political subdivisions

51,832

1,894

69

53,657

All foreign bonds

2,002

95

—

2,097

All other corporate bonds

11,871

254

—

12,125

Total Held-to-Maturity Fixed Maturities

$
72,765

$
2,526

$
69

$
75,222

AVAILABLE-FOR-SALE

Fixed maturities

Bonds:

United States government:

Collateralized mortgage obligations

$
25,046

$
699

$
—

$
25,745

All other government

181,326

447

4,394

177,379

States, municipalities and political subdivisions

282,672

7,688

393

289,967

All foreign bonds

57,224

1,346

332

58,238

Public utilities

306,091

12,433

1,456

317,068

Corporate bonds:

Collateralized mortgage obligations

2,837

48

340

2,545

All other corporate bonds

883,137

29,594

7,724

905,007

Redeemable preferred stocks

1,150

12

—

1,162

Total Available-For-Sale Fixed Maturities

$
1,739,483

$
52,267

$
14,639

$
1,777,111

Equities

Common stocks:

Public utilities

$
10,019

$
6,731

$
753

$
15,997

Bank, trust and insurance companies

12,480

67,799

184

80,095

All other common stocks

27,110

36,007

913

62,204

Nonredeemable preferred stocks

230

—

4

226

Total Available-for-Sale Equity Securities

$
49,839

$
110,537

$
1,854

$
158,522

Total Available-for-Sale Securities

$
1,789,322

$
162,804

$
16,493

$
1,935,633

~~United Fire & Casualty Company and Subsidiaries~~

The amortized cost and fair value of held-to-maturity, available-for-sale and trading ~~fixed maturities~~securities at December 31, ~~2006,~~2007, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in Thousands)	Held-To-Maturity				Available-For-Sale				Trading				Held-To-Maturity				Available-For-Sale				Trading
December 31, 2006	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
December 31, 2007													Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	6,615	$	6,648	$	208,458	$	208,344	$	1,953	$	2,026	$	3,441	$	3,468	$	212,180	$	212,630	$	2,560	$	3,204
Due after one year through five years		9,720		9,947		584,913		593,306		2,560		2,984		8,420		8,628		589,969		606,036		—		—
Due after five years through 10 years		21,404		22,013		575,828		582,503		—		—		11,777		12,030		623,751		629,708		—		—
Due after 10 years		1,991		2,013		397,403		402,671		5,714		6,567		—		—		341,061		343,954		7,363		7,589
Mortgage-backed securities		979		1,068		3		3		—		—		794		875		3		3		—		—
Collateralized mortgage obligations		3,954		4,026		21,275		21,401		—		—		2,911		2,980		19,951		20,479		—		—
	$	44,663	$	45,715	$	1,787,880	$	1,808,228	$	10,227	$	11,577	$	27,343	$	27,981	$	1,786,915	$	1,812,810	$	9,923	$	10,793

Proceeds from sales of available-for-sale securities during 2007, 2006 and 2005 were $3,689,000, $2,400,000 and ~~2004 were $2,400,000,~~ $5,720,000, ~~and $11,541,000,~~ respectively. Gross gains of $929,000, $235,000 ~~$2,249,000~~ and ~~$1,139,000~~$2,249,000 and gross losses of $0, $16,000 ~~$1,135,000~~ and ~~$2,579,000~~$1,135,000 were realized on those sales in 2007, 2006 ~~2005~~ and ~~2004,~~2005, respectively.

Our investment portfolio includes trading securities with embedded derivatives. These securities, which are primarily convertible redeemable preferred debt securities, are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of realized investment gains. Our portfolio of trading securities had a fair value of $10,793,000, at December 31, 2007 and $11,577,000 at December 31, ~~2006 and $4,881,000 at December 31, 2005.~~2006.

Proceeds from the sale of trading securities were $5,815,000, $995,000 and $11,140,000 in 2007, 2006 and ~~$3,992,000 in 2006,~~ 2005, ~~and 2004,~~ respectively. Gross gains of $2,081,000, $232,000, ~~$482,000~~ and ~~$399,000~~$482,000 and gross losses of $29,000, $42,000 ~~$106,000~~ and ~~$11,000~~$106,000 were realized on these sales in 2007, 2006 ~~2005~~ and ~~2004,~~2005, respectively. Additional gross gains (losses) of $(480,000), $1,367,000 ~~$(491,000)~~ and ~~$63,000~~$(491,000) were realized in 2007, 2006 ~~2005~~ and ~~2004,~~2005, respectively, which were attributable to the change in fair value of these securities.

There were no sales of held-to-maturity securities during 2007, 2006 ~~2005~~ or ~~2004.~~2005.

A summary of net realized investment gains resulting from sales, calls and other-than-temporary impairments and a summary of net changes in unrealized investment appreciation, less applicable income taxes, is as ~~follows.~~follows:

(Dollars in Thousands)
Years Ended December 31	2006			2005			2004			2007			2006			2005
Net realized investment gains
Fixed maturities	$	4,700		$	2,035		$	2,028		$	2,078		$	3,143		$	2,150
Equity securities		5,264			2,505			416			6,020			5,265			2,505
Other investments		1			—			1,616
Trading securities											1,572			1,557			(115	)
	$	9,965		$	4,540		$	4,060		$	9,670		$	9,965		$	4,540
Net changes in unrealized investment appreciation
Available-for-sale fixed maturities and equity securities	$	1,703		$	(54,246	)	$	14,890		$	(8,382	)	$	1,703		$	(54,246	)
Deferred policy acquisition costs		9,188			27,669			5,229			(3,831	)		9,188			27,669
Income tax effect		(3,812	)		9,302			(7,041	)		4,273			(3,812	)		9,302
Change in net unrealized appreciation	$	7,079		$	(17,275	)	$	13,078		$	(7,940	)	$	7,079		$	(17,275	)

United Fire & Casualty Company and Subsidiaries

Net investment income for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004,~~2005, is composed of the ~~following.~~following:

(Dollars in Thousands)
Years Ended December 31	2006		2005			2004		2007			2006		2005
Investment income
Interest on fixed maturities	$	104,767	$	107,139		$	104,958	$	103,632		$	102,550	$	106,295
Dividends on equity securities		4,862		4,839			3,687		6,190			4,862		4,841
Income (loss) on other long-term investments⁽¹⁾		366		(487	)		1,174		(954	)		366		(487	)
Interest on mortgage loans		1,682		1,708			2,073		1,712			1,682		1,708
Interest on short-term investments		12,559		8,439			3,651		2,634			2,268		878
Interest on cash and cash equivalents									12,327			12,405		7,818
Other		1,712		1,219			1,052		1,208			1,815		1,804
Total investment income	$	125,948	$	122,857		$	116,595	$	126,749		$	125,948	$	122,857
Less investment expenses		3,967		4,010			5,121		4,310			3,967		4,010
Investment income, net	$	121,981	$	118,847		$	111,474	$	122,439		$	121,981	$	118,847

(1) ~~Note:~~ Includes an adjustment to reflect the change in the ~~market~~fair value of our limited partnership investments.

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires that other-than-temporary impairment charges be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security, or that the anticipated recovery in market value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date and are included in net realized gains and losses. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery.

On the following ~~page is~~pages are a summary of fixed maturity and equity securities that were in an unrealized loss position at December 31, 2007 and 2006. We have the ability and positive intent to hold the securities until such time as the value recovers or the securities mature. Further, we believe the deterioration in value of our fixed maturity portfolio is primarily attributable to changes in market interest rates and not the credit quality of the issuer. We attribute the deterioration in value of our equity security portfolio to usual market volatility and not to any permanent financial hardships encountered by the underlying companies in which we are invested. Therefore, we have concluded that our unrealized losses are temporary in nature.

United Fire & Casualty Company and Subsidiaries

(Dollars in Thousands)
December 31, 2007	Less than 12 months					12 months or longer					Total
Type of Investment	Number of Issues	Fair Value		Gross Unrealized Depreciation		Number of Issues	Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation
HELD-TO-MATURITY
Fixed maturities
Bonds:
States, municipalities and political subdivisions	—	$	—	$	—	2	$	1,214	$	70	$	1,214	$	70
Total Held-to-Maturity Fixed Maturities	—	$	—	$	—	2	$	1,214	$	70	$	1,214	$	70

AVAILABLE-FOR-SALE
Fixed maturities
Bonds:
United States government:
Collateralized mortgage obligations	—	$	—	$	—	1	$	2,269	$	12	$	2,269	$	12
All other government	3		14,985		613	16		69,727		1,785		84,712		2,398
States, municipalities and political subdivisions	30		28,176		196	7		5,918		194		34,094		390
All foreign bonds	2		4,559		173	2		6,963		29		11,522		202
Public utilities	7		20,567		109	14		41,169		653		61,736		762
Corporate bonds:
Collateralized mortgage obligations	—		—		—	1		67		58		67		58
All other corporate bonds	42		99,748		6,785	32		101,263		3,581		201,011		10,366
Total Available-For-Sale Fixed Maturities	84	$	168,035	$	7,876	73	$	227,376	$	6,312	$	395,411	$	14,188
Equity securities:
Common stocks	49	$	11,832	$	2,885	8	$	4,700	$	465	$	16,532	$	3,350
Nonredeemable preferred stocks	—		—		—	3		226		4		226		4
Total Available-for-Sale Equity Securities	49	$	11,832	$	2,885	11	$	4,926	$	469	$	16,758	$	3,354
Total Available-for-Sale Securities	133	$	179,867	$	10,761	84	$	232,302	$	6,781	$	412,169	$	17,542
Total	133	$	179,867	$	10,761	86	$	233,516	$	6,851	$	413,383	$	17,612

United Fire & Casualty Company and Subsidiaries

(Dollars in Thousands)
December 31, 2006	Less than 12 months					12 months or longer					Total				Less than 12 months					12 months or longer					Total
Type of Investment	Number of Issues	Fair Value		Gross Unrealized Depreciation		Number of Issues	Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation		Number of Issues	Fair Value		Gross Unrealized Depreciation		Number of Issues	Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation
HELD-TO-MATURITY
Fixed maturities
Bonds:
States, municipalities and political subdivisions	1	$	387	$	19	2	$	911	$	57	$	1,298	$	76	1	$	387	$	19	2	$	911	$	57	$	1,298	$	76
All other corporate bonds	4		667		14	1		17		—		684		14	4		667		14	1		17		—		684		14
Total Held-to-Maturity Fixed Maturities	5	$	1,054	$	33	3	$	928	$	57	$	1,982	$	90	5	$	1,054	$	33	3	$	928	$	57	$	1,982	$	90

AVAILABLE-FOR-SALE
Fixed maturities
Bonds:
United states government:
Collateralized mortgage obligations	1	$	2,543	$	5	—	$	—	$	—	$	2,543	$	5	1	$	2,543	$	5	—	$	—	$	—	$	2,543	$	5
All other government	5		13,083		39	34		138,184		5,013		151,267		5,052	5		13,083		39	34		138,184		5,013		151,267		5,052
States, municipalities and political subdivisions	19		18,672		123	4		4,998		235		23,670		358	19		18,672		123	4		4,998		235		23,670		358
All foreign bonds	3		8,814		147	3		10,774		170		19,588		317	3		8,814		147	3		10,774		170		19,588		317
Public utilities	9		31,004		203	18		58,131		1,225		89,135		1,428	9		31,004		203	18		58,131		1,225		89,135		1,428
Corporate bonds:
Collateralized mortgage obligations	—		—		—	1		174		62		174		62	—		—		—	1		174		62		174		62
All other corporate bonds	46		143,024		1,001	56		193,789		5,162		336,813		6,163	46		143,024		1,001	56		193,789		5,162		336,813		6,163
Total Available-For-Sale Fixed Maturities	83	$	217,140	$	1,518	116	$	406,050	$	11,867	$	623,190	$	13,385	83	$	217,140	$	1,518	116	$	406,050	$	11,867	$	623,190	$	13,385
Equities:
Equity securities:
Common stocks	9	$	10,666	$	473	8	$	2,932	$	266	$	13,598	$	739	9	$	10,666	$	473	7	$	2,703	$	265	$	13,369	$	738
Nonredeemable preferred stocks															—		—		—	1		229		1		229		1
Total Available-for-Sale Equity Securities	9	$	10,666	$	473	8	$	2,932	$	266	$	13,598	$	739	9	$	10,666	$	473	8	$	2,932	$	266	$	13,598	$	739
Total Available-for-Sale Securities	92	$	227,806	$	1,991	124	$	408,982	$	12,133	$	636,788	$	14,124	92	$	227,806	$	1,991	124	$	408,982	$	12,133	$	636,788	$	14,124
Total	97	$	228,860	$	2,024	127	$	409,910	$	12,190	$	638,770	$	14,214	97	$	228,860	$	2,024	127	$	409,910	$	12,190	$	638,770	$	14,214

United Fire & Casualty Company and Subsidiaries

NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the particular asset or liability shown.

In most cases, quoted market prices were used to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. Where quoted market prices do not exist, fair value is based upon estimated realizable value.

The estimated fair value of mortgage loans is based upon discounted cash flows, utilizing the market rate of interest for similar loans in effect at the valuation date.

The estimated fair value of policy loans is equivalent to carrying value. No policy loans are made for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders’ account balance for interest-sensitive policies.

~~The estimated fair value of mortgage loans is based upon discounted cash flows, utilizing the market rate of interest for similar loans in effect at the valuation date.~~ Other long-term investments consist primarily of holdings in limited partnership funds that are valued by the various fund managers. In management’s opinion, these values represent fair value at December 31, ~~2006~~2007 and ~~2005.~~2006.

For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value, due to its short-term nature.

The fair value of the liabilities for annuity products that are in a benefit payment phase, guaranteed investment contracts and structured settlements is based on a discount rate of 5.75 percent ~~and 6.25 percent~~ at December 31, ~~2006~~2007 and ~~2005, respectively.~~2006. The fair value of annuities currently in an accumulation phase is based on the underlying net cash surrender value.

~~United Fire & Casualty Company and Subsidiaries~~

A summary of the carrying value and estimated fair value of our financial instruments at December 31, ~~2006~~2007 and ~~2005,~~2006, is as ~~follows.~~follows:

At December 31	2006				2005				2007				2006
(Dollars In Thousands)	Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments:
Held-to-maturity fixed maturities	$	45,715	$	44,663	$	75,222	$	72,765	$	27,981	$	27,343	$	45,715	$	44,663
Available-for-sale fixed maturities		1,808,228		1,808,228		1,777,111		1,777,111		1,812,810		1,812,810		1,808,228		1,808,228
Equity securities										177,720		177,720		193,207		193,207
Trading securities		11,577		11,577		4,881		4,881		10,793		10,793		11,577		11,577
Equity securities		193,207		193,207		158,522		158,522
Mortgage loans		27,282		27,789		24,348		23,637		18,188		19,161		27,282		27,789
Policy loans		7,833		7,833		8,193		8,193		7,622		7,622		7,833		7,833
Other long-term investments		11,777		11,777		11,036		11,036		12,793		12,793		11,777		11,777
Short-term investments		28,268		28,268		35,485		35,485		78,334		78,334		28,268		28,268
Cash and cash equivalents		255,045		255,045		162,791		162,791		252,565		252,565		255,045		255,045
Accrued investment income		28,383		28,383		30,232		30,232		28,431		28,431		28,383		28,383
Liabilities
Policy Reserves:
Annuity (Accumulations)	$	876,184	$	888,693	$	955,165	$	965,678	$	811,262	$	827,793	$	876,184	$	888,693
Annuity (On-Benefits)		11,151		10,809		9,941		9,079
Annuity (Benefit Payments)										18,858		12,347		11,151		10,809
Structured settlements		706		791		749		881		680		822		706		791
Guaranteed investment contracts		24,739		25,618		17,806		18,518		28,925		29,855		24,739		25,618

United Fire & Casualty Company and Subsidiaries

NOTE 4. SHORT-TERM BORROWINGS

We maintain a $50,000,000 bank line of credit. Under the terms of the agreement, interest on outstanding notes is payable at the lender’s prevailing prime rate minus 1.0 percent. There was no outstanding loan balances at December 31, ~~2006~~2007 and ~~2005,~~2006, nor did we borrow against this line of credit in 2007, 2006 ~~2005 and 2004.~~or 2005. As of December 31, ~~2006, $200,000~~2007, approximately $187,000 of the line of credit was allocated towards letters of credit we have issued as a result of our reinsurance operations.

NOTE 5. REINSURANCE

Property and casualty insurance segment

Reinsurance is a contract by which one insurer, called the reinsurer, agrees to cover under certain defined circumstances, a portion of the losses incurred by a primary insurer if a claim is made under a policy issued by the primary insurer. We have several programs that provide reinsurance coverage. This reinsurance coverage limits the risk of loss that we retain by reinsuring direct risks in excess of our retention limits. The following table provides a summary of ~~the~~our primary reinsurance treaties. Retention amounts reflect the accumulated retentions and co-participation of all layers ~~with~~within a treaty.

(Dollars in Thousands)	2006 Reinsurance Program					2005 Reinsurance Program					2007 Reinsurance Program					2006 Reinsurance Program
Type of Reinsurance Treaty	Stated Retention		Limits		Coverage	Stated Retention		Limits		Coverage	Stated Retention		Limits		Coverage	Stated Retention		Limits		Coverage
Casualty excess of loss	$	2,000	$	20,000	100% of $18,000	$	2,000	$	15,000	100% of $13,000	$	2,000	$	20,000	100% of $18,000	$	2,000	$	20,000	100% of $18,000
Property excess of loss	$	2,000	$	12,000	100% of $10,000	$	2,000	$	12,000	100% of $10,000	$	2,000	$	12,000	100% of $10,000	$	2,000	$	12,000	100% of $10,000
Umbrella excess of loss	$	1,000	$	10,000	100% of $9,000	$	1,000	$	5,000	100% of $4,000	$	1,000	$	10,000	100% of $9,000	$	1,000	$	10,000	100% of $9,000
Surety excess of loss	$	1,500	$	20,000	89% of $18,500	$	1,500	$	20,000	89% of $18,500	$	1,500	$	20,000	89% of $18,500	$	1,500	$	20,000	89% of $18,500
Property catastrophe, excess⁽¹⁾	$	15,000	$	185,000	95% of $170,000	$	10,000	$	125,000	95% of $115,000	$	20,000	$	200,000	95% of $180,000	$	15,000	$	185,000	95% of $170,000
Boiler and machinery		N/A	$	25,000	100% of $25,000		N/A	$	25,000	100% of $25,000		N/A	$	50,000	100% of $50,000		N/A	$	25,000	100% of $25,000

(1) For 2006, $20.0 million of the property catastrophe reinsurance coverage applied only to specific named perils.

The ceding of insurance does not legally discharge us from primary liability under our policies and we must pay the loss if the reinsurer fails to meet its obligations. We believe all reinsurance receivables are collectable.

Historically, we have acted as a reinsurer, assuming both property and casualty reinsurance from other insurance or reinsurance companies. Most of the business we have assumed is property reinsurance, with an emphasis on catastrophe coverage. The majority of our assumed reinsurance business expired on or before December 31, 2000. Late in 2006, we made the decision to cancel one of the largest remaining assumed contracts. This decision was made in response to an exposure base that was in excess of our risk tolerance levels as compared to the premium we were able to collect. We limit our exposure on our remaining assumed reinsurance contracts through selective renewal. However, we still have exposure related to the assumed reinsurance contracts that we have elected to continue writing and those that are in runoff status.

In addition, in the event that we incurred catastrophe losses covered by our reinsurance programs, our catastrophe reinsurance program would provide one guaranteed reinstatement at ~~100~~100.0 percent of the original premium. We also purchase reinsurance from the Florida Hurricane Catastrophe ~~Fund (“FHCF”).~~Fund. The level of reinsurance protection obtained through this fund is immaterial to our operations.

Our reinsurance assumed from foreign insurance companies is primarily accounted for using the periodic method, whereby premiums are recognized as revenue over the policy term and claims, including an estimate of IBNR claims, are recognized as they occur. The amount of reinsurance business assumed from foreign insurance companies is not material to our Consolidated Financial Statements.

United Fire & Casualty Company and Subsidiaries

Premiums, losses and loss settlement expenses related to our ceded and assumed business is ~~displayed in the table below.~~as follows:

(Dollars in Thousands)
Years Ended December 31	2006		2005		2004		2007		2006		2005
Ceded Business:
Written premiums ceded	$	47,018	$	36,073	$	28,191	$	41,046	$	47,018	$	36,073
Earned premiums ceded		44,455		36,180		28,674		43,979		44,455		36,180
Loss and loss settlement expenses ceded		25,203		150,505		5,464		9,278		25,203		150,505

Assumed Business:
Written premiums assumed	$	19,000	$	15,088	$	11,339	$	16,907	$	19,000	$	15,088
Earned premiums assumed		18,767		14,995		11,467		17,647		18,767		14,995
Loss and loss settlement expenses assumed		10,988		18,625		7,002		8,211		10,988		18,625

Life insurance segment

~~As of December 31, 2006 and 2005,~~ United Life Insurance Company has purchased reinsurance to limit the dollar amount of any one risk of loss. On standard individual life cases where the insured is age 65 or ~~less,~~younger, our retention is $200,000. On standard individual life cases where the insured is age 66 or older, our retention is $80,000. Our accidental death benefit rider on an individual policy is reinsured at 100 percent up to a maximum benefit of $250,000. Our group coverage, both life and accidental death and dismemberment, is reinsured at 50 percent. Catastrophe excess coverage applies when three or more insureds die in a catastrophic accident. For catastrophe excess claims, we retain the first $1,000,000 of ultimate net loss and the reinsurer agrees to indemnify us for the excess up to a maximum of $5,000,000. We supplement this coverage when appropriate with “known concentration” coverage. Known concentration coverage is typically tied to a specific event and time period, with a threshold of a minimum number of lives involved in the event, minimum event deductible (company’s retention) and a maximum payout.

(Dollars in Thousands)

Years Ended December 31
2006

2005

2004

Ceded Business:

Insurance in force ceded
$
658,817

$
546,135

$
479,409

Earned premiums ceded

1,497

1,473

1,355

Loss incurred ceded

596

1,404

2,313

Assumed Business:

Written premiums assumed
$
—

$
—

$
284

Earned premiums assumed

97

227

436

Loss incurred assumed

101

64

157

(Dollars in Thousands)
Years Ended December 31	2007		2006		2005
Ceded Business:
Insurance in force	$	737,561	$	658,817	$	546,135
Earned premiums		1,664		1,497		1,473
Loss and loss settlement expenses		813		596		1,404

Assumed Business:
Insurance in force	$	1,458	$	4,245	$	8,992
Earned premiums		36		97		227
Loss and loss settlement expenses		29		101		64

The ceding of insurance does not legally discharge United Life Insurance Company from primary liability under its policies. United Life Insurance Company must pay the loss if the reinsurer fails to meet its obligations. Approximately ~~91.0~~91.9 percent of ceded life insurance in force as of December 31, ~~2006,~~2007, has been ceded to four reinsurers. We believe all reinsurance receivables are collectable.

From 2002 to 2004, the life insurance segment assumed portions of credit life and accident and health insurance business from other insurance companies. We continue to have exposure related to our assumed reinsurance contracts that are in a runoff status.

United Fire & Casualty Company and Subsidiaries

NOTE 6. RESERVES FOR LOSS AND LOSS SETTLEMENT EXPENSES

Because property and casualty insurance reserves are estimates of the unpaid portions of losses that have occurred, including IBNR losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses and related loss settlement expenses may vary materially from recorded amounts, which are based on management's best estimates. We regularly update our reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported in losses and loss settlement expenses in the accompanying Consolidated Statements of Income in the period such changes are determined.

The table below provides an analysis of changes in our property and casualty loss and loss settlement expense reserves for 2007, 2006 ~~2005~~ and ~~2004~~2005 (net of reinsurance amounts). The favorable development in each year resulted from a re-estimation of loss reserves recorded at December 31 of the prior year. This re-estimation is primarily attributable to both the payment of claims in amounts less than the amounts reserved and from changes in loss reserves due to additional information on individual claims that we received after the reserves for those claims had been established. Another factor contributing to the redundancy recognized ~~during 2006, 2005 and 2004~~each year is the development of reserves for IBNR claims and loss settlement expenses at a level significantly less than ~~that reserved for~~anticipated at December 31 ~~2005 and 2004, respectively.~~of the prior year. We attribute this favorable development to the fact that during recent years, we have experienced abnormally low levels of noncatastrophe claims ~~frequency. Due~~frequency, due to ~~uncertainty surrounding loss development from Hurricane Katrina and the uncertainty surrounding the continuance of the extraordinarily low levels of noncatastrophe claims frequency experienced~~improvements in ~~recent years, we~~our underwriting process. We have not altered our reserving process as of December 31, ~~2006.~~2007.

Conditions and trends that have affected the reserve development for a given year may change. Therefore, such development cannot be used to extrapolate future reserve redundancies or deficiencies.

(Dollars in Thousands)
Years Ended December 31	2007			2006			2005
Gross liability for losses and loss settlement expenses at beginning of year	$	518,886		$	620,100		$	464,889
Reinsurance receivables		(40,560	)		(60,137	)		(28,609	)
Net liability for losses and loss settlement expenses at beginning of year	$	478,326		$	559,963		$	436,280
Losses and loss settlement expenses incurred for claims occurring during
Current year	$	291,046		$	303,469		$	453,342
Prior years		(45,201	)		(24,965	)		(77,484	)
Total incurred	$	245,845		$	278,504		$	375,858
Losses and loss settlement expense payments for claims occurring during
Current year	$	118,295		$	129,686		$	142,162
Prior years		148,593			230,455			110,013
Total paid	$	266,888		$	360,141		$	252,175
Net liability for losses and loss settlement expenses at end of year	$	457,283		$	478,326		$	559,963
Reinsurance receivables		38,800			40,560			60,137
Gross liability for losses and loss settlement expenses at end of year	$	496,083		$	518,886		$	620,100

We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our underwriters are aware of these exposures and use riders or endorsements to limit exposure.

(Dollars in Thousands)

Years Ended December 31

2006

2005

2004

Gross liability for losses and loss settlement expenses at beginning of year

$
620,100

$
464,889

$
427,047

Reinsurance receivables

(60,137
)

(28,609
)

(27,307
)
Net liability for losses and loss settlement expenses at beginning of year

$
559,963

$
436,280

$
399,740

Losses and loss settlement expenses incurred for claims occurring during

Current year

$
303,469

$
453,341

$
294,829

Prior years

(24,965
)

(77,484
)

(38,587
)
Total incurred

$
278,504

$
375,857

$
256,242

Losses and loss settlement expense payments for claims occurring during

Current year

$
129,686

$
142,161

$
118,807

Prior years

230,455

110,013

100,895

Total paid

$
360,141

$
252,174

$
219,702

Net liability for losses and loss settlement expenses at end of year

$
478,326

$
559,963

$
436,280

Reinsurance receivables

40,560

60,137

28,609

Gross liability for losses and loss settlement expenses at end of year

$
518,886

$
620,100

$
464,889

United Fire & Casualty Company and Subsidiaries

NOTE 7. STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDENDS AND RETAINED
EARNINGS RESTRICTIONS

Statutory capital and surplus in regards to policyholders at December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005 and net income for the years then ended are as ~~follows.~~follows:

(Dollars in Thousands)	Statutory Capital and Surplus		Statutory Net Income		Statutory Capital and Surplus		Statutory Net Income
2007
Property and casualty ⁽¹⁾					$	648,451	$	105,083
Life, accident and health						164,168		15,115
2006
Property and casualty (1)	$	575,983	$	71,564	$	575,983	$	71,564
Life, accident and health		151,676		18,006		151,676		18,006
2005
Property and casualty (1)	$	383,136	$	1,565	$	383,136	$	1,565
Life, accident and health		135,362		17,640		135,362		17,640
2004
Property and casualty (1)	$	383,900	$	66,693
Life, accident and health		124,463		16,932

(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.

We and our property and casualty and life insurance subsidiaries prepare our statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance department of the applicable ~~state~~states of domicile. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (“NAIC”), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.

All states require domiciled insurance companies to prepare statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. Statutory accounting practices primarily differ from GAAP in that policy acquisition and certain sales inducement costs are charged to expense as incurred, life insurance reserves are established based on different actuarial assumptions and the value of investments 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 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. At December 31, ~~2006,~~2007, both United Life Insurance Company and United Fire and its property and casualty subsidiaries and affiliate had statutory capital and surplus in regards to policyholders well in excess of their required levels.

The State of Iowa Insurance Department governs the amount of dividends that we may pay to stockholders without prior approval by the department. Based on these restrictions, we are allowed to make a maximum of ~~$71,564,000~~$105,083,000 in dividend distributions to stockholders in ~~2007~~2008 without prior approval. We paid dividends of $15,293,000, $13,196,000 ~~$11,817,000~~ and ~~$12,654,000~~$11,818,000 in 2007, 2006 ~~2005~~ and ~~2004,~~2005, respectively. Dividend payments by the insurance subsidiaries to United Fire are subject to similar restrictions in the states in which they are domiciled. In 2007, 2006 and 2005, United Fire received $4,000,000 in dividends each year from United Life Insurance Company. ~~There were no intercompany dividends~~Also, in ~~2004.~~ 2007, United Fire received an $8,000,000 dividend from American Indemnity Financial Corporation.

Pursuant to the sale of American Indemnity Company in May 2006, we implemented a plan of corporate reorganization. Part of this plan entailed the distribution of the majority of American Indemnity Company’s net assets to United Fire & Casualty Company. This distribution was recognized by United Fire in 2006 as a $34,700,000 intercompany dividend.

Federal income tax expense (benefit) is composed of the ~~following.~~following:

A reconciliation of income tax expense (computed at the applicable federal tax rate of 35 ~~percent in 2006, 2005 and 2004, respectively)~~percent) to the amount recorded in the accompanying Consolidated Financial Statements is as ~~follows.~~follows:

The significant components of the net deferred tax liability at December 31, ~~2006~~2007 and ~~2005,~~2006, are as ~~follows.~~follows:

As of December 31, ~~2006,~~2007, we have a gross deferred tax asset for net operating loss carryforwards totaling ~~$18,780,000,~~$17,215,000, all of which was acquired as part of our purchase of American Indemnity Financial Corporation. ~~These~~Net operating loss carryforwards totaling $769,000 and $5,491,000 expire in 2010 and 2011, respectively, and can only be used to offset future income of our property and casualty insurance segment. We are required to establish a

~~net operating loss carryforwards expire from 2009 through 2018, of which carryforwards of $11,085,000 expire from 2009 through 2011. We are required to establish a~~ valuation allowance for any portion of the gross deferred tax asset that we believe may not be realized. At December 31, ~~2006,~~2007, we recorded a valuation allowance of ~~$6,195,000, which relates to those net operating loss carryforwards that can only be used to offset future income of the property and casualty insurance segment.~~$5,647,000. As we ~~have determined~~determine that the benefit of these net operating losses can be realized, the related reduction in the deferred tax asset valuation allowance ~~was~~will be recorded as a reduction to our intangible asset for agency relationships, which resulted in the elimination of the carrying value of the intangible asset related to the acquisition of American Indemnity Financial Corporation in 2004. Beginning in 2006, these adjustments have been recognized as a reduction to current federal income tax expense.

A portion of life insurance income earned prior to 1984 was not taxable unless it exceeded certain statutory limitations or was distributed as dividends. As of December 31, 2004, such income, accumulated in the policyholders’ surplus account, totaled $2,121,000. At current corporate income tax rates, the associated tax was $742,000. The American Jobs Creation Act (“AJCA”) suspended the tax on distributions from the policyholder surplus accounts of stock life insurance companies for the tax years beginning after December 31, 2004 and before January 1, 2007. AJCA also reversed the order of accounts from which distributions are deemed to occur during this time. Distributions occurring during 2005 and 2006 were deemed to come from the policyholder surplus accounts, then from the shareholder surplus accounts and then from other accounts, which allowed the distribution of the amount in our policyholders’ surplus account to be made on a tax-free basis in 2005 or 2006. During 2005, the $2,121,000 in the policyholders’ surplus account was distributed.

The two main employee benefit plans we offer are a noncontributory defined benefit pension plan and an employee/retiree health and dental benefit plan.

~~Noncontributory defined~~Pension and other postretirement benefit ~~pension plan~~plans

We offer a noncontributory defined benefit pension plan in which all of our employees are eligible to participate after they have completed one year of service, attained 21 years of age and have met the hourly service requirements. ~~Under~~Retirement benefits under our pension plan ~~retirement benefits~~ are based on the number of years of service and level of compensation. Our policy is to fund this plan on a current basis to the extent that the contribution is deductible under existing tax regulations. We estimate that we will contribute approximately $4,000,000 to the plan in ~~2007.~~2008.

The following is a summary of the plan’s weighted average asset allocations at December 31, 2007 and 2006 by asset category:

Dividends on shares of United Fire common stock totaled ~~approximately~~$109,000 and $100,000 ~~during~~in 2007 and 2006, ~~as compared to $97,000 during 2005.~~respectively. The annuity fund purchased from United Life Insurance Company is credited with compound interest on the average fund balance for the year. The interest rate will be equivalent to the ratio of net investment income to mean assets of United Life Insurance Company. It is our policy to ~~invest funds within~~structure our pension plan portfolio based upon a long-term, strategic outlook of the investment markets. We utilize historical and forward-looking return forecasts to establish future return expectations for our various asset categories. These investment return expectations are used to develop our asset allocation based on the specific needs of the pension ~~plan, primarily~~plan. We utilize multiple investment managers in ~~common equity securities.~~

~~Employee/retiree health and dental benefit plan~~order to maximize the plan’s return while minimizing risk.

We offer a health and dental benefit plan to all of our eligible employees and ~~retirees. The plan~~retirees, which is composed of two programs: (1) the self-funded retiree health and dental benefit plan and (2) the self-funded employee health and dental benefit plan. The plan provides health and dental benefits to our employees and retirees (and covered dependents) who have met the service and participation requirements stipulated by the plan. The plan’s contract administrators are responsible for making medical and dental care benefit payments. ~~The plan requires participants~~Participants are required to submit claims for reimbursement or payment to the claims administrator within ~~365 days~~12 months after the end of the calendar year in which the charges were incurred. ~~The plan’s~~An unfunded benefit obligation is reported for the plan, which relates primarily to our postretirement benefit program.

The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of ~~the benefit~~ plan obligations. We annually establish the discount rate, ~~used to determine the present value of the plan benefit obligations as of December 31. The discount rate~~which is an estimate of the interest rate at which the plan benefits could be effectively ~~settled.~~settled, that is used to determine the present value of the respective plans benefit obligations as of December 31. In estimating the discount rate, we look to rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of the ~~plan~~respective plans benefit obligations. Another significant assumption utilized is the expected long-term rate of return on the invested pension plan ~~assets. The expected long-term rate of return~~assets, which is an assumption as to the average rate of earnings expected on the pension plan funds invested, or to be invested, to provide for the settlement of benefits included in the projected pension benefit obligation. Investment securities, in general, are exposed to various risks, such as fluctuating interest rates, credit standing of the issuer of the security and overall market volatility. Annually, we perform an analysis of expected long-term rates of return based on the composition and allocation of our pension plan assets and recent economic conditions.

The following actuarial assumptions were used to determine the reported plan benefit obligations at December ~~31, 2006.~~31:

The following actuarial assumptions were used at January 1 to determine our reported net periodic benefit costs for the year ended December ~~31.~~31:

The table below provides a reconciliation of the changes in benefit obligations and fair value of plan assets for both plans and a statement of the plans’ funded status for 2007 and 2006.

~~The table below provides a reconciliation of the changes in both plans’ benefit obligations and fair value of plan assets and a statement of the plans’ funded status for 2006 and 2005.~~

~~The~~Our accumulated pension benefit obligation was ~~$49,670,000~~$55,993,000 and ~~$44,300,000~~$49,670,000 at December 31, 2007 and 2006, ~~and 2005,~~ respectively.

The unrecognized prior service cost and the unrecognized actuarial loss are being amortized on a straight-line basis over an average period of approximately 1110 years. This period represents the average remaining employee service period until the date of full eligibility. We anticipate amortization of prior service costs and net losses for ~~2007~~2008 to be ~~$107,000~~$108,000 and ~~$855,000,~~$1,206,000, respectively.

The ~~following~~ table below provides the components of net periodic benefit cost for the plans for 2007, 2006 ~~2005~~ and ~~2004.~~2005.

For measurement purposes of our health and dental benefit plan, a ~~9.0~~10.0 percent annual rate of increase in the per capita cost of covered health care benefits is assumed for ~~2006.~~2007. The rate is assumed to decrease gradually each year to a rate of 5.25 percent for ~~2011~~2013 and remain at that level thereafter. For dental claims, a 5.25 percent annual rate of increase was assumed for ~~2007~~2008 and thereafter.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1.0 percent change in assumed health care cost trend rates would have the following effects.

The following table summarizes the expected ~~benefit payments~~benefits to be paid from our plans over the next 10 years.

We have a profit-sharing plan in which employees who meet service requirements are eligible to participate. The amount of our contribution is discretionary and is determined annually, but cannot exceed the amount deductible for federal income tax purposes. Our contribution to the plan for the years ended December 31, 2007, 2006 and 2005, was $4,107,000, $3,892,000 and ~~2004, was $3,892,000,~~ $1,364,000, ~~and $3,402,000,~~ respectively.

We ~~also~~ have an employee stock ownership plan for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the plan upon completion of one year of service, meeting the hourly requirements with United Fire and attaining ~~age 21.~~21 years of age. Contributions to this plan are made at our discretion. These contributions are based upon a percentage of the total payroll and are allocated to participants on the basis of compensation. We make contributions in stock or cash, which the trustee uses to acquire shares of United Fire stock to allocate to participants’ accounts. As of December 31, 2007, 2006 and 2005, the employee stock ownership plan owned 244,386, 248,764 and ~~2004, the Employee Stock Ownership Plan owned 248,764,~~ 249,978 ~~and 250,922~~ shares of United Fire common stock, respectively. Shares owned by the ~~Employee Stock Ownership Plan~~employee stock ownership plan are included in shares issued and outstanding for purposes of calculating earnings per share and dividends paid on the shares are charged to retained earnings. We made contributions to the plan of $275,000, $650,000 and $250,000 in 2007, 2006 and ~~$30,000 in 2006,~~ 2005, ~~and 2004,~~ respectively.

We have a nonqualified employee stock option plan that authorizes the issuance of up to 1,000,000 shares of United Fire common stock to employees, with ~~486,908~~310,908 options available for future issuance at December 31, ~~2006.~~2007. The plan is administered by the ~~board~~Board of ~~directors.~~Directors. The ~~board~~Board has the authority to determine which employees will receive options, when options will be granted and the terms and conditions of the options. The ~~board~~Board may also take any action it deems necessary and appropriate for the administration of the plan. Pursuant to the plan, the ~~board~~Board may, at its sole discretion, grant options to any employees of United Fire or any of its affiliated companies. These options are granted to buy shares of United Fire’s common stock at the market value of the stock on the date of grant. The options vest and are exercisable in installments of 2020.0 percent of the number of shares covered by the option award each year from the grant date. To the extent not exercised, installments shall accumulate and be exercisable by the optionee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Stock options have historically been granted free of charge to eligible employees as designated by the Board of Directors.

We ~~also~~ have a nonqualified nonemployee director stock option and restricted stock plan that authorizes United Fire to grant restricted stock and nonqualified stock options to purchase 150,000 shares of United Fire’s common stock, with ~~120,003~~100,003 options available for future issuance at December 31, ~~2006.~~2007. The board has the authority to determine which nonemployee directors receive options, when options and restricted stock shall be granted, the option price, the

option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement. The board may also take any action it deems necessary and appropriate for the administration of the plan.

The analysis below details the activity of both of our stock option plans for the year ended December 31, ~~2006.~~2007. Information on the options outstanding at December 31, ~~2006,~~2007, is also presented.

Intrinsic value is the difference between our share price on the last day of trading, December 31, ~~2006~~2007 and the price of the options when granted and represents the value that would have been received by option holders had they exercised their options on December 31, ~~2006.~~2007. These values change based on the fair market value of our shares. The intrinsic value of options exercised totaled $774,000, $448,000 ~~$845,000~~ and ~~$575,000~~$845,000 in December 31, 2007, 2006 and 2005, ~~and 2004,~~ respectively.

The weighted-average grant-date fair value of the options granted under the plan has been estimated using the Black-Scholes option pricing model with the following weighted-average assumptions.

The following table summarizes information regarding the stock options outstanding and exercisable at December 31, ~~2006.~~2007:

We have two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance segment has three domestic locations from which it conducts its business. All offices target a similar customer base, market the same products and use the same marketing strategies and are therefore aggregated. The life insurance segment operates from our home office. The accounting policies of the segments are the same as those described in Note 1. We analyze results based on profitability (i.e., loss ratios), expenses and return on equity. Because all of our insurance is sold domestically, we have no revenues allocable to foreign operations.

The property and casualty insurance segment markets most forms of commercial and personal property and casualty insurance products, including surety bonds and reinsurance. The business is generated through ~~891~~865 independent agencies and brokers in 4142 states. The life insurance segment underwrites and markets life (primarily universal and traditional life) and annuity (primarily single premium annuity) products to individuals and groups through ~~899~~927 independent agencies in 2728 states.

Total revenue by segment includes sales to outside customers and intersegment sales that are eliminated to arrive at the total revenues as reported in the accompanying Consolidated Statements of Income. We account for intersegment sales on the same basis as sales to outside customers. The ~~table on the~~ following ~~page~~table sets forth certain data for each of our business segments and is reconciled to our Consolidated Financial Statements. Depreciation expense and property and equipment acquisitions for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004,~~2005, are reported in the property and casualty insurance segment.

~~(1)”Fire and allied lines” in this table includes fire, allied lines, homeowners, commercial multiple peril and inland marine.~~

~~(2)"Other liability" is business insurance covering bodily injury and property damage arising from general business.~~

The following table sets forth our selected unaudited quarterly financial information.

(1) The sum of the quarterly reported amounts may not equal the full year as each is computed independently.

~~We compute~~Basic earnings per share ~~in accordance with SFAS No. 128, “Earnings per Share.” Accordingly, we compute basic earnings per share~~is computed by dividing net income or loss available to common shareholders (net income or loss less dividends to preferred shareholders and accretions of preferred stock issuance costs) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share give effect to all ~~potentially~~ dilutive common shares outstanding during the period. The ~~potentially~~ dilutive shares we consider in our diluted earnings per share calculation relate to our convertible preferred stock outstanding as well as our outstanding stock options. During 2005, we redeemed all shares of preferred stock that were not previously converted into shares of common stock. ~~We therefore have no shares of preferred stock outstanding at December 31, 2006 and 2005.~~

We determine the dilutive effect of our convertible preferred stock using the “if-converted” method. Under this method, we add to the denominator of the earnings per share calculation a number determined by multiplying the number of convertible preferred shares by the appropriate conversion rate. We also add the amount of preferred dividends and accretions back to the numerator of the earnings per share equation due to the assumed conversion of all the convertible preferred stock to common stock at the beginning of the reporting period. If the effect of the if-converted method is anti-dilutive, the effect on diluted earnings per share of our convertible preferred stock is disregarded. The preferred stock had an anti-dilutive effect in ~~2005 and a dilutive effect in 2004.~~2005.

We determine the dilutive effect of our stock options outstanding using the “treasury stock” method. Under this method, we assume the exercise of all of the outstanding options whose exercise price is less than the weighted-average fair market value of our stock during the period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of common stock at the weighted-average fair market value of the stock during the period. The net of the assumed options exercised and assumed common shares repurchased ~~represents~~represent the number of ~~potentially~~ dilutive common shares, which we add to the denominator of the earnings per share calculation.

The components of basic and diluted earnings per share are displayed in the table below. ~~The 2004 amounts reflect the retroactive effects of our December 15, 2004, one-for-one stock dividend.~~

Comprehensive income (loss) includes changes in equity during a period except those resulting from investments by shareholders and dividends to shareholders. The primary components of our comprehensive income (loss) are net income and the change in net unrealized gains and losses on available-for-sale securities as adjusted for amounts that have been reclassified as realized gains and losses. The following table sets forth the components of comprehensive income (loss) and the related tax effects for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004.~~2005.

United Fire & Casualty Company and Subsidiaries

NOTE ~~14.~~15. LEASE COMMITMENTS

At December 31, ~~2006,~~2007, we were obligated under noncancelable operating lease agreements for office space, vehicles, computer equipment and office equipment. Most of our leases include renewal options, purchase options or both. These provisions may be exercised by us upon the expiration of the related lease agreements. Rental expense under our operating lease agreements was $4,785,000, $4,714,000 ~~$4,558,000~~ and ~~$2,355,000~~$4,558,000 for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004,~~2005, respectively. Our most prominent lease arrangement is for office space through which we conduct the insurance operations of our Galveston, Texas, location. This lease was initiated in December 2004, with a lease term of 10 years. The annual lease payment for this office space is approximately $2,100,000.

At December 31, ~~2006,~~2007, our future minimum rental payments are as follows:

(Dollars in Thousands)
2007	$	4,347
2008		3,453	$	4,390
2009		3,038		4,177
2010		2,603		3,636
2011		2,223		2,897
2012				2,403
Thereafter		7,077		5,534
Total	$	22,741	$	23,037

~~NOTE 15. COMMON STOCK OFFERING~~

During the second quarter of 2006, we completed an offering of shares of our common stock priced at $28.00 per share. Pursuant to this offering, we issued 4,025,000 shares of our $3.33 par value common stock, resulting in proceeds (net of $5,738,000 million in underwriting expenses) of $106,962,000.

United Fire & Casualty Company and Subsidiaries

Report of Independent Registered Public Accounting Firm on Financial Statements

Board of Directors and Stockholders

United Fire & Casualty Company

We have audited the accompanying consolidated balance sheets of United Fire & Casualty Company (United Fire) as of December 31, ~~2006~~2007 and ~~2005,~~2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, ~~2006.~~2007. Our audits also included the financial statement schedules of United Fire listed in Item ~~15(2)~~15(a)(2). These financial statements and schedules are the responsibility of United Fire’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Fire & Casualty Company at December 31, ~~2006~~2007 and ~~2005,~~2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2006,~~2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

During 2006, United Fire changed its method of accounting for the recognition of stock-based compensation expense and the recognition of the funded status of its defined benefit pension and postretirement plans, which has been discussed in Note 1 to the consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of United Fire’s internal control over financial reporting as of December 31, ~~2006,~~2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report, dated February ~~28, 2007,~~27, 2008, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Ernst & Young LLP

Chicago, Illinois

February ~~28, 2007~~27, 2008

United Fire & Casualty Company and Subsidiaries

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of United Fire & Casualty Company is responsible for establishing and maintaining adequate internal control over financial reporting. United Fire & Casualty Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

As of December 31, ~~2006,~~2007, United Fire & Casualty Company’s management assessed the effectiveness of internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, United Fire & Casualty Company’s management determined that effective internal control over financial reporting is maintained as of December 31, ~~2006,~~2007, based on those criteria.

Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements of United Fire & Casualty Company included in this Annual Report on Form 10-K, has ~~issued an attestation report on management’s assessment of~~audited the effectiveness of internal control over financial reporting as of December 31, ~~2006. The~~2007. Their report, which expresses an unqualified ~~opinions on management’s assessment and~~opinion on the effectiveness of United Fire & Casualty Company’s internal control over financial reporting as of December 31, ~~2006,~~2007, is included in this item under the heading “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.”

Dated: February ~~28, 2007~~27, 2008

/s/ ~~John~~Randy A. ~~Rife~~Ramlo

~~John~~Randy A. ~~Rife~~Ramlo

Chief Executive Officer

/s/ Dianne M. Lyons

Dianne M. Lyons

Chief Financial Officer

United Fire & Casualty Company and Subsidiaries

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

Board of Directors and Stockholders

United Fire & Casualty Company

We have audited ~~management’s assessment, included in~~ the ~~accompanying Management Report on Internal Control Over Financial Reporting, that~~internal control over financial reporting of United Fire & Casualty Company (United Fire) ~~maintained effective internal control over financial reporting~~ as of December 31, ~~2006,~~2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). United Fire’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial ~~reporting.~~reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on ~~management’s assessment and an opinion on the effectiveness of~~ United Fire’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, ~~evaluating management’s assessment,~~assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that United Fire & Casualty Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, United Fire & Casualty Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2006,~~2007, based on~~the~~onthe COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balances sheets of United Fire & Casualty Company as of December 31, ~~2006~~2007 and ~~2005,~~2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, ~~2006,~~2007, and our report dated February ~~28, 2007,~~27, 2008, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Ernst & Young LLP

Chicago, Illinois

February ~~28, 2007~~27, 2008

United Fire & Casualty Company and Subsidiaries

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, with the participation of our ~~Chief Executive Officer~~chief executive officer and ~~Chief Financial Officer,~~chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the ~~Chief Executive Officer~~chief executive officer and ~~Chief Financial Officer~~chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management’s annual report on internal control over financial reporting and the attestation report of our independent registered public accounting firm are included in Item 8 under the headings “Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting,” respectively and incorporated herein by reference.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As required by Rule 15d-15(e) under the Securities Exchange Act of 1934, our management, including our ~~Chief Executive Officer~~chief executive officer and ~~Chief Financial Officer,~~chief financial officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, no such change in our internal control over financial reporting occurred during our fourth fiscal quarter.

ITEM 9B. OTHER INFORMATION

None.

United Fire & Casualty Company and Subsidiaries

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

	DIRECTORS AT UNITED FIRE
Age (as of December 31, ~~2006)~~2007), Present Position and Business Experience	Term as DirectorExpires	Served as DirectorSince
Scott McIntyre Jr., ~~73,~~74, has served as chairman of our board of directors since 1975. He has been employed by us in various capacities since 1954, including as president from 1966 to 1997 and as chief executive officer from 1991 to 2000. Mr. McIntyre is ~~also~~ the father-in-law of Christopher R. Drahozal, who also serves as a director.	~~May 2008~~	~~1956~~
~~John A. Rife, 64, serves as our president and chief executive officer.~~ Mr. Rife began his employment with our life insurance subsidiary, United Life Insurance Company, in 1976. Mr. Rife was appointed president in 1997 and chief executive officer in 2000. He serves as president of United Life Insurance Company, a position he has held since 1984 and he also serves as president and chief executive officer of some of our other subsidiaries. Mr. Rife has served as a director of United Life Insurance Company from 1983 to the present. He has served us as a director since 1998. Since 2001, Mr. Rife has served on the board of directors of Cedar Rapids Bank & Trust, a bank in Cedar Rapids, Iowa. Since 2006 he has served on the board of directors of QCR Holdings, Inc., the parent holding company of Cedar Rapids Bank & Trust. Mr. Rife also serves on the boards of trustees of United Way of East Central Iowa, Mercy Medical Center and Priority One. Mr. Rife is retiring as president and chief executive officer of United Fire & Casualty Company and its subsidiaries (except for United Life Insurance Company where he will continue to serve as president) effective May 16, 2007. Mr. RifeMcIntyre has agreed to be nominated as a director at our next annual stockholders’ meeting in ~~2007.~~2008.		May ~~2007~~2008	~~1998~~1956
Christopher R. Drahozal, 46, is a professor of law at the University of Kansas School of Law, Lawrence, Kansas, where he has taught since 1994. Mr. Drahozal is the son-in-law of Scott McIntyre Jr.	May 2009	1997
Jack B. Evans, ~~58,~~59, is president of the Hall-Perrine Foundation, a private philanthropic corporation located in Cedar Rapids, Iowa. He has served as its president since January 1996. Prior to that, Mr. Evans was employed by SCI Financial Group, Cedar Rapids, Iowa, serving as its president from 1993 to 1995. SCI Financial Group was a regional financial services firm providing brokerage, insurance and related services to its clients. In addition to United Fire & Casualty Company, Mr. Evans also serves on the board of directors of Nuveen Institutional Advisory Corp. of Chicago, ~~Illinois.~~Illinois and on the Board of Regents for the State of Iowa. He is also a former director of Alliant Energy Corporation of Madison, Wisconsin and the Federal Reserve Bank of Chicago.	May 2009	1995
Christopher R. Drahozal, 45, is a professor of law at the University of Kansas School of Law, Lawrence, Kansas, where he has taught since 1994. Mr. Drahozal was an attorney in private practice in Washington, D.C. from 1991 until 1994. Mr. Drahozal is the son-in-law of Scott McIntyre Jr.	~~May 2009~~	~~1997~~
Thomas W. Hanley, ~~54,~~55, is ~~currently~~ a teacher at Xavier High School, a Catholic high school in Cedar Rapids, Iowa. He began teaching full time in 2004. From 2002 to 2004, Mr. Hanley conducted post-graduate studies in Theology ~~from~~at Loras College in Dubuque, Iowa. From 1979 to April 2003, Mr. Hanley was employed as a certified public accountant by McGladrey & Pullen, LLP, a tax and accounting firm in Cedar Rapids, Iowa. Mr. Hanley served as a partner at McGladrey & Pullen, LLP from 1983 to January 2002.		May 2009	2003

Douglas M. Hultquist, ~~51, has consented to be nominated to serve the remainder of Mr. Riley’s term as director expiring in May 2008. Mr. Hultquist~~52, is the president, chief executive officer and a director of QCR Holdings, Inc., a multi-bank holding company headquartered in Moline, Illinois that serves Moline and Rockford, ~~Illinois,~~Illinois; Milwaukee, Wisconsin and Davenport and Cedar Rapids, Iowa through wholly owned subsidiary banks. He ~~practiced~~was a public ~~accountancy~~accountant with KPMG Peat Marwick beginning in 1977 and was named a partner of that firm in 1987. In 1991, the Quad City office of KPMG Peat Marwick merged with McGladrey & Pullen, a tax and accounting firm. Mr. Hultquist served as a tax partner in the Quad City office of McGladrey & Pullen from 1991 until he left and co-founded QCR Holdings, Inc. in 1993. Mr. Hultquist serves as director of Quad City Bank & Trust; director of Cedar Rapids Bank & Trust; director of Rockford Bank & Trust; director of Quad City Bancard; director of First Wisconsin Bank & Trust; and director of M2 Lease Funds. Mr. Hultquist also serves as board chair of Augustana College in Rock Island, Illinois.	~~Nominee~~	~~N/A~~
~~James A. Leach, 64,~~ Mr. Hultquist has agreed to be nominated as a director at our next annual stockholders’ meeting in ~~2007. From 1977 until~~ 2008.	May 2008	2007 ~~Mr.~~
James A. Leach, 65, served as a Representative from Iowa to the United States ~~Congress. Most recently,~~Congress from 1977 until 2007. Immediately prior to leaving Congress, Mr. Leach served as chairman emeritus, Committee on Banking and Financial Services; member, Committee on International Relations; and chairman, Subcommittee on East Asian and Pacific Affairs. Mr. Leach ~~received his bachelor~~is currently Director of ~~arts degree (cum laude)~~the Institute of Politics at Harvard University’s Kennedy School of Government in ~~political science~~Cambridge, Massachusetts. He is currently on leave from Princeton University ~~and his masters of arts degree~~ in ~~soviet politics from Johns Hopkins University. From 1966 to 1968,~~Princeton, New Jersey where he ~~was a research student in economics and soviet politics~~is the John L. Weinberg Visiting Professor at the ~~London~~Woodrow Wilson School of ~~Economics.~~Public and International Affairs.	~~Nominee~~May 2010	~~N/A~~2007

United Fire & Casualty Company and Subsidiaries

Age (as of December 31, 2007), Present Position and Business Experience

Term as DirectorExpires	Served as DirectorSince
Casey D. Mahon, ~~55,~~56, is an adjunct professor of law at the University of Iowa College of Law, Iowa City, Iowa, where she has taught since 1998. Ms. Mahon was employed as senior vice president and general counsel of McLeodUSA, Inc. from June 1993 until she retired in February 1998. McLeodUSA, Inc. provides integrated communications services. Ms. Mahon has agreed to be nominated as a director at our next annual stockholders’ meeting in 2008.	May 2008	1993
George D. Milligan, ~~50,~~51, is ~~the~~ president of The Graham Group, Inc., Des Moines, Iowa, a position he has held since 1985. The Graham Group includes a real estate firm specializing in the development of medical office buildings and a construction firm specializing in the construction of hospital facilities. Since 2005, Mr. Milligan has also served on the board of directors of West Bancorporation, Inc. of West Des Moines, Iowa.	May 2009	1999
Mary K. Quass, ~~56,~~57, is ~~the~~ president and chief executive officer of NRG Media, LLC, Cedar Rapids, Iowa. NRG Media, LLC is a radio broadcasting group of over 9060 stations founded in August 2002. Ms. Quass is also president and chief executive officer of Quass Communications, LLC. Founded in 1998, Quass Communications, LLC is a privately held investment company. From 1988 to 1998, Ms. Quass held the position of president and chief executive officer of Quass Broadcasting Company, which operated radio stations and a sign company. In 1998, Quass Broadcasting Company merged with Capstar Broadcasting Partners to form Central Star Communications. Ms. Quass served as president and chief executive officer of Central Star Communications, which operated over 50 radio stations throughout the Midwest, until 2000. ~~Ms. Quass has agreed to be nominated as a director at our next annual stockholders’ meeting in 2007.~~	May ~~2007~~2010	1998
~~Byron G. Riley, 76, is an attorney with the law firm~~John A. Rife, 65, retired in May 2007 as our president and chief executive officer. Mr. Rife continues to serve as president of ~~Bradley & Riley PC, Cedar Rapids, Iowa. He~~our life subsidiary, United Life Insurance Company, a position he has ~~practiced law with that law firm~~held since ~~1981. Bradley & Riley PC provides legal services to us.~~1984. Mr. ~~Riley is retiring from~~Rife has served as a director of United Life Insurance Company since 1983. Since 2001, Mr. Rife has served on the board of directors ~~effective May 16, 2007. Douglas M. Hultquist~~of Cedar Rapids Bank & Trust, a bank in Cedar Rapids, Iowa. Since 2006, he has ~~been nominated to serve~~served on the ~~remainder~~board of directors of QCR Holdings, Inc., the parent holding company of Cedar Rapids Bank & Trust. Mr. ~~Riley’s unexpired term as director.~~Rife also serves on the boards of trustees of United Way of East Central Iowa and Mercy Medical Center.	May ~~2008~~2010	~~1983~~1998
Kyle D. Skogman, ~~56,~~57, is president of Skogman Construction Co. of Iowa, a company that specializes in residential construction, primarily in Cedar Rapids, Iowa. He has served in that capacity since 1990. ~~Mr. Skogman has agreed to be nominated as a director at our next annual stockholders’ meeting in 2007.~~	May ~~2007~~2010	2000

Frank S. Wilkinson Jr., ~~67,~~68, retired in December 2000 from E.W. Blanch Co., a Minneapolis, Minnesota company that provides risk management and distribution services and arranges reinsurance coverage between insurers and reinsurers. Before retiring after 31 years of service, Mr. Wilkinson held a number of positions with E.W. Blanch, including executive vice president and director from 1993 to 2000. Mr. Wilkinson ~~also serves~~served on the ~~boards~~board of directors of Hub International, Ltd. of Chicago, Illinois ~~and~~from April 2003 until June 2007. Mr. Wilkinson currently serves on the board of directors of Benfield Group, Ltd. of London, ~~England.~~England where he serves on the audit, remuneration (compensation) and nominating and governance committees. Mr. Wilkinson ~~serves~~has agreed to be nominated as ~~chair of Hub International, Ltd. board’s compensation committee.~~a director at our next annual stockholders’ meeting in 2008.

May 2008

2001

United Fire & Casualty Company and Subsidiaries

EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES AT UNITED FIRE

The following table sets forth information as of December 31, ~~2006,~~2007, concerning the following executive officers and significant employees.

Name	Age	Position
Scott McIntyre Jr. ⁽¹⁾	7374	Chairman of the Board of Directors
~~John A. Rife~~ ⁽¹⁾	64	~~President, Chief Executive Officer and Director~~
Randy A. Ramlo ⁽¹⁾	4546	~~Executive Vice~~ President and Chief ~~Operating~~Executive Officer
Michael T. Wilkins ⁽¹⁾	4344	~~Senior~~Executive Vice President, Corporate Administration
~~Kent G. Baker~~ ⁽¹⁾⁽²⁾	63	~~Vice President and former Chief Financial Officer~~
~~Dianne M. Lyons~~ ⁽¹⁾	43	~~Vice President and Chief Financial Officer~~
Brian S. Berta	4243	Vice President, Great Lakes regional office
David E. Conner ⁽¹⁾	4849	Vice President and Chief Claims Officer
~~John R. Cruise~~ ⁽²⁾	65	~~Vice President, Reinsurance~~
Barrie W. Ernst ⁽¹⁾	5253	Vice President and Chief Investment Officer
David L. Hellen	5455	Resident Vice President, Denver regional office
~~Wilburn~~Kent J. ~~Hollis~~Hutchins ⁽²⁾⁽¹⁾	66	~~Former Vice President, Human Resources~~
~~Kent J. Hutchins~~	4849	Vice President and ~~General Manager,~~Chief Operating Officer, United Life Insurance Company
Joseph B. Johnson	5455	~~Branch Manager,~~Resident Vice President, Gulf Coast regional office
David A. Lange	4950	Corporate Secretary and Fidelity and Surety Claims Manager
Dianne M. Lyons ⁽¹⁾	44	Vice President and Chief Financial Officer
Scott A. Minkel	45	Vice President, Information Services
Douglas A. Penn	58	Vice President, Midwest regional office
Dennis J. Richmann	4243	Vice President, Fidelity and Surety
John A. Rife ⁽¹⁾	65	President, United Life Insurance Company
Neal R. Scharmer ⁽¹⁾	5051	Vice President, General Counsel and Corporate Secretary
Allen R. Sorensen	49	Vice President, Corporate Underwriting
Colleen R. Sova	53	Vice President, e-Solutions
Timothy G. Spain	5556	Vice President, Human Resources
Galen E. Underwood	6667	Treasurer
~~Stanley A. Wiebold~~	62	~~Vice President, Midwest regional office~~

(1)	Executive Officers
~~(2)~~	~~Retired effective December 31, 2006.~~

A brief description of the business experience of these officers follows.

Scott McIntyre Jr., chairman of our board of directors, has served us in that capacity since 1975. We have employed ~~him~~Mr. McIntyre in various capacities since 1954, including as president from 1966 to 1997 and as chief executive officer from 1991 to 2000.

~~John~~Randy A. ~~Rife serves as~~Ramlo was appointed our president and chief executive ~~officer. Mr. Rife began his employment with our life subsidiary in 1976. Mr. Rife was appointed president in 1997 and chief executive~~ officer in ~~2000.~~May 2007. He ~~has been president of United Life Insurance Company since 1984 and also serves as president and chief executive officer of some of our other subsidiaries. Mr. Rife has~~previously served as a director of United Life Insurance Company since 1983 and on our board of directors since 1998. Mr. Rife is retiring as president and chief executive officer of United Fire & Casualty Company and its subsidiaries (except for United Life Insurance Company where he will continue to serve as president) effective May 16, 2007.

~~Randy A. Ramlo serves as our executive vice president and chief operating officer. He has served~~us as chief operating officer ~~since~~from May 2006 ~~and~~until May 2007, as executive vice president ~~since~~from May ~~2004. Mr. Ramlo previously served~~2004 until May 2007, and as vice president, fidelity and surety, from November 2001 until May ~~2004 and~~2004. He also worked as an underwriting manager in our Great Lakes region. We have employed Mr. Ramlo since 1984. ~~Mr. Ramlo will serve us as president and chief executive officer, replacing Mr. Rife effective May 16, 2007.~~

~~United Fire & Casualty Company and Subsidiaries~~

Michael T. Wilkins became our executive vice president, corporate administration, in May 2007. He was ~~appointed~~ our senior vice president, corporate administration, infrom May ~~2004. He served as~~2004 until May 2007, our vice president, corporate administration, from August 2002 until May 2004 and asthe resident vice president in our Lincoln regional office from 1998 tountil 2002. Prior to 1998, heMr. Wilkins held various other positions within our company since joining us in 1985.

~~Kent G. Baker is a vice president. He served us as vice president and chief financial officer from 1984 until May 2006 and as vice president until his retirement effective December 31, 2006.~~

Dianne M. Lyons was appointed chief financial officer in May 2006. She has been our vice president since May 2003 and served as our controller from 1999 until May 2006. Ms. Lyons has been employed by us in the accounting department since 1983.

Brian S. Berta is vice president of our Great Lakes region, a position he has held since May 2006. Mr. Berta previously served as underwriting manager in our Great Lakes region and has been employed by us since 1993.

United Fire & Casualty Company and Subsidiaries

David E. Conner was appointed our vice president and chief claims officer, effective January 1, 2005. Mr. Conner has served in various capacities within the claims department, including claims manager and assistant vice president, since joining us in 1998.

~~John R. Cruise is vice president, reinsurance, a position he has held with us since 1987. Mr. Cruise has worked for us since 1971. Mr. Cruise retired effective December 31, 2006.~~

Barrie W. Ernst is our vice president and chief investment officer. He joined us in August 2002. Previously, Mr. Ernst served as senior vice president of SCI Financial Group, Cedar Rapids, Iowa, where he worked from 1980 to 2002. SCI Financial Group was a regional financial services firm providing brokerage, insurance and related services to its clients.

David L. Hellen was appointed resident vice president of our Denver regional office in 1988. We have employed Mr. Hellen since 1975.

~~Wilburn J. Hollis was our vice president, human resources from 1996 until July 2006. He served as a consultant until his retirement on December 31, 2006.~~

Kent J. Hutchins was named vice president and ~~general manager~~chief operating officer of our life insurance subsidiary, United Life Insurance Company, in May 2007 after serving as its vice president and general manager from August ~~2006.~~2006 until May 2007. Mr. Hutchins was previously employed by Tricor Lending and Financial Services in Prairie du Chien, Wisconsin. HeAs an employee of Tricor, he was a member of our life agency force for 25 years before joining United Life Insurance Company as a marketing representative for the state of Wisconsin in June 2004.

Joseph B. Johnson was ~~named branch manager~~promoted to resident vice president of our Gulf Coast regional office in May 2007 after having served as branch manager since August 2006. Mr. Johnson has over 25 years of experience in the insurance industry. ~~Prior to joining us,~~From August 2001 until August 2006, he served ~~since August 2001~~ as ~~Vice President~~vice president of ~~Insurance Operations~~insurance operations for Beacon Insurance Group in Wichita Falls, Texas.

David A. Lange has served as one of our corporate secretaries since 1997. Mr. Lange has also been a surety claims manager since he began his employment with us in 1987.

Dianne M. Lyons was appointed chief financial officer in May 2006. She was appointed vice president in May 2003 and served as our controller from 1999 until May 2006. Ms. Lyons has been employed by us in the accounting department since 1983.

Scott A. Minkel is our vice president, information services, a position he has held since May 2007. Prior to his promotion, Mr. Minkel served in various capacities within the information services department since joining us in 1984, including assistant vice president, director of information services and programming manager.

Douglas A. Penn is vice president of our Midwest regional office, a position he has held since May 2007. Since joining us in 1974, Mr. Penn has served in a variety of capacities including underwriting manager, marketing representative and commercial underwriter.

Dennis J. Richmann was named our vice president, fidelity and surety, in May 2006. He has been employed by us in various capacities since joining us in August 1988, most recently as surety bond underwriting manager.

John A. Rife retired in May 2007 as our president and chief executive officer. Mr. Rife continues to serve as president our life subsidiary, United Life Insurance Company, a position he has held since 1984. Mr. Rife has served as a director of United Life Insurance Company since 1983 and has served us as a director since 1998.

Neal R. Scharmer ~~has been~~was appointed our vice president and general counsel ~~since joining us in 1995. He was named a vice president~~ in May 2001 and corporate secretary in May 2006. He joined us in 1995.

Allen R. Sorensen became our vice president, corporate underwriting, in May 2006. Mr. Sorensen began his career with us in June 1981 and has served us in various capacities including underwriting, product support and product automation.

Colleen R. Sova serves as vice president in our e-solutions department, a position she has held since May 2007. Prior to her promotion, Ms. Sova has served us in a variety of capacities since joining us in 1981 including assistant vice president and director of e-solutions, director of claims administration, claims supervisor and claims adjuster.

Timothy G. Spain became our vice president, human resources in July 2006. Mr. Spain began his employment with us in December 1994, most recently serving as training director.

Galen E. Underwood has served as our treasurer since 1979. He has been our employee since 1963.

~~Stanley A. Wiebold is vice president of our Midwest regional office, a position he has held since 1986. He began his employment with us in 1975.~~

United Fire & Casualty Company and Subsidiaries

AUDIT COMMITTEE

We have a separately designated standing audit committee as defined in Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The board of directors has adopted an Audit Committee Charter that we have published ~~once every three years in our annual proxy statement. Beginning in February 2007, we publish the charter~~ on our web ~~site.~~site, www.unitedfiregroup.com under “Investor Relations.” Copies of the Audit Committee Charter can also be obtained free of charge by writing to Investor Relations c/o United Fire Group, P.O. Box 73909, Cedar Rapids, Iowa 52407-3909.Our audit committee is composed of directors who are independent from management and free from any relationship that, in the opinion of the directors, would interfere with their exercise of independent judgment. The audit committee is primarily concerned with the effectiveness of audits of us performed by our internal auditor and independent registered public accounting firm. The audit committee seeks to maintain free and open communications between the directors, the independent registered public accounting firm, the internal auditors and management. Its duties consist of reviewing recommendations by the internal auditor and the independent registered public accounting firm on accounting matters and internal controls; advising the board on the scope of audits; reviewing our interim and annual Consolidated Financial Statements and the accounting standards and principles followed; appointing the independent registered public accounting firm; and conducting independent inquiries, if necessary. The audit committee meets at least four times annually. Current members of our audit committee include: Thomas W. Hanley (Chair), Jack B. Evans, George D. Milligan, Mary K. Quass and Kyle D. Skogman.

AUDIT COMMITTEE FINANCIAL EXPERT

The board of directors has determined that Thomas W. Hanley is an audit committee financial expert as defined by Item 407(d)(5) of Regulation S-K of the Securities Exchange Act of 1934 and is independent, as independence for audit committee members is defined in the listing standards of the NASDAQ Stock Market.

CODE OF ETHICS AND BUSINESS CONDUCT

The board of directors has adopted a Code of Ethics and Business Conduct that applies to all our officers, directors and employees. ~~See Exhibit 14 attached to this Form 10-K.~~ The Code of Ethics and Business Conduct establishes procedures regarding the reporting of a violation of the code. We have published our Code of Ethics and Business Conduct on our website at www.unitedfiregroup.com under “Investor Relations.” Copies of the Code of Ethics and Business Conduct can also be obtained free of charge by writing to Investor Relations c/o United Fire Group, P.O. Box 73909, Cedar Rapids, Iowa 52407-3909.

United Fire & Casualty Company and Subsidiaries

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

The compensation committee of our board of directors is responsible for developing the philosophy and structure for compensation of our named executive officers and other senior executive officers. Our named executive officers ~~include~~include: Scott McIntyre Jr., ~~the~~ chairman of ~~the~~our board of ~~directors,~~directors; Randy A. Ramlo, our president, chief executive officer and principal executive officer; Dianne M. Lyons, our vice president, chief financial officer and principal financial officer; Michael T. Wilkins, our executive vice president; John A. Rife, ~~the principal executive officer, Randy A. Ramlo, the chief operating officer, Dianne M. Lyons, the principal financial officer,~~president of our life insurance company subsidiary, United Life Insurance Company; and Barrie W. Ernst, ~~the~~our vice president and chief investment ~~officer, and Kent G. Baker.~~officer. Each year, the compensation committee reviews and recommends to the board of directors the compensation of the named executive ~~officers and certain other senior executive~~ officers.

COMPENSATION AND BENEFITS PHILOSOPHY

The objectives of our compensation programs for senior executive officers are to attract and retain qualified senior executive officers, assure that our compensation of senior executive officers is fair and reasonable and provide incentives to ~~provide incentive to the~~our senior executive officers that isare tied to both executing a sound business strategy and achieving ~~stockholder~~shareholder value.

The compensation committee ~~is responsible for developing our philosophy and structure for senior executive officer compensation. The Compensation Committee Charter,~~charter, which ~~was~~has been adopted by ~~the~~our board of directors, governs the compensation committee’s activities and spells out its responsibilities. Some key features of that charter include:

The compensation committee must ~~have at least~~be composed of only independent directors, with a minimum of three ~~members, all of whom must be independent directors.~~members.

The compensation committee must conduct at least two meetings each calendar ~~year, plus as many other meetings as the compensation committee deems necessary.~~year.

The compensation committee has the resources and authority to retain and compensate ~~such~~any outside counsel, ~~experts, consultants~~expert, consultant or ~~advisors as~~advisor it deems appropriate and ~~necessary to competently discharge its duties.~~necessary.

The responsibilities and functions of the compensation committee that relate to compensation for senior executive officers and directors are as follows:

Annually recommend to the board of directors for approval the salaries, bonus and other compensation for all of our ~~senior~~ executive officers.

Review and discuss with management the information reported in the Compensation Discussion and Analysis, and based on the review and discussions recommend to the board of directors that it be included in our annual report on Form 10-K.

Approve and grant, or recommend to the board of ~~the~~ directors the approval and granting of, stock options and other types of equity-based compensation in accordance with the terms of stock option and other equity-based ~~plans that have been established pursuant to applicable laws and regulations.~~plans.

Periodically review and report to the board of directors about the competitiveness of our executive compensation programs to ensure (a) our ability to attract and retain senior executive officers and (b) senior executive officers are motivated to achieve our business objectives. The committee’s review includes the evaluation of compensation plans for officers of companies comparable to us.programs.

Periodically review and recommend to the board of directors for approval the compensation of our directors.

Periodically review and make recommendations to the board of directors concerning ~~director and officer~~appropriate levels of liability insurance ~~provided by us~~ for our directors and officers.

United Fire & Casualty Company and Subsidiaries

Annually evaluate the ~~Compensation Committee Charter~~compensation committee charter and the compensation committee’s performance and make such reports to the board of directors as it deems warranted.

~~United Fire & Casualty Company and Subsidiaries~~

Prepare and approve the ~~Compensation Committee’s Report~~compensation committee’s report for inclusion in our annual proxy statement and report on Form 10-K in compliance with applicable rules and regulations of the Securities and Exchange Commission, the state of Iowa and the NASDAQ Stock Market, Inc.

When determining compensation levels for senior executive officers, the compensation committee considers the following principles:

•

Performance. We strive to reward performance of our ~~senior~~ executive officers by linking compensation to individual performance, business unit performance, and company performance. Management believes that tying an individual’s compensation to these three performance ~~of the business unit and company~~indicators is an important part of aligning our objectives with the personal interest of ~~the~~our senior executive officers.

•

Fairness and Reasonableness. We strive to provide compensation and benefit programs that are fair and that reasonably reward senior executive officers for their ~~services.~~services without being on the high end of salary ranges for comparable companies. The compensation committee ~~believes that compensation can be fair and reasonable without competing at the highest levels~~reviews a variety of compensation with companies with whom we compete for talent. Although the compensation committee reviews information regarding compensation of other companies’ executives, it also considers such other factors, asincluding the cost of living and quality of life in the geographical areas where we are located, the executive’s experience level, the responsibilities of an executive’s position, our employee-friendly culture, ~~and~~ the desire to avoid significant compensation disparities between senior executive officers and all other ~~employees. The committee considers that~~employees, and compensation ~~programs are fair~~ and ~~reasonable when all factors are considered.~~benefits of executives of other insurance companies and other companies of comparable size and geographic scope.

•

Cost.By designing compensation programs that are cost-effective and affordable, we strive to protect the interests of our ~~stockholders.~~shareholders.

•

~~Comparison Group~~. While the compensation committee does not use benchmarks to determine its compensation programs, it does review the compensation and benefit programs of other insurance companies and other companies of comparative size and geographic scope.

•

~~Internal Equity.~~ We use the principles described above to design the compensation and benefit plans for our non-senior executive employees. We believe that this helps create an environment of fairness, trust, and teamwork that furthers our long-term interests.

Our board of directors uses the total compensation approach to executive compensation, ~~considering~~and considers both currently paid compensation and long-term incentive compensation to be necessary compensation tools. Our board of directors ~~has favored~~favors currently paid compensation, ~~rather than~~over long-term incentive compensation, asbelieving it provides an immediate incentive for ~~and reward to~~our executives. The board uses long-term incentives sparingly to motivate and reward those senior executive officers who have the ability to have direct impact on our long-term success. The ability to use long-term incentives permits theExecutive compensation ~~committee and the board of directors flexibility to provide long-term incentives when they deem them to be fair and appropriate.~~changes for 2008 are discussed in “Compensation Changes - 2008.” Our board of directors awards long-term incentive compensation on a discretionary basis. Current paid compensation, coupled with long-term incentives, provides the compensation committee and the board of directors the flexibility necessary to design compensation programs that are fair and appropriate.

We have no written employment contracts or severance agreements with any of our executives. All our employees, including all senior executive officers, are “at will” employees.

We believe that ownership of our common stock promotes the alignment of directors’ and officers’ interests with ours and those of our shareholders. Our Articles of Incorporation require that all directors own our stock, but the Articles do not require or recommend a certain number of shares to be owned. We do not require our officers to be shareholders. During 2008, the compensation committee and board of directors are implementing stock ownership guidelines for executive officers.

ELEMENTS OF COMPENSATION

We compensate our senior executive officers using direct compensation, ~~and~~ company-sponsored benefit plans and, to a minor extent, perquisites. As direct compensation, we pay base salary, performance-based cash awards, flexible benefit credits and equity awards. Company-sponsored benefit plans include insurance plans and retirement plans. As a minor part of our compensation program, we provide perquisites to certain of our senior executive officers. The compensation committee administers these components of compensation to provide fair and reasonable compensation to senior executive officers that recognizes meaningful differences in individual responsibility and that rewards senior executive officers for both individual and corporate performance. The compensation committee also strives to compensate senior executive officers in a manner that those officers believe is fair to them and rewards them for their efforts.

~~United Fire & Casualty Company and Subsidiaries~~

Direct Compensation

Direct compensation consists of (i) base salary, (ii) annual performance-based cash awards, (iii) flexible benefit credits and (iv) long-term equity based awards. We pay these elements of direct compensation because we believe each of the following to be true:

A fair and reasonable base salary is essential to attract and retain good executives.

United Fire & Casualty Company and ~~reasonable base salary is essential to attract and retain good executives.~~Subsidiaries

Annual performance-based cash awards are valuable in recognizing and rewarding both individual achievement and the ~~executives’~~executive’s role in our overall performance.

~~Flexible benefit credits allow executives to elect benefits that correspond with their individual needs and preferences.~~

Equity-based compensation helps executives to “think like owners” and, therefore, align their interests with those of our ~~stockholders.~~shareholders.

Flexible benefit credits allow executives to elect benefits that correspond to their individual needs and preferences.

Base Salary

We design base salary to attract and retain experienced executives who can help us achieve our business goals. We determine an executive’s initial base salary by considering a variety of factors, including the executive’s experience level, the responsibilities of the executive’s position, our existing compensation structure, the compensation levels in ~~comparable~~other companies, the cost of living and quality of life in the geographical areas where we are located and our employee-friendly culture. ToIn addition, to determine increases in an executive’s base salary, ~~we consider those factors discussed above, plus~~ we consider individual performance, pertinent experience with us and increases in responsibility.

Annual Performance-Based Cash Awards

We maintain an annual incentive plan that provides annual performance-based cash awards. This plan links a portion of annual compensation directly to our performance. Each ~~employee~~calendar year, all employees (except the chairman of the board and the ~~chief executive officer) who has~~president of our life insurance subsidiary) are eligible to participate in the plan if they (1) have worked for us for at least twelve months, ~~who has~~(2) have 1,000 hours of service ~~in a~~during the calendar year and ~~who is employed~~(3) are in our employ at the time the cash ~~award is paid during the next calendar~~awards for that year isare paid. Employees who are otherwise eligible to participate inwho retire during the ~~plan for that~~ calendar ~~year. Upon retirement employees~~year receive payments under this plan prorated to the date of their retirement. ~~Currently, all senior executive officers, except the chief executive officer and the chairman of the board, are participants under the annual incentive plan.~~ Our objective in using the annual incentive plan is to provide a strong financial incentive to all employees to achieve critical corporate, branch and department goals. To measure achievement under the annual incentive plan for all eligible employees (except our chief executive officer), we use three performance indicators: corporate return on equity (ROE), business unit targets based on losses and loss ~~adjustment~~settlement expenses (loss ratio) and cost center expense targets. For our chief executive officer we use two performance indicators: ROE and our corporate growth rate, as measured by our property and casualty segment’s direct premium written through our independent agencies. Each year, we establish minimum, target and maximum levels of performance for each ~~of three~~ performance ~~indicators. Upon completion of~~indicator. After each fiscal year, we assess ~~the~~company performance ~~of the company~~ for each ~~of the three financial objectives,~~performance indicator, comparing ~~the~~ actual ~~fiscal year~~ results to the pre-determined minimum, target and maximum ~~levels for each objective and an overall percentage amount for the corporate financial objective is calculated.~~levels. Attaining the highest level of performance in each of the ~~categories~~three indicators would result in a cash award of 48.0 percent of base salary for our chief executive officer and 30.0 percent of base salary for our other participating named executive ~~officers (with~~officers.

The compensation committee chose ROE as an annual incentive plan performance indicator because it believes that ROE is a good overall measure for evaluating our operating performance and that the ~~exception~~value of our common stock is closely related to ROE performance. Accordingly, achieving ROE target levels should enhance our stock value and shareholder return. In determining whether we have achieved our ROE target goal, ROE is calculated based on after-tax consolidated earnings divided by average equity. We reserve the right to exclude the impact of net unrealized appreciation from our ROE calculation.

The compensation committee chose business unit loss ratios and cost center expense targets as annual incentive plan performance indicators because they are good measures of our underwriting performance and overall profitability. If we are able to keep our expenses in line with guidelines established for cost center expense targets, we are able to achieve profitability for ourselves and value for our shareholders. In determining whether we have achieved our business unit targets, loss ratios are calculated by dividing net premiums earned by net losses incurred plus allocated loss settlement expenses paid. Cost center expense targets are measured by expenses expressed as a percentage of direct written premiums.

The chairman of the board and the ~~chief executive officer).~~

president of our life subsidiary are not participants in our annual incentive plan. For ~~the chief executive officer and the chairman of the board,~~these individuals, the compensation committee determines on a discretionary basis what, if any, annual performance-based cash awards ~~are awarded~~ to grant them. The compensation committee recommends those awards to the board

United Fire & Casualty Company and Subsidiaries

of directors, which has the final approval. In making this determination, the compensation committee ~~uses~~considers our achievement of the same three performance indicators that are ~~considered under~~used in the annual incentive plan, emphasizing each executive’s overall performance in their leadership roles.

The table below shows the 2007 performance goals and actual results for our annual incentive plan. Payments to named executive officers under our annual incentive plan are made in March 2008 for performance during 2007.

Annual Incentive Plan

	2007 Plan Goals			2007 Annual Incentive Plan Actual Results (%)	Percentage of Total Incentive Plan Award to Executive (%)
Performance Measure	Threshold (%)	Target (%)	Maximum (%)	2007 Annual Incentive Plan Actual Results (%)	Percentage of Total Incentive Plan Award to Executive (%)
Return on Equity
Chief Executive Officer	10.0%	13.0%	16.0%	17.8%	75.0%
Other Named Executive Officers ⁽¹⁾	10.0	13.0	16.0	17.8	60.0
Business Unit Loss Ratio
Chief Executive Officer	—	—	—	—	—
Other Named Executive Officers ⁽¹⁾	60.0	52.5	45.0	43.0	20.0
Cost Center Expense Target
Chief Executive Officer	—	—	—	—	—
Other Named Executive Officers ⁽¹⁾	3.0	2.5	2.0	2.3	20.0
Corporate Growth Rate
Chief Executive Officer	2.5	2.5	2.5	(0.3)	25.0
Other Named Executive Officers ⁽¹⁾	—	—	—	—	—

(1)	Named executive officers participating in our annual incentive plan include Mr. Ramlo, Ms. Lyons, Mr. Ernst and Mr. Wilkins. Mr. McIntyre and Mr. Rife do not participate in the plan.

Flexible Benefit Credits

We maintain a flexible benefit credits program for all of our employees. Under this program, we allocate flexible benefit credits to each employee based on a formula that ~~takes into account~~considers length of service with us and base salary. All employees ~~including senior executive officers,~~ are treated the same under the program. Near the end of each year, our employees determine how to “spend” their flexible benefit credits. Employees can allocate their credits

~~United Fire & Casualty Company and Subsidiaries~~

among a variety of benefits, including supplemental life insurance, medical insurance, dental insurance, dependent life insurance and up to one week of ~~vacation and dependent life insurance.~~vacation. If the flexible benefit credits allocated to an individual employee are not enough to cover ~~the~~their selected benefits, ~~selected by that employee,~~ the difference is deducted from the employee’s base salary. If an employee has excess flexible benefit credits available after making his or her benefit elections, the employee can elect to take the excess credits as direct cash compensation or ~~allocate it~~contribute cash to our 401(k) plan.

~~The~~This program ~~provides~~gives each employee the opportunity to select the medical ~~plan~~and other insurance options that best meets his or her individual ~~needs.~~needs and preferences. Each employee must choose between two company-sponsored medical plan options or waive medical coverage. If an employee waives medical coverage, we reduce that employee’s flexible benefit credits.

This program permits each employee to select elements of benefits that correspond with that employee’s individual needs. We believe our flexible benefit credit program helps us to retain our senior executive officers. It is attractive to and appreciated by executives who want to be able to design and provide for their own financial security and meet their own needs and preferences.

Long-Term Equity Based Awards

We have adopted an ~~Employee Stock Option Plan~~employee stock option plan as part of our overall compensation ~~program to attract and retain executives and certain other key employees. Because increasing shareholder value directly rewards executives who own~~program. The principal purpose of our ~~stock, we believe this program strengthens executives’ desire to accomplish goals and strategies that enhance our value. Our~~ board of ~~directors’ principal purposes for~~directors granting stock options to named executive officers is to retain those executives and to provide compensation that encourages those executives to increase shareholder value by executing our strategies and achieving our goals. ~~Awards under this plan provide expected benefit to the named executive officers without immediate cost to us.~~ The expense related to these option awards is recognized in our Consolidated Financial Statements over the vesting period of the awards.

United Fire & Casualty Company and Subsidiaries

Our board of directors has full discretion to issue stock options to our named executive officers under the ~~Employee Stock Option Plan.~~employee stock option plan. Each year, the compensation committee determines whether and to what extent it will recommend to the board of directors the granting of stock options to ~~the~~our named executive officers and other key ~~employees under the Employee Stock Option Plan.~~employees. The board of directors then determines whether ~~and~~or not to ~~what extent it will grant options based~~act upon the ~~recommendation of~~committee’s recommendations. At the ~~compensation committee. In 2006,~~board’s regularly scheduled meeting held on February 16, 2007, the board ~~accepted the recommendation of the compensation committee and~~ granted stock options to named executive officers and other key employees. ~~This determination took place at~~The exercise price of those options was the ~~Board’s regularly scheduled meeting held~~closing market price for our common stock on ~~the third Friday of February each year.~~that date. The board of directors ~~granted~~grants options at ~~that~~the February meeting each year because it is the first regularly scheduled meeting following the release of year-end earnings.

In 2007, there were no material announcements made by us for the period between the release of year-end earnings and the granting of stock options.

The ~~Employee Stock Option Plan~~employee stock option plan permits repricing of options only in the limited circumstances of a stock split, combination of shares, stock dividend, reclassification, merger, consolidation, reorganization, recapitalization, or similar adjustment to the security underlying the options, or our dissolution or liquidation.

Options our board of directors has granted under the ~~Employee Stock Option Plan~~employee stock option plan have the following characteristics:

Options vest 20 percent each year on the first five anniversaries of the grant date. ~~The options~~Options vest immediately if we enter into an agreement to dispose of all or substantially all of our assets or capital stock. Under the employee stock option plan, the board of directors also has authority to accelerate vesting of stock options at their discretion.

Options expire ~~ten years after~~on the ~~date on which they are granted, or~~ sooner ~~30 days after termination of employment for any reason other than death or disability.~~of:

Ten years after the date on which they are granted;

One year after the termination of employment for reason of death or disability; or

30 days after the termination of employment for any reason other than death or disability, unless extended by the board of directors by up to one year after termination of employment.

The exercise price is the closing market price for our common stock on the option grant date.

InTo confirm the board’s established practice, in 2007 the board of directors adopted a written policy regarding the issuance of options under the ~~Employee Stock Option Plan.~~employee stock option plan. The policy provides that all options shall be issued at regularly scheduled meetings of the board of directors and that the exercise price for options issued under the plan shall be the closing market price on the option grant date.

~~United Fire & Casualty Company and Subsidiaries~~Company-Sponsored Benefit Plans

~~COMPANY-SPONSORED BENEFIT PLANS~~

We believe the insurance and retirement benefit plans we sponsor are an important part of fair and reasonable compensation offor all of our employees, including our senior executive officers. We ~~designed~~design these benefit plans to attract and retain good employees, to provide a measure of financial security for our employees and to assist our employees in providing for their own financial security in a manner that recognizes individual needs and preferences. ~~In addition to attracting and retaining good employees, we~~We also provide these programs because we believe that employees who have a plan for health and financial security are better employees. We apply these programs equally to all employees. Our ~~benefits~~benefit plans consist of an insurance plan that provides health, vision, dental, disability and basic term life insurance coverage, and various retirement plans. These retirement plans are described below.

Insurance Plans

~~The~~Our insurance package includes health, vision, dental, disability and basic term life insurance coverage. Senior executive officers participate in these benefits on the same basis as all of our other employees. These plans permit our employees ~~including senior executive officers,~~ to establish flexible spending accounts, up to statutorily ~~prescribe~~prescribed maximum contribution amounts, to pay for un-reimbursed medical and dependent care expenses. Also, ~~each employee~~employees can use ~~the~~their flexible benefit credits as discussed above to tailor their insurance coverage to meet their individual financial security goals and needs.

United Fire & Casualty Company and Subsidiaries

We use a schedule to provide basic term life benefits to each full-time employee based on that employee’s salary, with a maximum amount of $250,000 of coverage for ~~salary~~employees with salaries in excess of $200,000. When an employee reaches age 65, we reduce ~~the~~this benefit to 50 percent of that employee’s previous benefit, up to a maximum benefit of $15,000.

We provide both short-term and long-term disability benefits to all of our employees. Employees are eligible to participate in our short-term disability program after one-half year of continuous employment. Benefits accrue under our short-term disability plan based on the number of years of service towith us and then are calculated as a percentage of base salary. ~~For qualifying employees, short-term~~Short-term disability benefits terminate after six months.

Employees with one year of continuous service are eligible for our long-term disability program. Benefits under this program begin once an employee has been totally disabled for a period of six months. Benefits are ~~again~~ calculated as a percentage of base salary. Employment with us terminates ~~once~~when an employee begins receiving long-term disability benefits.

Retirement Plans

We provide retirement benefits to all of our employees, including senior executive officers, through a combination of qualified and non-qualified plans. The compensation committee periodically reviews the benefits provided by company-sponsored benefit plans to ensure that the benefits provided by ~~the~~these plans are cost effective for us and that they are fair and reasonable. Benefit plan levels are not tied to company, business area or individual performance.

~~United Fire & Casualty Company and Subsidiaries~~

Defined Benefit Pension Plan.

The United Pension Plan is a qualified defined benefit pension plan intended to supplement our employees’ retirement income and provide a measure of financial security in retirement. All of our employees who are 21 years of age and older automatically participate in the plan after completing one year of employment and 1,000 hours of service to us. Once eligibility criteria are met, ~~the employee participates~~participation in the plan begins on the next January 1 or July 1. Employees become 100 percent vested in the plan after completing five years of service. Plan benefits equal ~~the number of years of service – up to a maximum of 35 years – multiplied by~~ 1.25 percent of an employee’s five year average annual compensation, plus .5 percent of average annual compensation in excess of covered ~~compensation.~~compensation, multiplied by the lesser of years of service or 35 years. Covered compensation is determined by reference to the Social Security taxable wage base. Average annual compensation means annual compensation, averaged over the period of five consecutive years of service that produces the highest average. In most cases, the five year measurement period is the last five years of full-time ~~service~~employment prior to retirement.

Deferred Compensation ~~Plan.~~Plan

We maintain a non-qualified deferred compensation plan for executives at the vice president level or higher. We use this plan to provide these executives the opportunity to plan and supplement their retirement income by deferring receipt of part of their base salary and/or annual performance-based cash award. We hold the amounts deferred by an executive in a separate account for the benefit of that executive.

We pay the deferred amounts to the executive upon termination of employment for any reason after the executive reaches age 59½. The ~~employee~~executive may elect to receive the benefits in a lump sum or in annual installments over a period of years ending not later than the year in which the ~~employee~~executive reaches 75 years of age. An ~~employee~~executive with less than five years of service who defers compensation under this plan forfeits 60 percent of the deferred amounts if that ~~employee~~executive terminates employment prior to attaining age 59½. An executive with at least five years of service but less than ten years of service who defers compensation under this plan forfeits 30 percent of the deferred amounts if that executive terminates employment prior to attaining age 59½. An executive becomes fully vested in amounts deferred under our deferred compensation plan when the executive has attained ten years of service or reached age 59½. If the ~~employee~~executive dies or becomes disabled while employed by us, we will pay the plan benefits as directed by the ~~employee.~~executive. The amounts deferred are subject to our creditors. Because an executive has a risk of forfeiture upon termination of employment prior to age 59½, we believe this plan is an important tool to retain our senior executive officers.

United Fire & Casualty Company and Subsidiaries

Self-Funded 401(k) Investment ~~Plan.~~Plan

We sponsor a 401(k) plan that allows all our employees, including senior executive officers, to make pre-tax contributions, up to statutorily allowed maximums, to an individual 401(k) retirement account and/or to make after-tax contributions to a Roth 401(k) retirement account. Our 401(k) plan offers a variety of investment options, including investment in our stock. Our 401(k) plan allows us to make discretionary contributions to the plan. Because we maintain and fund the defined benefit pension plan, we make no discretionary contributions to the 401(k) plan and we do not match employees’ contributions to the 401(k) plan.

Employee Stock Ownership Plan.

We established the United Fire Group Employee Stock Ownership Plan (ESOP) so employees could share in our growth and prosperity. This plan does not permit employee contributions. We make contributions to this plan from time to time at the discretion of management. The plan allocates contributions to Plan participants on a basis determined by base salary level and years of service to us. All employees, including senior executive officers, are automatically enrolled in this plan when they reach age 21, complete one year of service and meet minimum hourly service requirements. Participants are 100 percent vested in the ESOP plan after completing five years of eligible service. Because employees must be participants in this plan for five years to be fully vested, we believe this plan provides additional incentive tofor employees to remain with us.

Employee Stock Purchase ~~Plan.~~Plan

The employee stock purchase plan is a non-qualified plan that allows all our employees, including senior executive officers, to purchase shares of our common stock through periodic payroll deductions of $10 or more per pay period. Plan participants can also make optional cash contributions of $10 or more in any given month to purchase additional shares. We maintain this plan to provide an opportunity for employees to invest in our stock. We believe

~~United Fire & Casualty Company and Subsidiaries~~

that employees who own our stock will be more likely to execute our business strategies to achieve ~~stockholder~~shareholder value.

~~PERQUISITES~~Perquisites

We do not rely upon perquisites as a method ~~to provide~~of providing significant compensation to any of our employees, preferring instead to use direct compensation and benefit plans. We provide perquisites that are related to our business or that we believe are necessary ~~for us.~~to attract and retain key executive personnel.

For security reasons, the board of directors requires that the chairman of ~~the~~our board of directors ~~and the chief executive officer to~~ use our corporate aircraft for business ~~and personal~~ travel. We ~~also~~expect our chief executive officer and other executive officers to use the corporate aircraft for business travel whenever it is reasonable to do so. We permit ~~the spouse of~~ the chairman of ~~the~~our board of directors and his wife to use the aircraft ~~and~~for personal travel. Through December 31, 2007, we ~~permit the spouse of the~~permitted John A. Rife, chief executive officer until May 16, 2007 and president of our life subsidiary, to use the aircraft ~~to accompany him when he uses the aircraft.~~for personal travel. Under Internal Revenue Service regulations, we report the value of their personal use of the corporate aircraft as ordinary income. We increase their cash compensation to pay the income taxes associated with their personal use of the corporate aircraft.

In addition to the use of our corporate aircraft, we provide the following perquisites:

We provide as a benefit to ~~the~~our chairman of the board a universal life insurance policy in the amount of ~~$235,000.~~$540,600.

For ~~the~~our chairman of the board and ~~the chief executive officer~~our life insurance company president we provide home telephone and internet service to enhance their ability to provide services to us.

Because ~~the~~our chairman of the board, ~~the~~our chief executive officer, ~~the chief operating officer~~our life insurance company president and ~~the~~our chief investment officer use a country club for business entertainment, we pay one-half of the monthly dues for each of these ~~officers.~~executives.

United Fire & Casualty Company and Subsidiaries

As permitted by Internal Revenue Service regulations, we do not deduct the amount of these payments as business expenses and we do not report the value of these perquisites as income to the executive officers for income tax purposes.

THE ANNUAL COMPENSATION PROCESS

Role of Management

~~The~~Our chief executive officer, with input from ~~the~~our chairman of the board, has a key role in determining compensation levels for the senior executive officers (not including the chairman of the board and the chief executive officer). ~~The~~Our chief executive officer directs the collection and compilation of data for consideration by the compensation committee. Guided by the principles discussed under ~~Compensation~~“Compensation and Benefits Philosophy, ~~previously, the~~” our chief executive officer:

Identifies appropriate performance measures and recommends to the compensation committee performance targets to determine annual and long-term awards.

Using survey data and publicly disclosed compensation, develops compensation guidelines for each executive position.

Based on survey data and on our performance, recommends annual salary and long-term awards to the compensation committee.

Briefs each executive on the guidelines established for that executive’s position.

~~United Fire & Casualty Company and Subsidiaries~~

Independent Consultants

~~The~~Under its charter, the compensation committee has the authority ~~under its charter~~ to engage the services of outside advisors to assist in carrying out its duties. Under this authority, ~~in 2006~~during 2007 the committee engaged the services of ~~independent~~Compensation Resources, Inc. as outside compensation ~~consultants~~consultant to provide advice on compensation matters. The compensation committee engaged Compensation Resources, Inc. to provide an individual who would provide services to and report directly to the compensation committee on matters of executive compensation. Our named executives did not participate in the compensation committee’s selection of Compensation Resources, Inc. Compensation Resources, Inc.’s engagement with the compensation committee includes:

Reviewing and advising on all principal aspects of executive and non-employee director compensation, including base salaries and annual incentive awards for executive officers, and cash compensation and equity awards for non-employee directors;

Reviewing and advising on target performance levels and the design of our annual incentive plan; and

Providing advice on executive and director compensation matters as requested by the Committee.

During 2007, the individual also provided assistance to the compensation committee relating to our annual incentive plan for executives and the provisions of our employee stock option plan.

Compensation Resources, Inc. also assists our human resources department with, among other things, structuring various compensation programs that are available to all of our employees. To maintain the independence of the individual who provides services to the compensation committee, he does not provide any other services to us. The compensation committee believes that the individual is independent of management with respect to services provided to the compensation committee because:

The individual who provides consulting services to the committee does not provide any other services to us;

The individual who works with the compensation committee reports only to the committee, does not provide reports to our human resources department or to management, and does not meet with our human resources department or management; and

United Fire & Casualty Company and Subsidiaries

The individual keeps confidential and separate from management all information provided by or to the compensation committee.

Role of the Compensation Committee and the Board of Directors

The compensation committee and the board of directors refers to the principles discussed under ~~Compensation~~“Compensation and Benefits ~~Philosophy~~Philosophy” to guide it in determining and implementing compensation programs for the senior executive officers. For senior executive officers other than the chairman of the board and the chief executive officer, the compensation committee receives and reviews the recommendation of management as described above and makes recommendations to the board of directors.

The compensation committee and the board of directors take the following steps to approve the compensation of the chairman of the board and the chief executive officer:

The compensation committee, with the assistance of ~~the consultant,~~Compensation Resources, Inc., identifies appropriate performance measures.

The compensation committee reviews data provided by ~~the consultant~~Compensation Resources, Inc. and management ~~and~~along with data it obtains from public sources. Based on that review, it recommends to the board of directors the annual salary and long-term awards for the chairman of the board and the chief executive officer.

The board of directors reviews and considers the proposals of the compensation committee and makes its final determination based on our best interest and that of our ~~stockholders.~~shareholders.

~~We have no employment contracts or severance agreements with any of our officers. All our employees, including all senior executive officers, are “at will” employees.~~

We believe that ownership of our stock promotes the alignment of directors’ and officers’ interests with ours and those of our stockholders. The Articles of Incorporation require that all directors own our stock, but the Articles do not require or recommend a certain number of shares to be owned. We do not require our officers to be stockholders.

United Fire & Casualty Company and Subsidiaries

COMPENSATION DURING THE LAST FISCAL YEAR

~~2006~~ Summary Compensation Table – 2007

Name and Principal Position

Year

Salary⁽¹⁾

Bonus

Option
Awards⁽²⁾

Non-Equity Incentive Plan Compensation⁽³⁾

Change in Pension
Value and
Nonqualified Deferred Compensation Earnings

All
Other
Compensation ⁽⁴⁾

Total

John A. Rife

2006

$
500,000

$
250,000

$
51,833

$
—

$
21,104

$
16,064

$
839,001

President/Chief Executive Officer – United Fire & Casualty Company, United Life
Insurance Company, Lafayette Insurance Company, United Fire & Indemnity Company
and its affiliate and American Indemnity Financial Corporation and its
subsidiary

Chief Executive Officer – Addison Insurance Company

Dianne M. Lyons ⁽⁵⁾

2006

130,833

—

12,958

36,633

5,677

—

186,101

Vice President/Chief Financial Officer – United Fire & Casualty Company

Vice President – Addison Insurance Company, Lafayette Insurance Company and
United Fire & Indemnity Company

Treasurer – United Life Insurance Company

Scott McIntyre, Jr.

2006

375,000

250,000

—

—

29,670

48,236

702,906

Chairman – United Fire & Casualty Company, its subsidiaries and affiliate

Randy A. Ramlo

2006

195,833

—

25,916

54,833

11,027

10,619

298,228

Executive Vice President/Chief Operating Officer – United Fire & Casualty Company

President – Addison Insurance Company

Barrie W. Ernst

2006

220,000

—

6,479

61,600

4,583

—

292,662

Vice President/Chief Investment Officer – United Fire & Casualty Company

Kent G. Baker ⁽⁶⁾

2006

151,139

—

—

35,840

5,427

—

192,406

Vice President/Chief Financial Officer – United Fire & Casualty Company

Treasurer – Addison Insurance Company, Lafayette Insurance Company, United Fire &
Indemnity Company and its affiliate and American Indemnity Financial Corporation
and its subsidiary

~~Footnotes appear on next page.~~

Name and Principal Position	Year	Salary ($) ⁽¹⁾		Bonus ($)		Option Awards ($) ⁽²⁾⁽³⁾		Non-Equity Incentive Plan Compensation ($) ⁽⁴⁾		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)			All Other Compensation ($) ⁽⁵⁾		Total ($)
Randy A. Ramlo⁽⁶⁾	2007	$	281,250	$	—	$	35,859	$	101,250	$	13,428		$	10,794	$	442,581
President/Chief Executive Officer	2006		195,833		—		25,916		54,833		11,027			11,634		299,243
Dianne M. Lyons	2007		188,750		—		23,906		54,738		10,396			8,359		286,148
Vice President/Chief Financial Officer	2006		130,833		—		12,958		36,633		5,677			8,659		194,760
John A. Rife⁽⁷⁾	2007		500,000		125,000		47,811		—		23,717			23,990		720,519
President – United Life Insurance Company Retired President/Chief Executive Officer	2006		500,000		250,000		51,833		—		21,104			12,703		835,640
Scott McIntyre Jr.	2007		375,000		100,000		47,811		—		(75,704)	⁽⁸⁾		93,936		541,043
Chairman of the Board	2006		375,000		250,000		—		—		29,670			72,546		727,216
Barrie W. Ernst	2007		230,000		—		11,953		66,700		5,634			8,951		323,237
Vice President/Chief Investment Officer	2006		220,000		—		6,479		61,600		4,583			11,005		303,667
Michael T. Wilkins	2007		205,625		—		23,906		59,631		10,261			8,823		308,246
Executive Vice President	2006		165,000		—		12,958		46,200		6,711			9,979		240,848

~~United Fire & Casualty Company and Subsidiaries~~

(1)	The amounts shown in this column represent base salary without deductions for executive contributions to our 401(k) ~~plan~~Plan or salary deferrals.

(2)

We use the Black-Scholes model to determine this amount. This model estimates the fair value of traded options, which have different characteristics than employee stock options. Changes to the subjective assumptions used in the model can result in materially different fair value estimates. The hypothetical value determined by using this model is based on the following assumptions for ~~2006:~~2007: an exercise price equal to the closing market price on the day of the grant; estimated dividend yield of ~~1.53~~2.06 percent; expected volatility of ~~26.45~~28.11 percent, a risk-free interest rate of ~~4.6~~4.7 percent; and expected lives of seven years. This column reflects the fair value amounts expensed during ~~2006.~~2007.

(3)	Option awards represented in this column vest 20 percent each year for five years after the first anniversary of the grant date; unvested options are subject to forfeiture until vested.

(4)	The amounts shown in this column are those amounts earned by the executive in ~~2006.~~2007. These amounts were determined and paid in ~~2007.~~2008.

~~(4)~~(5)

See the “All Other Compensation Detail” table ~~below.~~on the next page.

~~(5)~~

~~The Board of Directors appointed Dianne M. Lyons Vice President/Chief Financial Officer effective May 17, 2006.~~

(6)

The board of directors appointed Mr. ~~Baker resigned~~Ramlo as President/Chief ~~Financial~~Executive Officer of United Fire & Casualty Company and its subsidiaries (except for United Life Insurance Company) effective May ~~17, 2006. He continued as Vice President until his retirement on December 31, 2006. He resigned his positions as officer of our subsidiaries effective August 1, 2006.~~16, 2007.

(7)	Mr. Rife retired as President/Chief Executive Officer of United Fire & Casualty Company and its subsidiaries (except for United Life Insurance Company) effective May 16, 2007.

(8)	Mr. McIntyre’s negative change in pension fund valuation is due to required distributions from the United Pension Plan to Mr. McIntyre under Internal Revenue Service guidelines.

United Fire & Casualty Company and Subsidiaries

The following table provides a detailed breakdown of the “All Other Compensation” figures appearing in the ~~2006~~2007 Summary Compensation Table.

All Other Compensation Detail – ~~2006~~2007

Named Executive Officer

Year

Country Club
Membership⁽¹⁾

Miscellaneous⁽²⁾

Flexible
Benefit
Credits

Tax
Gross-ups

Insurance
Premiums

Personal
Travel on
Company
Aircraft

Total⁽³⁾

John A. Rife

2006

$
2,780

$
1,080

$
6,587

$
1,698

$
300

$
3,619

$
16,064

Dianne M. Lyons

2006

—

—

—

—

—

—

—

Scott McIntyre Jr.

2006

2,539

540

6,587

4,087

5,018

29,465

48,236

Randy A. Ramlo

2006

2,753

—

5,443

2,183

240

—

10,619

Barrie W. Ernst

2006

—

—

—

—

—

—

—

Kent G. Baker

2006

—

—

—

—

—

—

—

		Perquisites and Personal Benefits ⁽¹⁾
Name	Year	Country Club Membership ($) ⁽²⁾		Personal Travel on Company Aircraft ($)		Misc.($) ⁽³⁾		Tax Gross-ups ($)		Flexible Benefit Credits ($)		ESOP Allocation ($)		Insurance Premiums ($)		Total ($)
Randy A. Ramlo	2007	$	—	$	—	$	—	$	2,050	$	6,749	$	1,756	$	240	$	10,794
	2006		—		—		—		2,183		5,443		3,768		240		11,634
Dianne M. Lyons	2007		—		—		—		—		6,594		1,525		240		8,359
	2006		—		—		—		—		5,919		2,560		180		8,659
John A. Rife	2007		3,309		9,885		506		1,485		6,749		1,756		300		23,990
	2006		—		—		—		1,698		6,587		4,118		300		12,703
Scott McIntyre Jr.	2007		2,274		52,241		426		5,472		6,749		1,756		25,018		93,936
	2006		2,539		29,465		731		4,087		6,587		4,118		25,018		72,546
Barrie W. Ernst	2007		—		—		—		146		6,749		1,756		300		8,951
	2006		—		—		—		—		6,587		4,118		300		11,005
Michael T. Wilkins	2007		—		—		—		177		6,749		1,657		240		8,823
	2006		—		—		—		—		6,587		3,212		180		9,979

(1)	~~Because insurance is a relationship-driven business, we pay one half of annual country club dues for Mr. Rife, Mr. McIntyre and Mr. Ramlo to provide a facility to entertain United Fire’s clients.~~

~~(2)~~

~~Includes telephone and internet access.~~

~~(3)~~

If the total of perquisites and other personal benefits received by an executive, except for tax gross-ups, does not exceed $10,000, no amount is shown in this table for that year for that executive.

(2)	Because insurance is a relationship-driven business, we pay one half of annual country club dues for Messrs. Ramlo, Rife, McIntyre and Ernst to provide a facility for business entertainment.

(3)	Includes telephone and internet access.

The following table shows ~~plan based~~plan-based awards granted to the named executive officers during ~~2006.~~

2007.

Grants of Plan-Based Awards – 2007

Named Executive Officer

Grant
Date⁽¹⁾

Estimated Future Payouts under
Non-Equity Incentive Plan Awards ⁽²⁾

All Other
Option
Awards: Number of
Securities
Underlying
Options

Exercise or
Base Price
of Option
Awards

Aggregate
Grant Date
Fair Value
of Stock and
Option Awards

Threshold⁽³⁾

Target⁽⁴⁾

Maximum⁽⁵⁾

John A. Rife ⁽⁶⁾

2/17/2006

20,000

$
39.13

$
259,164

N/A

$
—

$
—

$
—

Dianne M. Lyons

2/17/2006

5,000

$
39.13

$
64,791

N/A

22,275

37,125

44,550

Scott McIntyre Jr. ⁽⁶⁾

2/17/2006

—

—

—

N/A

—

—

—

Randy A. Ramlo

2/17/2006

10,000

$
39.13

$
129,582

N/A

33,000

55,000

66,000

Barrie W. Ernst

2/17/2006

2,500

$
39.13

$
32,395

N/A

36,300

60,500

72,600

Kent G. Baker ⁽⁷⁾

2/17/2006

—

—

—

N/A

—

—

—

Name	Grant Date ⁽¹⁾	Estimated Future Payouts under Non-Equity Incentive Plan Awards ⁽²⁾						All Other Option Awards: Number of Securities Underlying Options (#)	Exercise or Base Price of Option Awards ($/Sh)		Aggregate Grant Date Fair Value of Stock and Option Awards ($)
Name	Grant Date ⁽¹⁾	Threshold ($) ⁽³⁾		Target ($) ⁽⁴⁾		Maximum ($) ⁽⁵⁾			Exercise or Base Price of Option Awards ($/Sh)
Randy A. Ramlo	2/16/2007							15,000	$	35.23	$	179,293
	N/A	$	67,500	$	112,500	$	135,000
Dianne M. Lyons	2/16/2007							10,000		35.23		119,529
	N/A		28,313		47,188		56,625
John A. Rife ⁽⁶⁾	2/16/2007							20,000		35.23		239,057
	N/A		—		—		—
Scott McIntyre Jr.⁽⁶⁾	2/16/2007							20,000		35.23		239,057
	N/A		—		—		—
Barrie W. Ernst	2/16/2007							5,000		35.23		59,764
	N/A		34,500		57,500		69,000
Michael T. Wilkins	2/16/2007							10,000		35.23		119,529
	N/A		30,844		51,406		61,688

(1)	All option awards were granted under our ~~Employee Stock Option Plan.~~employee stock option plan.

(2)

We grant non-equity incentive plan awards under our ~~Annual Incentive Plan.~~annual incentive plan. The threshold, target and maximum amounts for future payouts are not determinable. The amounts shown are representative amounts based on the previous fiscal year’s performance. We pay awards based on our 2007 performance in 2008. Actual amounts paid to each named executive officer for 2007 are shown in the Summary Compensation Table.

~~United Fire & Casualty Company and Subsidiaries~~

(3)	We estimate the amount in this column by assuming the achievement of threshold levels for all three performance indicators and by multiplying ~~110% of~~ base salary by 24 percent for Mr. Ramlo and 15 ~~percent.~~percent for Ms. Lyons, Mr. Ernst and Mr. Wilkins.

(4)	We estimate the amount in this column by assuming the achievement of target levels for all three performance indicators and by multiplying ~~110% of~~ base salary by 40 percent for Mr. Ramlo and 25 ~~percent.~~percent for Ms. Lyons, Mr. Ernst and Mr. Wilkins.

(5)	We estimate the amount in this column by assuming the achievement of maximum levels for all three performance indicators and by multiplying ~~100% of~~ base salary by 48 percent for Mr. Ramlo and 30 ~~percent.~~percent for Ms. Lyons, Mr. Ernst and Mr. Wilkins.

(6)	Mr. Rife and Mr. McIntyre do not participate in our ~~Annual Incentive Plan.~~annual incentive plan.

~~(7)~~

~~Because Mr. Baker retired in 2006, he will not participate in our Annual Incentive Plan for 2007.~~

We grant awards to named executive officers under the Employee Stock Option Plan on a discretionary basis. Options are granted based on a recommendation from the compensation committee and are typically granted at the regularly scheduled meeting of the board of directors held on the third Friday in February each year. There were no material announcements made by us for the period between the release of year-end earnings and the granting of options. Options granted to named executive officers vest 20 percent each year on the first five anniversaries of the grant date. The options vest immediately if we enter into an agreement to dispose of all or substantially all of its assets or capital stock. Options expire ten years after the option grant date, or, if sooner, 30 days after termination of employment for any reason other than death or disability, unless extended by the board of directors for up to a year after termination of employment. The exercise price of options granted to named executive officers is the closing market price for our common stock on the option grant date.

All senior executive officers, except the chief executive officer and the chairman of the board, participate in the annual incentive plan. Our objective in using the plan is to provide a strong financial incentive to all employees to achieve critical corporate, branch and department goals. To measure achievement, the plan provides for three performance indicators: corporate return on equity, business unit targets based on losses and loss adjustment expenses and cost center targets. Each year, we establish three target levels for each of three performance indicators and we determine the total amount of cash awards to be paid under the plan at various levels of performance. The plan allocates differing amounts to employees based upon their ability to affect the achievement of our goals.

United Fire & Casualty Company and Subsidiaries

The following table details the outstanding equity awards held by each of our named executive officers as of December 31, ~~2006.~~

2007.

Outstanding Equity Awards at Fiscal Year-End – ~~2006~~2007

Named Executive Officer	Number of Securities Underlying Unexercised Options Exercisable	Number of Securities Underlying Unexercised Options Unexercisable		Option Exercise Price		Option Expiration Date
John A. Rife	—	2,000	⁽¹⁾	$	15.16	2/15/2012
							Option Awards
Name							Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Option Exercise Price ($/Sh)		Option Expiration Date ^{(1)(2)(3)(4)(5)}
Randy A. Ramlo							2,000	—	$	15.16	2/21/2012
							1,600	400		15.85	2/21/2013	⁽¹⁾
	—	4,000	⁽²⁾	$	15.85	2/21/2013	2,400	1,600		21.66	2/20/2014	⁽²⁾
	—	12,000	⁽³⁾	$	21.66	2/20/2014	2,000	3,000		32.39	2/18/2015	⁽³⁾
	4,000	16,000	⁽⁴⁾	$	32.39	2/18/2015	2,000	8,000		39.13	2/17/2016	⁽⁴⁾
	—	20,000	⁽⁵⁾	$	39.13	2/17/2016	—	15,000		35.23	2/16/2017	⁽⁵⁾
Dianne M. Lyons	—	400	⁽⁶⁾	$	15.16	2/15/2012	400	—		15.16	2/21/2012
	—	1,600	⁽⁷⁾	$	15.85	2/21/2013	800	800		15.85	2/21/2013	⁽¹⁾
	—	2,400	⁽⁸⁾	$	21.66	2/20/2014	800	1,600		21.66	2/20/2014	⁽²⁾
	1,000	4,000	⁽⁹⁾	$	32.39	2/18/2015	2,000	3,000		32.39	2/18/2015	⁽³⁾
	—	5,000	⁽¹⁰⁾	$	39.13	2/17/2016	1,000	4,000		39.13	2/17/2016	⁽⁴⁾
Scott McIntyre, Jr.	—	2,000	⁽¹¹⁾	$	15.16	2/15/2012
							—	10,000		35.23	2/16/2017	⁽⁵⁾
John A. Rife							1,500	2,000		15.85	2/21/2013	⁽¹⁾
	2,000	4,000	⁽¹²⁾	$	15.85	2/21/2013	4,000	8,000		21.66	2/20/2014	⁽²⁾
	8,000	12,000	⁽¹³⁾	$	21.66	2/20/2014	8,000	12,000		32.39	2/18/2015	⁽³⁾
	4,000	16,000	⁽¹⁴⁾	$	32.39	2/18/2015	4,000	16,000		39.13	2/17/2016	⁽⁴⁾
Randy A. Ramlo	1,600	400	⁽¹⁵⁾	$	15.16	2/15/2012
	1,200	800	⁽¹⁶⁾	$	15.85	2/21/2013	—	20,000		35.23	2/16/2017	⁽⁵⁾
Scott McIntyre Jr.							—	2,000		15.85	2/21/2013	⁽¹⁾
	1,600	2,400	⁽¹⁷⁾	$	21.66	2/20/2014	12,000	8,000		21.66	2/20/2014	⁽²⁾
	1,000	4,000	⁽¹⁸⁾	$	32.39	2/18/2015	8,000	12,000		32.39	2/18/2015	⁽³⁾
	—	10,000	⁽¹⁹⁾	$	39.13	2/17/2016	—	20,000		35.23	2/16/2017	⁽⁵⁾
Barrie W. Ernst	11,000	4,000	⁽²⁰⁾	$	17.70	8/1/2012	12,000	—		17.70	8/1/2012
	1,200	800	⁽²¹⁾	$	15.85	2/21/2013	1,600	400		15.85	2/21/2013	⁽¹⁾
	800	1,200	⁽²²⁾	$	21.66	2/20/2014	1,200	800		21.66	2/20/2014	⁽²⁾
	500	2,000	⁽²³⁾	$	32.39	2/18/2015	1,000	1,500		32.39	2/18/2015	⁽³⁾
	—	2,500	⁽²⁴⁾	$	39.13	2/17/2016	500	2,000		39.13	2/17/2016	⁽⁴⁾
Kent G. Baker	200	—		$	13.06	12/31/07⁽²⁵⁾
							—	5,000		35.23	2/16/2017	⁽⁵⁾
Michael T. Wilkins							200	—		17.70	8/1/2012
							—	400		15.85	2/21/2013	⁽¹⁾
							—	1,600		21.66	2/20/2014	⁽²⁾
							2,000	3,000		32.39	2/18/2015	⁽³⁾
							1,000	4,000		39.13	2/17/2016	⁽⁴⁾
							—	10,000		35.23	2/16/2017	⁽⁵⁾

Table footnotes appear on the next page.

(1)	~~2,000~~The unexercisable portion of the options that expire on 2/21/2013 vest ~~February 15, 2007.~~in full on 2/21/2008.

(2)	~~2,000~~The unexercisable portion of the options that expire on 2/20/2014 vest ~~February 21, 2007~~one-half on 2/20/2008 and ~~February 21, 2008, respectively.~~one-half on 2/20/2009.

(3)	~~4,000~~The unexercisable portion of the options that expire on 2/18/2015 vest ~~February 20, 2007, February 20,~~ one-third on 2/18/2008, one-third on 2/18/2009 and ~~February 20, 2009, respectively.~~one-third on 2/18/2010.

(4)	~~4,000~~The unexercisable portion of the options that expire on 2/17/2016 vest ~~February 18, 2007, February 18,~~ one-fourth on 2/17/2008, ~~February 18,~~ one-fourth on 2/17/2009, one-fourth on 2/17/2010 and ~~February 18, 2010, respectively.~~one-fourth on 2/17/2011.

(5)

~~4,000~~The unexercisable portion of the options that expire on 2/16/2017 vest ~~February 17, 2007, February 17,~~ one-fifth on 2/16/2008, ~~February 17,~~ one-fifth on 2/16/2009, ~~February 17,~~ one-fifth on 2/16/2010, one-fifth on 2/16/2011 and ~~February 17, 2011, respectively.~~one-fifth on 2/16/2012.

~~(6)~~

~~400 options vest February 15, 2007.~~

~~(7)~~

~~800 options vest February 21, 2007 and February 21, 2008, respectively.~~

~~(8)~~

~~800 options vest February 20, 2007, February 20, 2008 and February 20, 2009, respectively.~~

~~(9)~~

~~1,000 options vest February 18, 2007, February 18, 2008, February 18, 2009 and February 18, 2010, respectively.~~

~~(10)~~

~~1,000 options vest February 17, 2007, February 17, 2008, February 17, 2009, February 17, 2010 and February 17, 2011, respectively.~~

~~(11)~~

~~2,000 options vest February 15, 2007.~~

~~(12)~~

~~2,000 options vest February 21, 2007 and February 21, 2008, respectively.~~

~~(13)~~

~~4,000 options vest February 20, 2007, February 20, 2008 and February 20, 2009, respectively.~~

~~(14)~~

~~4,000 options vest February 18, 2007, February 18, 2008, February 18, 2009 and February 18, 2010, respectively.~~

~~(15)~~

~~400 options vest February 15, 2007.~~

~~(16)~~

~~400 options vest February 21, 2007 and February 21, 2008, respectively.~~

~~(17)~~

~~800 options vest February 20, 2007, February 20, 2008 and February 20, 2009, respectively.~~

~~(18)~~

~~1,000 options vest February 18, 2007, February 18, 2008, February 18, 2009 and February 18, 2010, respectively.~~

~~(19)~~

~~2,000 options vest February 17, 2007, February 17, 2008, February 17, 2009, February 17, 2010 and February 17, 2011, respectively.~~

~~(20)~~

~~4,000 options vest August 1, 2007.~~

~~(21)~~

~~400 options vest February 21, 2007 and February 21, 2008, respectively.~~

~~(22)~~

~~400 options vest February 20, 2007, February 20, 2008 and February 20, 2009, respectively.~~

~~(23)~~

~~500 options vest February 18, 2007, February 18, 2008, February 18, 2009 and February 18, 2010, respectively.~~

United Fire & Casualty Company and Subsidiaries

~~(24)~~

~~500 options vest February 17, 2007, February 17, 2008, February 17, 2009, February 17, 2010 and February 17, 2011, respectively.~~

~~(25)~~

The original expiration date on these options when they were granted was April 1, 2009. Because Mr. Baker retired effective December 31, 2006, he has one year from the date of his retirement to exercise any vested options.

The following table represents the number of shares and the value of those shares acquired through the exercise of vested stock options under our Employee Stock Option Plan by the named executive officers during fiscal year ~~2006.~~

2007.

~~2006~~ Option Exercises – 2007

Named Executive Officers

Option Awards

Number of Shares
Acquired on Exercise

Value
Realized on Exercise

John A. Rife

10,000

$
190,478

Dianne M. Lyons

4,000

$
67,736

Scott McIntyre Jr.

4,000

$
72,590

Randy A. Ramlo

—

$
—

Barrie W. Ernst

—

$
—

Kent G. Baker

—

$
—

Name	Option Awards
Name	Number of Shares Acquired on Exercise (#)	Value Realized on Exercise ($)
Randy A. Ramlo	—	$	—
Dianne M. Lyons	—		—
John A. Rife	2,500		41,980
Scott McIntyre Jr.	6,000		100,080
Barrie W. Ernst	3,000		72,900
Michael T. Wilkins	2,800		52,116

POST EMPLOYMENT COMPENSATION

~~2006~~ Pension Benefits – 2007

Named Executive Officer

Plan Name

Number of
Years Credited
Service

Present
Value of
Accumulated
Benefit

Payments
During Last
Fiscal Year

John A. Rife

United Pension Plan

30

$
100,631

$
—

Dianne M. Lyons

United Pension Plan

23

30,434

—

Scott McIntyre, Jr.

United Pension Plan

35
⁽¹⁾

225,823

196,153

Randy A. Ramlo

United Pension Plan

22

44,061

—

Barrie W. Ernst

United Pension Plan

4

12,541

—

Kent G. Baker

United Pension Plan

22

42,752

—

Name	Plan Name	Number of Years of Credited Service (#)		Present Value of Accumulated Benefit ($)		Payments During Last Fiscal Year ($)
Randy A. Ramlo	United Pension Plan	23		$	232,072	$	—
Dianne M. Lyons	United Pension Plan	24			157,408		—
John A. Rife	United Pension Plan	31			1,144,540		—
Scott McIntyre Jr.	United Pension Plan	35	⁽¹⁾		1,110,893		492,260	⁽²⁾
Barrie W. Ernst	United Pension Plan	5			89,709		—
Michael T. Wilkins	United Pension Plan	22			170,748		—

(1)

The maximum number of years allowed under the Plan for computation of benefits is 35. Mr. McIntyre has more than 35 years of service with us.

(2)

This figure represents distributions made to Mr. McIntyre during 2007 that should have been made in prior years, including $22,055 for 2003, $150,205 for 2004 and $171,244 for 2005.

The Pension Benefits table above reports the present value of the ~~annual defined~~accumulated pension benefit payable for each named executive officer payable under our United Pension Plan. The present value is based on the retirement benefit formula for the compensation levels and years of service of those officers.

The pension plan uses average annual compensation for a participant for the highest five years for which that participant was paid as a participant. The pension plan uses only salary to determine the average annual compensation, excluding bonuses and other forms of compensation. Under federal law, the maximum salary that can be considered is $220,000. The Internal Revenue Service adjusts this limit annually based on the Consumer Price Index.

The pension plan provides an annual benefit equal to the sum of 1.25 percent of five year average annual compensation plus 0.5 percent of average annual compensation in excess of covered compensation, multiplied by the lesser of years of service or 35 years. Covered compensation is determined by reference to the Social Security taxable wage base.

The valuation method and all material assumptions ~~applied in quantifying~~used to determine the present value of the ~~current~~ accrued pension benefit for each ~~name~~named executive officer is ~~disclosed by reference to the discussion of those matters~~discussed in greater detail above in under “Company-Sponsored Benefit Plans – Retirement ~~Plans”.~~

~~United Fire & Casualty Company and Subsidiaries~~

Plans.”

The normal form of payment under the pension plan is a joint and 50 percent survivor annuity for a participant who is married on the annuity starting date and a life annuity for a participant who is unmarried. Participants may elect to

United Fire & Casualty Company and Subsidiaries

receive a monthly pension over the participant’s life or a term of up to 20 years or, if the actuarial equivalent of the annuity is $10,000 or less, in the form of cash. The amount of monthly pension benefits varies depending upon the term of payments elected by the participant, but the payments are in each case the actuarial equivalent of the normal form of payment.

Normal retirement age under the pension plan is 65, which is the earliest time a participant may retire under the plan without any benefit reduction due to age. Participants may elect early retirement at age 55, with a reduction of benefits of 6 percent for each year the participant retires after age 55 and before age 60 and a reduction of benefits of 4 percent for each year the participant retires after age 60 and before age 65.

The following table ~~shows contributions, earnings, distributions and balances in~~provides information about the participation by each of ~~the plans listed for the~~our named executive officers ~~as of December 31, 2006.~~

~~2006~~in the United Fire & Casualty Company Nonqualified Deferred Compensation Plan.

Nonqualified Deferred Compensation – 2007

Named Executive Officer/Plan Name

Executive contributions
in 2006⁽¹⁾

Aggregate
earnings
in 2006

Aggregate withdrawals distributions

Aggregate balance at December 31, 2006 ⁽²⁾

John A. Rife

Deferred Compensation Plan

$
50,000

$
12,727

$
—

$
321,457

Dianne M. Lyons

Deferred Compensation Plan

—

—

—

—

Scott McIntyre Jr.

Deferred Compensation Plan

—

—

—

—

Randy A. Ramlo

Deferred Compensation Plan

—

—

—

—

Barrie W. Ernst

Deferred Compensation Plan

6,908

1,147

—

30,352

Kent G. Baker

Deferred Compensation Plan

12,336

704

—

23,477

Name

Executive Contributions
in Last FY
($) ⁽¹⁾

Aggregate
Earnings
in Last FY
($)

Aggregate Withdrawals/ Distributions
($)

Aggregate Balance at Last FYE
($) ⁽²⁾

Randy A. Ramlo

$
—

$
—

$
—

$
—

Dianne M. Lyons

—

—

—

—

John A. Rife

—

17,680

—

339,137

Scott McIntyre Jr.

—

—

—

—

Barrie W. Ernst

12,760

2,116

—

45,237

Michael T. Wilkins

—

—

—

—

(1)
All amounts ~~reported~~shown in this column were reported as part of either the “Base Salary” or the “Non-Equity Incentive Plan Compensation” reported in the Summary Compensation Table on page ~~105~~108 of this Form 10-K.
(2)
All amounts reported in this column were reported as compensation in ~~our~~the Summary Compensation ~~Tables~~Table for previous reporting years.
The ~~amounts in the Nonqualified Deferred Compensation table represent the participation of named executive officers in the Deferred Compensation Plan. The Deferred Compensation Plan~~deferred compensation plan permits our executives at the vice president level or higher the opportunity to save a portion of their direct compensation for retirement. Executives must make a deferral election at least six months prior to the end of the applicable year or, for newly eligible executives, within 30 days of attaining eligible status. We do not make contributions to the ~~Deferred Compensation Plan.~~
deferred compensation plan.
Under the plan, we credit amounts deferred to notational accounts for the deferring executive. ~~The value~~We determine the interest rate credited on these notational accounts annually, based on a reasonable rate of ~~these accounts is credited with interest at~~return, using the rate of return on our own investment portfolio as a ~~rate determined annually by us.~~guide.
The plan requires us to make payments to the deferring executive in a single lump sum or in annual installments over a period of years selected by the executive, not to extend beyond the year in which the participant reaches age 75.

United Fire & Casualty Company and Subsidiaries

PAYMENTS UPON TERMINATION OF EMPLOYMENT
We employ all of our employees, including our named executive officers, “at will,” without employment contracts or severance agreements. We do not have a pre-defined involuntary termination severance plan or policy for employees, including the named executive officers.
Upon the termination of employment for any reason, our named executive officers will receive compensation and benefits pursuant to the same plans and arrangements that are available generally to all salaried employees. Such plans and arrangements do not discriminate in scope, terms or operation in favor of our ~~executive officers. In addition, upon termination of employment for any reason after 59½, our~~ named executive officers.
The information in the following table describes the compensation that would be payable under specific circumstances if the named executive officers’ employment had terminated on December 31, 2007.
Potential Payments Upon Termination or Change-in-Control– 2007
Name
Termination Scenario
Annual Incentive Plan ($) ⁽¹⁾⁽²⁾
Stock Options ($) ⁽³⁾⁽⁴⁾
Nonqualified Deferred Compensation ($) ⁽⁵⁾
Randy A. Ramlo
Death
$ 101,250
$ 84,060
$ —

Disability
—
84,060
—

Retirement
101,250
84,060
—

Change-in-control
101,250
84,060
—
Dianne M. Lyons
Death
54,738
44,588
—

Disability
—
44,588
—

Retirement
54,738
44,588
—

Change-in-control
54,738
44,588
—
John A. Rife
Death
—
135,500
339,137

Disability
—
135,500
339,137

Retirement
—
135,500
339,137

Change-in-control
—
135,500
339,137
Scott McIntyre Jr.
Death
—
175,080
—

Disability
—
175,080
—

Retirement
—
175,080
—

Change-in-control
—
175,080
—
Barrie W. Ernst
Death
66,700
178,020
45,237

Disability
—
178,020
45,237

Retirement
66,700
178,020
31,666

Change-in-control
66,700
178,020
45,237
Michael T. Wilkins
Death
59,631
19,423
—

Disability
—
19,423
—

Retirement
59,631
19,423
—

Change-in-control
59,631
19,423
—
(1)
Upon termination of employment other than for death or retirement, a named executive officer participating in the annual incentive plan will receive payment under the plan for a particular year only if the officer was employed on the date the incentive plan payment is paid, typically in March of the following year.
(2)
Payments for participation in the annual incentive plan shown for a change-in-control event would be made for a particular year only if the executive were still employed on the date the incentive plan payment is scheduled to be paid, typically in March of the following year.
(3)
Upon termination of employment for any reason, all unvested options expire. The board of directors may, in its discretion, accelerate the vesting of unvested options. Amounts shown in this column are based on the fair market value of the stock underlying in-the-money vested options and in-the-money unvested options that would have become exercisable on December 31, 2007 if the board of directors had accelerated all unvested options. Upon termination of employment due to death or disability, all unexercised vested options remain exercisable for up to one year from the date of death or disability or the expiration date of the grant, whichever is earlier. Upon termination of employment for any reason other than death or disability, all unexercised vested options remain exercisable for up to 30 days after termination or the option expiration date, whichever occurs first.
(4)
Upon a change-in-control, all unvested options become exercisable. Amounts shown in this column assume acceleration of all unvested options and are calculated using fair market value of the stock underlying in-the-money vested options and in-the-money unvested options that would have become exercisable because of a change-in-control.
(5)
Upon termination of employment for any reason other than death or disability, our named executive officers will receive a distribution of compensation that each employee had deferred under the deferred compensation plan, together with earnings on that deferred compensation based upon a vesting schedule. An executive with less than five years of service who defers compensation under this plan forfeits 60 percent of the deferred amounts if that executive terminates employment prior to reaching age 59½. An executive with more than five and less than ten years of service who defers compensation under this plan forfeits 30 percent of the deferred amounts if that executive terminates employment prior to reaching age 59½. An executive becomes fully vested in amounts deferred under our deferred compensation plan when

United Fire & Casualty Company and Subsidiaries
the executive attains ten years of service or reaches age 59½. Upon the named executive officer’s death or disability or if there is a ~~distribution~~change in control or ownership of ~~any compensation such employee had~~a substantial portion of our assets, all amounts deferred under the deferred compensation plan ~~together with earnings on that~~immediately become 100 percent vested and nonforfeitable. Based upon his age and years of service, Mr. Rife is 100 percent vested in his deferred ~~compensation. Termination~~compensation plan amounts. Because of ~~employment for any reason prior to~~his age ~~59½ results~~and years of service, Mr. Ernst is 70 percent vested in ~~forfeiture by the named executive officer of any amounts~~his deferred ~~and any earnings thereon.~~compensation plan amounts.

~~Whether or not~~2008 COMPENSATION CHANGES
During 2007, the compensation committee worked to redesign our equity compensation program with the intent of using both restricted stock and options. The compensation committee believes that providing a ~~named executive officer’s employment terminates, if we enter into an agreement~~balance of restricted stock and options is beneficial to ~~dispose~~us, our executives and our shareholders. The size of ~~all or substantially all of~~awards to executives under our assets or capital stock by means of a sale, merger, consolidation, reorganization, liquidation, or otherwise, options granted to a named executive officer under the employee stock option plan become immediately exercisable with respect to the full number of shares subject to that option during the period commencing as of the later of date of execution of such agreement or six months after the date the option is granted and ending as of the earlier of the stated option expiration date or the date on which the disposition of assets or capital stock contemplated by such agreement is consummated.
~~Upon termination of employment for any reason other than upon retirement, a named executive officer participating the~~ annual incentive plan and our redesigned equity compensation program are initially tied to the executive’s base salary. Under the redesigned equity compensation program, our executive officers (except our chairman of the board and the president of our life insurance subsidiary, United Life Insurance Company) are assigned to one of three “tiers” with each tier receiving a proportionate share of the pool of equity awards designated annually for all plan participants. The size of the awards will ~~receive payment under the~~be modified based on our operating results, so that in years when performance has proven to be commendable, our executives will get higher annual incentive plan awards and more equity, and in years when results are not at target, the award levels will be diminished. We are implementing this new equity compensation plan during the 2008 fiscal year.
During 2008, the compensation committee and board of directors are also implementing stock ownership guidelines for ~~a particular year only if~~its executive officers. Under the ~~officer was employed on~~new guidelines, executives are expected to achieve their target ownership levels by December 31, 2012. The goal of these guidelines is to have the ~~date the incentive plan payment is scheduled to be paid, typically March 14th each year. If the officer’s employment terminates because of retirement, named~~senior executive officers ~~participating~~hold a more significant stake in ~~the plan receive a payment~~our company. The table below provides information on potential payments to our named executives under the ~~annual incentive plan pro-rated to their retirement date.~~
~~John A. Rife~~
~~If Mr. Rife’s employment had terminated for any reason on December 31, 2006, the payment of compensation he had deferred under the deferred~~new equity compensation plan and ~~earnings~~target equity ownership levels under the new stock ownership guidelines for executives.
Compensation Changes – 2008
Name
Tier
2008 Salary
Level ($)
Estimated
Value of Equity
Awards ($) ⁽¹⁾

Target Number
of Shares of
Common Stock to be
Beneficially Owned by
December 31, 2012 (#) ⁽²⁾
Randy Ramlo
3
$
350,000
$
306,130

24,063
Dianne Lyons
2

225,000

162,070

11,602
Mike Wilkins
2

240,000

172,870

12,375
Barrie Ernst
1

242,000

136,960

8,319
(1)
Equity awards will be paid if certain company ROE targets are met. Under the redesigned equity compensation program, total annual awards can range anywhere from 35 percent of the participating executives’ aggregate annual salaries (if our ROE is between 5 and 10 percent), to 80 percent of the participating executives’ aggregate annual salaries (if our ROE is above 20 percent).Based on our historic ROE performance, we anticipate that on a yearly basis the amount of equity awards granted under this plan will approximate 65 percent of the aggregate amount of the participating executives’ annual salaries.
(2)
Equity ownership targets for members of Tier 3 were calculated as the number of shares equal to two times their base salary on January 1, 2008 divided by the closing price of our common stock on January 1, 2008. Equity ownership targets for members of Tier 2 were calculated as the number of shares equal to one and one half times their base salary on January 1, 2008 divided by the closing price of our common stock on January 1, 2008. Equity ownership targets for members of Tier 1 were calculated as the number of shares equal to their base salary on January 1, 2008 divided by the closing price of our common stock on January 1, 2008. Current beneficial ownership totals for each named executive can be found in the table on page 118.
DIRECTOR COMPENSATION
In 2007, all non-employee directors received a base director’s fee of $15,000 for service on the board of directors for that ~~deferred~~year. In addition, the vice chairman of the board of directors and the audit committee chair received an additional annual fee of $10,000. The chairs of the compensation ~~would have been $321,457. On~~committee and the nominating and governance committee each received an additional annual fee of $5,000. We pay an attendance fee of $2,000 for each regularly scheduled meeting, $1,000 for each unscheduled meeting that the chief executive officer and the chair of the compensation committee designate as a major meeting, and $500 for all other meetings. We pay an attendance fee of $1,000 for each audit committee meeting and $500 for each compensation committee and nominating and governance committee meeting. We also reimburse direct expenses, such as travel expenses, for non-employee directors to attend board and committee meetings. As of December 31, ~~2006, Mr. Rife owned~~2007 we maintained a nonqualified director stock option and restricted stock plan. During 2007, based upon the recommendation of the compensation committee, the board of directors approved the issuance under this plan of options for ~~54,000~~2,000 shares ~~that had not yet vested. Vesting~~ of ~~those options would have accelerated on December 31, 2006 if there had been a change in control on that date. Mr. Rife does not participate in the annual incentive plan.~~
~~Dianne M. Lyons~~
On December 31, 2006, Ms. Lyons owned options for 13,400 shares that had not yet vested. Vesting of those options would have accelerated on December 31, 2006 if there had been a change in control on that date. If Ms. Lyons’ employment had terminated on December 31, 2006 because of retirement, death or disability, Ms. Lyons would have received a payment of $36,633our common stock to each non-employee director under ~~the annual incentive plan. Ms. Lyons has deferred no compensation pursuant to the deferred compensation plan.~~
~~Scott McIntyre Jr.~~
On December 31, 2006, Mr. McIntyre owned options for 34,000 shares that had not yet vested. Vesting of those options would have accelerated on December 31, 2006 if there had been a change in control on that date. Mr. McIntyre does not participate in the annual incentive plan. Mr. McIntyre has deferred no compensation pursuant to the deferred compensation plan.
~~Randy A. Ramlo~~
On December 31, 2006, Mr. Ramlo owned options for 17,600 shares that had not yet vested. Vesting of those options would have accelerated on December 31, 2006 if there had been a change in control on that date. If Mr. Ramlo’s employment had terminated on December 31, 2006 because of retirement, death or disability, Mr. Ramlo would have received a payment of $54,833 under the annual incentive plan. Mr. Ramlo has deferred no compensation pursuant to the deferred compensationthis plan.

United Fire & Casualty Company and Subsidiaries

For 2008, based upon the recommendation of the compensation committee, the board of directors adopted a new compensation schedule for non-employee directors. All non-employee directors will receive a base director’s fee of $20,000 for service on the board of directors. In addition, the vice chairman of the board of directors will receive an additional annual fee of $20,000. The chairs of the audit, the compensation and the nominating and governance committees will each receive an additional annual fee of $10,000. We will continue to pay an attendance fee of $2,000 for each regularly scheduled meeting, $1,000 for each unscheduled meeting that the chief executive officer and the chair of the compensation committee designate as a major meeting, and $500 for all other meetings. We will also pay an attendance fee of $1,000 for each audit committee meeting and $500 for each compensation committee and nominating and governance committee meeting. Under our nonqualified director stock option and restricted stock plan, the board of directors may issue each non-employee director options, restricted stock units or a combination of both for a total of 3,000 shares of our common stock in 2008.
~~Barrie W. Ernst~~
~~If Mr. Ernst’s employment had terminated~~Qualified directors must be individuals who have the required background, experience and functional expertise to provide us with strategic direction and oversight. We have designed the compensation of our directors to attract and retain qualified directors and to align director compensation with the interests of our shareholders. The compensation committee is responsible for ~~any reason on December 31, 2006, Mr. Ernst would receive no payment~~making recommendations to the board of directors regarding compensation plans and the elements of compensation ~~he had deferred under~~of directors. In 2007 the ~~deferred~~ compensation ~~plan. On December 31, 2006, Mr. Ernst owned options~~committee engaged Compensation Resources, Inc. as independent outside compensation consultants to provide information and advice regarding director and executive officer compensation. The following table shows director compensation for 10,500 shares that had not yet vested. Vesting of those options would have accelerated on December 31, 2006 if there had been a change in control on that date. If Mr. Ernst’s employment had terminated on December 31, 2006 because of retirement, death or disability, Mr. Ernst would have received a payment of $61,600 under the annual incentive plan.
~~Kent G. Baker~~
Mr. Baker retired effective December 31, 2006. Because of his retirement, he was entitled to receive payment of compensation he had deferred under the deferred compensation plan and earnings on that deferred compensation totaling $23,477. On December 31, 2006, Mr. Baker owned options for no shares that had not yet vested. Because of Mr. Baker’s retirement, he also received $35,840 under the annual incentive plan.
2007.
~~2006~~ Nonemployee Director Compensation – 2007
Director

Fees Earned or
Paid in Cash

Number of Shares
Underlying
Options
Granted⁽¹⁾

Option
Awards ⁽²⁾

All
Other
Compensation ⁽³⁾

Total

Christopher R. Drahozal

$
15,000

3,333
⁽⁴⁾
$
7,951

$
1,128

$
24,079

Jack B. Evans

25,400

3,333
⁽⁵⁾

7,951

640

33,991

Thomas W. Hanley

24,000

3,333
⁽⁶⁾

7,951

—

31,951

Casey D. Mahon

18,500

3,333
⁽⁷⁾

7,951

1,499

27,950

George D. Milligan

22,500

3,333
⁽⁸⁾

7,951

1,144

31,595

Mary K. Quass

19,000

3,333
⁽⁹⁾

7,951

—

26,951

Byron G. Riley

15,400

3,333
⁽¹⁰⁾

7,951

—

23,351

Kyle D. Skogman

20,000

3,333
⁽¹¹⁾

7,951

—

27,951

Frank S. Wilkinson Jr.

20,500

3,333
⁽¹²⁾

7,951

2,611

31,062

Name
Fees Earned or
Paid in Cash ($)
Option
Awards ($) ⁽¹⁾⁽²⁾
All Other Compensation ($) ⁽³⁾
Total ($)
Christopher R. Drahozal
$ 23,000
$ 18,840
⁽⁴⁾
$ 903
$ 42,743
Jack B. Evans
40,200
18,840
⁽⁵⁾
—
59,040
Thomas W. Hanley
37,500
18,840
⁽⁶⁾
—
56,340
Douglas M. Hultquist
21,000
18,840
⁽⁷⁾
—
39,840
James A. Leach
22,500
18,840
⁽⁸⁾
—
41,340
Casey D. Mahon
26,000
18,840
⁽⁹⁾
326
45,166
George D. Milligan
30,500
18,840
⁽¹⁰⁾
512
49,852
Mary K. Quass
27,500
18,840
⁽¹¹⁾
—
46,340
Byron G. Riley⁽¹²⁾
2,350

—
2,350
Kyle D. Skogman
34,500
18,840
⁽¹³⁾
—
53,340
Frank S. Wilkinson Jr.
33,500
18,840
⁽¹⁴⁾
6,733
59,073
(1)
~~Through an administrative error,~~
Option awards represented in this column vest 20 percent each year for five years after the ~~nonemployee directors were granted a total~~first anniversary of ~~36,000 options during 2006. The Nonqualified Nonemployee Director Stock Option~~the grant date and Restricted Stock Plan allows for a maximum grant of 30,000 options during any one calendar year. This error was corrected and the 2006 option grants were adjusted, at the board of directors meeting on February 16, 2007.are subject to forfeiture until vested.
(2)
We use the Black-Scholes model to determine this amount. This model estimates the fair value of traded options, which have different characteristics than ~~employee~~non-employee director stock options. Changes to the subjective assumptions used in the model can result in materially different fair value estimates. The hypothetical value determined by using this model is based on the following assumptions for ~~2006:~~2007: an exercise price equal to the closing market price on day of grant; estimated dividend yield of ~~1.53~~2.06 percent; expected volatility of ~~26.45 percent,~~29.94 percent; risk-free interest rate of ~~4.6~~3.9 percent; and expected lives of seven years.
(3)
Amounts in this column represent reimbursement for travel and other incidental expenses for attendance at ~~Board~~board of ~~Director~~director and committee meetings.
(4)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, ~~2006~~2007 – ~~9,333.~~11,333.
(5)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, ~~2006~~2007 – ~~9,133.~~6,533.
(6)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, ~~2006~~2007 – ~~7,333.~~9,333.
(7)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, ~~2006~~2007 – ~~7,933.~~2,000.
(8)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, ~~2006~~2007 – ~~9,133.~~2,000.
(9)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, ~~2006~~2007 – ~~9,333.~~9,933.
(10)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, ~~2006~~2007 – ~~8,133.~~11,133.
(11)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, ~~2006~~2007 – ~~7,933.~~11,333.
~~(12)~~
~~Aggregate options outstanding at December 31, 2006 – 8,333.~~
For attendance at meetings of the board of directors, we pay each nonemployee director a fee of $1,000 for each regularly scheduled meeting, $1,000 for each unscheduled meeting that the chief executive officer and the chair of the compensation committee designate as a major meeting and $500 for all other meetings. For attendance at committee meetings, we pay independent directors serving on a committee $1,000 for each audit committee meeting and $500 for each compensation committee or nominating and governance committee meeting. We pay an annual retainer of $15,000 to the vice chairman of the board of directors and to the chair of the audit committee and we pay an annual retainer of $10,000 to each other nonemployee director. We also reimburse direct expenses, such as travel expenses, for attendance at director and committee meetings. As of December 31, 2006 we maintained a

United Fire & Casualty Company and Subsidiaries

nonqualified director stock option and restricted stock plan. Our board of directors approved the issuance of options under this plan to nonemployee directors during 2006 based upon recommendations by the compensation committee.
Qualified directors must be individuals who have the required background, experience and functional expertise to provide strategic direction and oversight to us. We have designed the compensation of our directors to attract and retain qualified directors and to align director compensation with the interests of our stockholders. The compensation committee is responsible for making recommendations to the board of directors regarding compensation plans and the elements of compensation of directors. In 2006 the compensation committee engaged an outside consultant who provided information and advice regarding director compensation.
(12)
Mr. Riley retired from the board of directors effective May 16, 2007. He received a director’s fee for one of our board of directors meetings during 2007, two boards of directors meetings for each of three of our subsidiaries, no annual retainer and no stock options or restricted stock. Aggregate options outstanding at December 31, 2007 – 8,133.
(13)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, 2007 – 8,933.
(14)
Represents grant date fair value for options issued during 2007. Aggregate options outstanding at December 31, 2007 – 10,333.
Compensation Committee ~~Interlocks~~Interlock and Insider Participation
~~All members~~Our compensation committee is composed of directors who are independent from management and free from any relationship that, in the opinion of the directors, would interfere with their exercise of independent judgment. No compensation committee ~~during 2006 were independent directors and no~~ member was an employee or former ~~employee.~~employee of ours. No compensation committee member had any relationship requiring disclosure under ~~“Certain Relationships and~~the “Transactions with Related ~~Transactions, Director Independence” beginning on page 117~~Persons” section of this ~~Form 10-K.~~report. During ~~2006,~~2007, none of our executive officers served on the compensation committee (or its equivalent) or board of directors of another entity whose executive officer(s) served on our compensation committee.

COMPENSATION COMMITTEE REPORT

The Compensation Committee is responsible for developing United Fire & Casualty Company’s philosophy and structure for executive compensation. On an annual basis the Compensation Committee reviews and recommends the compensation of the Company’s senior executive officers, which include the Chairman of the Board of Directors, the principal executive officer, the principal financial officer, other named executive officers and other senior executive officers. The Compensation Committee reports:

February 2008
~~the~~The Compensation Committee has reviewed and discussed with management the “Compensation Discussion and Analysis” ~~beginning on page 97~~required by Item 402(b) of Regulation S-K and,
based on ~~that~~such review and ~~those~~ discussions, the Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in the Company’s ~~annual report~~Annual Report on Form ~~10-K.~~
10-K for the year ended December 31, 2007.
Compensation Committee
Frank S. Wilkinson, Jr., Chair
James A. Leach
Casey D. Mahon
George D. Milligan

United Fire & Casualty Company and Subsidiaries

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth information as of February 1, ~~2007,~~2008, with respect to ownership of United Fire’s ~~$3.33?~~$3.33 1/3 par value common stock by principal security holders. Except as otherwise indicated, each of the persons named below has sole voting and investment powers with respect to the shares indicated.
Title of Class

Address of Beneficial Owner

Amount and Nature of Beneficial Ownership

Percent of Class

Address of Beneficial Owner
Amount and Nature of Beneficial Ownership

Percent of Class
Common

Scott McIntyre Jr.
2222 First Avenue NE, Apt. 1004
Cedar Rapids, Iowa 52402

5,233,928
⁽¹⁾
18.93
%

Scott McIntyre Jr.
2222 First Avenue NE, Apt. 1004
Cedar Rapids, Iowa 52402

3,855,672
⁽¹⁾
14.18
%
Common

EARNEST Partners LLC
75 Fourteenth Street, Suite 2300
Atlanta, Georgia 30309

2,328,596
⁽²⁾
8.42
%

Dimensional Fund Advisors LP
1299 Ocean Avenue
Santa Monica, California 90401

2,189,667
⁽²⁾
8.05
%
Common

EARNEST Partners LLC
75 Fourteenth Street, Suite 2300
Atlanta, Georgia 30309

1,611,682
⁽³⁾
5.93
%
(1)
Includes 4,968 shares held in an individual retirement account for Mr. McIntyre’s benefit; ~~2,235,730~~2,561,176 shares owned by a revocable trust for the lifetime benefit of Mr. McIntyre, for which Mr. McIntyre serves as sole trustee; ~~1,094,328~~40,087 shares owned by a ~~revocable~~ trust ~~for the lifetime benefit of~~established by Mr. McIntyre’s mother (now deceased) for ~~which Mr. McIntyre serves as sole trustee; 1,066,490 shares owned by~~ the ~~trust under the will~~benefit of ~~John Scott McIntyre,~~her children and grandchildren, for which Mr. McIntyre serves as sole trustee; 450,000 shares owned by a trust for the benefit of Mr. McIntyre’s wife, for which Mr. McIntyre serves as sole trustee; 243,000 shares owned by a trust established by Mr. McIntyre’s mother (now deceased) for the benefit of ~~Mr. McIntyre’s mother and~~ her grandchildren, for which Mr. McIntyre serves as sole trustee; ~~110,180~~519,180 shares owned by the McIntyre Foundation, for which Mr. McIntyre serves as president and one of four directors; ~~3,232~~3,261 shares owned by Mr. McIntyre’s wife; and ~~26,000~~34,000 options that are exercisable on or before sixty (60) days from the date of this report.
(2)
Based on Schedule 13-F filed with the Securities and Exchange Commission on January 31, 2008.
(3)
Based on Schedule 13-G (Amendment No. 3)4) filed with the Securities and Exchange Commission on ~~February 12, 2007.~~January 31, 2008.

SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial ownership of our ~~$3.33?~~$3.33 1/3 par value common stock as of February 1, ~~2007,~~2008, with respect to each of our directors, certain of our executive officers and all of our directors and officers, as a group.
As of February 1, ~~2007,~~2008, we had ~~27,651,393~~27,189,088 shares of ~~$3.33?~~$3.33 1/3 par value common stock outstanding. Except as otherwise indicated, each of the stockholders listed in the table on the following page has sole voting and investment power over the shares beneficially owned.

United Fire & Casualty Company and Subsidiaries

Title of Class

Name of Beneficial Owner

Amount and Nature of Beneficial Ownership⁽¹⁾

Percentage
of Class

Name of Beneficial Owner

Amount and Nature of Beneficial Ownership⁽¹⁾

Percentage
of Class

Common

Kent G. Baker

200
⁽²⁾
0
%

Christopher R. Drahozal

826,953
⁽²⁾
3.04
%
Common

Christopher R. Drahozal

414,036
⁽³⁾
1.50
%

Barrie W. Ernst

22,891
⁽³⁾
.08
%
Common

Barrie W. Ernst

18,065
⁽⁴⁾
.07
%

Jack B. Evans

23,115
⁽⁴⁾
*

Common

Jack B. Evans

19,974
⁽⁵⁾
*

Thomas W. Hanley

4,070
⁽⁵⁾
*

Common

Thomas W. Hanley

2,603
⁽⁶⁾
*

Douglas M. Hultquist

550
⁽⁶⁾
*

Common

Dianne M. Lyons

5,221
⁽⁷⁾
.02
%

James A. Leach

—

*

Common

Casey D. Mahon

10,684
⁽⁸⁾
*

Dianne M. Lyons

10,825
⁽⁷⁾
.04
%
Common

Scott McIntyre Jr.

5,233,928
⁽⁹⁾
18.93
%

Casey D. Mahon

12,351
⁽⁸⁾
*

Common

George D. Milligan

6,857
⁽¹⁰⁾
*

Scott McIntyre Jr.

3,855,672
⁽⁹⁾
14.18
%
Common

Mary K. Quass

5,400
⁽¹¹⁾
*

George D. Milligan

9,528
⁽¹⁰⁾
*

Common

Randy A. Ramlo

11,676
⁽¹²⁾
.04
%

Mary K. Quass

7,067
⁽¹¹⁾
*

Common

John A. Rife

39,306
⁽¹³⁾
.14
%

Randy A. Ramlo

18,956
⁽¹²⁾
.07
%
Common

Byron G. Riley

7,554
⁽¹⁴⁾
*

John A. Rife

56,806
⁽¹³⁾
.21
%
Common

Kyle D. Skogman

8,900
⁽¹⁵⁾
*

Kyle D. Skogman

11,617
⁽¹⁴⁾
*

Common

Frank S. Wilkinson Jr.

6,093
⁽¹⁶⁾
*

Michael T. Wilkins

11,148
⁽¹⁵⁾
.04
%
Common

All directors and officers as a group (includes 48 persons)

5,761,239
⁽¹⁷⁾
20.84
%

Frank S. Wilkinson Jr.

12,760
⁽¹⁶⁾
*

Common

All directors and officers as a group (includes 45 persons)

4,441,770
⁽¹⁷⁾
16.34
%
*Represents directors with ownership of less than 1%1 percent.
(1)
Except as otherwise indicated, each person ~~named on the previous table~~ has sole voting and investment power with respect to the number of shares indicated. The inclusion ~~herein~~ of any shares as beneficially owned does not constitute admission of beneficial ownership.
(2)
~~Represents 200 options that are exercisable by Mr. Baker on or before sixty (60) days from the date of this report. None of Mr. Baker’s shares are pledged as security.~~
~~(3)~~
Includes 674 shares owned jointly by Mr. Drahozal and his wife; 177,274 owned individually by Mr. Drahozal’s wife; ~~71,084~~73,334 shares held in accounts for the benefit of Mr. Drahozal’s minor children; 50,624 shares owned by a trust for which Mr. Drahozal’s wife is one of two trustees; ~~110,180~~519,180 shares owned by the McIntyre Foundation, for which Mr. Drahozal’s wife serves as one of four directors; and ~~4,200~~5,867 stock options that are exercisable by Mr. Drazohal on or before sixty (60) days from the date of this report. Mr. Drahozal is Mr. McIntyre’s son-in-law. None of Mr. Drahozal’s shares are pledged as security.
~~(4)~~(3)
Includes ~~2,599~~3,623 shares owned in a 401(k) account for Mr. Ernst’s benefit; ~~166~~168 shares held for the benefit of Mr. Ernst’s daughter; and ~~15,300~~19,100 stock options that are exercisable by Mr. Ernst on or before sixty (60) days from the date of this report. None of Mr. Ernst’s shares are pledged as security.
~~(5)~~(4)
Includes ~~200~~674 shares owned individually by Mr. Evans; ~~13,750~~19,350 shares owned in an individual retirement account for Mr. Evans’ benefit; 2,024 shares owned in an IRA account for the benefit of Mr. Evans’ wife; and ~~4,000~~1,067 stock options that are exercisable by Mr. Evans on or before sixty (60) days from the date of this report. None of Mr. Evan’s shares are pledged as security.
~~(6)~~(5)
Includes 203 shares owned individually by Mr. Hanley and ~~2,400~~3,867 stock options that are exercisable by Mr. Hanley on or before sixty (60) days from the date of this report. None of Mr. Hanley’s shares are pledged as security.
(6)
Includes 550 shares owned individually by Mr. Hultquist and no stock options that are exercisable by Mr. Hultquist on or before sixty (60) days from the date of this report. None of Mr. Hultquist’s shares are pledged as security.
(7)
Includes ~~221~~225 shares owned by Ms. Lyons individually and ~~5,000~~10,600 options that are exercisable by Ms. Lyons on or before sixty (60) days from the date of this report. None of Ms. Lyons’ shares are pledged as security.
(8)
Includes 6,884 shares owned individually by Ms. Mahon; 1,000 shares owned in an individual retirement account for Ms. Mahon’s benefit; and ~~2,800~~4,467 stock options that are exercisable by Ms. Mahon on or before sixty (60) days from the date of this report. None of Ms. Mahon’s shares are pledged as security.
(9)
Includes 4,968 shares held in an individual retirement account for Mr. McIntyre’s benefit; ~~2,235,730~~2,561,176 shares owned by a revocable trust for the lifetime benefit of Mr. McIntyre, for which Mr. McIntyre serves as sole trustee; ~~1,094,328~~40,087 shares owned by a ~~revocable~~ trust established by Mr. McIntyre’s mother (now deceased) for the ~~lifetime~~ benefit of ~~Mr. McIntyre’s mother,~~her children and grandchildren, for which Mr. McIntyre serves as sole

~~United Fire & Casualty Company and Subsidiaries~~
trustee; 1,066,490 shares owned by a trust under the will of John Scott McIntyre, for which Mr. McIntyre serves as sole trustee; 450,000 shares owned by a trust for the benefit of Mr. McIntyre’s wife, for which Mr. McIntyre serves as sole trustee; 243,000 shares owned by a trust for the benefit of Mr. McIntyre’s mother and her grandchildren, for which Mr. McIntyre serves as sole trustee; 110,180 shares owned by the McIntyre Foundation, for which Mr. McIntyre serves as president and one of four directors; 3,232 shares owned by Mr. McIntyre’s wife; and 26,000 trustee; 450,000 shares owned by a trust for the benefit of Mr. McIntyre’s wife, for which Mr. McIntyre serves as sole trustee; 243,000 shares owned by a trust established by Mr. McIntyre’s mother (now deceased) for the benefit of her grandchildren, for which Mr. McIntyre serves as sole trustee; 519,180 shares owned by the McIntyre Foundation, for which Mr. McIntyre serves as president and one of four directors; 3,261 shares owned by Mr. McIntyre’s wife; and 34,000 options that are exercisable on or before sixty (60) days from the date of this report. None of Mr. McIntyre’s shares are pledged as security.

(10)	Includes ~~2,857~~3,861 shares owned by Mr. Milligan individually and ~~4,000~~5,667 options that are exercisable by Mr. Milligan on or before sixty (60) days from the date of this report. None of Mr. Milligan’s shares are pledged as security.

(11)	Includes 1,200 shares owned by Ms. Quass individually and ~~4,200~~5,867 options that are exercisable by Ms. Quass on or before sixty (60) days from the date of this report. None of Ms. Quass’ shares are pledged as security.

118

The audit committee reviews and approves audit and permissible nonaudit services performed by Ernst & Young LLP, as well as the fees charged by Ernst & Young LLP for such services. In its review of nonaudit service fees and its appointment of Ernst & Young LLP as our independent registered public accounting firm, the audit committee considered whether the provision of such services is compatible with maintaining Ernst & Young LLP’s independence. The audit committee preapproved all of the services provided and fees charged by Ernst & Young LLP in ~~2006.~~2007.

The following is a summary of the fees billed to United Fire by Ernst & Young LLP for professional services rendered for the fiscal years ended December 31, ~~2006~~2007 and December 31, ~~2005:~~2006:

Schedule I. Summary of Investments – Other than Investments in Related Parties

Schedule ~~I. Summary of Investments – Other than Investments in Related Parties~~

(1) Annuity deposits are included in future policy benefits, losses, claims and loss expenses.

(2) Per Regulation S-X, does not apply to life ~~insurance.~~insurance companies. Please refer to the Non-GAAP financial measures section of this report for further explanation of this measure.

(2) Recorded primarily in connection with the purchase of American Indemnity Financial Corporation.

Schedule VI. Supplemental Information Concerning Property and Casualty Insurance Operations

Iowa		42-0644327
(State of Incorporation)		(IRS Employer Identification No.)

118 Second Avenue SE PO Box 73909 Cedar Rapids, Iowa		52407-3909
(Address of principal executive offices)		(Zip Code)

		PAGE
PART I:
Item 1.	Business	1
Item 1A.	Risk Factors	1112
Item 1B.	Unresolved Staff Comments	2120
Item 2.	Properties	2120
Item 3.	Legal Proceedings	2221
Item 4.	Submission of Matters to a Vote of Security Holders	2221

PART II:
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2322
Item 6.	Selected Financial Data	2524
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2625
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	5354
Item 8.	Financial Statements and Supplementary Data	5556
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	9193
Item 9A.	Controls and Procedures	9193
Item 9B.	Other Information	9193

PART III:
Item 10.	Directors, Executive Officers and Corporate Governance	9294
Item 11.	Executive Compensation	9799
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~114~~117
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~117~~120
Item 14.	Principal Accounting Fees and Services	~~118~~121
PART IV:
Item 15.	Exhibits, Financial Statement Schedules	~~119~~122
	Signatures	~~125~~129

(Dollars in Thousands) Years Ended December 31	2006		Percent of Total		2005		Percent of Total		2004		Percent of Total

Commercial lines:
Fire and allied lines (1)	$	148,252	29.4	%	$	137,768	29.0	%	$	144,861	30.3	%
Other liability (2)		143,534	28.5	%		131,489	27.6	%		124,290	26.0	%
Automobile		99,431	19.7	%		95,121	20.0	%		96,044	20.1	%
Workers’ compensation		43,370	8.6	%		37,746	8.0	%		34,055	7.1	%
Surety		27,298	5.4	%		27,296	5.8	%		28,816	6.0	%
Miscellaneous		3,549	0.7	%		3,189	0.7	%		3,189	0.7	%
Total commercial lines	$	465,434	92.3	%	$	432,609	91.1	%	$	431,255	90.2	%
Personal lines:
Fire and allied lines (3)	$	22,761	4.5	%	$	22,288	4.7	%	$	23,218	4.7	%
Automobile		15,876	3.1	%		19,416	4.1	%		23,946	5.0	%
Miscellaneous		350	0.1	%		355	0.1	%		421	0.1	%
Total personal lines	$	38,987	7.7	%	$	42,059	8.9	%	$	47,585	9.8	%
Total	$	504,421			$	474,668			$	478,840

(Dollars in Thousands)
Years Ended December 31	2007		2006		2005
Total assets	$	1,436,437	$	1,475,944	$	1,522,867
Premiums earned and other considerations	$	32,841	$	36,324	$	39,604
Net income	$	13,167	$	14,115	$	13,642

(Dollars in Thousands)
Years Ended December 31	1997		1998		1999		2000		2001		2002		2003		2004				2005		2006
Liability for Unpaid
Losses and Loss Settlement Expense:	$	218,912	$	243,006	$	310,637	$	320,506	$	326,910	$	356,889	$	399,740	$		436,280		$	559,963	$	478,326
Net Liability Re-Estimated as of
One year later		192,297		213,047		273,706		273,469		315,854		344,590		361,153			358,796			534,998
Two years later		185,700		233,325		261,217		290,872		323,354		340,502		331,693			330,137
Three years later		198,298		226,353		273,921		300,011		321,168		324,582		317,187
Four years later		198,931		232,851		279,740		302,884		318,125		313,745
Five years later		202,765		235,860		279,653		298,428		309,033
Six years later		208,071		235,560		280,983		296,296
Seven years later		206,938		236,844		279,892
Eight years later		206,962		237,192
Nine years later		208,415
Net Redundancy	$	10,497	$	5,814	$	30,745	$	24,210	$	17,877	$	43,144	$	82,553	$		106,143		$	24,965
Cumulative Amount of
Net Liability Paid Through:
One year later	$	62,988	$	71,251	$	97,021	$	110,516	$	112,546	$	107,271	$	100,895		$		110,016	$	230,455
Two years later		97,142		123,965		154,886		166,097		172,538		172,158		167,384				166,592
Three years later		122,818		155,622		189,730		204,792		215,002		214,307		203,861
Four years later		143,216		176,376		213,190		230,889		240,973		237,150
Five years later		158,306		190,644		231,838		245,677		252,969
Six years later		168,310		199,802		241,540		252,153
Seven years later		175,381		205,149		245,145
Eight years later		179,261		208,632
Nine years later		181,988
Net Liability for Unpaid
Losses and Loss Settlement Expense:	$	218,912	$	243,006	$	310,637	$	320,506	$	326,910	$	356,889	$	399,740		$		436,280	$	559,963	$		478,326
Reinsurance Recoverable		12,856		8,111		27,606		37,526		36,909		35,760		27,307				28,609		60,137			40,560
Gross Liability	$	231,768	$	251,117	$	338,243	$	358,032	$	363,819	$	392,649	$	427,047		$		464,889	$	620,100	$		518,886
Net Re-Estimated Liability	$	208,415	$	237,192	$	279,892	$	296,296	$	309,033	$	313,745	$	317,187		$		330,137	$	534,998
Re-Estimated Reinsurance Recoverable		14,593		10,834		26,952		34,476		40,310		40,988		34,518				34,706		76,441
Gross Re-Estimated Liability	$	223,008	$	248,026	$	306,844	$	330,772	$	349,343	$	354,733	$	351,705		$		364,843	$	611,439
Gross Redundancy	$	8,760	$	3,091	$	31,399	$	27,260	$	14,476	$	37,916	$	75,342		$		100,046	$	8,661

Years Ended December 31	2006		Industry (1)		2005		Industry		2004		Industry		2007		Industry (1)		2006		Industry		2005		Industry
Loss ratio	60.2	%	66.9	%	81.2	%	74.8	%	56.1	%	73.1	%	52.4	%	67.7	%	60.2	%	65.3	%	81.2	%	75.3	%
Expense ratio⁽²⁾	29.5	%	26.4	%	31.3	%	26.0	%	30.3	%	25.4	%	29.7	%	27.9	%	29.5	%	27.1	%	31.3	%	25.9	%
Combined ratio(3)	89.7	%	93.3	%	112.5	%	100.8	%	86.4	%	98.5	%	82.1	%	95.6	%	89.7	%	92.4	%	112.5	%	101.2	%

(Dollars in Thousands)
Years ended December 31	Average Invested Assets⁽¹⁾		Investment Income, Net⁽²⁾		Annualized Yield on Average Invested Assets		Average Invested Assets ⁽¹⁾		Investment Income, Net ⁽²⁾		Annualized Yield on Average Invested Assets
2007							$	2,219,510	$	122,439	5.5	%
2006	$	2,158,953	$	121,981	5.7	%		2,158,953		121,981	5.7	%
2005		2,065,775		118,847	5.8	%		2,065,775		118,847	5.8	%
2004		1,959,729		111,474	5.7	%

Location	~~Approximate Area (Square Feet)~~Utilized by	Owned or Leased	Lease Expiration Date
Corporate Headquarters –
Cedar Rapids, Iowa ~~(2 buildings)~~(118 Second Ave.)	~~156,882~~Corporate Administration, Property and Casualty Segment	Owned	N/A
Cedar Rapids, Iowa ~~(1 building)~~(119 Second Ave.)	~~14,911~~Corporate Administration, Life Insurance Segment	Owned	N/A
Cedar Rapids, Iowa (109 Second Street)	Corporate Administration	Leased	December 31, 2010 and April 30, 2012
Denver Regional Office – Westminster, Colorado	~~10,162~~Property and Casualty Segment	Leased	June 30, ~~2008~~2015
Gulf Coast Regional Office – Galveston, Texas	~~95,098~~Property and Casualty Segment	Leased	November 30, 2014
New Orleans Claims Office – Metairie, Louisiana	~~4,275~~Property and Casualty Segment	Leased	September 30, 2009

	Share Price				Cash Dividends		Share Price				Cash Dividends
							High		Low		Declared
2007
Quarter Ended:
March 31							$	36.65	$	32.57	$	0.135
June 30								40.18		34.27		0.135
September 30								43.31		33.19		0.135
December 31								42.99		28.41		0.15
	High		Low		Declared
2006
Quarter Ended:
March 31	$	42.33	$	32.14	$	0.12	$	42.33	$	32.14	$	0.12
June 30		33.39		27.50		0.12		33.39		27.50		0.12
September 30		31.47		27.63		0.12		31.47		27.63		0.12
December 31		37.32		30.69		0.135		37.32		30.69		0.135

2005
Quarter Ended:
March 31	$	35.68	$	27.75	$	0.12
June 30		45.46		33.30		0.12
September 30		47.72		37.20		0.12
December 31		47.44		39.36		0.12

Period	Total Number of Shares Purchased		Average Price Paid per Share	Total Number of Shares Purchased as a Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
10/1/07 – 10/31/07	100,000	$	33.37	100,000	387,167
11/1/07 – 11/30/07	124,100	$	29.38	124,100	263,067
12/1/07 – 12/31/07	73,400	$	29.23	73,400	189,667

	Period Ending
Index	12/31/02		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07
United Fire & Casualty Company	$	100.00	$	123.32	$	209.15	$	254.08	$	224.90	$	188.52
Russell 2000		100.00		147.25		174.24		182.18		215.64		212.27
SNL Insurance P&C		100.00		123.73		135.62		148.25		172.81		186.59
SNL Insurance		100.00		124.94		144.22		168.70		185.41		186.58

(Dollars in Thousands Except Per Share Data)
Years Ended December 31	2006		2005		2004		2003			2002			2007		2006		2005		2004		2003
Total assets	$	2,776,067	$	2,721,924	$	2,570,387	$	2,405,155		$	2,159,475		$	2,760,554	$	2,776,067	$	2,721,924	$	2,570,387	$	2,405,155

Redeemable preferred stock		—		—		65,789		65,456			65,113			—		—		—		65,789		65,456

Revenues
Net premiums earned	$	503,122	$	495,516	$	492,291	$	464,595		$	417,286			505,763		503,122		495,516		492,291		464,595
Investment income, net		121,981		118,847		111,474		108,540			105,553			122,439		121,981		118,847		111,474		108,540
Realized investment gains (losses), net		9,965		4,540		4,060		(1,691	)		(13,801	)		9,670		9,965		4,540		4,060		(1,691	)
Other income		532		702		300		1,841			1,839			654		532		702		300		1,841

Net income		88,085		9,044		78,817		55,574			20,786			111,392		88,085		9,044		78,817		55,574

Preferred stock dividends and accretions		—		4,106		4,742		4,742			3,100			—		—		4,106		4,742		4,742
Basic earnings per common share		3.37		0.22		3.68		2.53			0.88			4.04		3.37		0.22		3.68		2.53
Diluted earnings per common share		3.36		0.22		3.34		2.36			0.88			4.03		3.36		0.22		3.34		2.36

Cash dividends declared per common share		0.495		0.48		0.42		0.39			0.37			0.555		0.495		0.48		0.42		0.39

Underwriting Ratios (GAAP Basis)							Increase (Decrease) in Ratios
Years ended December 31	2006		2005		2004		2006 vs. 2005		2005 vs. 2004

Net loss ratio	59.6	%	82.4	%	56.1	%	-22.8	%	26.3	%
Expense ratio	28.3	%	28.9	%	29.2	%	-0.6	%	-0.3	%
Combined ratio	87.9	%	111.3	%	85.3	%	-23.4	%	26.0	%
Combined ratio (without catastrophes)	75.1	%	66.2	%	81.1	%	8.0	%	-14.9	%

	Property & Casualty Insurance Segment				Life Insurance Segment				Total				Property & Casualty Insurance Segment				Life Insurance Segment				Total
(Dollars in Thousands)			Percent of Total				Percent of Total				Percent of Total				Percent of Total				Percent of Total				Percent of Total
Fixed maturities⁽¹⁾	$	580,003	74.1	%	$	1,272,888	94.1	%	$	1,852,891	86.9	%	$	696,844	79.4	%	$	1,143,309	90.2	%	$	1,840,153	85.7	%
Equity securities		173,599	22.2			19,608	1. 5			193,207	9.1			156,797	17.8			20,923	1.6			177,720	8.3
Trading securities		11,577	1.5			—	—			11,577	0.5			10,793	1.2			—	—			10,793	0.5
Mortgage loans		3,559	0.5			24,230	1.8			27,789	1.3			—	—			19,161	1.5			19,161	0.9
Policy loans		—	—			7,833	0.6			7,833	0.4			—	—			7,622	0.6			7,622	0.4
Other long-term investments		11,777	1.5			—	—			11,777	0.5			12,793	1.5			—	—			12,793	0.6
Short-term investments		1,200	0.2			27,068	2.0			28,268	1.3			1,200	0.1			77,134	6.1			78,334	3.6
Total	$	781,715	100.0	%	$	1,351,627	100.0	%	$	2,133,342	100.0	%	$	878,427	100.0	%	$	1,268,149	100.0	%	$	2,146,576	100.0	%

~~(Dollars in Thousands)~~
~~Invested assets at December 31, 2005~~	$	~~2,091,630~~
~~Purchases~~		~~405,501~~
~~Sales~~		~~(3,754~~	)
~~Calls/maturities~~		~~(362,641~~	)
~~Net realized investment gains~~		~~5,197~~
~~Mark to market adjustment~~⁽¹⁾		~~1,047~~
~~Net bond premium accretion~~		~~(1,682~~	)
~~Net change in unrealized appreciation~~		~~1,703~~
~~Other~~ ⁽²⁾		~~(3,659~~	)
~~Change in carrying value of invested assets~~	$	~~41,712~~
~~Invested assets at December 31, 2006~~	$	~~2,133,342~~

Cash Flow Summary	Years Ended December 31,
(Dollars in Thousands)	2007			2006			2005
Cash provided by (used in):
Operating activities	$	105,780		$	104,457		$	53,690
Investing activities		(16,332	)		(30,119	)		(183,744	)
Financing activities		(91,928	)		17,916			(12,730	)
Net increase (decrease) in cash and cash equivalents	$	(2,480	)	$	92,254		$	(142,784	)

(Dollars in Thousands)	Payments Due By Period										Payments Due By Period
Contractual Obligations	Total		Less Than One Year		One to Three Years		Three to Five Years		More Than Five Years		Total		Less Than One Year		One to Three Years		Three to Five Years		More Than Five Years
Loss and loss settlement expense reserves	$	518,886	$	202,819	$	197,550	$	77,833	$	40,684
Future policy benefits ⁽¹⁾											$	2,026,096	$	249,883	$	336,252	$	329,966	$	1,109,995
Loss and loss settlement expenses												496,083		186,026		190,127		74,412		45,518
Operating leases		22,741		4,347		6,491		4,826		7,077		23,037		4,390		7,813		5,300		5,534
Future policy benefit reserves⁽¹⁾		1,801,048		272,862		369,605		285,527		873,054
Total	$	2,342,675	$	480,028	$	573,646	$	368,186	$	920,815	$	2,545,216	$	440,299	$	534,192	$	409,678	$	1,161,047

Sensitivity Analysis - Impact of Changes in Assumed Loss and Loss Settlement Expense Ratios
(Dollars in Thousands)		-10%		-5%		Base		+5%		+10%

Sensitivity Analysis – Impact on DAC asset of changes is assumptions
Sensitivity Analysis – Impact on DAC asset of changes in assumptions
(Dollars in Thousands)
Changes in assumption		-10%			+10%
Changes in assumptions							-10%			+10%
Interest rate spread assumption	$	(2,201	)	$	2,061	$	(1,591	)	$	1,534
Mortality experience assumption		(2,059	)		1,868		2,393			(2,549	)
Policy lapse experience assumption		(2,147	)		2,274		2,538			(2,328	)

(Dollars in Thousands)	Case Basis		IBNR		Loss Settlement Expense		Total Reserves		Case-Basis		IBNR		Loss Settlement Expense		Total Reserves

Commercial lines:
Fire and allied lines (1)	$	66,670	$	6,387	$	13,062	$	86,119	$	47,368	$	7,715	$	6,931	$	62,014
Other liability (2)		76,692		31,392		63,152		171,236		81,536		31,170		63,584		176,290
Automobile		48,924		11,766		12,855		73,545		53,835		11,223		13,599		78,657
Workers' compensation		79,428		9,224		15,047		103,699		86,053		9,150		16,319		111,522
Fidelity and surety		9,794		259		1,470		11,523		5,150		97		871		6,118
Miscellaneous		148		146		29		323		268		103		42		413
Total commercial lines	$	281,656	$	59,174	$	105,615	$	446,445	$	274,210	$	59,458	$	101,346	$	435,014
Personal lines:
Automobile		6,408		916		1,301		8,625		5,097		829		1,099		7,025
Fire and allied lines (3)		22,533		2,078		2,860		27,471		17,745		1,912		1,658		21,315
Miscellaneous		1,355		82		280		1,717		1,218		51		266		1,535
Total personal lines	$	30,296	$	3,076	$	4,441	$	37,813	$	24,060	$	2,792	$	3,023	$	29,875
Reinsurance		11,932		22,350		346		34,628		8,647		22,350		197		31,194
Total	$	323,884	$	84,600	$	110,402	$	518,886	$	306,917	$	84,600	$	104,566	$	496,083

(Dollars in Thousands)
Change in claim frequency and severity assumptions utilized within the IBNR reserve calculation	-10%			-5%			+5%		+10%
Impact due to change in frequency assumption	$	(8,460	)	$	(4,230	)	$	4,230	$	8,460
Impact due to change in severity assumption		(8,460	)		(4,230	)		4,230		8,460

(Dollars in Thousands)
Change in claim frequency and claim severity assumptions utilized within the IBNR reserve calculation	5%		10%
Impact due to change in assumptions	$	4,230	$	8,460

(Dollars in Thousands)
Change in LAE paid to losses paid ratio	-2%			-1%			+1%		+2%		1%		2%
Impact due to change in LAE reserving assumption	$	(2,206	)	$	(1,103	)	$	1,103	$	2,206	$	1,024	$	2,047

(Dollars in Thousands)
Change in level of case-basis reserve development	5%		10%
Impact on reported case-basis reserves	$	13,532	$	27,065

(Dollars in Thousands) Historical Reserve Development Volatility Levels	-10%		-5%		+5%		+10%
(Dollars in Thousands) Hypothetical Reserve Development Volatility Levels									-10%			-5%			+5%		+10%
Impact on Loss and Loss Settlement Expenses:
Other liability	$	(17,124 )	$	(8,562 )	$	8,562	$	17,124	$	(17,629	)	$	(8,815	)	$	8,815	$	17,629
Workers’ compensation		(10,370 )		(5,185 )		5,185		10,370		(11,152	)		(5,576	)		5,576		11,152
Automobile		(8,217 )		(4,109 )		4,109		8,217		(8,568)	)		(4,284	)		4,284		8,568

Historical Reserve Development Volatility Levels		-5%		-3%		+3%		+5%
Hypothetical Reserve Development Volatility Levels										-5%			-3%			+3%		+5%
Impact on Loss and Loss Settlement Expenses:
All other lines		(16,178 )		(8,089 )		8,089		16,178		(6,129	)		(3,678	)		3,678		6,129

(Dollars in Thousands)
December 31	Net Premiums Written		Net Change in Unearned Premium			Net Premiums Earned
2006	$	509,669	$	(6,547	)	$	503,122
2005	$	487,627	$	7,889		$	495,516

(Dollars in Thousands)	Years Ended December 31,
	2007			2006
Net premiums written	$	501,849		$	509,669
Net change in unearned premium		6,847			(9,110	)
Net change in prepaid reinsurance premium		(2,933	)		2,563
Net premiums earned	$	505,763		$	503,122

(Dollars in Thousands)	-200 Basis Points		-100 Basis Points		Base		+100 Basis Points		+200 Basis Points		-200 Basis Points		-100 Basis Points		Base		+100 Basis Points		+200 Basis Points
Asset

Estimated fair value of fixed maturities	$	2,486,992	$	2,401,471	$	2,321,157	$	2,235,946	$	2,156,203	$	2,093,616	$	2,005,998	$	1,929,919	$	1,845,480	$	1,762,627

(Dollars in Thousands Except Per Share Data and Number of Shares)	2006		2005		2007		2006
ASSETS
Investments
Fixed maturities
Held-to-maturity, at amortized cost (fair value $45,715 in 2006 and $75,222 in 2005)	$	44,663	$	72,765
Available-for-sale, at fair value (amortized cost $1,787,880 in 2006 and $1,739,483 in 2005)		1,808,228		1,777,111
Equity securities, at fair value (cost $65,685 in 2006 and $49,839 in 2005)		193,207		158,522
Trading securities, at fair value (amortized cost $10,227 in 2006 and $4,898 in 2005)		11,577		4,881
Held-to-maturity, at amortized cost (fair value $27,981 in 2007 and $45,715 in 2006)					$	27,343	$	44,663
Available-for-sale, at fair value (amortized cost $1,786,915 in 2007 and $1,787,880 in 2006)						1,812,810		1,808,228
Equity securities, at fair value (cost $64,127 in 2007 and $65,685 in 2006)						177,720		193,207
Trading securities, at fair value (amortized cost $9,923 in 2007 and $10,227 in 2006)						10,793		11,577
Mortgage loans		27,789		23,637		19,161		27,789
Policy loans		7,833		8,193		7,622		7,833
Other long-term investments		11,777		11,036		12,793		11,777
Short-term investments		28,268		35,485		78,334		28,268
	$	2,133,342	$	2,091,630	$	2,146,576	$	2,133,342

Cash and cash equivalents	$	255,045	$	162,791	$	252,565	$	255,045
Accrued investment income		28,383		30,232		28,431		28,383
Premiums receivable (net of allowance for doubtful accounts of $393 in 2006 and $742 in 2005)		126,689		115,655
Premiums receivable (net of allowance for doubtful accounts of $631 in 2007 and $393 in 2006)						121,059		126,689
Deferred policy acquisition costs		135,761		119,869		128,998		135,761
Property and equipment (primarily land and buildings, at cost, less accumulated
depreciation of $27,320 in 2006 and $25,722 in 2005)		12,663		11,150
depreciation of $30,198 in 2007 and $27,320 in 2006)						10,794		12,663
Reinsurance receivables and recoverables		53,543		126,161		45,475		53,543
Prepaid reinsurance premiums		5,578		3,015		2,645		5,578
Income taxes receivable		10,355		40,689		7,439		10,355
Other assets		14,708		20,732		16,572		14,708
TOTAL ASSETS	$	2,776,067	$	2,721,924	$	2,760,554	$	2,776,067

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits and losses, claims and loss settlement expenses:
Property and casualty insurance	$	518,886	$	620,100	$	496,083	$	518,886
Life insurance		1,233,342		1,285,635		1,184,977		1,233,342
Unearned premiums		231,377		222,267		224,530		231,377
Accrued expenses and other liabilities		67,690		57,558		63,937		67,690
Deferred income taxes		43,964		36,152		39,530		43,964
TOTAL LIABILITIES	$	2,095,259	$	2,221,712	$	2,009,057	$	2,095,259
Stockholders' Equity
Common stock, $3.33 1/3 par value; authorized 75,000,000 shares; 27,648,993 shares issued
and outstanding in 2006 and 23,597,773 shares issued and outstanding in 2005	$	92,163	$	78,658
Common stock, $3.33 1/3 par value; authorized 75,000,000 shares; 27,195,888 and
27,648,993 shares issued and outstanding in 2007 and 2006, respectively					$	90,653	$	92,163
Additional paid-in capital		161,533		66,242		149,511		161,533
Retained earnings		343,761		268,872		439,860		343,761
Accumulated other comprehensive income, net of tax		83,351		86,440		71,473		83,351
TOTAL STOCKHOLDERS' EQUITY	$	680,808	$	500,212	$	751,497	$	680,808
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,776,067	$	2,721,924	$	2,760,554	$	2,776,067

(Dollars in Thousands Except Per Share Data and Number of Shares)	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income, Net of Tax			Total			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income, Net of Tax			Total

Balances, January 1, 2004	$	33,475	$	7,040	$	242,774		$	90,637		$	373,926
Net income		—		—		78,817			—			78,817
Change in net unrealized appreciation⁽¹⁾		—		—		—			13,078			13,078
Minimum pension liability adjustment ⁽²⁾		—		—		—			(1,256	)		(1,256	)
Total comprehensive income												90,639
Dividends on common stock, $.42 per share ⁽³⁾		—		—		(8,450	)		—			(8,450	)
Dividends on preferred stock		—		—		(4,399	)		—			(4,399	)
Accretion of preferred stock issuance costs		—		—		(343	)		—			(343	)
Issuance of 10,066,028 shares of common stock attributable to a one-for-one stock dividend		33,553		—		(33,553	)		—			—
Issuance of 23,836 shares of common stock attributable to exercise of stock options		80		747		—			—			827
Issuance of 248 shares of common stock attributable to conversion of preferred stock		1		9		—			—			10
Balances, December 31, 2004	$	67,109	$	7,796	$	274,846		$	102,459		$	452,210
Balances, January 1, 2005														$	67,109		$	7,796		$	274,846		$	102,459		$	452,210
Net income		—		—		9,044			—			9,044			—			—			9,044			—			9,044
Change in net unrealized appreciation⁽¹⁾		—		—		—			(17,275	)		(17,275	)		—			—			—			(17,275	)		(17,275	)
Minimum pension liability adjustment ⁽²⁾		—		—		—			1,256			1,256			—			—			—			1,256			1,256
Total comprehensive loss												(6,975	)														(6,975	)
Dividends on common stock, $.48 per share		—		—		(10,912	)		—			(10,912	)		—			—			(10,912	)		—			(10,912	)
Dividends on preferred stock		—		—		(906	)		—			(906	)		—			—			(906	)		—			(906	)
Accretion of preferred stock issuance costs		—		—		(3,200	)		—			(3,200	)		—			—			(3,200	)		—			(3,200	)
Issuance of 3,420,727 shares of common stock attributable to conversion of preferred stock		11,402		57,454		—			—			68,856			11,402			57,454			—			—			68,856
Issuance of 43,640 shares of common stock attributable to exercise of stock options		145		971		—			—			1,116			145			971			—			—			1,116
Issuance of 850 shares of common stock attributable to employee service awards		2		21		—			—			23			2			21			—			—			23
Balances, December 31, 2005	$	78,658	$	66,242	$	268,872		$	86,440		$	500,212		$	78,658		$	66,242		$	268,872		$	86,440		$	500,212
Net income		—		—		88,085			—			88,085			—			—			88,085			—			88,085
Change in net unrealized appreciation ⁽¹⁾		—		—		—			7,079			7,079			—			—			—			7,079			7,079
Total comprehensive income												95,164															95,164
Adjustment to initially apply SFAS No. 158, net of tax ⁽⁴⁾		—		—		—			(10,168	)		(10,168	)
Stock option grants and related tax benefit				1,371								1,371
Initial recognition of underfunded status of employee benefit plans ⁽³⁾															—			—			—			(10,168	)		(10,168	)
Compensation expense and related tax benefit for stock option grants															—			1,371			—			—			1,371
Dividends on common stock, $.495 per share		—		—		(13,196	)		—			(13,196	)		—			—			(13,196	)		—			(13,196	)
Issuance of 4,025,000 shares of common stock attributable to common stock offering⁽⁵⁾		13,417		93,545		—			—			106,962
Issuance of 4,025,000 shares of common stock attributable to common stock offering⁽⁴⁾															13,417			93,545			—			—			106,962
Issuance of 25,380 shares of common stock attributable to exercise of stock options		85		344		—			—			429			85			344			—			—			429
Issuance of 840 shares of common stock attributable to employee service awards		3		31		—			—			34			3			31			—			—			34
Balances, December 31, 2006	$	92,163	$	161,533	$	343,761		$	83,351		$	680,808		$	92,163		$	161,533		$	343,761		$	83,351		$	680,808
Net income															—			—			111,392			—			111,392
Change in net unrealized appreciation ⁽¹⁾															—			—			—			(7,940	)		(7,940	)
Change in underfunded status of employee benefit plans ⁽³⁾															—			—			—			(3,938	)		(3,938	)
Total comprehensive income																											99,514
Compensation expense and related tax benefit for stock option grants															—			1,710			—			—			1,710
Dividends on common stock, $.555 per share															—			—			(15,293	)		—			(15,293	)
Repurchase of 497,500 shares of common stock															(1,658	)		(14,420	)		—			—			(16,078	)
Issuance of 43,650 shares of common stock attributable to exercise of stock options															146			666			—			—			812
Issuance of 745 shares of common stock attributable to employee service awards															2			22			—			—			24
Balances, December 31, 2007														$	90,653		$	149,511		$	439,860		$	71,473		$	751,497

December 31, 2005	(Dollars in Thousands)
Type of Investment	Cost or Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value
HELD-TO-MATURITY
Fixed maturities
Bonds:
United States government:
Collateralized mortgage obligations	$	4,518	$	135	$	—	$	4,653
Mortgage-backed securities		1,342		140		—		1,482
All other government		1,200		8		—		1,208
States, municipalities and political subdivisions		51,832		1,894		69		53,657
All foreign bonds		2,002		95		—		2,097
All other corporate bonds		11,871		254		—		12,125
Total Held-to-Maturity Fixed Maturities	$	72,765	$	2,526	$	69	$	75,222
AVAILABLE-FOR-SALE
Fixed maturities
Bonds:
United States government:
Collateralized mortgage obligations	$	25,046	$	699	$	—	$	25,745
All other government		181,326		447		4,394		177,379
States, municipalities and political subdivisions		282,672		7,688		393		289,967
All foreign bonds		57,224		1,346		332		58,238
Public utilities		306,091		12,433		1,456		317,068
Corporate bonds:
Collateralized mortgage obligations		2,837		48		340		2,545
All other corporate bonds		883,137		29,594		7,724		905,007
Redeemable preferred stocks		1,150		12		—		1,162
Total Available-For-Sale Fixed Maturities	$	1,739,483	$	52,267	$	14,639	$	1,777,111
Equities
Common stocks:
Public utilities	$	10,019	$	6,731	$	753	$	15,997
Bank, trust and insurance companies		12,480		67,799		184		80,095
All other common stocks		27,110		36,007		913		62,204
Nonredeemable preferred stocks		230		—		4		226
Total Available-for-Sale Equity Securities	$	49,839	$	110,537	$	1,854	$	158,522
Total Available-for-Sale Securities	$	1,789,322	$	162,804	$	16,493	$	1,935,633

Pension Plan Assets (Dollars in Thousands)	2006		% of Total		2005		% of Total
Common stock:
United Fire common stock - 202,058 shares	$	7,123	13.4	%	$	8,169	18.0	%
Other		25,585	48.1	%		21,976	48.2	%
Total common stock	$	32,708	61.5	%	$	30,145	66.2	%
United Life Insurance Company annuity		8,539	16.0	%		9,267	20.3	%
Cash and cash equivalents		11,993	22.5	%		6,125	13.5	%
Total Plan Assets	$	53,240	100.0	%	$	45,537	100.0	%

Weighted-average assumptions as of	Pension Benefits				Other Benefits				Pension Benefits				Other Benefits
December 31	2006		2005		2006		2005
December 31,									2007		2006		2007		2006
Discount rate	5.75	%	5.75	%	5.75	%	5.75	%	5.75	%	5.75	%	5.75	%	5.75	%
Rate of compensation increase	4.00	%	4.00	%	N/A		N/A		4.00	%	4.00	%	N/A		N/A

(Dollars in Thousands)	1% Increase		1% Decrease			1% Increase		1% Decrease
Effect of total of service and interest cost components of net periodic postretirement health care benefit cost	$	290	$	(229	)
Effect on total service and interest cost components of net periodic postretirement health care benefit cost						$	352	$	(330	)
Effect on the health care component of the accumulated postretirement benefit obligation		2,441		(1,965	)		3,065		(2,467	)

(Dollars in Thousands)	2008			2009			2010			2011			2012			2013-2017
Pension Benefits	$	2,224		$	2,351		$	2,512		$	2,601		$	2,835		$	17,490
Other Benefits:
Excluding Modernization Act Subsidy		705			785			885			950			1,022			6,547
Expected Modernization Act Subsidy		(84	)		(97	)		(114	)		(128	)		(144	)		(1,005	)
Other Benefits	$	621		$	688		$	771		$	822		$	878		$	5,542