NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share amounts or as otherwise noted)
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance through a network of independent agencies. Our insurance company subsidiaries are licensed as property and casualty insurers in 48 states and the District of Columbia.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K for the year ended December 31, 2019, including certain financial statement footnote disclosures, is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted.
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 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; reinsurance receivables and recoverables; loss settlement expenses; and pension and post-retirement benefit obligations.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management of UFG believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.
Segment Information
On September 19, 2017, the Company announced that it had agreed to sell its subsidiary, United Life Insurance Company ("United Life"), to Kuvare US Holdings, Inc. ("Kuvare"). The sale closed on March 30, 2018. Prior to the announcement to sell United Life, we had two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance business has six domestic locations from which it conducts its direct business. The life insurance segment operated from our home office in Cedar Rapids, Iowa. Because all of our insurance is sold domestically, we have no revenues from foreign operations.
After the announcement of the United Life transaction, our continuing operations, the property and casualty insurance business, was reported as one reportable segment. The property and casualty insurance business profit or loss is consistent with consolidated reporting as disclosed on the Consolidated Statements of Income and Comprehensive Income. We analyze the property and casualty insurance business results based on profitability (i.e., loss ratios), expenses and return on equity. The Company's property and casualty insurance business was determined using a management approach to make decisions on operating matters, including allocating resources, assessing performance, determining which products to market and sell, determining distribution networks with insurance
agents and monitoring the regulatory environment. The property and casualty insurance business products have similar economic characteristics and use a similar marketing and distribution strategy with our independent agents. The property and casualty insurance business geographic concentration did not change after the announcement of the sale of the life insurance business. We will continue to evaluate our continuing operations on the basis of both statutory accounting principles prescribed or permitted by our states of domicile and GAAP.
Discontinued Operations
On September 18, 2017, the Company signed a definitive agreement to sell its subsidiary, United Life, to Kuvare for $280,000 in cash, less a $21 adjustment as set forth in the definitive agreement, for a net amount of $279,979. The sale closed on March 30, 2018 (the "closing date") and we reported an after-tax gain on the sale of discontinued operations of $27,307. The life insurance business (previously reported as a separate segment) was considered held for sale and reported as discontinued operations and its financial position, results of operations and cash flows were reported separately for all periods presented, as applicable, unless otherwise noted.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.
For the nine-month periods ended September 30, 2020 and 2019, we made payments for income taxes totaling $125 and $1,556, respectively. We did not receive a tax refund during the nine-month period ended September 30, 2020 and we received a tax refund of $5,401 during the nine-month period ended September 30, 2019.
For the nine-month periods ended September 30, 2020 and 2019, we made no interest payments (excluding interest credited to policyholders’ accounts).
Deferred Policy Acquisition Costs ("DAC")
Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the nine-month period ended September 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
Total
|
Recorded asset at beginning of period
|
$
|
94,292
|
|
Underwriting costs deferred
|
158,371
|
|
Amortization of deferred policy acquisition costs
|
(158,440)
|
|
Recorded asset at September 30, 2020
|
$
|
94,223
|
|
Property and casualty insurance policy acquisition costs deferred are amortized as premium revenue is recognized. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value. This takes into account the premium to be earned, losses and loss settlement expenses expected to be incurred and certain other costs expected to be incurred as the premium is earned.
Goodwill
Goodwill assets arise as a result of business combinations and consist of the excess of the fair value of consideration paid over the tangible assets acquired and liabilities assumed. All of our goodwill assets relate to the acquisition of Mercer Insurance Group, Inc. on March 28, 2011. We evaluate goodwill assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill assets may exceed their implied fair value. Any impairment is recognized in the period that the impairment is identified. During the third quarter of 2020, we completed a quantitative analysis of our goodwill as a
result of the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, as a result of the COVID-19 pandemic and due to the current year weather related catastrophes; and (ii) the fair value of our stock trading significantly below book value. As a result of the quantitative analysis, we recorded an impairment charge of $15,091 as of September 30, 2020. The impairment charge was determined based on completion of both a discounted cash flow and market value analysis.
Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss ("NOL") carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has considered the implications of the CARES Act on its tax provision and has included an income tax benefit of $17.8 million as the result of this Act.
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 federal income tax expense.
We reported consolidated federal income tax benefit of $52,176 for the nine-month period ended September 30, 2020 compared to income tax expense of $7,595 during the same period of 2019. Our effective tax rate is different than the federal statutory rate of 21 percent, due principally to the impact of the provisions of the CARES Act.
The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If, based on review, it appears not more likely than not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at September 30, 2020 or December 31, 2019. 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 a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2015. The Internal Revenue Service is conducting an examination of our federal income tax return for the 2017 tax year.
Leases
The Company determines if a contract contains a lease at inception of the contract. The Company's inventory of leases consists of operating leases which are recorded as a lease obligation liability disclosed in the "Accrued expenses and other liabilities" line on the Consolidated Balance Sheets and as a lease right-of-use asset disclosed in the "Other assets" line on the Consolidated Balance Sheets. The Company's operating leases consist of office space, vehicles, computer equipment and office equipment. The lease right-of-use asset represents the Company's right to use each underlying asset for the lease term and the lease obligation liability represents the Company's obligation over the lease term. The Company's lease obligation is recorded at the present value of the lease payments based on the term of the applied lease. Short-term leases of 12 months or less are recorded on the Consolidated Balance Sheets and lease payments are recognized on the Consolidated Statements of Income and Comprehensive Income. For more information on leases refer to Note 10 "Leases."
Variable Interest Entities
The Company and certain related parties are equity investors in one investment in which the Company determined is a variable interest entity ("VIE") as a result of participation in the risks and rewards of the VIE based on the objectives and strategies of the VIE. The VIE is a limited liability company that primarily invests in commercial real estate. The Company and certain related parties are not the primary beneficiary largely due to their inability to influence management or direct the activities that most significantly impact the VIE's economic performance. Based on these facts and circumstances, the Company has a variable interest in the VIE, but has not consolidated the VIE's financial results as it is not the primary beneficiary. The Company's investment is reported in other long-term investments in the Consolidated Balance Sheets and accounted for under the equity method of accounting. The fair value of the VIE at September 30, 2020 was $3,638 and there are no future funding commitments.
Credit Losses
The Company recognizes credit losses for our available-for-sale fixed-maturity portfolio, reinsurance receivables, mortgage loans and premium receivables by setting up allowances which are remeasured each reporting period and recorded in the Consolidated Statements of Income and Comprehensive Income.
For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history.
The Company does not recognize an allowance for credit losses for accrued interest receivable for available-for-sale fixed-maturity securities, which is recorded in "Accrued investment income" in the Consolidated Balance Sheets and "Investment income, net of investment expenses" in the Consolidated Statements of Income and Comprehensive Income. The Company considers collections of accrued investment income within six months to be timely and therefore not requiring a write-off. If a write-off is required for accrued investment income outstanding greater than six months, the Company writes off accrued interest by reversing net investment income. For more information on credit losses and the allowance for credit losses for available-for-sale fixed-maturity portfolio, see Note 2 "Summary of Investments."
An allowance for mortgage loan losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments which have similar risk characteristics. To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. On a quarterly basis, quantitative credit risk metrics, including for example, cash-flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations. This allowance is presented as a separate line in the Consolidated Balance Sheets beneath the asset value as well as presented net and recorded through "Net realized investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income. For more information on credit losses and the allowance for credit losses for our investment in mortgage loans see Note 3 "Fair Value of Financial Instruments."
For reinsurance receivables, the Company's model estimates expected credit loss by multiplying the exposure at default by both the probability of default and loss given default ("LGD"). The LGD is estimated by the rating of the Company, historical relationship with UFG, existence of letters of credit and known regulation the Company may be held accountable for. The ultimate LGD percentage is estimated after considering Moody’s experience with unsecured year 1 bond recovery rates from 1983-2017. The allowance calculated as of September 30, 2020 is recorded through the line "Reinsurance receivables and recoverables" in the Consolidated Balance Sheets and through the line "Other underwriting expenses" in the Consolidated Statements of Income and Other Comprehensive Income. As of September 30, 2020, the Company had a credit loss allowance for reinsurance receivables of $241.
|
|
|
|
|
|
|
|
|
Rollforward of credit loss allowance for reinsurance receivable:
|
|
|
As of
|
|
|
September 30, 2020
|
Beginning balance, January 1, 2020
|
|
$
|
38
|
|
Current-period provision for expected credit losses
|
|
203
|
|
Write-off charged against the allowance, if any
|
|
—
|
|
Recoveries of amounts previously written off, if any
|
|
—
|
|
Ending balance of the allowance for reinsurance receivable, September 30, 2020
|
|
$
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With respect to premiums receivable, the Company utilizes an aging method to estimate credit losses. An allowance for doubtful accounts is based on a periodic evaluation of the aging and collectability of amounts due from agents and policyholders. "Premiums receivable" are presented in the Consolidated Balance Sheets net of an estimated allowance for doubtful accounts and recorded through "Other underwriting expenses" in the Consolidated Statements of Income and Comprehensive Income.
Subsequent Events
In the preparation of the accompanying financial statements, the Company has evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure in the Company's financial statements.
COVID-19 Pandemic
The COVID-19 pandemic caused significant financial market volatility, economic uncertainty and interruptions to normal business activities in the first nine months of 2020. As of the date of this report, we expect the effect of COVID-19 on claims currently under our coverages to be manageable, based on the information presently available. However, the effects of the COVID-19 pandemic continue to evolve and we cannot predict the extent to which our business, results of operations, financial condition, liquidity, capital position, the value of investments we hold in our investment portfolio, premiums and the demand for our products and our ability to collect premiums or requirement to return premiums to our policyholders, will ultimately be impacted. Additionally, if established written contract policy exclusions of business interruption coverage for losses attributable to the COVID-19 pandemic are voided or changed through legislation, regulations or interpretations by the courts, such changes have the potential to materially increase claims, losses and legal expenses which may impact our business, financial condition, results of operations or liquidity. See further discussion in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2020
Intangibles - Other Internal Use Software
In August 2018, the FASB issued guidance to align the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance requires the Company to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The new guidance was effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance as of January 1, 2020. The adoption did not have a significant impact on the Company's financial position or results of operations.
Financial Instruments - Credit Losses
In June 2016, the FASB issued new guidance on the measurement of credit losses for most financial instruments. The new guidance replaces the incurred loss model for recognizing credit losses with an expected loss model for instruments measured at amortized cost and requires allowances to be recorded for available-for-sale debt securities rather than reduce the carrying amount. These allowances are remeasured each reporting period. The new guidance was effective for annual periods beginning after December 15, 2019 and interim periods within those years. The new guidance impacted the Company's impairment model related to our available-for-sale fixed-maturity portfolio, reinsurance receivables and mortgage loans. The Company has performed a run of the credit loss models as of January 1, 2020. These models resulted in an immaterial expected credit loss at January 1, 2020. Prior to the adoption of the new guidance, the Company utilized an aging method to estimate credit losses on premiums receivable. This aging method is permitted under the new guidance. The Company adopted the new guidance prospectively as of January 1, 2020 with an immaterial estimated cumulative effect adjustment to opening retained earnings. This cumulative effect adjustment is an allowance related to the Company's reinsurance receivables. The adoption of the new guidance did not have a material impact on the Company's financial position and results of operations.
Goodwill
In January 2017, the FASB issued new guidance which simplifies the test for goodwill impairment. The new guidance eliminates the implied fair value calculation when measuring a goodwill impairment charge. Under the new guidance, impairment charges are based on the excess of the carrying value over fair value of goodwill. The new guidance was effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance as of January 1, 2020. The adoption did not have a significant impact on the Company's financial position or results of operations.
Financial Instruments - Disclosures
In August 2018, the FASB issued new guidance which modifies the disclosure requirements on fair value measurements of financial instruments. The new guidance removes the requirement for disclosing the amount and reason for transfers between Level 1 and Level 2 investment securities and the valuation processes for Level 3 fair value measurements. The guidance also requires additional disclosures on the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance as of January 1, 2020. The adoption modified existing fair value disclosures, but did not have an impact on the Company's financial position or results of operations.
Pending Adoption of Accounting Standards
Defined Benefit Plans - Disclosures
In August 2018, the FASB issued new guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension and postretirement plans. The new guidance removes the requirement for disclosing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs in the next year and the sensitivity of postretirement health plans to one-percentage-point changes in medical trend rates. The new guidance is effective for annual periods beginning after December 15, 2020. The Company will adopt the new guidance as of January 1, 2021. Management currently believes the new guidance will modify existing disclosures, but will not have an impact on the Company's financial position and results of operations.
NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in available-for-sale fixed maturity and equity securities, presented on a consolidated basis, as of September 30, 2020 and December 31, 2019, is provided below:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
Type of Investment
|
Cost or Amortized Cost
|
|
Gross Unrealized Appreciation
|
|
Gross Unrealized Depreciation
|
|
Fair Value
|
|
Allowance for Credit Losses
|
|
Carrying Value
|
AVAILABLE-FOR-SALE
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
53,877
|
|
|
$
|
730
|
|
|
$
|
8
|
|
|
$
|
54,599
|
|
|
$
|
—
|
|
|
$
|
54,599
|
|
U.S. government agency
|
60,503
|
|
|
4,457
|
|
|
—
|
|
|
64,960
|
|
|
—
|
|
|
64,960
|
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
General obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
79,872
|
|
|
4,106
|
|
|
—
|
|
|
83,978
|
|
|
—
|
|
|
83,978
|
|
Northeast
|
29,124
|
|
|
1,426
|
|
|
—
|
|
|
30,550
|
|
|
—
|
|
|
30,550
|
|
South
|
105,290
|
|
|
5,295
|
|
|
—
|
|
|
110,585
|
|
|
—
|
|
|
110,585
|
|
West
|
102,772
|
|
|
7,175
|
|
|
—
|
|
|
109,947
|
|
|
—
|
|
|
109,947
|
|
Special revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
126,251
|
|
|
8,590
|
|
|
—
|
|
|
134,841
|
|
|
—
|
|
|
134,841
|
|
Northeast
|
58,287
|
|
|
4,557
|
|
|
—
|
|
|
62,844
|
|
|
—
|
|
|
62,844
|
|
South
|
220,904
|
|
|
17,446
|
|
|
—
|
|
|
238,350
|
|
|
—
|
|
|
238,350
|
|
West
|
133,934
|
|
|
9,168
|
|
|
—
|
|
|
143,102
|
|
|
—
|
|
|
143,102
|
|
Foreign bonds
|
26,413
|
|
|
1,835
|
|
|
230
|
|
|
28,018
|
|
|
—
|
|
|
28,018
|
|
Public utilities
|
77,147
|
|
|
7,155
|
|
|
—
|
|
|
84,302
|
|
|
—
|
|
|
84,302
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
24,912
|
|
|
2,589
|
|
|
—
|
|
|
27,501
|
|
|
—
|
|
|
27,501
|
|
Industrials
|
39,558
|
|
|
3,499
|
|
|
—
|
|
|
43,057
|
|
|
—
|
|
|
43,057
|
|
Consumer goods and services
|
45,250
|
|
|
3,790
|
|
|
12
|
|
|
49,028
|
|
|
—
|
|
|
49,028
|
|
Health care
|
6,674
|
|
|
895
|
|
|
—
|
|
|
7,569
|
|
|
—
|
|
|
7,569
|
|
Technology, media and telecommunications
|
37,241
|
|
|
4,330
|
|
|
—
|
|
|
41,571
|
|
|
—
|
|
|
41,571
|
|
Financial services
|
95,696
|
|
|
7,030
|
|
|
267
|
|
|
102,459
|
|
|
8
|
|
|
102,451
|
|
Mortgage-backed securities
|
14,333
|
|
|
305
|
|
|
109
|
|
|
14,529
|
|
|
—
|
|
|
14,529
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
|
|
|
|
|
Government national mortgage association
|
71,992
|
|
|
5,206
|
|
|
1
|
|
|
77,197
|
|
|
—
|
|
|
77,197
|
|
Federal home loan mortgage corporation
|
119,006
|
|
|
3,019
|
|
|
349
|
|
|
121,676
|
|
|
—
|
|
|
121,676
|
|
Federal national mortgage association
|
83,276
|
|
|
2,579
|
|
|
406
|
|
|
85,449
|
|
|
—
|
|
|
85,449
|
|
Asset-backed securities
|
314
|
|
|
621
|
|
|
—
|
|
|
935
|
|
|
—
|
|
|
935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Fixed Maturities
|
$
|
1,612,626
|
|
|
$
|
105,803
|
|
|
$
|
1,382
|
|
|
$
|
1,717,047
|
|
|
$
|
8
|
|
|
$
|
1,717,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Type of Investment
|
Cost or Amortized Cost
|
|
Gross Unrealized Appreciation
|
|
Gross Unrealized Depreciation
|
|
Fair Value
|
AVAILABLE-FOR-SALE
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
69,300
|
|
|
$
|
203
|
|
|
$
|
12
|
|
|
$
|
69,491
|
|
U.S. government agency
|
97,962
|
|
|
2,344
|
|
|
104
|
|
|
100,202
|
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
|
General obligations:
|
|
|
|
|
|
|
|
Midwest
|
85,607
|
|
|
2,987
|
|
|
—
|
|
|
88,594
|
|
Northeast
|
30,120
|
|
|
1,150
|
|
|
—
|
|
|
31,270
|
|
South
|
111,688
|
|
|
3,515
|
|
|
—
|
|
|
115,203
|
|
West
|
105,569
|
|
|
4,748
|
|
|
—
|
|
|
110,317
|
|
Special revenue:
|
|
|
|
|
|
|
|
Midwest
|
133,717
|
|
|
6,175
|
|
|
—
|
|
|
139,892
|
|
Northeast
|
58,665
|
|
|
2,878
|
|
|
—
|
|
|
61,543
|
|
South
|
224,214
|
|
|
10,452
|
|
|
—
|
|
|
234,666
|
|
West
|
138,557
|
|
|
6,287
|
|
|
—
|
|
|
144,844
|
|
Foreign bonds
|
4,936
|
|
|
181
|
|
|
—
|
|
|
5,117
|
|
Public utilities
|
60,950
|
|
|
2,701
|
|
|
—
|
|
|
63,651
|
|
Corporate bonds
|
|
|
|
|
|
|
|
Energy
|
28,695
|
|
|
1,429
|
|
|
—
|
|
|
30,124
|
|
Industrials
|
52,249
|
|
|
1,766
|
|
|
—
|
|
|
54,015
|
|
Consumer goods and services
|
47,131
|
|
|
2,335
|
|
|
—
|
|
|
49,466
|
|
Health care
|
8,998
|
|
|
482
|
|
|
—
|
|
|
9,480
|
|
Technology, media and telecommunications
|
25,931
|
|
|
1,739
|
|
|
—
|
|
|
27,670
|
|
Financial services
|
96,613
|
|
|
3,870
|
|
|
230
|
|
|
100,253
|
|
Mortgage-backed securities
|
6,250
|
|
|
127
|
|
|
21
|
|
|
6,356
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
|
Government national mortgage association
|
78,400
|
|
|
2,053
|
|
|
97
|
|
|
80,356
|
|
Federal home loan mortgage corporation
|
123,572
|
|
|
1,150
|
|
|
220
|
|
|
124,502
|
|
Federal national mortgage association
|
70,322
|
|
|
1,631
|
|
|
108
|
|
|
71,845
|
|
Asset-backed securities
|
314
|
|
|
436
|
|
|
—
|
|
|
750
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Fixed Maturities
|
$
|
1,659,760
|
|
|
$
|
60,639
|
|
|
$
|
792
|
|
|
$
|
1,719,607
|
|
Maturities
The amortized cost and fair value of available-for-sale and trading fixed maturity securities at September 30, 2020, by contractual maturity, are shown in the following tables. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
|
|
|
|
|
|
|
|
|
Available-For-Sale
|
|
Trading
|
September 30, 2020
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
$
|
53,911
|
|
|
$
|
54,386
|
|
|
$
|
1,957
|
|
|
$
|
3,935
|
|
Due after one year through five years
|
365,831
|
|
|
388,192
|
|
|
9,221
|
|
|
9,265
|
|
Due after five years through 10 years
|
401,105
|
|
|
433,321
|
|
|
—
|
|
|
—
|
|
Due after 10 years
|
502,858
|
|
|
541,362
|
|
|
1,080
|
|
|
1,611
|
|
Asset-backed securities
|
314
|
|
|
935
|
|
|
—
|
|
|
—
|
|
Mortgage-backed securities
|
14,333
|
|
|
14,529
|
|
|
—
|
|
|
—
|
|
Collateralized mortgage obligations
|
274,274
|
|
|
284,322
|
|
|
—
|
|
|
—
|
|
Allowance for credit losses
|
—
|
|
|
(8)
|
|
|
—
|
|
|
—
|
|
|
$
|
1,612,626
|
|
|
$
|
1,717,039
|
|
|
$
|
12,258
|
|
|
$
|
14,811
|
|
Net Realized Investment Gains and Losses
Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Available-for-sale
|
$
|
52
|
|
|
$
|
129
|
|
|
$
|
52
|
|
|
$
|
271
|
|
Allowance for credit losses
|
2
|
|
|
—
|
|
|
(8)
|
|
—
|
|
Trading securities
|
|
|
|
|
|
|
|
Change in fair value
|
248
|
|
|
43
|
|
|
(760)
|
|
|
2,290
|
|
Sales
|
134
|
|
|
8
|
|
|
(20)
|
|
|
100
|
|
Equity securities
|
|
|
|
|
|
|
|
Change in fair value
|
21,962
|
|
|
9,692
|
|
|
(38,876)
|
|
|
46,825
|
|
Sales
|
(7,186)
|
|
|
(50)
|
|
|
(22,772)
|
|
|
655
|
|
Mortgage loans allowance for credit losses
|
—
|
|
|
—
|
|
|
(4)
|
|
|
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
—
|
|
|
—
|
|
|
(28)
|
|
|
—
|
|
Total net realized investment gains (losses)
|
$
|
15,212
|
|
|
$
|
9,822
|
|
|
$
|
(62,416)
|
|
|
$
|
50,126
|
|
The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Proceeds from sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,907
|
|
|
$
|
36,490
|
|
Gross realized gains
|
—
|
|
|
—
|
|
|
198
|
|
|
30
|
|
Gross realized losses
|
—
|
|
|
—
|
|
|
495
|
|
|
13
|
|
Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily convertible securities which are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains. Our portfolio of trading securities had a fair value of $14,811 and $15,256 at September 30, 2020 and December 31, 2019, respectively.
Funding Commitment
Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through July 10, 2030 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $10,284 at September 30, 2020.
In addition, the Company invested $25,000 in December 2019 in a limited liability partnership investment fund which is subject to a 3-year lockup with a 60 day minimum notice, with 4 possible repurchase dates per year, after the 3-year lockup period is met. The fair value of the investment at September 30, 2020 was $24,035 and there are no remaining capital contributions with this investment.
Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
Change in net unrealized investment appreciation
|
|
|
|
Available-for-sale fixed maturities
|
$
|
44,574
|
|
|
$
|
77,103
|
|
Income tax effect
|
(9,361)
|
|
|
(16,192)
|
|
Total change in net unrealized investment appreciation, net of tax
|
$
|
35,213
|
|
|
$
|
60,911
|
|
Credit Risk
An allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history. The following table contains a rollforward of the allowance for credit losses for available-for-sale fixed maturity securities at September 30, 2020:
|
|
|
|
|
|
|
|
|
Rollforward of allowance for credit losses for available-for-sale fixed maturity securities:
|
|
|
As of
|
|
|
September 30, 2020
|
Beginning balance, January 1, 2020
|
|
$
|
—
|
|
Additions to the allowance for credit losses for which credit losses were not previously recorded
|
|
8
|
|
Reductions for securities sold during the period (realized)
|
|
—
|
|
Writeoffs charged against the allowance
|
|
—
|
|
Recoveries of amounts previously written off
|
|
—
|
|
Ending balance, September 30, 2020
|
|
$
|
8
|
|
The following tables summarize our fixed maturity securities that were in an unrealized loss position reported on a consolidated basis at September 30, 2020 and December 31, 2019. The securities are presented by the length of time they have been continuously in an unrealized loss position. Non-credit related unrealized losses are recognized as a component of other comprehensive income and represent other market movements that are not credit related, for example interest rate changes. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
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
|
AVAILABLE-FOR-SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
|
$
|
11,804
|
|
|
$
|
8
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,804
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign bonds
|
1
|
|
|
$
|
2,776
|
|
|
$
|
230
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,776
|
|
|
$
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer goods and services
|
1
|
|
|
2,196
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,196
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
1
|
|
|
2,998
|
|
|
2
|
|
|
1
|
|
|
3,000
|
|
|
9
|
|
|
5,998
|
|
|
11
|
|
Mortgage-backed securities
|
2
|
|
|
9,118
|
|
|
107
|
|
|
6
|
|
|
157
|
|
|
2
|
|
|
9,275
|
|
|
109
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal home loan mortgage corporation
|
14
|
|
|
48,062
|
|
|
348
|
|
|
1
|
|
|
57
|
|
|
1
|
|
|
48,119
|
|
|
349
|
|
Federal national mortgage association
|
10
|
|
|
43,684
|
|
|
406
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43,684
|
|
|
406
|
|
Government national mortgage association
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
76
|
|
|
1
|
|
|
76
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Fixed Maturities
|
31
|
|
|
$
|
120,638
|
|
|
$
|
1,113
|
|
|
9
|
|
|
$
|
3,290
|
|
|
$
|
13
|
|
|
$
|
123,928
|
|
|
$
|
1,126
|
|
The unrealized losses on our investments in available-for-sale fixed maturities were the result of interest rate movements. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
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
|
AVAILABLE-FOR-SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
4,733
|
|
|
$
|
12
|
|
|
$
|
4,733
|
|
|
$
|
12
|
|
U.S. government agency
|
3
|
|
|
13,846
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,846
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
3
|
|
|
10,906
|
|
|
142
|
|
|
1
|
|
|
4,913
|
|
|
88
|
|
|
15,819
|
|
|
230
|
|
Mortgage-backed securities
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
1,585
|
|
|
21
|
|
|
1,585
|
|
|
21
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal home loan mortgage corporation
|
12
|
|
|
50,829
|
|
|
183
|
|
|
3
|
|
|
4,844
|
|
|
37
|
|
|
55,673
|
|
|
220
|
|
Federal national mortgage association
|
4
|
|
|
23,515
|
|
|
90
|
|
|
3
|
|
|
1,102
|
|
|
18
|
|
|
24,617
|
|
|
108
|
|
Government national mortgage association
|
2
|
|
|
8,444
|
|
|
38
|
|
|
5
|
|
|
3,053
|
|
|
59
|
|
|
11,497
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Fixed Maturities
|
24
|
|
|
$
|
107,540
|
|
|
$
|
557
|
|
|
27
|
|
|
$
|
20,230
|
|
|
$
|
235
|
|
|
$
|
127,770
|
|
|
$
|
792
|
|
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
•Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.
•Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.
•Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years' experience and who have demonstrated knowledge of the subject security.
In order to determine the proper classification in the fair value hierarchy, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.
The mortgage loan portfolio consists entirely of commercial mortgage loans. The fair value of our mortgage loans is determined by modeling performed by our third party fund manager based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value.
Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.
The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Supplemental Executive Retirement and Deferral Plan (the "Executive Retirement Plan"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plan. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of September 30, 2020, the cash surrender value of the COLI policies was $7,670, which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.
A summary of the carrying value and estimated fair value of our financial instruments at September 30, 2020 and December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
Assets
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
1,717,047
|
|
|
$
|
1,717,039
|
|
|
$
|
1,719,607
|
|
|
$
|
1,719,607
|
|
Trading securities
|
14,811
|
|
|
14,811
|
|
|
15,256
|
|
|
15,256
|
|
Equity securities
|
198,791
|
|
|
198,791
|
|
|
299,203
|
|
|
299,203
|
|
Mortgage loans
|
48,977
|
|
|
47,733
|
|
|
43,992
|
|
|
42,448
|
|
Other long-term investments
|
62,903
|
|
|
62,903
|
|
|
78,410
|
|
|
78,410
|
|
Short-term investments
|
175
|
|
|
175
|
|
|
175
|
|
|
175
|
|
Cash and cash equivalents
|
99,604
|
|
|
99,604
|
|
|
120,722
|
|
|
120,722
|
|
Corporate-owned life insurance
|
7,670
|
|
|
7,670
|
|
|
6,777
|
|
|
6,777
|
|
The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table includes financial instruments at September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Fair Value Measurements
|
Description
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
AVAILABLE-FOR-SALE
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
54,599
|
|
|
$
|
—
|
|
|
$
|
54,599
|
|
|
$
|
—
|
|
U.S. government agency
|
64,960
|
|
|
—
|
|
|
64,960
|
|
|
—
|
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
|
General obligations
|
|
|
|
|
|
|
|
Midwest
|
83,978
|
|
|
—
|
|
|
83,978
|
|
|
—
|
|
Northeast
|
30,550
|
|
|
—
|
|
|
30,550
|
|
|
—
|
|
South
|
110,585
|
|
|
—
|
|
|
110,585
|
|
|
—
|
|
West
|
109,947
|
|
|
—
|
|
|
109,947
|
|
|
—
|
|
Special revenue
|
|
|
|
|
|
|
|
Midwest
|
134,841
|
|
|
—
|
|
|
134,841
|
|
|
—
|
|
Northeast
|
62,844
|
|
|
—
|
|
|
62,844
|
|
|
—
|
|
South
|
238,350
|
|
|
—
|
|
|
238,350
|
|
|
—
|
|
West
|
143,102
|
|
|
—
|
|
|
143,102
|
|
|
—
|
|
Foreign bonds
|
28,018
|
|
|
—
|
|
|
28,018
|
|
|
—
|
|
Public utilities
|
84,302
|
|
|
—
|
|
|
84,302
|
|
|
—
|
|
Corporate bonds
|
|
|
|
|
|
|
|
Energy
|
27,501
|
|
|
—
|
|
|
27,501
|
|
|
—
|
|
Industrials
|
43,057
|
|
|
—
|
|
|
43,057
|
|
|
—
|
|
Consumer goods and services
|
49,028
|
|
|
—
|
|
|
49,028
|
|
|
—
|
|
Health care
|
7,569
|
|
|
—
|
|
|
7,569
|
|
|
—
|
|
Technology, media and telecommunications
|
41,571
|
|
|
—
|
|
|
41,571
|
|
|
—
|
|
Financial services
|
102,459
|
|
|
—
|
|
|
102,209
|
|
|
250
|
|
Mortgage-backed securities
|
14,529
|
|
|
—
|
|
|
14,529
|
|
|
—
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
|
Government national mortgage association
|
77,197
|
|
|
—
|
|
|
77,197
|
|
|
—
|
|
Federal home loan mortgage corporation
|
121,676
|
|
|
—
|
|
|
121,676
|
|
|
—
|
|
Federal national mortgage association
|
85,449
|
|
|
—
|
|
|
85,449
|
|
|
—
|
|
Asset-backed securities
|
935
|
|
|
—
|
|
|
—
|
|
|
935
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Fixed Maturities
|
$
|
1,717,047
|
|
|
$
|
—
|
|
|
$
|
1,715,862
|
|
|
$
|
1,185
|
|
TRADING
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
|
$
|
2,004
|
|
|
$
|
—
|
|
|
$
|
2,004
|
|
|
$
|
—
|
|
Consumer goods and services
|
1,171
|
|
|
—
|
|
|
1,171
|
|
|
—
|
|
Health care
|
4,965
|
|
|
—
|
|
|
4,965
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Financial services
|
1,622
|
|
|
—
|
|
|
1,622
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stocks
|
5,049
|
|
|
5,049
|
|
|
—
|
|
|
—
|
|
Total Trading Securities
|
$
|
14,811
|
|
|
$
|
5,049
|
|
|
$
|
9,762
|
|
|
$
|
—
|
|
EQUITY SECURITIES
|
|
|
|
|
|
|
|
Common stocks
|
|
|
|
|
|
|
|
Public utilities
|
$
|
16,344
|
|
|
$
|
16,344
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Energy
|
8,833
|
|
|
8,833
|
|
|
—
|
|
|
—
|
|
Industrials
|
30,935
|
|
|
30,935
|
|
|
—
|
|
|
—
|
|
Consumer goods and services
|
31,432
|
|
|
31,432
|
|
|
—
|
|
|
—
|
|
Health care
|
24,646
|
|
|
24,646
|
|
|
—
|
|
|
—
|
|
Technology, media and telecommunications
|
16,003
|
|
|
16,003
|
|
|
—
|
|
|
—
|
|
Financial services
|
63,957
|
|
|
63,957
|
|
|
—
|
|
|
—
|
|
Nonredeemable preferred stocks
|
6,641
|
|
|
6,046
|
|
|
—
|
|
|
595
|
|
Total Equity Securities
|
$
|
198,791
|
|
|
$
|
198,196
|
|
|
$
|
—
|
|
|
$
|
595
|
|
Short-Term Investments
|
$
|
175
|
|
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money Market Accounts
|
$
|
54,590
|
|
|
$
|
54,590
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate-Owned Life Insurance
|
$
|
7,670
|
|
|
$
|
—
|
|
|
$
|
7,670
|
|
|
$
|
—
|
|
Total Assets Measured at Fair Value
|
$
|
1,993,084
|
|
|
$
|
258,010
|
|
|
$
|
1,733,294
|
|
|
$
|
1,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Fair Value Measurements
|
Description
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
AVAILABLE-FOR-SALE
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
69,491
|
|
|
$
|
—
|
|
|
$
|
69,491
|
|
|
$
|
—
|
|
U.S. government agency
|
100,202
|
|
|
—
|
|
|
100,202
|
|
|
—
|
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
|
General obligations
|
|
|
|
|
|
|
|
Midwest
|
88,594
|
|
|
—
|
|
|
88,594
|
|
|
—
|
|
Northeast
|
31,270
|
|
|
—
|
|
|
31,270
|
|
|
—
|
|
South
|
115,203
|
|
|
—
|
|
|
115,203
|
|
|
—
|
|
West
|
110,317
|
|
|
—
|
|
|
110,317
|
|
|
—
|
|
Special revenue
|
|
|
|
|
|
|
|
Midwest
|
139,892
|
|
|
—
|
|
|
139,892
|
|
|
—
|
|
Northeast
|
61,543
|
|
|
—
|
|
|
61,543
|
|
|
—
|
|
South
|
234,666
|
|
|
—
|
|
|
234,666
|
|
|
—
|
|
West
|
144,844
|
|
|
—
|
|
|
144,844
|
|
|
—
|
|
Foreign bonds
|
5,117
|
|
|
—
|
|
|
5,117
|
|
|
—
|
|
Public utilities
|
63,651
|
|
|
—
|
|
|
63,651
|
|
|
—
|
|
Corporate bonds
|
|
|
|
|
|
|
|
Energy
|
30,124
|
|
|
—
|
|
|
30,124
|
|
|
—
|
|
Industrials
|
54,015
|
|
|
—
|
|
|
54,015
|
|
|
—
|
|
Consumer goods and services
|
49,466
|
|
|
—
|
|
|
49,466
|
|
|
—
|
|
Health care
|
9,480
|
|
|
—
|
|
|
9,480
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology, media and telecommunications
|
27,670
|
|
|
—
|
|
|
27,670
|
|
|
—
|
|
Financial services
|
100,253
|
|
|
—
|
|
|
100,003
|
|
|
250
|
|
Mortgage-backed securities
|
6,356
|
|
|
—
|
|
|
6,356
|
|
|
—
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
|
Government national mortgage association
|
80,356
|
|
|
—
|
|
|
80,356
|
|
|
—
|
|
Federal home loan mortgage corporation
|
124,502
|
|
|
—
|
|
|
124,502
|
|
|
—
|
|
Federal national mortgage association
|
71,845
|
|
|
—
|
|
|
71,845
|
|
|
—
|
|
Asset-backed securities
|
750
|
|
|
—
|
|
|
—
|
|
|
750
|
|
|
|
|
|
|
|
|
|
Total Available-for-Sale Fixed Maturities
|
$
|
1,719,607
|
|
|
$
|
—
|
|
|
$
|
1,718,607
|
|
|
$
|
1,000
|
|
TRADING
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer goods and services
|
$
|
2,276
|
|
|
$
|
—
|
|
|
$
|
2,276
|
|
|
$
|
—
|
|
Health care
|
4,701
|
|
|
—
|
|
|
4,701
|
|
|
—
|
|
Technology, media and telecommunications
|
1,732
|
|
|
—
|
|
|
1,732
|
|
|
—
|
|
Financial services
|
2,460
|
|
|
—
|
|
|
2,460
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stocks
|
4,087
|
|
|
4,087
|
|
|
—
|
|
|
—
|
|
Total Trading Securities
|
$
|
15,256
|
|
|
$
|
4,087
|
|
|
$
|
11,169
|
|
|
—
|
|
EQUITY SECURITIES
|
|
|
|
|
|
|
|
Common stocks
|
|
|
|
|
|
|
|
Public utilities
|
$
|
16,295
|
|
|
$
|
16,295
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Energy
|
14,639
|
|
|
14,639
|
|
|
—
|
|
|
—
|
|
Industrials
|
57,330
|
|
|
57,330
|
|
|
—
|
|
|
—
|
|
Consumer goods and services
|
29,935
|
|
|
29,935
|
|
|
—
|
|
|
—
|
|
Health care
|
27,285
|
|
|
27,285
|
|
|
—
|
|
|
—
|
|
Technology, media and telecommunications
|
19,265
|
|
|
19,265
|
|
|
—
|
|
|
—
|
|
Financial services
|
127,780
|
|
|
127,780
|
|
|
—
|
|
|
—
|
|
Nonredeemable preferred stocks
|
6,674
|
|
|
6,079
|
|
|
—
|
|
|
595
|
|
Total Equity Securities
|
$
|
299,203
|
|
|
$
|
298,608
|
|
|
$
|
—
|
|
|
$
|
595
|
|
Short-Term Investments
|
$
|
175
|
|
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money Market Accounts
|
$
|
9,334
|
|
|
$
|
9,334
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate-Owned Life Insurance
|
$
|
6,777
|
|
|
$
|
—
|
|
|
$
|
6,777
|
|
|
$
|
—
|
|
Total Assets Measured at Fair Value
|
$
|
2,050,352
|
|
|
$
|
312,204
|
|
|
$
|
1,736,553
|
|
|
$
|
1,595
|
|
The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.
We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit
quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. In addition, on a quarterly basis, we also test all securities in the portfolio and independently corroborate the valuations obtained from our third-party valuation service providers. Quarterly, we also perform deep dive analysis of the pricing method used by our third-party valuation service provider by selecting a random sample of securities by asset class and reviewing methodologies. In our opinion, the pricing obtained at September 30, 2020 and December 31, 2019 was reasonable.
For the three- and nine-month periods ended September 30, 2020, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes. The following table provides a quantitative information about our Level 3 securities at September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
Fair Value at
|
|
Valuation Technique(s)
|
|
Unobservable inputs
|
|
Range of weighted average significant unobservable inputs
|
|
|
September 30, 2020
|
|
|
|
Corporate bonds - financial services
|
|
$
|
250
|
|
|
Fair value equals cost
|
|
NA
|
|
NA
|
|
|
|
|
|
|
|
|
|
Fixed Maturities asset-backed securities
|
|
935
|
|
|
Discounted cash flow
|
|
Probability of default
|
|
4% - 6%
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
|
595
|
|
|
Discounted cash flow
|
|
Multiplier
|
|
3x - 4x
|
During the three- and nine-month periods ended September 30, 2020, there were no securities transferred in or out of Level 3.
The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
Asset-backed securities
|
|
Equities
|
|
Total
|
Balance at June 30, 2020
|
|
|
|
|
|
|
$
|
250
|
|
|
$
|
927
|
|
|
$
|
595
|
|
|
$
|
1,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains(1)
|
|
|
|
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
|
|
|
|
|
$
|
250
|
|
|
$
|
935
|
|
|
$
|
595
|
|
|
$
|
1,780
|
|
(1) Net unrealized gains are recorded as a component of comprehensive income.
The following table provides a summary of the changes in fair value of our Level 3 securities for the nine-month period ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
Asset-backed securities
|
|
Equities
|
|
Total
|
Balance at January 1, 2020
|
|
|
|
|
|
|
$
|
250
|
|
|
$
|
750
|
|
|
$
|
595
|
|
|
$
|
1,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains(1)
|
|
|
|
|
|
|
—
|
|
|
185
|
|
|
—
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
|
|
|
|
|
$
|
250
|
|
|
$
|
935
|
|
|
$
|
595
|
|
|
$
|
1,780
|
|
(1) Net unrealized gains are recorded as a component of comprehensive income.
Commercial Mortgage Loans
The following tables present the carrying value of our commercial mortgage loans and additional information at September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgage Loans
|
|
September 30, 2020
|
|
December 31, 2019
|
Loan-to-value
|
Carrying Value
|
|
Carrying Value
|
Less than 65%
|
$
|
30,467
|
|
|
$
|
34,024
|
|
65%-75%
|
17,342
|
|
|
8,496
|
|
Total amortized cost
|
$
|
47,809
|
|
|
$
|
42,520
|
|
Allowance for mortgage loan losses
|
(76)
|
|
|
(72)
|
|
Mortgage loans, net
|
$
|
47,733
|
|
|
$
|
42,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Region
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Carrying Value
|
|
Percent of Total
|
|
Carrying Value
|
|
Percent of Total
|
East North Central
|
$
|
3,245
|
|
|
6.8
|
%
|
|
$
|
3,245
|
|
|
7.6
|
%
|
Southern Atlantic
|
9,794
|
|
|
20.5
|
|
|
7,026
|
|
|
16.5
|
|
East South Central
|
8,238
|
|
|
17.2
|
|
|
8,358
|
|
|
19.7
|
|
New England
|
6,588
|
|
|
13.8
|
|
|
6,588
|
|
|
15.5
|
|
Middle Atlantic
|
14,971
|
|
|
31.3
|
|
|
15,076
|
|
|
35.5
|
|
Mountain
|
2,227
|
|
|
4.6
|
|
|
2,227
|
|
|
5.2
|
|
West North Central
|
2,746
|
|
|
5.8
|
|
|
—
|
|
|
—
|
|
Total mortgage loans at amortized cost
|
$
|
47,809
|
|
|
100.0
|
%
|
|
$
|
42,520
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Property Type
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Carrying Value
|
|
Percent of Total
|
|
Carrying Value
|
|
Percent of Total
|
Commercial
|
|
|
|
|
|
|
|
Multifamily
|
$
|
17,051
|
|
|
35.6
|
%
|
|
$
|
11,741
|
|
|
27.6
|
%
|
Office
|
11,932
|
|
|
25.0
|
|
|
11,848
|
|
|
27.9
|
|
Industrial
|
10,124
|
|
|
21.2
|
|
|
10,124
|
|
|
23.8
|
|
Retail
|
2,227
|
|
|
4.7
|
|
|
2,227
|
|
|
5.2
|
|
Mixed use/Other
|
6,475
|
|
|
13.5
|
|
|
6,580
|
|
|
15.5
|
|
Total mortgage loans at amortized cost
|
$
|
47,809
|
|
|
100.0
|
%
|
|
$
|
42,520
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis by Year of Origination and Credit Quality Indicator
|
|
2020
|
|
2019
|
|
2018
|
|
Total
|
Commercial mortgage loans:
|
|
|
|
|
|
|
|
Risk Rating:
|
|
|
|
|
|
|
|
1-2 internal grade
|
$
|
5,551
|
|
|
$
|
8,404
|
|
|
$
|
18,770
|
|
|
$
|
32,725
|
|
3-4 internal grade
|
—
|
|
|
8,496
|
|
|
6,588
|
|
|
15,084
|
|
5 internal grade
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
6 internal grade
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
7 internal grade
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial mortgage loans
|
$
|
5,551
|
|
|
$
|
16,900
|
|
|
$
|
25,358
|
|
|
$
|
47,809
|
|
Current-period write-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Current-period recoveries
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Current-period net write-offs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial mortgage loans carrying value excludes accrued interest of $167. As of September 30, 2020, all loan receivables were current, with no delinquencies. The commercial mortgage loans originate with an initial loan-to-value ratio to provide sufficient collateral to absorb losses should a loan be required to foreclose. Mortgage loans are evaluated on a quarterly basis for impairment on an individual basis through a monitoring process and review of key credit indicators, such as economic trends, delinquency rates, property valuations, occupancy and rental rates and loan-to-value ratios. A loan is considered impaired when the Company believes it will not collect the contractual principal and interest set forth in the contractual terms of the loan. An internal grade is assigned to each mortgage loan, with a grade of 1 being the highest and least likely for an impairment and the lowest rating of 7 being the most likely for an impairment. An allowance for mortgage loan losses is established on each loan recognizing a loss for amounts which we believe will not be collected according to the contractual terms of the respective loan agreement. As of September 30, 2020, the Company had an allowance for mortgage loan losses of $76, summarized in the following rollforward:
|
|
|
|
|
|
|
|
|
Rollforward of allowance for mortgage loan losses:
|
|
|
As of
|
|
|
September 30, 2020
|
Beginning balance, January 1, 2020
|
|
$
|
72
|
|
Current-period provision for expected credit losses
|
|
4
|
|
Write-off charged against the allowance, if any
|
|
—
|
|
Recoveries of amounts previously written off, if any
|
|
—
|
|
Ending balance of the allowance for mortgage loan losses, September 30, 2020
|
|
$
|
76
|
|
NOTE 4. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.
Liabilities for losses and loss settlement expenses reflect management's best estimates at a given point in time of what we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"), based on known facts, circumstances, and historical trends. Because property and casualty insurance reserves are estimates of the unpaid portions of incurred losses that have been reported to us, as well as losses that have been incurred but not reported, 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. 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 as a component of losses and loss settlement expenses incurred in the period such changes are determined.
The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we will take action that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc., to render an opinion as to the reasonableness of our statutory reserves annually. The actuarial opinion is filed in those states where we are licensed.
On a quarterly basis, UFG's internal actuary performs a detailed actuarial review of IBNR reserves. This review includes a comparison of results from the most recent analysis of reserves completed by both our internal and external actuaries. Senior management meets with our internal actuary to review, on a regular and quarterly basis, the adequacy of carried reserves based on results from this actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate.
We do not discount loss reserves based on the time value of money.
The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves at September 30, 2020 and December 31, 2019 (net of reinsurance amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Gross liability for losses and loss settlement expenses
at beginning of year
|
$
|
1,421,754
|
|
|
$
|
1,312,483
|
|
Ceded losses and loss settlement expenses
|
(68,536)
|
|
|
(57,094)
|
|
Net liability for losses and loss settlement expenses
at beginning of year
|
$
|
1,353,218
|
|
|
$
|
1,255,389
|
|
Losses and loss settlement expenses incurred
for claims occurring during
|
|
|
|
Current year
|
$
|
656,207
|
|
|
$
|
835,507
|
|
Prior years
|
(30,038)
|
|
|
(5,335)
|
|
Total incurred
|
$
|
626,169
|
|
|
$
|
830,172
|
|
Losses and loss settlement expense payments
for claims occurring during
|
|
|
|
Current year
|
$
|
263,898
|
|
|
$
|
333,975
|
|
Prior years
|
330,190
|
|
|
398,368
|
|
Total paid
|
$
|
594,088
|
|
|
$
|
732,343
|
|
Net liability for losses and loss settlement expenses
at end of year
|
$
|
1,385,299
|
|
|
$
|
1,353,218
|
|
Ceded loss and loss settlement expenses
|
169,784
|
|
|
68,536
|
|
Gross liability for losses and loss settlement expenses
at end of period
|
$
|
1,555,083
|
|
|
$
|
1,421,754
|
|
There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific monetary impact of any individual factor on the development of reserves.
Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year. However, conditions and trends that have affected the reserve development for a given year do change. Therefore, such development cannot be used to project future reserve redundancies or deficiencies.
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.
Reserve Development
For the three-month period ended September 30, 2020, the majority of favorable development came from workers' compensation and commercial liability lines of business. This favorable development was partially offset by unfavorable development of commercial auto and reinsurance assumed lines. All other lines combined contributed a relatively modest amount of overall favorable development during this three-month period. For the nine-month period ended September 30, 2020 the majority of favorable development came from workers' compensation and commercial fire and allied lines of business. This favorable development was partially offset by unfavorable development of the assumed reinsurance and commercial auto lines of business. All other lines combined contributed a relatively modest amount of overall favorable development during this nine-month period.
For the three-month period ended September 30, 2019, the majority of favorable development came from workers'
compensation with a partial offset coming primarily from unfavorable development for commercial liability. The
favorable development for workers' compensation was primarily from reductions in reserves for reported claims
which were more than sufficient to offset paid loss. The unfavorable development for commercial liability is due to
paid losses and an increase in loss adjustment expenses. All other lines combined contributed additional overall
favorable development during this three-month period. For the nine-month period ended September 30, 2019 the
majority of favorable development came from workers' compensation, which was more than offset by unfavorable
development for commercial liability. The favorable development for workers' compensation was primarily from
reductions in reserves for reported claims, which were more than sufficient to offset paid loss. Also, loss adjustment
expense contributed favorable development with reductions in reserves more than sufficient to offset payments. The
unfavorable development for commercial liability is due to paid losses and an increase in loss adjustment expenses.
All other lines combined contributed additional overall favorable development during this nine-month period.
NOTE 5. EMPLOYEE BENEFITS
Net Periodic Benefit Cost
The components of the net periodic benefit cost for our pension and postretirement benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
Postretirement Benefit Plan
|
Three Months Ended September 30,
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
|
|
|
|
|
Service cost
|
$
|
2,707
|
|
|
$
|
1,997
|
|
|
$
|
432
|
|
|
$
|
456
|
|
Interest cost
|
2,066
|
|
|
2,080
|
|
|
253
|
|
|
319
|
|
Expected return on plan assets
|
(3,385)
|
|
|
(2,696)
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(2,021)
|
|
|
(2,221)
|
|
Amortization of net loss
|
979
|
|
|
901
|
|
|
94
|
|
|
224
|
|
Net periodic benefit cost
|
$
|
2,367
|
|
|
$
|
2,282
|
|
|
$
|
(1,242)
|
|
|
$
|
(1,222)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
Postretirement Benefit Plan
|
Nine Months Ended September 30,
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
|
|
|
|
|
Service cost
|
$
|
8,122
|
|
|
$
|
5,991
|
|
|
$
|
1,296
|
|
|
$
|
1,368
|
|
Interest cost
|
6,199
|
|
|
6,240
|
|
|
760
|
|
|
956
|
|
Expected return on plan assets
|
(10,154)
|
|
|
(8,088)
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(6,063)
|
|
|
(6,463)
|
|
Amortization of net loss
|
2,936
|
|
|
2,703
|
|
|
282
|
|
|
671
|
|
Net periodic benefit cost
|
$
|
7,103
|
|
|
$
|
6,846
|
|
|
$
|
(3,725)
|
|
|
$
|
(3,468)
|
|
A portion of the service cost component of net periodic pension and postretirement benefit costs is capitalized and amortized as part of deferred acquisition costs and is included in the line "Amortization of deferred policy acquisition costs" in the Consolidated Statements of Income and Comprehensive Income. The portion not related to the compensation and the other components of net periodic pension and postretirement benefit costs is included in the income statement line titled "other underwriting expenses."
Employer Contributions
We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 that we expected to contribute $10,000 to the pension plan in 2020. For the nine-month period ended September 30, 2020, we contributed $10,000 to the pension plan.
NOTE 6. STOCK-BASED COMPENSATION
Non-Qualified Employee Stock Award Plan
The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, restricted stock units, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of UFG common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of UFG common stock issuable at any time and from time to time pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc. Stock Plan (as amended, the "Stock Plan"). At September 30, 2020, there were 704,760 authorized shares remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the
Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees.
Options granted pursuant to the Stock Plan are granted to buy shares of UFG's common stock at the market value of the stock on the date of grant. Options granted prior to March 2017 vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. Options granted after March 2017 vest and are exercisable in installments of 33.3 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the Stock Plan are granted at the market value of UFG's common stock on the date of the grant. Restricted stock units fully vest after 3 years or 5 years from the date of grant, unless accelerated upon the approval of the Board of Directors, at which time UFG common stock will be issued to the awardee.
The activity in the Stock Plan is displayed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Authorized Shares Available for Future Award Grants
|
Nine Months Ended September 30, 2020
|
|
From Inception to September 30, 2020
|
Beginning balance
|
834,910
|
|
|
1,900,000
|
|
Additional shares authorized
|
—
|
|
|
1,500,000
|
|
Number of awards granted
|
(165,024)
|
|
|
(3,281,445)
|
|
Number of awards forfeited or expired
|
34,874
|
|
|
586,205
|
|
Ending balance
|
704,760
|
|
|
704,760
|
|
Number of option awards exercised
|
7,200
|
|
|
1,450,389
|
|
Number of unrestricted stock awards granted
|
—
|
|
|
10,090
|
|
Number of restricted stock awards vested
|
63,600
|
|
|
164,378
|
|
Non-Qualified Non-Employee Director Stock Plan
The United Fire Group, Inc. Non-Employee Director Stock Plan (formerly known as the 2005 Non-Qualified Non- Employee Director Stock Option and Restricted Stock Plan) (the "Director Stock Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of UFG's common stock to non-employee directors. On May 20, 2020, the Company’s shareholders approved amendments to the Director Stock Plan, previously approved by the Company’s Board of Directors, to (i) increase the number of shares available for future awards under the Director Stock Plan from 300,000 to 450,000, (ii) extend the expiration date of the Director Stock Plan from December 31, 2020 to December 31, 2029, (iii) allow for the grant of awards of restricted stock units, and (iv) rename the Director Stock Plan as the "United Fire Group, Inc. Non-Employee Director Stock Plan." At September 30, 2020, the Company had 160,135 authorized shares available for future issuance.
The Board of Directors has the authority to determine which non-employee directors receive awards, when restricted stock, restricted stock units and options 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, restricted stock and restricted stock units (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, restricted stock or restricted stock unit agreements (subject to limits set forth in the Director Stock Plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Stock Plan.
The activity in the Director Stock Plan is displayed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Authorized Shares Available for Future Award Grants
|
Nine Months Ended September 30, 2020
|
|
From Inception to September 30, 2020
|
Beginning balance
|
34,863
|
|
|
300,000
|
|
Additional authorization
|
150,000
|
|
|
150,000
|
|
Number of awards granted
|
(24,728)
|
|
|
(313,868)
|
|
Number of awards forfeited or expired
|
—
|
|
|
24,003
|
|
Ending balance
|
160,135
|
|
|
160,135
|
|
Number of option awards exercised
|
14,183
|
|
|
133,275
|
|
Number of restricted stock awards vested
|
14,300
|
|
|
98,491
|
|
Stock-Based Compensation Expense
For the three-month periods ended September 30, 2020 and 2019, we recognized stock-based compensation expense of $1,052 and $1,203, respectively. For the nine-month periods ended September 30, 2020 and 2019, we recognized stock-based compensation expense of $3,979 and $5,248, respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.
As of September 30, 2020, we had $5,004 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized over the remainder of 2020 and subsequent years according to the table below, except with respect to awards that are accelerated by the Board of Directors, in which case we will recognize any remaining compensation expense in the period in which the awards are accelerated.
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
1,060
|
|
2021
|
|
2,584
|
|
2022
|
|
1,056
|
|
2023
|
|
211
|
|
2024
|
|
82
|
|
2025
|
|
11
|
|
Total
|
|
$
|
5,004
|
|
NOTE 7. EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options, restricted stock awards and restricted stock unit awards.
We determine the dilutive effect of our outstanding stock options using the "treasury stock" method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average market value of our common stock during the reporting period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.
The components of basic and diluted earnings per share were as follows for the three-month periods ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
(In Thousands, Except Share Data)
|
2020
|
|
2019
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Net income (loss)
|
$
|
(37,241)
|
|
|
$
|
(37,241)
|
|
|
$
|
(2,342)
|
|
|
$
|
(2,342)
|
|
Weighted-average common shares outstanding
|
25,031,234
|
|
|
25,031,234
|
|
|
25,176,334
|
|
|
25,176,334
|
|
Add dilutive effect of restricted stock unit awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Add dilutive effect of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average common shares outstanding
|
25,031,234
|
|
|
25,031,234
|
|
|
25,176,334
|
|
|
25,176,334
|
|
Earnings (loss) per common share
|
$
|
(1.49)
|
|
|
$
|
(1.49)
|
|
|
$
|
(0.09)
|
|
|
$
|
(0.09)
|
|
Awards excluded from diluted earnings per share calculation(1)
|
—
|
|
|
820,124
|
|
|
—
|
|
|
63,897
|
|
(1)Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.
The components of basic and diluted earnings per share were as follows for the nine-month periods ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(In Thousands, Except Share Data)
|
2020
|
|
2019
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Net income (loss)
|
$
|
(103,815)
|
|
|
$
|
(103,815)
|
|
|
$
|
37,983
|
|
|
$
|
37,983
|
|
Weighted-average common shares outstanding
|
25,023,401
|
|
|
25,023,401
|
|
|
25,172,716
|
|
|
25,172,716
|
|
Add dilutive effect of restricted stock unit awards
|
—
|
|
|
—
|
|
|
—
|
|
|
249,605
|
|
Add dilutive effect of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
221,423
|
|
Weighted-average common shares outstanding
|
25,023,401
|
|
|
25,023,401
|
|
|
25,172,716
|
|
|
25,643,744
|
|
Earnings (loss) per common share
|
$
|
(4.15)
|
|
|
$
|
(4.15)
|
|
|
$
|
1.51
|
|
|
$
|
1.48
|
|
Awards excluded from diluted earnings per share calculation(1)
|
—
|
|
|
515,984
|
|
|
—
|
|
|
63,897
|
|
(1)Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.
NOTE 8. CREDIT FACILITY
On March 31, 2020, United Fire & Casualty Company (the "Borrower"), a wholly owned subsidiary of the Company, entered into a credit agreement (the "New Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent (the "Administrative Agent"), issuing lender, swing-line lender and lender, and the other lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), providing for a $50,000 revolving credit facility, which includes a $20,000 letter of credit sub-facility and a $5,000 swing-line loan for working capital and other general corporate purposes. The New Credit Agreement is provided by the Lenders on an unsecured basis, and the Borrower has the option to increase the New Credit Agreement by $100,000 if agreed to by the Lenders providing such incremental facility.
The New Credit Agreement includes customary events of default, including default in payments of principals, default in payment of other indebtedness, change of control and voluntary and involuntary insolvency proceedings, the occurrence of which would allow the Lenders to accelerate payment of all amounts outstanding thereunder and terminate any further commitments to lend.
The entry into the New Credit Agreement was completed as part of the Company’s regular course of financial planning and was not initiated as a result of market conditions resulting from the COVID-19 pandemic.
Prior to February 2, 2020, the Company had a credit agreement (the "Previous Credit Agreement") which it entered into on February 2, 2016. The Company, as borrower, entered into the Previous Credit Agreement with the lenders from time to time party thereto and KeyBank National Association ("Key Bank"), as administrative agent, swingline lender and letter of credit issuer. The Previous Credit Agreement provided for a $50,000 four-year unsecured revolving credit facility that included a $20,000 letter of credit subfacility and a swingline subfacility in the amount up to $5,000. The Previous Credit Agreement allowed the Company to increase the aggregate amount of the commitments thereunder by up to $100,000, provided that no event of default had occurred and was continuing and certain other conditions were satisfied. The Previous Credit Agreement was available for the Company's general corporate purposes, including liquidity, acquisitions and working capital. All unpaid principal and accrued interest under the Previous Credit Agreement was due and payable in full at maturity on February 2, 2020. Based on the type of loan, advances under the Previous Credit Agreement bore interest on either the London Interbank Offered Rate ("LIBOR") or a base rate plus, in each case, a calculated margin amount.
There was no outstanding balance on either the New Credit Agreement or the Previous Credit Agreement at September 30, 2020 and 2019, respectively. For the nine-month periods ended September 30, 2020 and 2019, we did not incur any interest expense related to either credit facility. We were in compliance with all covenants of the New Credit Agreement at September 30, 2020.
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the three-month period ended September 30, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for
|
|
|
|
Net unrealized
|
|
underfunded
|
|
|
|
appreciation
|
|
employee
|
|
|
|
on investments
|
|
benefit costs(1)
|
|
Total
|
Balance as of June 30, 2020
|
79,283
|
|
|
(32,433)
|
|
|
$
|
46,850
|
|
Change in accumulated other comprehensive income before reclassifications
|
3,252
|
|
|
—
|
|
|
3,252
|
|
Reclassification adjustments from accumulated other comprehensive income (loss)
|
(43)
|
|
|
848
|
|
|
805
|
|
Balance as of September 30, 2020
|
$
|
82,492
|
|
|
$
|
(31,585)
|
|
|
$
|
50,907
|
|
(1) 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 for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.
The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the nine-month period ended September 30, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for
|
|
|
|
Net unrealized
|
|
underfunded
|
|
|
|
appreciation
|
|
employee
|
|
|
|
on investments
|
|
benefit costs(1)
|
|
Total
|
Balance as of January 1, 2020
|
47,279
|
|
|
(34,127)
|
|
|
$
|
13,152
|
|
Change in accumulated other comprehensive income before reclassifications
|
35,223
|
|
|
—
|
|
|
35,223
|
|
Reclassification adjustments from accumulated other comprehensive income (loss)
|
(10)
|
|
|
2,542
|
|
|
2,532
|
|
Balance as of September 30, 2020
|
$
|
82,492
|
|
|
$
|
(31,585)
|
|
|
$
|
50,907
|
|
(1) 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 for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.
NOTE 10. LEASES
The Company has operating leases consisting of office space, vehicle leases, computer equipment, and office equipment. Lease terms and options vary in the Company's operating leases dependent upon the underlying leased asset. We exclude options to extend or terminate a lease from our recognition as part of our right-of-use assets and lease liabilities until those options are known and/or executed, as we typically do not exercise options to purchase the underlying leased asset. As of September 30, 2020, we have leases with remaining terms of 1 year to 7 years, some of which may include no options for renewal and others with options to extend the lease terms from 6 months to 5 years.
The components of our operating leases were as follows for the three- and nine-month periods ended September 30, 2020 and 2019:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Components of lease expense:
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|
|
|
|
|
|
|
|
Operating lease expense
|
|
$
|
1,832
|
|
|
$
|
1,910
|
|
|
$
|
5,788
|
|
|
$
|
5,730
|
|
Less sublease income
|
|
53
|
|
|
119
|
|
|
239
|
|
|
371
|
|
Net lease expense
|
|
1,779
|
|
|
1,791
|
|
|
5,549
|
|
|
5,359
|
|
Cash flows information related to leases:
|
|
|
|
|
|
|
|
|
Operating cash outflow from operating leases
|
|
1,796
|
|
|
1,812
|
|
|
5,265
|
|
|
5,420
|
|