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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34257
UFCS-20200630_G1.GIF
________________________
 UNITED FIRE GROUP INC.
(Exact name of registrant as specified in its charter)
Iowa   45-2302834
(State of incorporation)   (I.R.S. Employer Identification No.)
118 Second Avenue SE
Cedar Rapids Iowa
52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 399-5700
Securities Registered Pursuant to Section 12(b) of the Exchange Act of 1934:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, $0.001 par value UFCS The NASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No

As of August 3, 2020, 25,031,234 shares of common stock were outstanding.


United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
June 30, 2020
  Page
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FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "remain(s) optimistic," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our other filings with the Securities and Exchange Commission ("SEC") for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:
The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy; the occurrence of catastrophic events, including international events, significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics, including the ongoing impact of the novel coronavirus (COVID-19) pandemic;
The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses;
Geographic concentration risk in our property and casualty insurance business;
The potential disruption of our operations and reputation due to unauthorized data access, cyber-attacks or cyber-terrorism and other security breaches;
Developments in general economic conditions, domestic and global financial markets, interest rates and other-than-temporary impairment losses that could affect the performance of our investment portfolio;
Litigation or regulatory actions that could require us to pay significant damages, fines or penalties or change the way we do business;
Our ability to effectively underwrite and adequately price insured risks;
Changes in industry trends, an increase in competition and significant industry developments;
Lowering of one or more of the financial strength ratings of our operating subsidiaries or our issuer credit ratings and the adverse impact such action may have on our premium writings, policy retention, profitability and liquidity;
Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and other federal stimulus relief legislation, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions; changes in laws, regulations and stock exchange requirements relating to corporate governance and the cost of compliance;
Our relationship with and the financial strength of our reinsurers; and
Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network.
These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
1

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data) June 30,
2020
  December 31,
2019
  (unaudited)    
ASSETS      
Investments      
Fixed maturities      
Available-for-sale, at fair value (amortized cost $1,595,817 in 2020 and $1,659,760 in 2019; allowance for credit losses $10 in 2020 and $— in 2019)
$ 1,696,166      $ 1,719,607   
Trading securities, at fair value (amortized cost $8,916 in 2020 and $11,941 in 2019)
11,223    15,256   
Equity securities at fair value (cost $63,615 in 2020 and $67,529 in 2019)
207,626    299,203   
Mortgage loans 47,685      42,520   
Less: allowance for mortgage loan losses 76      72   
Mortgage loans, net 47,609    42,448   
Other long-term investments 68,941      78,410   
Short-term investments 175      175   
2,031,740      2,155,099   
Cash and cash equivalents 146,262      120,722   
Accrued investment income 14,485      15,182   
Premiums receivable (net of allowance for doubtful accounts of $947 in 2020 and $1,239 in 2019)
376,808      357,632   
Deferred policy acquisition costs 97,566      94,292   
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $52,630 in 2020 and $50,183 in 2019)
126,036      116,989   
Reinsurance receivables and recoverables (net of allowance for credit losses of $41 in 2020 and $— in 2019)
127,881      72,369   
Prepaid reinsurance premiums 14,506      9,550   
Goodwill and intangible assets 22,188    22,542   
Income taxes receivable 38,374    19,190   
Other assets 39,067      29,905   
TOTAL ASSETS $ 3,034,913      $ 3,013,472   
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Liabilities      
Future policy benefits and losses, claims and loss settlement expenses      
Losses and loss settlement expenses $ 1,477,689      $ 1,421,754   
Unearned premiums 530,801      505,162   
Accrued expenses and other liabilities 151,257      155,498   
Deferred tax liability 14,499      20,586   
TOTAL LIABILITIES $ 2,174,246      $ 2,103,000   
Stockholders’ Equity      
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,031,234 and 25,015,963 shares issued and outstanding in 2020 and 2019, respectively
$ 25      $ 25   
Additional paid-in capital 199,796      200,179   
Retained earnings 613,996      697,116   
Accumulated other comprehensive income, net of tax 46,850      13,152   
TOTAL STOCKHOLDERS’ EQUITY $ 860,667      $ 910,472   
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,034,913      $ 3,013,472   
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
2

United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands, Except Share Data) 2020   2019 2020 2019
Revenues      
Net premiums earned $ 263,609      $ 276,486    $ 532,458    $ 538,800   
Investment income, net of investment expenses 12,696      14,120    15,059    30,632   
Net realized investment gains (losses) (includes reclassifications for net unrealized investment gains/(losses) on available-for-sale securities of $80 and $(41) in 2020 and $37 and $127 in 2019; previously included in accumulated other comprehensive income)
15,779    13,591    (77,628)   40,304   
Other income 5,719      —    5,719    —   
Total revenues $ 297,803      $ 304,197    $ 475,608    $ 609,736   
Benefits, Losses and Expenses    
Losses and loss settlement expenses $ 204,973      $ 220,009    $ 391,476    $ 384,249   
Amortization of deferred policy acquisition costs 51,893      54,795    106,345    107,014   
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,072 and $2,144 in 2020 and $1,124 and $2,248 in 2019; previously included in accumulated other comprehensive income)
36,701      33,964    78,550    68,367   
Total benefits, losses and expenses $ 293,567      $ 308,768    $ 576,371    $ 559,630   
Income (loss) before income taxes $ 4,236      $ (4,571)   $ (100,763)   $ 50,106   
Federal income tax expense (benefit) (includes reclassifications of $207 and $458 in 2020 and $229 and $445 in 2019; previously included in accumulated other comprehensive income)
(1,724)     (375)   (34,189)   9,781   
Net Income (loss) $ 5,960    $ (4,196)   $ (66,574)   $ 40,325   
Other comprehensive income (loss)
Change in net unrealized appreciation on investments $ 33,037      $ 28,596    $ 40,205      $ 61,950   
Change in net unrealized appreciation on investments for which an allowance for a credit loss has been recorded 1,858    —    265    —   
Change in liability for underfunded employee benefit plans —    —    —    —   
Other comprehensive income, before tax and reclassification adjustments $ 34,895      $ 28,596    $ 40,470      $ 61,950   
Income tax effect (7,329)     (6,004)   (8,499)     (13,009)  
Other comprehensive income, after tax, before reclassification adjustments $ 27,566      $ 22,592    $ 31,971      $ 48,941   
Reclassification adjustment for net realized investment (gains) losses included in income $ (80)     $ (37)   $ 41      $ (127)  
Reclassification adjustment for employee benefit costs included in expense 1,072      1,124    2,144      2,248   
Total reclassification adjustments, before tax $ 992    $ 1,087    $ 2,185    $ 2,121   
Income tax effect (207)   (229)   (458)   (445)  
Total reclassification adjustments, after tax $ 785    $ 858    $ 1,727    $ 1,676   
Comprehensive income (loss) $ 34,311      $ 19,254    $ (32,876)     $ 90,942   
Diluted weighted average common shares outstanding 25,255,604      25,210,354    25,019,441    25,659,803   
Earnings (loss) per common share:
Basic $ 0.24    $ (0.17)   $ (2.66)   $ 1.60   
Diluted 0.24    (0.17)   (2.66)   1.57   
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
3

United Fire Group, Inc.
Consolidated Statement of Stockholders’ Equity (Unaudited)

Common Stock
(In Thousands, Except Share Data) Shares outstanding Common stock Additional paid-in capital Retaining Earnings Accumulated other comprehensive income Total
 
Balance, January 1, 2020 25,015,963    $ 25    $ 200,179    $ 697,116    $ 13,152    $ 910,472   
Net income (loss) —    —    —    (72,534)   —    (72,534)  
Shares repurchased (70,467)   —    (2,741)   —    —    (2,741)  
Stock based compensation 70,597    —    879    —    —    879   
Dividends on common stock ($0.33 per share)
—    —    —    (8,249)   —    (8,249)  
Change in net unrealized investment appreciation(1)
—    —    —    —    4,500    4,500   
Change in liability for underfunded employee benefit plans(2)
—    —    —    —    847    847   
Cumulative effect of change in accounting principle —    —    —    (30)   —    (30)  
Balance, March 31, 2020 25,016,093    $ 25    $ 198,317    $ 616,303    $ 18,499    $ 833,144   
Net income —    $ —    $ —    $ 5,960    $ —    $ 5,960   
Stock based compensation 15,141    —    1,479    —    —    1,479   
Dividends on common stock ($0.33 per share)
—    —    —    (8,267)   —    (8,267)  
Change in net unrealized investment appreciation(1)
—    —    —    —    27,504    27,504   
Change in liability for underfunded employee benefit plans(2)
—    —    —    —    847    847   
Balance, June 30, 2020 25,031,234    $ 25    $ 199,796    $ 613,996    $ 46,850    $ 860,667   
(1)The change in net unrealized appreciation is net of reclassification adjustments and income taxes.
(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.


.

4

Common Stock
(In Thousands, Except Share Data) Shares outstanding Common stock Additional paid-in capital Retaining Earnings Accumulated other comprehensive income Total
 
Balance, January 1, 2019 25,097,408    $ 25    $ 203,350    $ 715,472    $ (30,472)   888,375   
Net income —    —    —    44,521    —    44,521   
Stock based compensation 70,414    —    3,438    —    —    3,438   
Dividends on common stock $0.31 per share)
—    —    —    (7,797)   —    (7,797)  
Change in net unrealized investment appreciation(1)
—    —    —    —    26,279    26,279   
Change in liability for underfunded employee benefit plans(2)
—    —    —    —    888    888   
Cumulative effect of change in accounting principle —    —    —    (513)   —    (513)  
Balance, March 31, 2019 25,167,822    $ 25    $ 206,788    $ 751,683    $ (3,305)   $ 955,191   
Net income (loss) $ —    $ —    $ —    $ (4,196)   $ —    $ (4,196)  
Shares repurchased (1,507)   —    (69)   —    —    (69)  
Stock based compensation 78,885    —    2,252    —    —    2,252   
Dividends on common stock $0.33 per share)
—    —    —    (8,325)   —    (8,325)  
Change in net unrealized investment appreciation(1)
—    —    —    —    22,562    22,562   
Change in liability for underfunded employee benefit plans(2)
—    —    —    —    888    888   
Balance, June 30, 2019 25,245,200    $ 25    $ 208,971    $ 739,162    $ 20,145    $ 968,303   
(1)The change in net unrealized appreciation is net of reclassification adjustments and income taxes.
(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.



5

United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
(In Thousands) 2020   2019
Cash Flows From Operating Activities      
Net income (loss) $ (66,574)     $ 40,325   
Adjustments to reconcile net income to net cash provided by operating activities  
Net accretion of bond premium 5,501      5,039   
Depreciation and amortization 3,318      2,618   
Stock-based compensation expense 2,927      4,045   
Net realized investment (gains) losses 77,628      (40,304)  
Net cash flows from equity and trading investments 17,148      639   
Deferred income tax benefit (19,229)     7,716   
Changes in:  
Accrued investment income 697      574   
Premiums receivable (19,176)     (56,062)  
Deferred policy acquisition costs (3,274)     (8,767)  
Reinsurance receivables (55,512)     8,558   
Prepaid reinsurance premiums (4,956)     (1,049)  
Income taxes receivable (19,184)     5,913   
Other assets (9,162)     (18,706)  
Losses and loss settlement expenses 55,935      29,183   
Unearned premiums 25,639      47,062   
Accrued expenses and other liabilities (2,098)     10,562   
Deferred income taxes 4,184      —   
Other, net 10,420      (1,070)  
Cash from operating activities 70,806    (4,049)  
Net cash provided by operating activities $ 4,232      $ 36,276   
Cash Flows From Investing Activities      
Proceeds from sale of available-for-sale investments $ 16,907      $ 36,490   
Proceeds from call and maturity of available-for-sale investments 159,709      111,824   
Proceeds from sale of other investments 2,750      2,315   
Purchase of investments Mortgage Loans (5,323)     (10,723)  
Purchase of investments available-for-sale (117,299)   (44,400)  
Purchase of other investments (3,577)     (11,986)  
Purchase of property and equipment $ (12,040)     (20,920)  
Net cash provided by investing activities 41,127    62,600   
Cash Flows From Financing Activities      
Issuance of common stock $ (562)   $ 1,645   
Repurchase of common stock (2,741)   (69)  
Payment of cash dividends (16,516)   (16,122)  
Net cash used in financing activities $ (19,819)   (14,546)  
Net Change in Cash and Cash Equivalents $ 25,540      $ 84,330   
Cash and Cash Equivalents at Beginning of Period 120,722    64,454   
Cash and Cash Equivalents at End of Period $ 146,262    $ 148,784   
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
6


UNITED FIRE GROUP, INC.
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 46 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
7

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 six-month periods ended June 30, 2020 and 2019, we made payments for income taxes totaling $35 and $1,537, respectively. We did not receive a tax refund during the six-month period ended June 30, 2020 and we received a tax refund of $5,401 during the six-month period ended June 30, 2019.
For the six-month periods ended June 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 six-month period ended June 30, 2020.
Total
Recorded asset at beginning of period $ 94,292   
Underwriting costs deferred 109,619   
Amortization of deferred policy acquisition costs (106,345)  
Recorded asset at June 30, 2020 $ 97,566   

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.
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
8

implications of the CARES Act on its tax provision and has included an income tax benefit of $11.1 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 $34,189 for the six-month period ended June 30, 2020 compared to income tax expense of $9,781 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 June 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 June 30, 2020 was $6,849 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.
9

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 June 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 June 30, 2020, the Company had a credit loss allowance for reinsurance receivables of $41.
Rollforward of credit loss allowance for reinsurance receivable:
As of
June 30, 2020
Beginning balance, January 1, 2020 $ 38   
Current-period provision for expected credit losses  
Write-off charged against the allowance, if any —   
Recoveries of amounts previously written off, if any —   
Ending balance of the allowance for reinsurance receivable, June 30, 2020 $ 41   

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.


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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. The COVID-19 pandemic caused significant financial market volatility, economic uncertainty and interruptions to normal business activities in the first half 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
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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.
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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 June 30, 2020 and December 31, 2019, is provided below:
June 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 $ 50,353    $ 869    $ —    $ 51,222    $ —    $ 51,222   
U.S. government agency 63,503    4,005    —    67,508    —    67,508   
States, municipalities and political subdivisions
General obligations:
Midwest 81,486    4,068    —    85,554    —    85,554   
Northeast 30,012    1,487    —    31,499    —    31,499   
South 105,479    5,126    —    110,605    —    110,605   
West 105,196    6,647    —    111,843    —    111,843   
Special revenue:
Midwest 127,824    8,508    —    136,332    —    136,332   
Northeast 58,414    4,218    —    62,632    —    62,632   
South 221,309    15,894    —    237,203    —    237,203   
West 134,462    8,532    —    142,994    —    142,994   
Foreign bonds 26,428    1,739    106    28,061    —    28,061   
Public utilities 77,529    6,713    —    84,242    —    84,242   
Corporate bonds
Energy 25,928    2,353    11    28,270    —    28,270   
Industrials 39,625    3,115    —    42,740    —    42,740   
Consumer goods and services 47,134    3,726    52    50,808    —    50,808   
Health care 7,327    869    —    8,196    —    8,196   
Technology, media and telecommunications 35,253    4,010    —    39,263    —    39,263   
Financial services 96,415    6,680    317    102,778    10    102,768   
Mortgage-backed securities 15,737    335      16,070    —    16,070   
Collateralized mortgage obligations
Government national mortgage association 74,741    5,707      80,447    —    80,447   
Federal home loan mortgage corporation 95,076    2,862    160    97,778    —    97,778   
Federal national mortgage association 76,272    3,015    83    79,204    —    79,204   
Asset-backed securities 314    613    —    927    —    927   
Total Available-for-Sale Fixed Maturities $ 1,595,817    $ 101,091    $ 732    $ 1,696,176    $ 10    $ 1,696,166   


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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 June 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.
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Maturities
  Available-For-Sale   Trading
June 30, 2020   Amortized Cost   Fair Value   Amortized Cost   Fair Value
Due in one year or less   $ 54,841      $ 55,305      $ 1,122      $ 3,085   
Due after one year through five years   324,957      343,117      6,703      6,565   
Due after five years through 10 years   434,946      468,553      —      —   
Due after 10 years   518,933      554,775      1,091      1,573   
Asset-backed securities 314    927    —    —   
Mortgage-backed securities   15,737      16,070      —      —   
Collateralized mortgage obligations   246,089      257,429      —      —   
Allowance for credit losses —    (10)   —    —   
    $ 1,595,817      $ 1,696,166      $ 8,916      $ 11,223   
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 June 30, Six Months Ended June 30,
2020   2019 2020 2019
Net realized investment gains (losses):      
Fixed maturities:
Available-for-sale $ 30    $ (8)   $ —    $ 142   
Allowance for credit losses 49    —    (10) —   
Trading securities
Change in fair value 1,601    501    (1,008)   2,247   
Sales (305)   92    (154)   92   
Equity securities
Change in fair value 29,809    12,499    (60,838)   37,133   
Sales (15,406)   507    (15,586)   705   
Mortgage loans allowance for credit losses   —    (4)   (15)  
Real estate —    —    (28)   —   
Total net realized investment gains (losses) $ 15,779      $ 13,591    $ (77,628)   $ 40,304   

The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities are as follows:
  Three Months Ended June 30, Six Months Ended June 30,
2020   2019 2020 2019
Proceeds from sales $ 4,996      $ —    $ 16,907    $ 36,490   
Gross realized gains 26      —    198    30   
Gross realized losses 113      —    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 $11,223 and $15,256 at June 30, 2020 and December 31, 2019, respectively.
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Funding Commitment

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through July 31, 2028 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $10,886 at June 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 June 30, 2020 was $24,541 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:
  Six Months Ended June 30,
2020   2019
Change in net unrealized investment appreciation      
Available-for-sale fixed maturities $ 40,511    $ 61,824   
Income tax effect (8,507)