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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 September 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-20200930_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 November 2, 2020, 25,031,234 shares of common stock were outstanding.


United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
September 30, 2020
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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) September 30,
2020
  December 31,
2019
  (unaudited)    
ASSETS      
Investments      
Fixed maturities      
Available-for-sale, at fair value (amortized cost $1,612,626 in 2020 and $1,659,760 in 2019; allowance for credit losses $8 in 2020 and $— in 2019)
$ 1,717,039    $ 1,719,607 
Trading securities, at fair value (amortized cost $12,258 in 2020 and $11,941 in 2019)
14,811  15,256 
Equity securities at fair value (cost $61,467 in 2020 and $67,529 in 2019)
198,791  299,203 
Mortgage loans 47,809    42,520 
Less: allowance for mortgage loan losses 76    72 
Mortgage loans, net 47,733  42,448 
Other long-term investments 62,903    78,410 
Short-term investments 175    175 
2,041,452    2,155,099 
Cash and cash equivalents 99,604    120,722 
Accrued investment income 15,028    15,182 
Premiums receivable (net of allowance for doubtful accounts of $812 in 2020 and $1,239 in 2019)
352,150    357,632 
Deferred policy acquisition costs 94,223    94,292 
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $54,145 in 2020 and $50,183 in 2019)
127,990    116,989 
Reinsurance receivables and recoverables (net of allowance for credit losses of $241 in 2020 and $— in 2019)
199,920    72,369 
Prepaid reinsurance premiums 12,284    9,550 
Goodwill and intangible assets 6,920  22,542 
Income taxes receivable 57,388  19,190 
Other assets 41,521    29,905 
TOTAL ASSETS $ 3,048,480    $ 3,013,472 
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Liabilities      
Future policy benefits and losses, claims and loss settlement expenses      
Losses and loss settlement expenses $ 1,555,083    $ 1,421,754 
Unearned premiums 499,730    505,162 
Accrued expenses and other liabilities 156,874    155,498 
Deferred tax liability 16,511    20,586 
TOTAL LIABILITIES $ 2,228,198    $ 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 200,849    200,179 
Retained earnings 568,501    697,116 
Accumulated other comprehensive income, net of tax 50,907    13,152 
TOTAL STOCKHOLDERS’ EQUITY $ 820,282    $ 910,472 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,048,480    $ 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 September 30, Nine Months Ended September 30,
(In Thousands, Except Share Data) 2020   2019 2020 2019
Revenues      
Net premiums earned $ 259,061    $ 274,942  $ 791,519  $ 813,742 
Investment income, net of investment expenses 7,244    13,291  22,303  43,923 
Net realized investment gains (losses) (includes reclassifications for net unrealized investment gains/(losses) on available-for-sale securities of $54 and $13 in 2020 and $130 and $257 in 2019; previously included in accumulated other comprehensive income)
15,212  9,822  (62,416) 50,126 
Other income 604    —  6,323  — 
Total revenues $ 282,121    $ 298,055  $ 757,729  $ 907,791 
Benefits, Losses and Expenses    
Losses and loss settlement expenses $ 234,693    $ 211,752  $ 626,169  $ 596,001 
Amortization of deferred policy acquisition costs 52,095    54,828  158,440  161,842 
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,072 and $3,217 in 2020 and $1,124 and $3,372 in 2019; previously included in accumulated other comprehensive income)
35,470    36,003  114,020  104,370 
Goodwill impairment 15,091  —  15,091  — 
Total benefits, losses and expenses $ 337,349    $ 302,583  $ 913,720  $ 862,213 
Income (loss) before income taxes $ (55,228)   $ (4,528) $ (155,991) $ 45,578 
Federal income tax expense (benefit) (includes reclassifications of $213 and $672 in 2020 and $209 and $654 in 2019; previously included in accumulated other comprehensive income)
(17,987)   (2,186) (52,176) 7,595 
Net Income (loss) $ (37,241) $ (2,342) $ (103,815) $ 37,983 
Other comprehensive income (loss)
Change in net unrealized appreciation on investments $ 4,116    $ 15,410  $ 44,586    $ 77,360 
Change in liability for underfunded employee benefit plans   —    — 
Other comprehensive income, before tax and reclassification adjustments $ 4,116    $ 15,410  $ 44,586    $ 77,360 
Income tax effect (864)   (3,237) (9,363)   (16,246)
Other comprehensive income, after tax, before reclassification adjustments $ 3,252    $ 12,173  $ 35,223    $ 61,114 
Reclassification adjustment for net realized investment (gains) losses included in income $ (54)   $ (130) $ (13)   $ (257)
Reclassification adjustment for employee benefit costs included in expense 1,072    1,124  3,217    3,372 
Total reclassification adjustments, before tax $ 1,018  $ 994  $ 3,204  $ 3,115 
Income tax effect (213) (209) (672) (654)
Total reclassification adjustments, after tax $ 805  $ 785  $ 2,532  $ 2,461 
Comprehensive income (loss) $ (33,184)   $ 10,616  $ (66,060)   $ 101,558 
Diluted weighted average common shares outstanding 25,031,234    25,176,334  25,023,401  25,643,744 
Earnings (loss) per common share:
Basic $ (1.49) $ (0.09) $ (4.15) $ 1.51 
Diluted (1.49) (0.09) (4.15) 1.48 
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 
Net income (loss)   $   $   $ (37,241) $   $ (37,241)
Stock based compensation     1,053      1,053 
Dividends on common stock ($0.33 per share)
      (8,254)   (8,254)
Change in net unrealized investment appreciation(1)
        3,209  3,209 
Change in liability for underfunded employee benefit plans(2)
        848  848 
Balance, September 30, 2020 25,031,234  $ 25  $ 200,849  $ 568,501  $ 50,907  $ 820,282 
(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 
Net income (loss) $ —  $ —  $ —  $ (2,342) $ —  $ (2,342)
Shares repurchased (177,249) —  (8,058) —  —  (8,058)
Stock based compensation 13,775  —  1,591  —  —  1,591 
Dividends on common stock $0.33 per share)
—  —  —  (8,284) —  (8,284)
Change in net unrealized investment appreciation(1)
—  —  —  —  12,070  12,070 
Change in liability for underfunded employee benefit plans(2)
—  —  —  —  888  888 
Balance, September 30, 2019 25,081,726  $ 25  $ 202,504  $ 728,536  $ 33,103  $ 964,168 
(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)
Nine Months Ended September 30,
(In Thousands) 2020   2019
Cash Flows From Operating Activities      
Net income (loss) $ (103,815)   $ 37,983 
Adjustments to reconcile net income to net cash provided by (used in) operating activities  
Net accretion of bond premium 7,719    7,074 
Depreciation and amortization 5,009    4,235 
Goodwill impairment 15,091  — 
Stock-based compensation expense 3,979    5,248 
Net realized investment (gains) losses 62,416    (50,126)
Net cash flows from equity and trading investments 37,552    911 
Deferred income tax benefit (21,824)   8,829 
Changes in:  
Accrued investment income 154    170 
Premiums receivable 5,482    (40,792)
Deferred policy acquisition costs 69    (5,704)
Reinsurance receivables (127,551)   3,664 
Prepaid reinsurance premiums (2,734)   (887)
Income taxes receivable (38,198)   3,029 
Other assets (11,616)   (17,645)
Losses and loss settlement expenses 133,329    48,056 
Unearned premiums (5,432)   35,296 
Accrued expenses and other liabilities 4,593    16,821 
Deferred income taxes 7,713    (434)
Other, net 15,196    437 
Cash from operating activities 90,947  18,182 
Net cash provided by (used in) operating activities $ (12,868)   $ 56,165 
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 239,438    206,478 
Proceeds from sale of other investments 5,391    3,607 
Purchase of investments in mortgage loans (5,564)   (10,723)
Purchase of investments available-for-sale (216,001) (151,528)
Purchase of other investments (4,829)   (16,939)
Purchase of property and equipment $ (15,506)   (27,796)
Net cash provided by investing activities 19,836  39,589 
Cash Flows From Financing Activities      
Issuance of common stock $ (568) $ 2,033 
Repurchase of common stock (2,741) (8,127)
Payment of cash dividends (24,777) (24,406)
Net cash used in financing activities $ (28,086) (30,500)
Net Change in Cash and Cash Equivalents $ (21,118)   $ 65,254 
Cash and Cash Equivalents at Beginning of Period 120,722  64,454 
Cash and Cash Equivalents at End of Period $ 99,604  $ 129,708 
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 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
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 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
8

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."


9

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.
10

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.


11

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.
12

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:
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 


13

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.
14

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  (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.
15

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
Reductions for securities sold during the period (realized) — 
Writeoffs charged against the allowance — 
Recoveries of amounts previously written off — 
Ending balance, September 30, 2020 $







16

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.
17

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 —  $ —  $ —  $ 4,733  $ 12  $ 4,733  $ 12 
U.S. government agency 13,846  104  —  —  —  13,846  104 
Corporate bonds
Financial services 10,906  142  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  4,844  37  55,673  220 
Federal national mortgage association 23,515  90  1,102  18  24,617  108 
Government national mortgage association 8,444  38  3,053  59  11,497  97 
Total Available-for-Sale Fixed Maturities 24  $ 107,540  $ 557  27  $ 20,230  $ 235  $ 127,770  $ 792 
18

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.
19

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 





















20

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