UNITED FIRE GROUP INC - Quarter Report: 2019 June (Form 10-Q)

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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, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-34257

________________________

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 5, 2019, 25,257,384 shares of common stock were outstanding.

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United Fire Group, Inc.

Index to Quarterly Report on Form 10-Q

June 30, 2019



	Page
Forward-Looking Information	1

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018	2

Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and six-month periods ended June 30, 2019 and 2018	3

Consolidated Statement of Stockholders’ Equity (unaudited) for the three- and six-month periods ended June 30, 2019 and 2018	4

Consolidated Statements of Cash Flows (unaudited) for the six-month periods ended June 30, 2019 and 2018	6

Notes to Unaudited Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3. Quantitative and Qualitative Disclosures About Market Risk	50

Item 4. Controls and Procedures	50

Part II. Other Information

Item 1. Legal Proceedings	51

Item 1A. Risk Factors	51

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3. Defaults Upon Senior Securities	51

Item 4. Mine Safety Disclosures	51

Item 5. Other Information	51

Item 6. Exhibits	52

Signatures	53

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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)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will continue," "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, 2018 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;


•	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, 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 Securities and Exchange Commission ("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.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

United Fire Group, Inc. Consolidated Balance Sheets

(In Thousands, Except Share Data)	June 30, 2019		December 31, 2018
	(unaudited)
ASSETS
Investments
Fixed maturities
Available-for-sale, at fair value (amortized cost $1,653,296 in 2019 and $1,761,289 in 2018)	$	1,703,319	$	1,749,488
Trading securities, at fair value (amortized cost $12,932 in 2019 and $11,277 in 2018)	17,143		13,240
Equity securities at fair value (cost $65,409 in 2019 and $64,819 in 2018)	283,178		248,361
Mortgage loans	36,374		25,782
Other long-term investments	47,772		37,077
Short-term investments	175		175
	2,087,961		2,074,123
Cash and cash equivalents	148,784		64,454
Accrued investment income	15,200		15,774
Premiums receivable (net of allowance for doubtful accounts of $1,208 in 2019 and $785 in 2018)	402,887		346,825
Deferred policy acquisition costs	101,563		92,796
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $42,118 in 2019 and $39,894 in 2018)	115,853		97,194
Reinsurance receivables and recoverables	52,779		61,337
Prepaid reinsurance premiums	8,112		7,063
Deferred tax asset	—		912
Income taxes receivable	9,122		15,035
Goodwill and intangible assets	22,897		23,252
Other assets	36,639		17,933
TOTAL ASSETS	$	3,001,797	$	2,816,698
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Losses and loss settlement expenses	$	1,341,666	$	1,312,483
Unearned premiums	539,980		492,918
Accrued expenses and other liabilities	131,726		122,922
Deferred tax liability	20,122		—
TOTAL LIABILITIES	$	2,033,494	$	1,928,323
Stockholders’ Equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,245,200 and 25,097,408 shares issued and outstanding in 2019 and 2018, respectively	$	25	$	25
Additional paid-in capital	208,971		203,350
Retained earnings	739,162		715,472
Accumulated other comprehensive income (loss), net of tax	20,145		(30,472		)
TOTAL STOCKHOLDERS’ EQUITY	$	968,303	$	888,375
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,001,797	$	2,816,698

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

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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)	2019			2018			2019			2018
Revenues
Net premiums earned	$	276,486		$	256,853		$	538,800		$	502,020
Investment income, net of investment expenses	14,120			17,249			30,632			30,741
Net realized investment gains (losses) (includes reclassifications for net unrealized investment gains/(losses) on available-for-sale securities of $37 and $127 in 2019 and ($196) and ($159) in 2018; previously included in accumulated other comprehensive income)	13,591			1,297			40,304			(6,567		)
Total revenues	$	304,197		$	275,399		$	609,736		$	526,194
Benefits, Losses and Expenses
Losses and loss settlement expenses	$	220,009		$	189,146		$	384,249		$	333,874
Amortization of deferred policy acquisition costs	54,795			50,810			107,014			100,449
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,124 and $2,248 in 2019 and $1,661 and $3,321 in 2018; previously included in accumulated other comprehensive income)	33,964			37,252			68,367			72,107
Total benefits, losses and expenses	$	308,768		$	277,208		$	559,630		$	506,430
Income (loss) from continuing operations before income taxes	$	(4,571	)	$	(1,809	)	$	50,106		$	19,764
Federal income tax expense (benefit) (includes reclassifications of $229 and $445 in 2019 and $390 and $731 in 2018; previously included in accumulated other comprehensive income)	(375		)	(1,966		)	9,781			(757		)
Income (loss) from continuing operations	$	(4,196	)	$	157		$	40,325		$	20,521
Income (loss) from discontinued operations, net of taxes	—			—			—			(1,912		)
Gain on sale of discontinued operations, net of taxes	—			$	—		—			$	27,307
Net income (loss)	$	(4,196	)	$	157		$	40,325		$	45,916
Other comprehensive income (loss)
Change in net unrealized appreciation on investments	$	28,596		$	(6,199	)	$	61,950		$	(58,013	)
Change in liability for underfunded employee benefit plans	—			—			—			—
Other comprehensive income (loss), before tax and reclassification adjustments	$	28,596		$	(6,199	)	$	61,950		$	(58,013	)
Income tax effect	(6,004		)	1,301			(13,009		)	12,182
Other comprehensive income (loss), after tax, before reclassification adjustments	$	22,592		$	(4,898	)	$	48,941		$	(45,831	)
Reclassification adjustment for net realized investment (gains) losses included in income	$	(37	)	$	196		$	(127	)	$	159
Reclassification adjustment for employee benefit costs included in expense	1,124			1,661			2,248			3,321
Total reclassification adjustments, before tax	$	1,087		$	1,857		$	2,121		$	3,480
Income tax effect	(229		)	(390		)	(445		)	(731		)
Total reclassification adjustments, after tax	$	858		$	1,467		$	1,676		$	2,749
Comprehensive income (loss)	$	19,254		$	(3,274	)	$	90,942		$	2,834
Diluted weighted average common shares outstanding	25,210,354			25,611,773			25,659,803			25,582,708
Earnings per common share from continuing operations:
Basic	$	(0.17	)	$	0.01		$	1.60		$	0.82
Diluted	(0.17		)	0.01			1.57			0.80
Earnings per common share:
Basic	$	(0.17	)	$	0.01		$	1.60		$	1.84
Diluted	(0.17		)	0.01			1.57			1.80

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

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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, 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.

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United Fire Group, Inc.

Consolidated Statement of Stockholders’ Equity (Continued) (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, 2018	24,916,806		$	25	$	196,334		$	608,700		$	168,314		$	973,373
Net income	—		—		—			45,759			—			45,759
Shares repurchased	(120,372	)	—		(5,404		)	—			—			(5,404		)
Stock based compensation	116,314		—		3,574			—			—			3,574
Dividends on common stock ($0.28 per share)	—		—		—			(6,958		)	—			(6,958		)
Change in net unrealized investment appreciation⁽¹⁾	—		—		—			(6,714		)	(34,248		)	(40,962		)
Change in liability for underfunded employee benefit plans⁽²⁾	—		—		—			—			1,311			1,311
Cumulative effect of change in accounting principle	—		—		—			191,244			(191,244		)	—
Balance, March 31, 2018	24,912,748		$	25	$	194,504		$	832,031		$	(55,867	)	$	970,693

Net income	—		$	—	$	—		$	157		$	—		$	157
Shares repurchased	—		—		—			—			—			—
Stock based compensation	131,219		—		4,938			—			—			4,938
Dividends on common stock ($0.31 per share)	—		—		—			(7,757		)	—			(7,757		)
Change in net unrealized investment appreciation⁽¹⁾	—		—		—			—			(4,743		)	(4,743		)
Change in liability for underfunded employee benefit plans⁽²⁾	—		—		—			—			1,312			1,312
Balance, June 30, 2018	25,043,967		$	25	$	199,442		$	824,431		$	(59,298	)	$	964,600


(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.

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United Fire Group, Inc.

Consolidated Statements of Cash Flows (Unaudited)



	Six Months Ended June 30,
(In Thousands)	2019			2018
Cash Flows From Operating Activities
Net income	$	40,325		$	45,916
Less net loss from discontinued operations, net of taxes	—			(1,912		)
Adjustments to reconcile net income to net cash provided by operating activities
Net accretion of bond premium	5,039			4,324
Depreciation and amortization	2,618			2,316
Stock-based compensation expense	4,045			2,718
Net realized investment (gains) losses	(40,304		)	6,567
Net cash flows from equity and trading investments	639			21,839
Deferred income tax benefit	7,716			(8,836		)
Changes in:
Accrued investment income	574			(1,875		)
Premiums receivable	(56,062		)	(51,729		)
Deferred policy acquisition costs	(8,767		)	(6,963		)
Reinsurance receivables	8,558			4,384
Prepaid reinsurance premiums	(1,049		)	(1,153		)
Income taxes receivable	5,913			6,031
Other assets	(18,706		)	(102		)
Losses and loss settlement expenses	29,183			16,664
Unearned premiums	47,062			52,341
Accrued expenses and other liabilities	10,562			9,383
Income taxes payable	—			5,539
Deferred income taxes	—			(14,054		)
Other, net	(1,070		)	1,253
Cash from operating activities - continuing operations	(4,049		)	48,647
Cash from operating activities - discontinued operations	—			4,023
Cash from operating activities - gain on sale of discontinued operations	—			(34,851		)
Total adjustments	$	(4,049	)	$	17,819
Net cash provided by operating activities	$	36,276		$	65,647
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	36,490		$	23,994
Proceeds from call and maturity of available-for-sale investments	111,824			60,651
Proceeds from short-term and other investments	2,315			5,816
Proceeds from the sale of discontinued operations	—			276,055
Purchase of available-for-sale investments	(44,400		)	(383,633		)
Purchase of mortgage loans	(10,723		)	(9,896		)
Purchase of short-term and other investments	(11,986		)	(1,995		)
Net purchases and sales of property and equipment	(20,920		)	(13,012		)
Cash from investing activities - continuing operations	62,600			(42,020		)
Cash from investing activities - discontinued operations	—			14,343
Net cash provided by (used in) investing activities	$	62,600		$	(27,677	)
Cash Flows From Financing Activities
Payment of cash dividends	$	(16,122	)	$	(14,716	)
Repurchase of common stock	(69		)	(5,404		)
Issuance of common stock	1,645			5,794
Cash from financing activities - continuing operations	(14,546		)	(14,326		)
Cash from financing activities - discontinued operations	—			(11,547		)
Net cash used in financing activities	$	(14,546	)	$	(25,873	)
Net Change in Cash and Cash Equivalents	$	84,330		$	12,097
Less: increase in cash and cash equivalents - discontinued operations	—			(6,819		)
Net increase in cash and cash equivalents - continuing operations	84,330			5,278
Cash and Cash Equivalents at Beginning of Period - Continuing Operations	64,454			95,562
Cash and Cash Equivalents at End of Period - Continuing Operations	$	148,784		$	100,840

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

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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 a property and casualty insurer in 46 states and the District of Columbia.

Discontinued Operations

On September 18, 2017, the Company signed a definitive agreement to sell its subsidiary, United Life Insurance Company ("United Life"), to Kuvare US Holdings, Inc. ("Kuvare") and on March 30, 2018, the sale closed. As a result, the life insurance business, previously a separate segment, was reported as discontinued operations in the Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Cash Flows for all periods presented in this Form 10-Q. Subsequent to the announcement of this sale, our continuing operations were reported as one business segment. All current and prior periods reflected in this Form 10-Q have been presented as continuing and discontinued operations, as applicable, unless otherwise noted. For more information, refer to Note 11. Discontinued Operations.

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, 2018, including certain financial statement footnote disclosures, is not required by the rules and regulations of the SEC for interim financial reporting and have 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 postretirement 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, 2018.

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.

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For the six-month periods ended June 30, 2019 and 2018, we made payments for income taxes totaling $1,537 and $15,037, respectively. We received a tax refund of $5,401 and $1,503 for the six-month periods ended June 30, 2019 and 2018, respectively.

For the six-month periods ended June 30, 2019 and 2018, 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, 2019.




	Total
Recorded asset at beginning of period	$	92,796
Underwriting costs deferred	115,781
Amortization of deferred policy acquisition costs	(107,014		)
Recorded asset at June 30, 2019	$	101,563

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

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 expense from continuing operations of $9,781 for the six-month period ended June 30, 2019 compared to income tax expense from continuing operations and discontinued operations of $7,350 during the same period of 2018. Our effective tax rate is different than the federal statutory rate of 21 percent, due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.

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, 2019 or December 31, 2018. 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.

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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 accrued expenses and other liabilities line on the Consolidated Balance Sheets and as a lease right-of-use asset disclosed in 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 lease. The Company has elected to categorize its leases into four categories based on length of lease terms and applies an incremental borrowing rate of interest as of the effective date of adoption or the lease effective date equivalent to a collateralized rate with similar terms. The four categories are as follows: less than three years, three to five years, five to ten years and greater than ten years. The collateralized discount rate used to calculate the present value of future minimum lease payments is based, where appropriate, on the Company's incremental borrowing rate of its credit facility, described in Note 9 Credit Facility of this Form 10-Q. For leases that existed prior to the adoption of the new accounting guidance on January 1, 2019 or those with terms not similar to the credit facility, the Company has elected to use the remaining lease term based on the four categories noted above as of the date of initial application to measure its incremental borrowing rate. In this case, the incremental borrowing rate is a collateralized rate based on current industry borrowing rates for similar companies with similar ratings.

Certain leases include rental payments adjusted for increases on an annual basis as part of the rental expense and are included in measurement of the lease liability. Lease expenses for lease payments, where appropriate, are recognized on a straight-line basis over the lease term. Short-term leases of 12 months or less are recorded on the Consolidated Balance Sheets and lease payments are recognized on the Consolidated Statement of Income and Comprehensive Income. The Company has agreements with lease and non-lease components, which the Company accounts for separately and continues to follow the guidance and its existing policy for minimum rental payments under Accounting Standard Codification ("ASC") Topic 840 for leases that commenced prior to the effective date. Modified or new leases subsequent to the effective date will follow ASC Topic 842. For more information on leases refer to Note 12. 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 Balance Sheets and accounted for under the equity method of accounting. The Company's initial investment and the fair value of the VIE at June 30, 2019 was $7.5 million. The Company's maximum exposure to loss from this VIE is $7.5 million, its carrying value of the investment, and there are no future funding commitments.

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 Company concluded there are no material subsequent events or transactions that have occurred after the balance sheet date through the date on which the financial statements were issued.

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Recently Issued Accounting Standards

Accounting Standards Adopted in 2019

Leases

In February 2016, the FASB issued guidance on the accounting for leases. The new guidance requires lessees to place a right-of-use asset and a lease liability on their balance sheets. The lease liability will be based on the present value of the future lease payments and the right-of-use asset will be based on the liability. Expenses will be recognized on the income statement in a similar manner as previous methods. The new guidance also requires companies to classify all leases as operating leases or financing leases. The Company has classified all of its leases as operating leases. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those years. The Company adopted the new guidance under a modified retrospective transition approach using the package of practical expedients and the Company did not adopt the hindsight practical expedient as of January 1, 2019. The package of practical expedients allowed the Company not to reassess whether the arrangement contains a lease, lease classification and whether previously capitalized costs qualify as initial direct costs. The practical expedients allowed the Company to continue classifying all of its leases as operating leases as they were previously classified under ASC Topic 840. Therefore, the Company's disclosures for the comparative periods presented in 2019 continues to be in accordance with previous lease guidance under ASC Topic 840. The Company used the accounting standard adoption date as its date of initial application.

Adoption of the new guidance resulted in the recording of additional net lease right-of-use assets and lease obligations of $19.8 million and $20.3 million, respectively, as of January 1, 2019. The lease amounts recognized were measured based on the present value of discounted future lease payments, net of reversal of prepaid rent and deferred rent balances that existed prior to January 1, 2019. The Company had no adjustments upon adoption related to unrecorded but expected lease abandonments at December 31, 2018. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as a cumulative change in accounting principles adjustment to retained earnings of $387. The adoption did not have a significant impact on the Company's financial position or results of operations and had no impact on cash flows.

Income Taxes - Intra-entity Transfers

In October 2016, the FASB issued new guidance on the income tax treatment of intra-entity transfers. The new guidance replaces the current guidance which prohibits the recognition of current and deferred income taxes of intra-entity transfers until the asset is sold externally. Under the new guidance, the exemption is eliminated and income taxes will be recognized on transfers of intra-entity assets. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. The Company adopted the new guidance as of January 1, 2019. The adoption did not have a significant impact on the Company's financial position and results of operations.

Financial Instruments - Callable Debt Securities

In March 2016, the FASB issued an update to amend the amortization period for certain purchased callable debt securities held at a premium. The update requires the premium to be amortized to the earliest call date. The update doesn’t change the accounting for securities held at a discount, which will continue to be amortized to maturity. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2018. The Company adopted the new guidance as of January 1, 2019. The adoption of the new guidance resulted in cumulative change in accounting principles adjustment to retained earnings, net of the deferred tax, of $126 on January 1, 2019 and did not have a material impact on net income between the comparable periods.

Pending Adoption of Accounting Standards

Intangibles - Other Internal Use Software

In August 2018, the FASB issued guidance to align the requirements for capitalizing implementation costs incurred

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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 is effective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020. Management currently believes that the adoption will 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 current 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 will be remeasured each reporting period. The new guidance is effective for annual periods beginning after December 15, 2019 and interim periods within those years. The new guidance will impact the Company's portfolio of mortgage loan investments, which are carried at amortized cost, the impairment model related to our available-for-sale fixed-maturity portfolio and reinsurance receivables. The Company will adopt the new guidance as of January 1, 2020. The Company has developed an implementation time-line for adopting the new guidance and is currently building it's model for recognizing credit losses for mortgage loans and available-for-sale fixed-maturity investments and reinsurance receivables as we continue to evaluate moving to an expected loss model. Currently, the Company utilizes an aging method to estimate credit losses on premiums receivable, which is in line with the new guidance. The Company is evaluating the impact of adopting the new guidance and the impact on it's financial position, results of operations and key processes.

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 will be based on the excess of the carrying value over fair value of goodwill. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020 and it currently believes the adoption will have no impact on the Company's financial position and 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 will adopt the new guidance as of January 1, 2020. Management currently believes the new guidance will modify existing fair value disclosures, but will not have an impact on the Company's financial position and results of operations.

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, 2019. The Company will adopt the new guidance as of January 1, 2020. 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 held-to-maturity and available-for-sale fixed maturity and equity securities, presented on a consolidated basis, as of June 30, 2019 and December 31, 2018, is provided below:



June 30, 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	$	28,937	$	177	$	42	$	29,072
U.S. government agency	137,846		2,245		41		140,050
States, municipalities and political subdivisions
General obligations:
Midwest	86,696		2,674		—		89,370
Northeast	31,213		1,111		—		32,324
South	113,289		2,757		71		115,975
West	105,978		3,927		12		109,893
Special revenue:
Midwest	139,244		5,203		9		144,438
Northeast	62,469		2,232		—		64,701
South	228,469		8,195		98		236,566
West	142,661		4,664		8		147,317
Foreign bonds	4,939		178		—		5,117
Public utilities	62,749		2,031		62		64,718
Corporate bonds
Energy	26,634		1,139		—		27,773
Industrials	53,751		1,454		43		55,162
Consumer goods and services	48,118		1,844		73		49,889
Health care	13,982		585		—		14,567
Technology, media and telecommunications	25,897		1,231		—		27,128
Financial services	91,870		3,049		256		94,663
Mortgage-backed securities	7,071		83		60		7,094
Collateralized mortgage obligations
Government national mortgage association	76,524		2,022		80		78,466
Federal home loan mortgage corporation	109,450		2,100		87		111,463
Federal national mortgage association	52,247		1,755		37		53,965
Asset-backed securities	3,262		430		84		3,608
Total Available-for-Sale Fixed Maturities	$	1,653,296	$	51,086	$	1,063	$	1,703,319

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December 31, 2018
Type of Investment	Cost or Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	27,632	$	6	$	220	$	27,418
U.S. government agency	215,535		896		1,749		214,682
States, municipalities and political subdivisions
General obligations:
Midwest	94,806		1,091		685		95,212
Northeast	37,326		432		103		37,655
South	114,710		754		1,553		113,911
West	107,787		1,229		1,175		107,841
Special revenue:
Midwest	140,025		1,609		870		140,764
Northeast	62,737		452		1,241		61,948
South	237,848		1,669		3,708		235,809
West	143,829		1,294		2,203		142,920
Foreign bonds	9,698		31		13		9,716
Public utilities	56,808		274		1,023		56,059
Corporate bonds
Energy	28,909		43		304		28,648
Industrials	53,867		124		906		53,085
Consumer goods and services	54,323		142		819		53,646
Health care	16,721		42		105		16,658
Technology, media and telecommunications	26,819		35		678		26,176
Financial services	81,286		238		2,175		79,349
Mortgage-backed securities	7,642		14		232		7,424
Collateralized mortgage obligations
Government national mortgage association	78,055		380		1,734		76,701
Federal home loan mortgage corporation	108,403		524		1,304		107,623
Federal national mortgage association	53,267		213		732		52,748
Asset-backed securities	3,256		352		113		3,495
Total Available-for-Sale Fixed Maturities	$	1,761,289	$	11,844	$	23,645	$	1,749,488

Maturities

The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at June 30, 2019, 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, 2019	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	44,381	$	44,604	$	6,176	$	7,346
Due after one year through five years	233,480		239,201		4,739		7,294
Due after five years through 10 years	514,156		533,677		—		—
Due after 10 years	612,725		631,241		2,017		2,503
Asset-backed securities	3,262		3,608		—		—
Mortgage-backed securities	7,071		7,094		—		—
Collateralized mortgage obligations	238,221		243,894		—		—
	$	1,653,296	$	1,703,319	$	12,932	$	17,143

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,
	2019			2018			2019			2018
Net realized investment gains (losses) from continuing operations:
Fixed maturities:
Available-for-sale	$	(8	)	$	(219	)	$	142		$	(193	)
Trading securities
Change in fair value	501			(148		)	2,247			(259		)
Sales	92			349			92			905
Equity securities
Change in fair value	12,499			305			37,133			(8,883		)
Sales	507			1,010			705			1,863
Mortgage loans	—			—			(15		)	—
Total net realized investment gains (losses) from continuing operations	$	13,591		$	1,297		$	40,304		$	(6,567	)
Total net realized investment gains (losses) from discontinued operations	—			—			—			(1,057		)
Total net realized investment gains (losses)	$	13,591		$	1,297		$	40,304		$	(7,624	)

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,
	2019		2018			2019		2018
Proceeds from sales	$	—	$	23,994		$	36,490	$	23,994
Gross realized gains	—		140			30		140
Gross realized losses	—		(307		)	13		(307		)

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 $17,143 and $13,240 at June 30, 2019 and December 31, 2018, 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 $17,791 at June 30, 2019.

Unrealized Appreciation

A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:



	Six Months Ended June 30,
	2019			2018
Change in net unrealized investment appreciation
Available-for-sale fixed maturities	$	61,824		$	(65,127	)
Deferred policy acquisition costs	—			7,274
Income tax effect	(12,983		)	12,148
Net unrealized investment depreciation of discontinued operations, sold	—			6,714
Cumulative change in accounting principles	—			(191,244		)
Total change in net unrealized investment appreciation, net of tax	$	48,841		$	(230,235	)

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date or based on the value calculated using a discounted cash flow model. Credit-related impairments on fixed maturity securities that we do not plan to sell, and for which we are not more likely than not to be required to sell, are recognized in net income. Any non-credit related impairment is recognized as a component of other comprehensive income. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.

The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position on a consolidated basis at June 30, 2019 and December 31, 2018. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at June 30, 2019, if future events or information cause us to determine that a decline in fair value is other-than-temporary.

We have evaluated the near-term prospects of the issuers of our fixed maturity securities in relation to the severity and duration of the unrealized loss and determined that these losses did not warrant the recognition of an OTTI charge at June 30, 2019 or at June 30, 2018. 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.

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June 30, 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	—	$	—	$	—	3	$	8,737	$	42	$	8,737	$	42
U.S. government agency	—	—		—		2	7,959		41		7,959		41
States, municipalities and political subdivisions
General obligations
Midwest	—	—		—		—	—		—		—		—
South	—	—		—		3	9,519		71		9,519		71
West	—	—		—		1	2,086		12		2,086		12
Special revenue
Midwest	—	—		—		2	3,339		9		3,339		9
Northeast	—	—		—		1	1,296		—		1,296		—
South	—	—		—		6	14,039		98		14,039		98
West	—	—		—		4	4,115		8		4,115		8
Public utilities	1	2,934		62		—	—		—		2,934		62
Corporate bonds
Energy	—	—		—		—	—		—		—		—
Industrials	1	5,009		1		1	3,996		42		9,005		43
Consumer goods and services	—	—		—		3	4,637		73		4,637		73
Health care	—	—		—		—	—		—		—		—
Technology, media and telecommunications	—	—		—		—	—		—		—		—
Financial services	1	4,744		256		1	998		—		5,742		256
Mortgage-backed securities	—	—		—		20	3,749		60		3,749		60
Collateralized mortgage obligations
Government national mortgage association	—	—		—		7	10,194		80		10,194		80
Federal home loan mortgage corporation	—	—		—		7	11,199		87		11,199		87
Federal national mortgage association	—	—		—		5	3,843		37		3,843		37
Asset-backed securities	—	—		—		1	2,864		84		2,864		84
Total Available-for-Sale Fixed Maturities	3	$	12,687	$	319	67	$	92,570	$	744	$	105,257	$	1,063

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December 31, 2018	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	1	$	8,018	$	7	5	$	14,645	$	213	$	22,663	$	220
U.S. government agency	4	17,907		81		17	80,696		1,668		98,603		1,749
States, municipalities and political subdivisions
General obligations
Midwest	2	2,939		5		7	23,749		680		26,688		685
Northeast	—	—		—		3	12,110		103		12,110		103
South	1	778		2		22	50,174		1,551		50,952		1,553
West	1	1,203		5		16	48,499		1,170		49,702		1,175
Special revenue
Midwest	4	3,892		8		19	43,854		862		47,746		870
Northeast	—	—		—		14	37,629		1,241		37,629		1,241
South	4	4,298		30		45	107,016		3,678		111,314		3,708
West	4	11,115		32		28	69,667		2,171		80,782		2,203
Foreign bonds	1	2,984		13		—	—		—		2,984		13
Public utilities	12	25,781		552		8	17,253		471		43,034		1,023
Corporate bonds
Energy	7	12,556		148		2	4,099		156		16,655		304
Industrials	9	21,970		397		4	11,040		509		33,010		906
Consumer goods and services	14	30,399		527		5	9,554		292		39,953		819
Health care	3	6,203		97		1	345		8		6,548		105
Technology, media and telecommunications	6	12,638		288		5	9,619		390		22,257		678
Financial services	13	30,177		650		13	32,855		1,525		63,032		2,175
Mortgage-backed securities	22	1,539		34		22	4,166		198		5,705		232
Collateralized mortgage obligations
Government national mortgage association	2	3,797		55		22	44,690		1,679		48,487		1,734
Federal home loan mortgage corporation	3	4,541		20		18	38,189		1,284		42,730		1,304
Federal national mortgage association	4	2,107		3		15	38,986		729		41,093		732
Asset-backed securities	1	2,829		113		—	—		—		2,829		113
Total Available-for-Sale Fixed Maturities	118	$	207,671	$	3,067	291	$	698,835	$	20,578	$	906,506	$	23,645

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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. We obtain one price for each security. 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. We request and utilize one broker quote per security.

In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, 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.

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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 June 30, 2019, the cash surrender value of the COLI policies was $5,976, 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 June 30, 2019 and December 31, 2018 is as follows:



	June 30, 2019				December 31, 2018
	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Fixed maturities:
Available-for-sale securities	$	1,703,319	$	1,703,319	$	1,749,488	$	1,749,488
Trading securities	17,143		17,143		13,240		13,240
Equity securities	283,178		283,178		248,361		248,361
Mortgage loans	38,018		36,374		26,021		25,782
Other long-term investments	47,772		47,772		37,077		37,077
Short-term investments	175		175		175		175
Cash and cash equivalents	148,784		148,784		64,454		64,454
Corporate-owned life insurance	5,976		5,976		4,907		4,907

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The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table includes financial instruments at June 30, 2019 and December 31, 2018:



June 30, 2019			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	29,072	$	—	$	29,072	$	—
U.S. government agency	140,050		—		140,050		—
States, municipalities and political subdivisions
General obligations
Midwest	89,370		—		89,370		—
Northeast	32,324		—		32,324		—
South	115,975		—		115,975		—
West	109,893		—		109,893		—
Special revenue
Midwest	144,438		—		144,438		—
Northeast	64,701		—		64,701		—
South	236,566		—		236,566		—
West	147,317		—		147,317		—
Foreign bonds	5,117		—		5,117		—
Public utilities	64,718		—		64,718		—
Corporate bonds
Energy	27,773		—		27,773		—
Industrials	55,162		—		55,162		—
Consumer goods and services	49,889		—		49,889		—
Health care	14,567		—		14,567		—
Technology, media and telecommunications	27,128		—		27,128		—
Financial services	94,663		—		94,413		250
Mortgage-backed securities	7,094		—		7,094		—
Collateralized mortgage obligations
Government national mortgage association	78,466		—		78,466		—
Federal home loan mortgage corporation	111,463		—		111,463		—
Federal national mortgage association	53,965		—		53,965		—
Asset-backed securities	3,608		—		2,864		744
Total Available-for-Sale Fixed Maturities	$	1,703,319	$	—	$	1,702,325	$	994
TRADING
Fixed maturities:
Bonds
U.S. Treasury	$	749	$	—	$	749	$	—
Corporate bonds
Industrials	398		—		398		—
Consumer goods and services	1,905		—		1,905		—
Health care	5,164		—		5,164		—

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Technology, media and telecommunications	3,065		—		3,065		—
Financial services	2,006		—		2,006		—
Redeemable preferred stocks	3,856		3,856		—		—
Total Trading Securities	$	17,143	$	3,856	$	13,287	$	—
EQUITY SECURITIES
Common stocks
Public utilities	$	15,665	$	15,665	$	—	$	—
Energy	13,784		13,784		—		—
Industrials	59,931		59,931		—		—
Consumer goods and services	27,494		27,494		—		—
Health care	25,378		25,378		—		—
Technology, media and telecommunications	16,776		16,776		—		—
Financial services	118,779		118,779		—		—
Nonredeemable preferred stocks	5,371		4,776		—		595
Total Equity Securities	$	283,178	$	282,583	$	—	$	595
Short-Term Investments	$	175	$	175	$	—	$	—
Money Market Accounts	$	17,739	$	17,739	$	—	$	—
Corporate-Owned Life Insurance	$	5,976	$	—	$	5,976	$	—
Total Assets Measured at Fair Value	$	2,027,530	$	304,353	$	1,721,588	$	1,589

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December 31, 2018			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	27,418	$	—	$	27,418	$	—
U.S. government agency	214,682		—		214,682		—
States, municipalities and political subdivisions
General obligations
Midwest	95,212		—		95,212		—
Northeast	37,655		—		37,655		—
South	113,911		—		113,911		—
West	107,841		—		107,841		—
Special revenue
Midwest	140,764		—		140,764		—
Northeast	61,948		—		61,948		—
South	235,809		—		235,809		—
West	142,920		—		142,920		—
Foreign bonds	9,716		—		9,716		—
Public utilities	56,059		—		56,059		—
Corporate bonds
Energy	28,648		—		28,648		—
Industrials	53,085		—		53,085		—
Consumer goods and services	53,646		—		53,646		—
Health care	16,658		—		16,658		—
Technology, media and telecommunications	26,176		—		26,176		—
Financial services	79,349		—		79,099		250
Mortgage-backed securities	7,424		—		7,424		—
Collateralized mortgage obligations
Government national mortgage association	76,701		—		76,701		—
Federal home loan mortgage corporation	107,623		—		107,623		—
Federal national mortgage association	52,748		—		52,748		—
Asset-backed securities	3,495		—		2,829		666
Total Available-for-Sale Fixed Maturities	$	1,749,488	$	—	$	1,748,572	$	916
TRADING
Fixed maturities:
Bonds
Corporate bonds
Industrials	$	397	$	—	$	397	$	—
Consumer goods and services	1,599		—		1,599		—
Health care	3,236		—		3,236		—
Technology, media and telecommunications	3,028		—		3,028		—
Financial services	2,231		—		2,231		—

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Redeemable preferred stocks	2,749		2,749		—		—
Total Trading Securities	$	13,240	$	2,749	$	10,491	—
EQUITY SECURITIES
Common Stocks
Public utilities	$	15,949	$	15,949	$	—	$	—
Energy	10,975		10,975		—		—
Industrials	53,536		53,536		—		—
Consumer goods and services	24,465		24,465		—		—
Health care	22,286		22,286		—		—
Technology, media and telecommunications	13,944		13,944		—		—
Financial services	101,555		101,555		—		—
Nonredeemable preferred stocks	5,651		5,056		—		595
Total Equity Securities	$	248,361	$	247,766	$	—	$	595
Short-Term Investments	$	175	$	175	$	—	$	—
Money Market Accounts	$	3,275	$	3,275	$	—	$	—
Corporate-Owned Life Insurance	$	4,907	$	—	$	4,907	$	—
Total Assets Measured at Fair Value	$	2,019,446	$	253,965	$	1,763,970	$	1,511

The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.

At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. Unusual fluctuations outside of our expectations are independently corroborated with additional third-party sources that use similar valuation techniques as discussed above. In addition, on a quarterly basis, we also test all securities in the portfolio and independently corroborate the valuations obtained from our third-party valuation service providers. Quarterly, we also perform deep dive analysis of the pricing method used by our third-party valuation service provider by selecting a random sample of securities by asset class and reviewing methodologies. In our opinion, the pricing obtained at June 30, 2019 and December 31, 2018 was reasonable.

For the three- and six-month periods ended June 30, 2019, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities. During the three- and six-month periods ended June 30, 2019, there were no securities transferred between Level 1 and Level 2.

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Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes. If pricing cannot be obtained from these sources, which occurs on a limited basis, management will perform a discounted cash flow analysis, using an appropriate risk-adjusted discount rate, on the underlying security to estimate fair value. During the three- and six-month periods ended June 30, 2019, there were no securities transferred in or out of Level 3.

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended June 30, 2019:



	Corporate bonds		Asset-backed securities		Equities		Total
Balance at March 31, 2019	$	250	$	701	$	595	$	1,546
Net unrealized gains⁽¹⁾	—		43		—		43
Balance at June 30, 2019	$	250	$	744	$	595	$	1,589

(1) Net unrealized gains are recorded as a component of comprehensive income.

The following table provides a summary of the changes in fair value of our Level 3 securities for the six-month period ended June 30, 2019:



	Corporate bonds		Asset-backed securities		Equities		Total
Balance at January 1, 2019	$	250	$	666	$	595	$	1,511
Net unrealized gains⁽¹⁾	—		78		—		78
Balance at June 30, 2019	$	250	$	744	$	595	$	1,589

(1) Net unrealized gains are recorded as a component of comprehensive income.

Commercial Mortgage Loans

The following tables present the carrying value of our commercial mortgage loans and additional information at June 30, 2019 and December 31, 2018:



Commercial Mortgage Loans
	June 30, 2019			December 31, 2018
Loan-to-value	Carrying Value			Carrying Value
Less than 65%	$	27,940		$	25,828
65%-75%	8,496			—
Total amortized cost	$	36,436		$	25,828
Valuation allowance	(62		)	(46		)
Total mortgage loans	$	36,374		$	25,782

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Mortgage Loans by Region
	June 30, 2019				December 31, 2018
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
East North Central	$	3,245	8.9	%	$	3,244	12.6	%
Southern Atlantic	6,652		18.3		6,652		25.8
East South Central	4,899		13.4		4,975		19.3
New England	6,588		18.1		6,588		25.4
Middle Atlantic	12,825		35.2		4,369		16.9
Mountain	2,227		6.1		—		—
Total mortgage loans at amortized cost	$	36,436	100.0	%	$	25,828	100.0	%



Mortgage Loans by Property Type
	June 30, 2019				December 31, 2018
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
Commercial
Multifamily	$	3,245	8.9	%	$	3,244	12.6	%
Office	11,551		31.7		11,627		45.0
Retail	2,227		6.1		—		—
Mixed use/Other	19,413		53.3		10,957		42.4
Total mortgage loans at amortized cost	$	36,436	100.0	%	$	25,828	100.0	%

The commercial mortgage loans originate with an initial loan-to-value ratio to provide sufficient collateral to absorb losses should a loan be required to foreclose. Mortgage loans are evaluated on a quarterly basis for impairment on an individual basis through a monitoring process and review of key credit indicators, such as economic trends, delinquency rates, property valuations, occupancy and rental rates and loan-to-value ratios. A loan is considered impaired when the Company believes it will not collect the contractual principal and interest set forth in the contractual terms of the loan. A valuation allowance is established on each loan recognizing a loss for amounts which we believe will not be collected according to the contractual terms of the respective loan agreement. As of June 30, 2019 there were no mortgage loan impairments.

NOTE 4. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES

Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.

Liabilities for losses and loss settlement expenses reflect management's best estimates at a given point in time of what we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"), based on known facts, circumstances, and historical trends. Because property and casualty insurance reserves are estimates of the unpaid portions of incurred losses that have been reported to us, as well as losses that have been incurred but not reported, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses and related loss settlement expenses may vary materially from recorded amounts. We regularly update our reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported as a component of losses and loss settlement expenses incurred in the period such changes are determined.

The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment

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patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we will take action that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc., to render an opinion as to the reasonableness of our statutory reserves annually. The actuarial opinion is filed in those states where we are licensed.

On a quarterly basis, UFG's internal actuary performs a detailed actuarial review of IBNR reserves. This review includes a comparison of results from the most recent analysis of reserves completed by both our internal and external actuaries. Senior management meets with our internal actuary to review, on a regular and quarterly basis, the adequacy of carried reserves based on results from this actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate.

We do not discount loss reserves based on the time value of money.

The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves at June 30, 2019 and December 31, 2018 (net of reinsurance amounts):




	June 30, 2019			December 31, 2018
Gross liability for losses and loss settlement expenses at beginning of year	$	1,312,483		$	1,224,183
Ceded losses and loss settlement expenses	(57,094		)	(59,871		)
Net liability for losses and loss settlement expenses at beginning of year	$	1,255,389		$	1,164,312
Losses and loss settlement expenses incurred for claims occurring during
Current year	$	379,507		$	785,778
Prior years	4,742			(54,167		)
Total incurred	$	384,249		$	731,611
Losses and loss settlement expense payments for claims occurring during
Current year	$	125,106		$	306,032
Prior years	222,102			334,502
Total paid	$	347,208		$	640,534
Net liability for losses and loss settlement expenses at end of year	$	1,292,430		$	1,255,389
Ceded loss and loss settlement expenses	49,236			57,094
Gross liability for losses and loss settlement expenses at end of period	$	1,341,666		$	1,312,483

There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific monetary impact of any individual factor on the development of reserves.

For the three-month period ended June 30, 2019, the majority of unfavorable development came from commercial liability with a partial offset coming primarily from favorable development in workers compensation and commercial fire and allied lines. All other lines combined contributed a relatively minimal amount of overall unfavorable development during this three-month period. For the six-month period ended June 30, 2019, the

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majority of unfavorable development came from commercial liability with a partial offset coming primarily from favorable development in workers compensation, and fidelity and surety. All other lines combined contributed a relatively minimal amount of overall unfavorable development during this six-month period. The unfavorable development in both periods in commercial liability was primarily from prior year reserve strengthening on auto liability and other liability claims.

For the three-month period ended June 30, 2018, the majority of favorable development came from two lines, workers compensation and reinsurance assumed with a partial offset coming from unfavorable development for commercial fire and allied lines and commercial other liability. All other lines combined also contributed some overall favorable development during this three-month period. For the six-month period ended June 30, 2018, the majority of favorable development came from three lines: commercial automobile, workers compensation, and commercial other liability. All other lines combined also contributed overall favorable development and only one line, reinsurance assumed, provided any unfavorable development during this six-month period. The favorable development is attributable to our continued litigation management efforts as well as favorable runoff of reserves for general loss adjustment expenses.

Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year. However, conditions and trends that have affected the reserve development for a given year do change. Therefore, such development cannot be used to project future reserve redundancies or deficiencies.

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

NOTE 5. EMPLOYEE BENEFITS

Net Periodic Benefit Cost

The components of the net periodic benefit cost for our pension and postretirement benefit plans are as follows:



	Pension Plan						Postretirement Benefit Plan
Three Months Ended June 30,	2019			2018			2019			2018

Net periodic benefit cost
Service cost	$	1,997		$	2,175		$	456		$	750
Interest cost	2,080			1,875			318			502
Expected return on plan assets	(2,696		)	(2,626		)	—			—
Amortization of prior service credit	—			—			(2,221		)	(1,352		)
Amortization of net loss	901			1,072			224			589
Net periodic benefit cost	$	2,282		$	2,496		$	(1,223	)	$	489



	Pension Plan						Postretirement Benefit Plan
Six Months Ended June 30,	2019			2018			2019			2018

Net periodic benefit cost
Service cost	$	3,994		$	4,350		$	912		$	1,499
Interest cost	4,160			3,750			637			1,004
Expected return on plan assets	(5,392		)	(5,251		)	—			—
Amortization of prior service credit	—			—			(4,242		)	(2,704		)
Amortization of net loss	1,802			2,143			447			1,178
Net periodic benefit cost	$	4,564		$	4,992		$	(2,246	)	$	977

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A portion of the service cost component of net periodic pension and postretirement benefit costs is capitalized and amortized as part of deferred acquisition costs and is included in the income statement line titled "amortization of deferred policy acquisition costs." The portion not related to the compensation and the other components of net periodic pension and postretirement benefit costs is included in the income statement line titled "other underwriting expenses."

Employer Contributions

We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 that we expected to contribute $4,000 to the pension plan in 2019. For the six-month period ended June 30, 2019, we contributed $2,000 to the pension plan.

NOTE 6. STOCK-BASED COMPENSATION

Non-Qualified Employee Stock Award Plan

The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, restricted stock units, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of UFG common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of UFG common stock issuable at any time and from time to time pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc. Stock Plan (as amended, the "Stock Plan"). At June 30, 2019, there were 809,310 authorized shares remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees who are in positions of substantial responsibility with UFG.

Options granted pursuant to the Stock Plan are granted to buy shares of United Fire's common stock at the market value of the stock on the date of grant. Options granted prior to March 2017 vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. Options granted after March 2017 vest and are exercisable in installments of 33.3 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the Stock Plan are granted at the market value of UFG's common stock on the date of the grant. Restricted stock units fully vest after 3 years or 5 years from the date of grant, unless accelerated upon the approval of the Board of Directors, at which time UFG common stock will be issued to the awardee.

The activity in the Stock Plan is displayed in the following table:



Authorized Shares Available for Future Award Grants	Six Months Ended June 30, 2019		From Inception to June 30, 2019
Beginning balance	890,857		1,900,000
Additional shares authorized	—		1,500,000
Number of awards granted	(117,553	)	(3,140,620	)
Number of awards forfeited or expired	36,006		549,930
Ending balance	809,310		809,310
Number of option awards exercised	90,723		1,415,337
Number of unrestricted stock awards granted	—		9,370
Number of restricted stock awards vested	42,425		100,618

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Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan

The United Fire Group, Inc. 2005 Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan (the "Director Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of UFG's common stock to non-employee directors. At June 30, 2019, we had 34,863 authorized shares available for future issuance.

The Board of Directors has the authority to determine which non-employee directors receive awards, when options and restricted stock shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement (subject to limits set forth in the plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Plan.

The activity in the Director Plan is displayed in the following table:



Authorized Shares Available for Future Award Grants	Six Months Ended June 30, 2019		From Inception to June 30, 2019
Beginning balance	49,163		300,000
Number of awards granted	(14,300	)	(289,140	)
Number of awards forfeited or expired	—		24,003
Ending balance	34,863		34,863
Number of option awards exercised	1,131		119,092
Number of restricted stock awards vested	—		71,541

Stock-Based Compensation Expense

For the three-month periods ended June 30, 2019 and 2018, we recognized stock-based compensation expense of $1,357 and $1,437, respectively. For the six-month periods ended June 30, 2019 and 2018, we recognized stock-based compensation expense of $4,045 and $2,718, respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.

As of June 30, 2019, we had $8,114 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized over the remainder of 2019 and subsequent years according to the table below, except with respect to awards that are accelerated by the Board of Directors, in which case we will recognize any remaining compensation expense in the period in which the awards are accelerated.



2019	$	2,650
2020	3,614
2021	1,672
2022	178
2023	—
Total	$	8,114

NOTE 7. SEGMENT INFORMATION

On September 19, 2017, the Company announced that it had agreed to sell its subsidiary, United Life, to Kuvare. The sale closed on March 30, 2018. As a result, the life insurance business has been reported as discontinued operations in the Consolidated Financial Statements and all comparable prior periods have been presented to conform to the current period presentation. For more information, refer to Note 11. Discontinued Operations.

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

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from which it conducts its business. The life insurance segment operated from our home office in Cedar Rapids, Iowa. Because all of our insurance is sold domestically, we have no revenues from foreign operations.

After the announcement of the United Life transaction, our continuing operations, the property and casualty insurance business, was reported as one reportable segment. The property and casualty insurance business profit or loss is consistent with consolidated reporting as disclosed on the Consolidated Statements of Income and Comprehensive Income. We analyze the property and casualty insurance business results based on profitability (i.e., loss ratios), expenses and return on equity. The Company's property and casualty insurance business was determined using a management approach to make decisions on operating matters, including allocating resources, assessing performance, determining which products to market and sell, determining distribution networks with insurance agents and monitoring the regulatory environment. The property and casualty insurance business products have similar economic characteristics and use a similar marketing and distribution strategy with our independent agents. The property and casualty insurance business geographic concentration did not change after the announcement of the sale of the life insurance business. We will continue to evaluate our continuing operations on the basis of both statutory accounting principles prescribed or permitted by our states of domicile and GAAP.

NOTE 8. EARNINGS PER COMMON SHARE

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options, restricted stock awards and restricted stock unit awards.

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

The components of basic and diluted earnings per share were as follows for the three-month periods ended June 30, 2019 and 2018:



	Three Months Ended June 30,
(In Thousands, Except Share Data)	2019						2018
	Basic			Diluted			Basic		Diluted
Net income (loss) from continuing operations	$	(4,196	)	$	(4,196	)	$	157	$	157
Weighted-average common shares outstanding	25,210,354			25,210,354			24,976,563		24,976,563
Add dilutive effect of restricted stock unit awards	—			—			—		281,654
Add dilutive effect of stock options	—			—			—		353,556
Weighted-average common shares outstanding	25,210,354			25,210,354			24,976,563		25,611,773
Earnings (loss) per common share from continuing operations	$	(0.17	)	$	(0.17	)	$	0.01	$	0.01
Earnings (loss) per common share	$	(0.17	)	$	(0.17	)	$	0.01	$	0.01
Awards excluded from diluted earnings per share calculation⁽¹⁾	—			63,897			—		2,681


(1)	Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.

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The components of basic and diluted earnings per share were as follows for the six-month periods ended June 30, 2019 and 2018:



	Six Months Ended June 30,
(In Thousands, Except Share Data)	2019				2018
	Basic		Diluted		Basic			Diluted
Net income from continuing operations	$	40,325	$	40,325	$	20,521		$	20,521
Weighted-average common shares outstanding	25,170,877		25,170,877		24,946,335			24,946,335
Add dilutive effect of restricted stock unit awards	—		257,810		—			281,654
Add dilutive effect of stock options	—		231,116		—			354,719
Weighted-average common shares outstanding	25,170,877		25,659,803		24,946,335			25,582,708
Earnings per common share from continuing operations	$	1.60	$	1.57	$	0.82		$	0.80
Earnings (loss) per common share from discontinued operations	—		—		(0.08		)	(0.07		)
Gain on sale of discontinued operations, net of taxes	—		—		1.10			1.07
Earnings per common share	$	1.60	$	1.57	$	1.84		$	1.80
Awards excluded from diluted earnings per share calculation⁽¹⁾	—		63,897		—			2,681


(1)	Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.

NOTE 9. CREDIT FACILITY

On February 2, 2016, the Company, as borrower, entered into a Credit Agreement (the "Credit Agreement") by and among the Company, with the lenders from time to time party thereto and KeyBank National Association ("Key Bank"), as administrative agent, swingline lender and letter of credit issuer. The Credit Agreement provides for a $50,000 four-year unsecured revolving credit facility that includes a $20,000 letter of credit subfacility and a swingline subfacility in the amount up to $5,000. The Credit Agreement allows the Company to increase the aggregate amount of the commitments thereunder by up to $100,000, provided that no event of default has occurred and is continuing and certain other conditions are satisfied.

The Credit Agreement is available for the Company's general corporate purposes, including liquidity, acquisitions and working capital. All unpaid principal and accrued interest under the Credit Agreement is due and payable in full at maturity on February 2, 2020. Based on the type of loan, advances under the Credit Agreement would bear interest on either the London interbank offered rate ("LIBOR") or a base rate plus, in each case, a calculated margin amount.

The unused commitments under the Credit Agreement will be subject to a commitment fee that will be calculated at a per annum rate. The applicable margins for borrowings under the Credit Agreement and the commitment fee thereunder will be determined by reference to a pricing grid based on the Company’s issuer credit rating by A.M. Best Company, Inc.

The Credit Agreement contains customary representations, conditions to borrowing, covenants and events of default, including certain covenants that limit or restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to sell or transfer assets, enter into a merger or consolidate with another company, create liens, impose restrictions on subsidiary dividends, enter into sale-leaseback transactions, make investments or acquisitions, enter into certain reinsurance agreements, pay dividends during any period of default, enter into transactions with affiliates, change the nature of its business, or incur indebtedness. The Credit Agreement also includes financial covenants that require the Company to (i) maintain a minimum consolidated net worth, (ii) maintain a minimum consolidated statutory surplus and (iii) not exceed a 0.35 to 1.0 debt to total capitalization ratio.

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There was no outstanding balance on the Credit Agreement at June 30, 2019 and 2018, respectively. For the six-month periods ended June 30, 2019 and 2018, we did not incur any interest expense related to either credit facility. We were in compliance with all covenants of the Credit Agreement at June 30, 2019.

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the three-month period ended June 30, 2019:



				Liability for
	Net unrealized			underfunded
	appreciation			employee
	on investments			benefit costs⁽¹⁾			Total
Balance as of March 31, 2019	16,956			(20,261		)	$	(3,305	)
Change in accumulated other comprehensive income before reclassifications	22,592			—			22,592
Reclassification adjustments from accumulated other comprehensive income (loss)	(30		)	888			858
Balance as of June 30, 2019	$	39,518		$	(19,373	)	$	20,145

(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the six-month period ended June 30, 2019:



				Liability for
	Net unrealized			underfunded
	appreciation			employee
	on investments			benefit costs⁽¹⁾			Total
Balance as of January 1, 2019	(9,323		)	(21,149		)	$	(30,472	)
Change in accumulated other comprehensive income before reclassifications	48,941			—			48,941
Reclassification adjustments from accumulated other comprehensive income (loss)	(100		)	1,776			1,676
Balance as of June 30, 2019	$	39,518		$	(19,373	)	$	20,145

NOTE 11. DISCONTINUED OPERATIONS

On September 18, 2017, we signed a definitive agreement to sell our 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 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.

UFG has agreed to provide services to Kuvare through a transition services agreement ("TSA"). The TSA ensures a

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seamless transfer of the business between UFG and Kuvare. The TSA includes, among other considerations, accounting management, human resources, legal and information technology services, from the closing date for up to 24 months. Since the close date, the Company has received $717 as part of the TSA agreement.

Summary operating results of discontinued operations were as follows for the periods indicated:



Discontinued Operations
Statements of Income (Unaudited)
	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands, Except Share Data)	2019		2018		2019		2018

Revenues
Net premiums earned	$	—	$	—	$	—	$	13,003
Investment income, net of investment expenses	—		—		—		12,663
Net realized investment gains (losses)	—		—		—		(1,057		)
Other income	—		—		—		146
Total revenues	$	—	$	—	$	—	$	24,755

Benefits, Losses and Expenses
Losses and loss settlement expenses	$	—	$	—	$	—	$	10,823
Increase in liability for future policy benefits	—		—		—		5,023
Amortization of deferred policy acquisition costs	—		—		—		1,895
Other underwriting expenses	—		—		—		3,864
Interest on policyholders’ accounts	—		—		—		4,499
Total benefits, losses and expenses	$	—	$	—	$	—	$	26,104

Income (loss) from discontinued operations before income taxes	$	—	$	—	$	—	$	(1,349	)
Federal income tax expense	—		—		—		563
Net income (loss) from discontinued operations	$	—	$	—	$	—	$	(1,912	)
Earnings (loss) per common share from discontinued operations:
Basic	$	—	$	—	$	—	(0.08		)
Diluted	—		—		—		(0.07		)

Note: The sale of the life insurance business was completed on March 30, 2018.

The Company's Consolidated Statement of Cash Flows presents operating, investing and financing cash flows of the discontinued operations separately. The Company's cash management and financial management of both continued and discontinued operations is consolidated as a centralized corporate function in our Finance Department.

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NOTE 12. LEASES

The Company has operating leases consisting of office space, vehicle leases, computer equipment, and office equipment. Lease terms and options vary in the Company's operating leases dependent upon the underlying leased asset. We exclude options to extend or terminate a lease from our recognition as part of our right-of-use assets and lease liabilities until those options are known and/or executed, as we typically do not exercise options to purchase the underlying leased asset. As of June 30, 2019, we have leases with remaining terms of 1 year to 7 years, some of which may include no options for renewal and others with options to extend the lease terms from 6 months to 5 years.

The components of our operating leases were as follows:



	As of June 30, 2019

Components of lease expense:
Operating lease expense	$	3,820
Less sublease income	252
Net lease expense	3,568
Cash flows information related to leases:
Operating cash outflow from operating leases	3,608



Balance sheet information for operating leases:	As of June 30, 2019

Operating lease right-of-use assets (Other assets on Consolidated Balance Sheets)	$	18,398
Operating lease liabilities (Accrued expenses and other liabilities on Consolidated Balance Sheets)	18,884
Right-of-use assets obtained in exchange for new operating lease liabilities	467
Weighted average remaining lease term	3.50
Weighted average discount rate	4.80		%



Maturities of lease liabilities:	As of June 30, 2019
2019	$	3,800
2020	7,258
2021	5,256
2022	2,374
2023	1,293
Thereafter	298
Total lease payments	20,279
Less imputed interest	(1,395		)
Lease liability	$	18,884

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Part I, Item 1 "Financial Statements."

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our consolidated financial condition and results of operations on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are more fully described in our Management's Discussion and Analysis of Financial Condition and Results of Operations presented in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no changes in our critical accounting policies from December 31, 2018.

INTRODUCTION

The purpose of this Management's Discussion and Analysis is to provide an understanding of our results of operations and consolidated financial condition. Our Management's Discussion and Analysis should be read in conjunction with our Consolidated Financial Statements and related notes, including those in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018. Our Consolidated Financial Statements are prepared on the basis of GAAP. We also prepare financial statements for each of our insurance company subsidiaries based on statutory accounting principles and file them with insurance regulatory authorities in the states where they do business.

When we provide information on a statutory or other basis, we label it as such, otherwise all other data is presented in accordance with GAAP.

BUSINESS OVERVIEW

Founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our") and its consolidated insurance subsidiaries provide insurance protection for individuals and businesses through several regional offices. Our property and casualty insurance company subsidiaries are licensed in 46 states plus the District of Columbia and are represented by approximately 1,100 independent agencies.

Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, future policy benefits, underwriting and other operating expenses and interest on policyholders' accounts.

Discontinued Operations

On September 18, 2017, the Company signed a definitive agreement to sell its subsidiary, United Life Insurance Company ("United Life"), to Kuvare US Holdings, Inc. ("Kuvare"). The sale closed on March 30, 2018. The life insurance business has been accounted for as discontinued operations in the Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Cash Flows. All periods presented have been revised to show results from continuing and discontinued operations, as applicable, unless otherwise noted. For more information, refer to Part I, Item 1, Note 11. "Discontinued Operations."

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Reportable Segments

Subsequent to the announcement of the sale of the life insurance business on September 19, 2017, we have operated and report as one business segment. The life insurance business has been reported as discontinued operations for all periods presented in this Form 10-Q, as applicable, unless otherwise noted. For more information, refer to Part I, Item 1, Note 7. "Segment Information."

Pooling Arrangement

All of our property and casualty insurance subsidiaries are members of an intercompany reinsurance pooling arrangement. The Company's pooling arrangement permits the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant’s own surplus level.

Geographic Concentration

For the six-month period ended June 30, 2019, approximately 47.6 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri and Colorado.

Profit Factors

Our profitability is influenced by many factors, including price, competition, economic conditions, investment returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, prudent management of our investments, appropriate matching of assets and liabilities, effective use of ceded reinsurance and effective and efficient use of technology.

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FINANCIAL HIGHLIGHTS



	Three Months Ended June 30,								Six Months Ended June 30,
(In Thousands, Except Ratios)	2019			2018			%		2019			2018			%
Revenues
Net premiums earned	$	276,486		$	256,853		7.6	%	$	538,800		$	502,020		7.3	%
Investment income, net of investment expenses	14,120			17,249			(18.1	)	30,632			30,741			(0.4	)
Net realized investment gains (losses)
Change in the value of equity securities	12,499			305			NM		37,133			(8,883		)	NM
All other net realized gains	1,092			992			10.1		3,171			2,316			36.9
Net realized investment gains (losses)	13,591			1,297			NM		40,304			(6,567		)	NM
Total revenues	$	304,197		$	275,399		10.5	%	$	609,736		$	526,194		15.9	%

Benefits, Losses and Expenses
Losses and loss settlement expenses	$	220,009		$	189,146		16.3	%	$	384,249		$	333,874		15.1	%
Amortization of deferred policy acquisition costs	54,795			50,810			7.8		107,014			100,449			6.5
Other underwriting expenses	33,964			37,252			(8.8	)	68,367			72,107			(5.2	)
Total benefits, losses and expenses	$	308,768		$	277,208		11.4	%	$	559,630		$	506,430		10.5	%

Income (loss) from continuing operations before income taxes	$	(4,571	)	$	(1,809	)	152.7		$	50,106		$	19,764		153.5	%
Federal income tax expense (benefit)	(375		)	(1,966		)	(80.9	)	9,781			(757		)	NM
Net income (loss) from continuing operations	$	(4,196	)	$	157		NM		$	40,325		$	20,521		96.5	%
Loss from discontinued operations, net of tax	—			—			—	%	—			(1,912		)	(100.0	)%
Gain on sale of discontinued operations, net of tax	—			—			—	%	—			27,307			(100.0	)%
Net income (loss)	$	(4,196	)	$	157		NM		$	40,325		$	45,916		(12.2	)%

GAAP Ratios:
Net loss ratio (without catastrophes)	71.6		%	67.7		%	5.8	%	66.5		%	62.8		%	5.9	%
Catastrophes - effect on net loss ratio	8.0			5.9			35.6	%	4.8			3.7			29.7	%
Net loss ratio⁽¹⁾	79.6		%	73.6		%	8.2	%	71.3		%	66.5		%	7.2	%
Expense ratio⁽²⁾	32.1			34.3			(6.4	)%	32.6			34.4			(5.2	)%
Combined ratio⁽³⁾	111.7		%	107.9		%	3.5	%	103.9		%	100.9		%	3.0	%

(1) The net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our unaudited Consolidated Financial Statements.

(2) The expense ratio is calculated by dividing nondeferred underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance business.

(3) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.

NM = Not meaningful

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The following is a summary of our financial performance for the three- and six-month periods ended June 30, 2019:

RESULTS OF OPERATIONS

For the three-month period ended June 30, 2019, net loss was $4.2 million compared to net income of $0.2 million for the same period of 2018. In the three-month period ended June 30, 2019, an increase in catastrophe losses and unfavorable prior year reserve development were partially offset by an increase in realized gains on equity securities and an increase in net earned premiums. Net premiums earned increased to $276.5 million compared to $256.9 million for the same period of 2018 primarily due to rate increases, premium audits and endorsements.

For the six-month period ended June 30, 2019, net income was $40.3 million compared to net income of $45.9 million for the same period of 2018. In the six-month period ended June 30, 2019, there was an increase in net premiums earned and net realized gains on equity securities, partially offset by an increase in losses and loss settlement expenses driven by unfavorable prior year reserve development and an increase in catastrophe losses. Net premiums earned increased to $538.8 million compared to $502.0 million for the same period of 2018 primarily due to rate increases, premium audits and endorsements.

Investment income decreased by $3.1 million and $0.1 million during the three- and six-month periods ended June 30, 2019 compared to the same periods of 2018. The change in net investment income for the three-month period ended June 30, 2019 was due to lower appreciation in the value of our investments in limited liability partnerships. The valuation of these investments in limited liability partnerships varies from period to period due to current equity market conditions, specifically related to financial institutions. The change in net investment income for the six-month period ended June 30, 2019 was relatively flat due to assets under management remaining relatively flat for the year.

The increase in net realized investment gains of $12.3 million was primarily due to strong equity markets during the three-month period ended June 30, 2019, which resulted in an increase in the value of equity securities of $12.5 million compared to an increase of $0.3 million during the same period of 2018. For the six-month period ended June 30, 2019, the increase in net realized investment gains of $46.9 million was primarily due to an increase in the value of equity securities of $37.1 million compared to a decrease of $8.9 million in the same period of 2018.

Losses and loss settlement expenses increased by 16.3 percentage points during the three-month period ended June 30, 2019 compared to the same period of 2018. Losses and loss settlement expenses increased by 15.1 percentage points during the six-month period ended June 30, 2019 compared to the same period of 2018. The increase in both periods was primarily due to unfavorable prior year reserve development from reserve strengthening in our commercial auto and commercial liability lines of business in our Gulf Coast region.

The combined ratio increased 3.8 percentage points and 3.0 percentage points to 111.7 percent and 103.9 percent for the three- and six-month periods ended June 30, 2019, compared to 107.9 percent and 100.9 percent for the same periods of 2018. The increase in the combined ratio in the three- and six-month periods ended June 30, 2019 was primarily driven by an increase in the GAAP loss ratio from a combination of increased catastrophe losses and unfavorable prior year reserve development partially offset by a decrease in the expense ratio.

Pre-tax catastrophe losses in the second quarter of 2019 were higher compared to the second quarter of 2018, with catastrophe losses adding 8.0 percentage points to the combined ratio in 2019 compared to 5.9 percentage points in 2018. Our historical average for second quarter is 10.9 percentage points added to the combined ratio. Year-to-date, catastrophe losses added 4.8 percentage points in 2019 compared to 3.7 percentage points in 2018.

The GAAP net loss ratio excluding catastrophe losses deteriorated by 3.9 percentage points and 3.7 percentage points to 71.6 percent and 66.5 percent in the three- and six-month periods ended June 30, 2019, respectively, as compared to the same period of 2018, primarily due to unfavorable prior year reserve development in 2019 as previously mentioned. Excluding the impact of prior year development, our core loss ratio improved 3.5 percentage points and 6.8 percentage points, respectively, for the three- and six-month periods ended June 30, 2019, as compared to the same periods of 2018.

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The expense ratio was 32.1 percent and 32.6 percent, respectively, for the three- and six-month periods ended June 30, 2019, a decrease of 2.2 percentage points and 1.8 percentage points, respectively, as compared with the same periods of 2018. The decrease in the three- and six-month periods ended June 30, 2019 was primarily due to a decrease in employee benefit accruals and expenses due to post-retirement benefit plan amendments made at the end of 2018 and capitalization of development expenses for our multi-year Oasis project. The Oasis project is intended to upgrade our technology platform to enhance core underwriting decisions, selection of risks and productivity.

On March 30, 2018, the sale of United Life closed, resulting in a gain on sale of discontinued operations after-tax of $27.3 million.

For a detailed discussion of our investment results, refer to the "Investment Portfolio" section below.

Reserve Development

For many liability claims, significant periods of time, ranging up to several years, and for certain construction defect claims, more than a decade, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement or other disposition of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability. Reserves for these long-tail coverages represent a significant portion of our overall carried reserves.

When establishing reserves and monitoring reserve adequacy, we analyze historical data and consider the potential impact of various loss development factors and trends, including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long-tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific dollar impact of any individual factor on the development of reserves.

Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after information about a claim becomes available. This approach tends to produce, on average, prudently conservative case reserves, which we expect to result in some level of favorable development over the course of settlement.

2019 Development

The property and casualty insurance business experienced $9.4 million and $4.7 million, respectively, of unfavorable development in our net reserves for prior accident years for the three- and six-month periods ended June 30, 2019. For the three-month period ended June 30, 2019 the majority of unfavorable development was from commercial liability with $17.5 million unfavorable development, followed by assumed reinsurance which contributed $2.1 million of unfavorable development. The unfavorable development in commercial liability was primarily from paid loss and an increase in claim reserves along with prior year reserve strengthening on auto liability and other liability claims in our Gulf Coast region. The apparent adverse development for assumed reinsurance is attributed to the acquisition of a new reinsurance program. The loss portfolio transfer of reserves for prior accident years shows up as unfavorable development. All other lines of insurance, in total, contributed $10.2 million of favorable development during the quarter which partially offset the unfavorable development from commercial liability and assumed reinsurance. For the six-month period ended June 30, 2019 the majority of unfavorable development was from commercial liability with $16.0 million unfavorable development, followed by commercial fire and allied lines which contributed $2.4 million unfavorable development and then assumed reinsurance which contributed $1.2 million of unfavorable development. The unfavorable development in commercial liability was primarily from prior

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year reserve strengthening on auto liability and other liability claims in our Gulf Coast region. Commercial fire and allied lines developed unfavorably due to an increase in paid loss. Reductions in unpaid claim reserves did not fully offset paid loss, but loss adjustment expense did provide a partial offset to the loss development by contributing favorable development. The apparent adverse development for assumed reinsurance is attributed to the acquisition of a new reinsurance program which was noted when discussing quarterly results above. All other lines of insurance, in total, contributed $14.9 million of favorable development during the year, which partially offset unfavorable development from commercial liability, commercial fire and allied and assumed reinsurance.

2018 Development

The property and casualty insurance business experienced $10.3 million of favorable development and $48.4 million of favorable development in our net reserves for prior accident years for the three- and six-month periods ended June 30, 2018, respectively. For the three-month period ended June 30, 2018, the two lines contributing the majority of favorable development were workers compensation with $10.5 million favorable development and reinsurance assumed with $3.2 million favorable development. During the three-month period ended June 30, 2018 three individual lines experienced unfavorable development, which totaled $6.0 million. Essentially all of the unfavorable development came from two lines: commercial fire and allied lines, with $3.7 million unfavorable development, and commercial other liability, with $2.3 million unfavorable development. For the six-month period ended June 30, 2018 the majority of favorable development came from three lines: commercial automobile with $15.0 million favorable development: workers compensation with $14.5 million favorable development; and commercial other liability, with $12.7 million favorable development. During the six-month period ended June 30, 2018, the only line with unfavorable development was reinsurance assumed, with $1.2 million unfavorable development. The favorable development was attributable to our continued litigation management efforts as well as favorable runoff of reserves for reported claims, reserves for incurred but not reported claims, and reserves for general loss adjustment expenses.

Development amounts can vary significantly from quarter-to-quarter and year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business. At June 30, 2019, our total reserves were within our actuarial estimates.

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The following tables display our net premiums earned, net losses and loss settlement expenses and net loss ratio by line of business:



Three Months Ended June 30,	2019							2018
			Net Losses							Net Losses
			and Loss							and Loss
	Net		Settlement			Net		Net		Settlement			Net
(In Thousands, Except Ratios)	Premiums		Expenses			Loss		Premiums		Expenses			Loss
Unaudited	Earned		Incurred			Ratio		Earned		Incurred			Ratio
Commercial lines
Other liability	$	79,452	$	57,582		72.5	%	$	76,309	$	38,503		50.5	%
Fire and allied lines	60,615		55,851			92.1		57,996		51,101			88.1
Automobile	78,472		69,766			88.9		69,709		66,090			94.8
Workers compensation	22,621		9,378			41.5		23,633		17,002			71.9
Fidelity and surety	6,146		(650		)	(10.6	)	5,742		291			5.1
Miscellaneous	436		99			22.7		428		193			45.1
Total commercial lines	$	247,742	$	192,026		77.5	%	$	233,817	$	173,180		74.1	%

Personal lines
Fire and allied lines	$	10,302	$	14,386		139.6	%	$	10,396	$	9,359		90.0	%
Automobile	7,698		6,809			88.5		7,227		6,213			86.0
Miscellaneous	307		552			179.8		301		(167		)	(55.5	)
Total personal lines	$	18,307	$	21,747		118.8	%	$	17,924	$	15,405		85.9	%
Reinsurance assumed	$	10,437	$	6,236		59.7	%	$	5,112	$	561		11.0	%
Total	$	276,486	$	220,009		79.6	%	$	256,853	$	189,146		73.6	%

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Six Months Ended June 30,	2019							2018
			Net Losses							Net Losses
			and Loss							and Loss
	Net		Settlement			Net		Net		Settlement			Net
(In Thousands, Except Ratios)	Premiums		Expenses			Loss		Premiums		Expenses			Loss
Unaudited	Earned		Incurred			Ratio		Earned		Incurred			Ratio
Commercial lines
Other liability	$	157,879	$	95,857		60.7	%	$	151,902	$	63,806		42.0	%
Fire and allied lines	119,789		92,637			77.3		115,395		85,330			73.9
Automobile	153,706		140,337			91.3		136,403		120,037			88.0
Workers compensation	44,496		15,323			34.4		46,974		29,062			61.9
Fidelity and surety	12,521		(901		)	(7.2	)	11,215		949			8.5
Miscellaneous	863		—			—		853		377			44.2
Total commercial lines	$	489,254	$	343,253		70.2	%	$	462,742	$	299,561		64.7	%

Personal lines
Fire and allied lines	$	20,522	$	20,668		100.7	%	$	20,834	$	16,760		80.4	%
Automobile	15,180		12,476			82.2		14,236		11,970			84.1
Miscellaneous	608		484			79.6		596		(272		)	(45.6	)
Total personal lines	$	36,310	$	33,628		92.6	%	$	35,666	$	28,458		79.8	%
Reinsurance assumed	$	13,236	$	7,368		55.7	%	$	3,612	$	5,855		162.1	%
Total	$	538,800	$	384,249		71.3	%	$	502,020	$	333,874		66.5	%

Below are explanations regarding significant changes in the net loss ratios by line of business:


•	Other liability - The net loss ratio deteriorated 22.0 and 18.7 percentage points, respectively, in the three- and six-month periods ended June 30, 2019, compared to the same periods of 2018. The deterioration in both periods is primarily due to prior year unfavorable reserve development in our Gulf Coast region.

•

Commercial automobile - The net loss ratio improved 5.9 and deteriorated 3.3 percentage points, respectively, in the three- and six-month periods ended June 30, 2019, compared to the same periods of 2018. The quarterly improvement is attributable to loss adjustment expense which saw favorable changes for both the paid amount and the reserve for unpaid loss adjustment expense while incurred loss was essentially unchanged. The year-to-date deterioration is primarily attributable to prior year reserve strengthening in our Gulf Coast region and to a lesser extent, an increase in paid losses.


•	Workers compensation - The net loss ratio improved 30.4 and 27.5 percentage points, respectively, in the three- and six-month periods ended June 30, 2019 compared to the same periods of 2018. This improvement is attributable to a decrease in severity of losses over $0.5 million.

•

Fidelity and surety - The net loss ratio improved 15.7 and 15.7 percentage points, respectively, in the three- and six-month periods ended June 30, 2019, compared to the same periods of 2018. The improvement is attributable to favorable changes for paid loss and paid loss adjustment expense, both of which were lower for 2019 vs. 2018 because 2018 had experienced significant payments for a large single claim.


•	Personal fire and allied lines -The net loss ratio deteriorated 49.6 and 20.3 percentage points, respectively, in the three- and six-month periods ended June 30, 2019, compared to the same periods of 2018. The

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deterioration is attributable to significantly more storm claims in 2019 vs. 2018 which increased paid loss and also reserves for unpaid claims.

•

Reinsurance assumed - The net loss ratio deteriorated 48.7 and improved 106.4 percentage points, respectively, in the three- and six-month periods ended June 30, 2019, compared to the same periods of 2018. Comparisons of results for 2019 vs. 2018 need to consider effects of a new reinsurance program which resulted in a portfolio transfer of premiums and reserves for prior accident years in the second quarter of 2019.

Financial Condition

Stockholders' equity increased to $968.3 million at June 30, 2019, from $888.4 million at December 31, 2018. The increase was primarily attributed to net income of $40.3 million and an increase in net unrealized investment gains of $48.8 million, net of tax, partially offset by shareholder dividends of $16.1 million.

At June 30, 2019, the book value per share of our common stock was $38.36. During the six-month period ended June 30, 2019, 1,507 shares of common stock were repurchased for a total of $69. Under our share repurchase program, which is scheduled to expire on August 31, 2020, we were authorized to repurchase an additional 2,114,693 shares of our common stock as of June 30, 2019.

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Discontinued Operations Results



	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2019		2018		2019		2018
Revenues
Net premiums earned	$	—	$	—	$	—	$	13,003
Investment income, net of investment expenses	—		—		—		12,663
Net realized investment gains (losses)	—		—		—		(1,057		)
Other income	—		—		—		146
Total revenues	$	—	$	—	$	—	$	24,755

Benefits, Losses and Expenses
Losses and loss settlement expenses	$	—	$	—	$	—	$	10,823
Increase in liability for future policy benefits	—		—		—		5,023
Amortization of deferred policy acquisition costs	—		—		—		1,895
Other underwriting expenses	—		—		—		3,864
Interest on policyholders' accounts	—		—		—		4,499
Total benefits, losses and expenses	$	—	$	—	$	—	$	26,104

Loss from discontinued operations, before income taxes	$	—	$	—	$	—	$	(1,349	)

The sale of our discontinued operations closed on March 30, 2018, and therefore no income attributable to that business was earned in the first and second quarter of 2019. For the six-month period ended June 30, 2018, our discontinued operations had a loss before income taxes of $1.3 million.

Investment Portfolio

Our invested assets totaled $2.1 billion at June 30, 2019, compared to $2.1 billion at December 31, 2018, an increase of $13.8 million. At June 30, 2019, fixed maturity securities and equity securities made up 82.4 percent and 13.6 percent of the value of our investment portfolio, respectively. Because the primary purpose of our investment portfolio is to fund future claims payments, we use a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to keep our cash on hand low in the current interest rate environment. If additional cash is needed, we can borrow funds available under our revolving credit facility.

Composition

We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation, regulatory requirements, interest rates and credit quality of assets. We administer our investment portfolio based on investment guidelines approved by management and the investment committee of our Board of Directors that comply with applicable statutory regulations.

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The composition of our investment portfolio at June 30, 2019 is presented at carrying value in the following table:




	Total
			Percent
(In Thousands, Except Ratios)			of Total
Fixed maturities ⁽¹⁾
Available-for-sale	$	1,703,319	81.6	%
Trading securities	17,143		0.8
Equity securities	283,178		13.6
Mortgage loans	36,374		1.7
Other long-term investments	47,772		2.3
Short-term investments	175		—
Total	$	2,087,961	100.0	%

(1) Available-for-sale securities and trading fixed maturities are carried at fair value.

At both June 30, 2019 and December 31, 2018, we classified $1.7 billion, or 99.0 percent, and $1.7 billion, or 99.2 percent, respectively, of our fixed maturities portfolio as available-for-sale. We classify our remaining fixed maturities as trading. We record available-for-sale fixed maturity securities at fair value, with any changes in fair value recognized in accumulated other comprehensive income. We record trading securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings.

As of June 30, 2019 and December 31, 2018, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.

Credit Quality

The table below shows the composition of fixed maturity securities held in our available-for-sale, held-to-maturity and trading security portfolios, by credit rating at June 30, 2019 and December 31, 2018. Information contained in the table is generally based upon the issued credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain credit ratings from Standard & Poor's.



(In Thousands, Except Ratios)	June 30, 2019				December 31, 2018
Rating	Carrying Value		% of Total		Carrying Value		% of Total
AAA	$	676,966	39.3	%	$	734,471	41.7	%
AA	689,927		40.1		684,863		38.9
A	176,984		10.3		178,282		10.1
Baa/BBB	164,462		9.6		157,349		8.9
Other/Not Rated	12,123		0.7		7,763		0.4
	$	1,720,462	100.0	%	$	1,762,728	100.0	%

Duration

Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement we use to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.

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Investment Results

We invest the premiums received from our policyholders in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Our net investment income from continuing operations decreased by 18.1% percent and 0.4% in the three- and six-month periods ended June 30, 2019, compared with the same period of 2018. The change in net investment income for the three-month period ended June 30, 2019 was due to lower appreciation in the value of our investments in limited liability partnerships and not due to a change in our investment philosophy. The valuation of these investments in limited liability partnerships varies from period to period due to current equity market conditions, specifically related to financial institutions.

We hold certain investments in limited liability partnerships that are recorded on the equity method of accounting, with changes in value of these investments recorded in investment income. In the three- and six-month periods ended June 30, 2019, the change in value of our investments in limited liability partnerships from continuing operations resulted in investment income of $0.1 million and $2.6 million, respectively, as compared to an increase of $3.1 million and $4.5 million, respectively, in investment income in the same periods of 2018. This resulted in a decrease of $3.0 million and $1.9 million, respectively, in investment income in the three- and six-month periods ended June 30, 2019.

Our net realized investment gains were $13.6 million and $40.3 million, respectively, during the three- and six-month periods ended June 30, 2019, as compared with net realized investment gains of $1.3 million and net realized investment losses of $6.6 million in the same period of 2018. $12.2 million of the $12.3 million change in the three-month period ended June 30, 2019 as compared to the same period in 2018 is due to the change in the fair value of equity securities. $46.0 million of the $46.9 million change in the six-month period ended June 30, 2019 as compared to the same period in 2018 is due to the change in the fair value of equity securities.

We regularly monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.

Changes in unrealized gains and losses on available-for-sale securities do not affect net income and earnings per share but do impact comprehensive income, stockholders' equity and book value per share. We believe that any unrealized losses on our available-for-sale securities at June 30, 2019 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. It is possible that we could recognize impairment charges in future periods on securities that we own at June 30, 2019 if future events and information cause us to determine that a decline in value is other-than-temporary. However, we endeavor to invest in high-quality assets to provide protection from future credit quality issues and corresponding other-than-temporary impairment write-downs. In the six-month periods ended June 30, 2019 and 2018, there were no other-than-temporary impairment write-downs.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations. Our cash inflows are primarily a result of the receipt of premiums, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of losses and loss settlement expenses, the purchase of investments, operating expenses, dividends, pension plan contributions, and in recent years, common stock repurchases.

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We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed by regulatory agencies in the United States.

Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes.

Historically, we have generated substantial cash inflows from operations. It is our policy to invest the cash generated from operations in securities with maturities that, in the aggregate, correlate to the anticipated timing of payments for losses and loss settlement expenses. The majority of our assets are invested in available-for-sale fixed maturity securities.

The following table displays a consolidated summary of cash sources and uses for the six-month periods ended June 30, 2019 and 2018 from continuing and discontinued operations:



Cash Flow Summary	Six Months Ended June 30,
(In Thousands)	2019			2018
Cash provided by (used in)
Operating activities	$	36,276		$	65,647
Investing activities	62,600			(27,677		)
Financing activities	(14,546		)	(25,873		)
Net increase in cash and cash equivalents	$	84,330		$	12,097

In the Consolidated Statement of Cash Flows, cash flows from discontinued operations are shown in separate lines in each of the operating, investing and financing sections of the Cash Flow Statement. Our cash flows from continuing operations were sufficient to meet our current liquidity needs for the six-month periods ended June 30, 2019 and 2018 and we anticipate they will be sufficient to meet our future liquidity needs.

Operating Activities

Net cash flows provided by operating activities totaled $36.3 million and $65.6 million for the six-month periods ended June 30, 2019 and 2018, respectively.

Investing Activities

Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturities provide regular interest payments and allow us to match the duration of our liabilities. Equity securities provide dividend income, potential dividend income growth and potential appreciation. For further discussion of our investments, including our philosophy and our strategy for our portfolio, see the "Investment Portfolio" section of this Item 2.

In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed maturity securities also can provide liquidity. During the next five years, $279.4 million, or 16.2 percent, of our fixed maturity portfolio will mature.

We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At June 30, 2019, our cash and cash equivalents included $17.7 million related to these money market accounts, compared to $3.3 million at December 31, 2018.

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Net cash flows provided by investing activities was $62.6 million and used by investing activities was $27.7 million for the six-month periods ended June 30, 2019 and 2018, respectively. For the six-month periods ended June 30, 2019 and 2018, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments, from continuing operations of $150.6 million and $90.5 million, respectively. We also had net cash inflows from the sale of discontinued operations of $276.1 million for the six-month period ended June 30, 2018.

Our cash outflows for investment purchases from continuing operations were $67.1 million for the six-month period ended June 30, 2019, compared to $395.5 million for the same period of 2018.

Financing Activities

Net cash flows used in financing activities from continuing operations was $14.5 million for the six-month period ended June 30, 2019 which increased $0.2 million compared to $14.3 million used in the six-month period ended June 30, 2018.

Credit Facilities

On February 2, 2016, the Company, as borrower, entered into a credit agreement by and among the Company, with the lenders from time to time party thereto and KeyBank National Association, as administrative agent, swingline lender and letter of credit issuer. As of June 30, 2019 and 2018, there were no balances outstanding under this credit agreement. For further discussion of our credit agreement, refer to Part I, Item 1, Note 9. "Credit Facility."

Dividends

Dividends paid to shareholders totaled $16.1 million and $14.7 million in the six-month periods ended June 30, 2019 and 2018, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.

Payments of any future dividends and the amounts of such dividends will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds.

As a holding company with no independent operations of its own, we rely on dividends received from our insurance company subsidiaries in order to pay dividends to our common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled, and if applicable, commercially domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at June 30, 2019, UFG's sole direct insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $109.2 million in dividend payments without prior regulatory approval. These restrictions will not have a material impact in meeting the cash obligations of UFG.

Stockholders' Equity

Stockholders' equity increased 9.0 percent to $968.3 million at June 30, 2019, from $888.4 million at December 31, 2018. The increase was primarily attributed to net income of $40.3 million and an increase in net unrealized investment gains of $48.8 million, net of tax, during the first six months of 2019, partially offset by shareholder dividends of $16.1 million. At June 30, 2019, the book value per share of our common stock was $38.36 compared to $35.40 at December 31, 2018.

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OFF BALANCE SHEET ARRANGEMENTS

Funding Commitments

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 $17.8 million at June 30, 2019.

MEASUREMENT OF RESULTS

Management evaluates our operations by monitoring key measures of growth and profitability. The following section provides further explanation of the key measures management uses to evaluate our results.

Catastrophe losses is a commonly used financial measure that uses the designations of the Insurance Services Office (ISO) and are reported with losses and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25.0 million or more in U.S. industry-wide direct insured losses to property and that affect a significant number of insureds and insurers ("ISO catastrophe"). In addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may include U.S. or international losses that we believe are, or will be, material to our operations, either in amount or in number of claims made. Management, at times, may determine for comparison purposes that it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation. The frequency and severity of catastrophe losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance business, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in our periodic earnings.



	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2019		2018		2019		2018
ISO catastrophes	$	19,549	$	15,111	$	23,095	$	18,549
Non-ISO catastrophes ⁽¹⁾	2,456		4		2,541		(73		)
Total catastrophes	$	22,005	$	15,115	$	25,636	$	18,476

(1) This number includes international assumed losses.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have exposure to market risk arising from potential losses in our investment portfolio due to adverse changes in interest rates and market prices. However, we have the ability to hold fixed maturity investments to maturity. Our investment guidelines define the overall framework for managing our market and other investment risks, including accountability and controls. In addition, each of our subsidiaries has specific investment policies that delineate the investment limits and strategies that are appropriate given each entity's liquidity, surplus, product, and regulatory requirements. We respond to market risk by managing the character of investment purchases.

It is our philosophy that we do not utilize financial hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but attempt to mitigate our exposure through active portfolio management. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer. At June 30, 2019, we did not have direct exposure to investments in sub-prime mortgages or other credit-enhancement exposures.

While our primary market risk exposure is to changes in interest rates, we do have limited exposure to changes in equity prices and limited exposure to foreign currency exchange rates.

There have been no material changes in our market risk or market risk factors from what we reported in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control Over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, no such change in our internal control over financial reporting occurred during the fiscal quarter to which this report relates.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its business, the Company is a party to a variety of legal proceedings. While the final outcome of these legal proceedings cannot be predicted with certainty, management believes all of the proceedings pending as of June 30, 2019 to be ordinary and routine and does not expect these legal proceedings to have a material adverse effect on the Company's financial condition or results of operations.

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks, including those identified in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019, that could have a material effect on our business, results of operations, financial condition, and/or liquidity and that could cause our operating results to vary significantly from period to period. The risks described in the above mentioned report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also have a material effect on our business, results of operations, financial condition and/or liquidity.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Under our share repurchase program, first announced in August 2007, we may purchase UFG common stock from time to time on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at our discretion and will depend upon a number of factors, including the share price, general economic and market conditions, and corporate and regulatory requirements.

The following table provides information with respect to purchases of shares of common stock made by or on our behalf or by any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, during the three-month period ended June 30, 2019:



				Total Number of Shares	Maximum Number of
	Total			Purchased as a Part of	Shares that may yet be
	Number of	Average Price		Publicly Announced	Purchased Under the
Period	Shares Purchased	Paid per Share		Plans or Programs	Plans or Programs⁽¹⁾
4/1/2019 - 4/30/2019	—	$	—	—	2,116,200
5/1/2019 - 5/31/2019	1,507	45.93		1,507	2,114,693
6/1/2019 - 6/30/2019	—	—		—	2,114,693
Total	1,507	$	45.93	1,507	2,114,693

(1) Our share repurchase program was originally announced in August 2007. In August 2016, our Board of Directors authorized the repurchase of up to an additional 1,500,000 shares of common stock through the end of August 2018. This is in addition to the 1,528,886 shares of common stock remaining under its previous authorizations. In August 2018, our Board of Directors extended our share repurchase program through the end of August, 2020. As of June 30, 2019 we remained authorized to repurchase 2,114,693 shares of common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBIT INDEX



Exhibit number	Exhibit description	Furnished herewith	Filed herewith
31.1	Certification of Randy A. Ramlo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		X
31.2	Certification of Dawn M. Jaffray pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		X
32.1	Certification of Randy A. Ramlo pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
32.2	Certification of Dawn M. Jaffray pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
101.1	The following financial information from United Fire Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 formatted in iXBRL(Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018; (ii) Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and six-months ended June 30, 2019 and 2018; (iii) Consolidated Statement of Stockholders’ Equity (unaudited) for the three- and six-months ended June 30, 2019 and 2018; (iv) Consolidated Statements of Cash Flows (unaudited) for the three- and six-months ended June 30, 2019 and 2018; and (v) Notes to Unaudited Consolidated Financial Statements, tagged as a block of text.		X

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



UNITED FIRE GROUP, INC.
(Registrant)

/s/ Randy A. Ramlo		/s/ Dawn M. Jaffray
Randy A. Ramlo		Dawn M. Jaffray
President, Chief Executive Officer, Director and Principal Executive Officer		Executive Vice President, Chief Financial Officer and Principal Accounting Officer


August 7, 2019		August 7, 2019
(Date)		(Date)