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UNITED FIRE GROUP INC - Quarter Report: 2020 September (Form 10-Q)

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

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34257
ufcs-20200930_g1.gif
________________________
 UNITED FIRE GROUP INC.
(Exact name of registrant as specified in its charter)
Iowa 45-2302834
(State of incorporation) (I.R.S. Employer Identification No.)
118 Second Avenue SE
Cedar RapidsIowa
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 classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par valueUFCSThe NASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

As of November 2, 2020, 25,031,234 shares of common stock were outstanding.

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United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
September 30, 2020
 Page
 
 
 

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FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "remain(s) optimistic," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our other filings with the Securities and Exchange Commission ("SEC") for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:
•The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy; the occurrence of catastrophic events, including international events, significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics, including the ongoing impact of the novel coronavirus (COVID-19) pandemic;
•The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses;
•Geographic concentration risk in our property and casualty insurance business;
•The potential disruption of our operations and reputation due to unauthorized data access, cyber-attacks or cyber-terrorism and other security breaches;
•Developments in general economic conditions, domestic and global financial markets, interest rates and other-than-temporary impairment losses that could affect the performance of our investment portfolio;
•Litigation or regulatory actions that could require us to pay significant damages, fines or penalties or change the way we do business;
•Our ability to effectively underwrite and adequately price insured risks;
•Changes in industry trends, an increase in competition and significant industry developments;
•Lowering of one or more of the financial strength ratings of our operating subsidiaries or our issuer credit ratings and the adverse impact such action may have on our premium writings, policy retention, profitability and liquidity;
•Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and other federal stimulus relief legislation, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions; changes in laws, regulations and stock exchange requirements relating to corporate governance and the cost of compliance;
•Our relationship with and the financial strength of our reinsurers; and
•Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network.
These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)September 30,
2020		 December 31,
2019
 (unaudited)  
ASSETS   
Investments   
Fixed maturities   
Available-for-sale, at fair value (amortized cost $1,612,626 in 2020 and $1,659,760 in 2019; allowance for credit losses $8 in 2020 and $— in 2019)
$1,717,039  $1,719,607 
Trading securities, at fair value (amortized cost $12,258 in 2020 and $11,941 in 2019)
14,811 15,256 
Equity securities at fair value (cost $61,467 in 2020 and $67,529 in 2019)
198,791 299,203 
Mortgage loans47,809  42,520 
Less: allowance for mortgage loan losses76  72 
Mortgage loans, net47,733 42,448 
Other long-term investments62,903  78,410 
Short-term investments175  175 
2,041,452  2,155,099 
Cash and cash equivalents99,604  120,722 
Accrued investment income15,028  15,182 
Premiums receivable (net of allowance for doubtful accounts of $812 in 2020 and $1,239 in 2019)
352,150  357,632 
Deferred policy acquisition costs94,223  94,292 
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $54,145 in 2020 and $50,183 in 2019)
127,990  116,989 
Reinsurance receivables and recoverables (net of allowance for credit losses of $241 in 2020 and $— in 2019)
199,920  72,369 
Prepaid reinsurance premiums12,284  9,550 
Goodwill and intangible assets6,920 22,542 
Income taxes receivable57,388 19,190 
Other assets41,521  29,905 
TOTAL ASSETS$3,048,480  $3,013,472 
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Liabilities   
Future policy benefits and losses, claims and loss settlement expenses   
Losses and loss settlement expenses$1,555,083  $1,421,754 
Unearned premiums499,730  505,162 
Accrued expenses and other liabilities156,874  155,498 
Deferred tax liability16,511  20,586 
TOTAL LIABILITIES$2,228,198  $2,103,000 
Stockholders’ Equity   
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,031,234 and 25,015,963 shares issued and outstanding in 2020 and 2019, respectively
$25  $25 
Additional paid-in capital200,849  200,179 
Retained earnings568,501  697,116 
Accumulated other comprehensive income, net of tax50,907  13,152 
TOTAL STOCKHOLDERS’ EQUITY$820,282  $910,472 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$3,048,480  $3,013,472 
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
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United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands, Except Share Data)2020 201920202019
Revenues   
Net premiums earned$259,061  $274,942 $791,519 $813,742 
Investment income, net of investment expenses7,244  13,291 22,303 43,923 
Net realized investment gains (losses) (includes reclassifications for net unrealized investment gains/(losses) on available-for-sale securities of $54 and $13 in 2020 and $130 and $257 in 2019; previously included in accumulated other comprehensive income)
15,212 9,822 (62,416)50,126 
Other income604  — 6,323 — 
Total revenues$282,121  $298,055 $757,729 $907,791 
Benefits, Losses and Expenses  
Losses and loss settlement expenses$234,693  $211,752 $626,169 $596,001 
Amortization of deferred policy acquisition costs52,095  54,828 158,440 161,842 
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,072 and $3,217 in 2020 and $1,124 and $3,372 in 2019; previously included in accumulated other comprehensive income)
35,470  36,003 114,020 104,370 
Goodwill impairment15,091 — 15,091 — 
Total benefits, losses and expenses$337,349  $302,583 $913,720 $862,213 
Income (loss) before income taxes$(55,228) $(4,528)$(155,991)$45,578 
Federal income tax expense (benefit) (includes reclassifications of $213 and $672 in 2020 and $209 and $654 in 2019; previously included in accumulated other comprehensive income)
(17,987) (2,186)(52,176)7,595 
Net Income (loss)$(37,241)$(2,342)$(103,815)$37,983 
Other comprehensive income (loss)
Change in net unrealized appreciation on investments$4,116  $15,410 $44,586  $77,360 
Change in liability for underfunded employee benefit plans— — — — 
Other comprehensive income, before tax and reclassification adjustments$4,116  $15,410 $44,586  $77,360 
Income tax effect(864) (3,237)(9,363) (16,246)
Other comprehensive income, after tax, before reclassification adjustments$3,252  $12,173 $35,223  $61,114 
Reclassification adjustment for net realized investment (gains) losses included in income$(54) $(130)$(13) $(257)
Reclassification adjustment for employee benefit costs included in expense1,072  1,124 3,217  3,372 
Total reclassification adjustments, before tax$1,018 $994 $3,204 $3,115 
Income tax effect(213)(209)(672)(654)
Total reclassification adjustments, after tax$805 $785 $2,532 $2,461 
Comprehensive income (loss)$(33,184) $10,616 $(66,060) $101,558 
Diluted weighted average common shares outstanding25,031,234  25,176,334 25,023,401 25,643,744 
Earnings (loss) per common share:
Basic$(1.49)$(0.09)$(4.15)$1.51 
Diluted (1.49)(0.09)(4.15)1.48 
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
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United Fire Group, Inc.
Consolidated Statement of Stockholders’ Equity (Unaudited)

Common Stock
(In Thousands, Except Share Data)Shares outstandingCommon stockAdditional paid-in capitalRetaining EarningsAccumulated other comprehensive incomeTotal
 
Balance, January 1, 202025,015,963 $25 $200,179 $697,116 $13,152 $910,472 
Net income (loss)— — — (72,534)— (72,534)
Shares repurchased(70,467)— (2,741)— — (2,741)
Stock based compensation70,597 — 879 — — 879 
Dividends on common stock ($0.33 per share)
— — — (8,249)— (8,249)
Change in net unrealized investment appreciation(1)
— — — — 4,500 4,500 
Change in liability for underfunded employee benefit plans(2)
— — — — 847 847 
Cumulative effect of change in accounting principle— — — (30)— (30)
Balance, March 31, 202025,016,093 $25 $198,317 $616,303 $18,499 $833,144 
Net income— $— $— $5,960 $— $5,960 
Stock based compensation15,141 — 1,479 — — 1,479 
Dividends on common stock ($0.33 per share)
— — — (8,267)— (8,267)
Change in net unrealized investment appreciation(1)
— — — — 27,504 27,504 
Change in liability for underfunded employee benefit plans(2)
— — — — 847 847 
Balance, June 30, 202025,031,234 $25 $199,796 $613,996 $46,850 $860,667 
Net income (loss)— $— $— $(37,241)$— $(37,241)
Stock based compensation— — 1,053 — — 1,053 
Dividends on common stock ($0.33 per share)
— — — (8,254)— (8,254)
Change in net unrealized investment appreciation(1)
— — — — 3,209 3,209 
Change in liability for underfunded employee benefit plans(2)
— — — — 848 848 
Balance, September 30, 202025,031,234 $25 $200,849 $568,501 $50,907 $820,282 
(1)The change in net unrealized appreciation is net of reclassification adjustments and income taxes.
(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.


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Common Stock
(In Thousands, Except Share Data)Shares outstandingCommon stockAdditional paid-in capitalRetaining EarningsAccumulated other comprehensive incomeTotal
 
Balance, January 1, 201925,097,408 $25 $203,350 $715,472 $(30,472)$888,375 
Net income— — — 44,521 — 44,521 
Stock based compensation70,414 — 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, 201925,167,822 $25 $206,788 $751,683 $(3,305)$955,191 
Net income (loss)$— $— $— $(4,196)$— $(4,196)
Shares repurchased(1,507)— (69)— — (69)
Stock based compensation78,885 — 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, 201925,245,200 $25 $208,971 $739,162 $20,145 $968,303 
Net income (loss)$— $— $— $(2,342)$— $(2,342)
Shares repurchased(177,249)— (8,058)— — (8,058)
Stock based compensation13,775 — 1,591 — — 1,591 
Dividends on common stock $0.33 per share)
— — — (8,284)— (8,284)
Change in net unrealized investment appreciation(1)
— — — — 12,070 12,070 
Change in liability for underfunded employee benefit plans(2)
— — — — 888 888 
Balance, September 30, 201925,081,726 $25 $202,504 $728,536 $33,103 $964,168 
(1)The change in net unrealized appreciation is net of reclassification adjustments and income taxes.
(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.



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United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30,
(In Thousands)2020 2019
Cash Flows From Operating Activities   
Net income (loss)$(103,815) $37,983 
Adjustments to reconcile net income to net cash provided by (used in) operating activities 
Net accretion of bond premium7,719  7,074 
Depreciation and amortization5,009  4,235 
Goodwill impairment15,091 — 
Stock-based compensation expense3,979  5,248 
Net realized investment (gains) losses62,416  (50,126)
Net cash flows from equity and trading investments37,552  911 
Deferred income tax benefit(21,824) 8,829 
Changes in: 
Accrued investment income154  170 
Premiums receivable5,482  (40,792)
Deferred policy acquisition costs69  (5,704)
Reinsurance receivables(127,551) 3,664 
Prepaid reinsurance premiums(2,734) (887)
Income taxes receivable(38,198) 3,029 
Other assets(11,616) (17,645)
Losses and loss settlement expenses133,329  48,056 
Unearned premiums(5,432) 35,296 
Accrued expenses and other liabilities4,593  16,821 
Deferred income taxes7,713  (434)
Other, net15,196  437 
Cash from operating activities90,947 18,182 
Net cash provided by (used in) operating activities$(12,868) $56,165 
Cash Flows From Investing Activities   
Proceeds from sale of available-for-sale investments$16,907  $36,490 
Proceeds from call and maturity of available-for-sale investments239,438  206,478 
Proceeds from sale of other investments5,391  3,607 
Purchase of investments in mortgage loans(5,564) (10,723)
Purchase of investments available-for-sale(216,001)(151,528)
Purchase of other investments(4,829) (16,939)
Purchase of property and equipment$(15,506) (27,796)
Net cash provided by investing activities19,836 39,589 
Cash Flows From Financing Activities   
Issuance of common stock$(568)$2,033 
Repurchase of common stock(2,741)(8,127)
Payment of cash dividends(24,777)(24,406)
Net cash used in financing activities$(28,086)(30,500)
Net Change in Cash and Cash Equivalents$(21,118) $65,254 
Cash and Cash Equivalents at Beginning of Period120,722 64,454 
Cash and Cash Equivalents at End of Period$99,604 $129,708 
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
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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 property and casualty insurers in 48 states and the District of Columbia.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K for the year ended December 31, 2019, including certain financial statement footnote disclosures, is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; loss settlement expenses; and pension and post-retirement benefit obligations.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management of UFG believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.
Segment Information
On September 19, 2017, the Company announced that it had agreed to sell its subsidiary, United Life Insurance Company ("United Life"), to Kuvare US Holdings, Inc. ("Kuvare"). The sale closed on March 30, 2018. Prior to the announcement to sell United Life, we had two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance business has six domestic locations from which it conducts its direct business. The life insurance segment operated from our home office in Cedar Rapids, Iowa. Because all of our insurance is sold domestically, we have no revenues from foreign operations.

After the announcement of the United Life transaction, our continuing operations, the property and casualty insurance business, was reported as one reportable segment. The property and casualty insurance business profit or loss is consistent with consolidated reporting as disclosed on the Consolidated Statements of Income and Comprehensive Income. We analyze the property and casualty insurance business results based on profitability (i.e., loss ratios), expenses and return on equity. The Company's property and casualty insurance business was determined using a management approach to make decisions on operating matters, including allocating resources, assessing performance, determining which products to market and sell, determining distribution networks with insurance
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agents and monitoring the regulatory environment. The property and casualty insurance business products have similar economic characteristics and use a similar marketing and distribution strategy with our independent agents. The property and casualty insurance business geographic concentration did not change after the announcement of the sale of the life insurance business. We will continue to evaluate our continuing operations on the basis of both statutory accounting principles prescribed or permitted by our states of domicile and GAAP.
Discontinued Operations
On September 18, 2017, the Company signed a definitive agreement to sell its subsidiary, United Life, to Kuvare for $280,000 in cash, less a $21 adjustment as set forth in the definitive agreement, for a net amount of $279,979. The sale closed on March 30, 2018 (the "closing date") and we reported an after-tax gain on the sale of discontinued operations of $27,307. The life insurance business (previously reported as a separate segment) was considered held for sale and reported as discontinued operations and its financial position, results of operations and cash flows were reported separately for all periods presented, as applicable, unless otherwise noted.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.
For the nine-month periods ended September 30, 2020 and 2019, we made payments for income taxes totaling $125 and $1,556, respectively. We did not receive a tax refund during the nine-month period ended September 30, 2020 and we received a tax refund of $5,401 during the nine-month period ended September 30, 2019.
For the nine-month periods ended September 30, 2020 and 2019, we made no interest payments (excluding interest credited to policyholders’ accounts).
Deferred Policy Acquisition Costs ("DAC")

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the nine-month period ended September 30, 2020.
Total
Recorded asset at beginning of period$94,292 
Underwriting costs deferred158,371 
Amortization of deferred policy acquisition costs(158,440)
Recorded asset at September 30, 2020$94,223 

Property and casualty insurance policy acquisition costs deferred are amortized as premium revenue is recognized. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value. This takes into account the premium to be earned, losses and loss settlement expenses expected to be incurred and certain other costs expected to be incurred as the premium is earned.
Goodwill
Goodwill assets arise as a result of business combinations and consist of the excess of the fair value of consideration paid over the tangible assets acquired and liabilities assumed. All of our goodwill assets relate to the acquisition of Mercer Insurance Group, Inc. on March 28, 2011. We evaluate goodwill assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill assets may exceed their implied fair value. Any impairment is recognized in the period that the impairment is identified. During the third quarter of 2020, we completed a quantitative analysis of our goodwill as a
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result of the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, as a result of the COVID-19 pandemic and due to the current year weather related catastrophes; and (ii) the fair value of our stock trading significantly below book value. As a result of the quantitative analysis, we recorded an impairment charge of $15,091 as of September 30, 2020. The impairment charge was determined based on completion of both a discounted cash flow and market value analysis.

Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss ("NOL") carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has considered the implications of the CARES Act on its tax provision and has included an income tax benefit of $17.8 million as the result of this Act.
Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders' equity and do not impact federal income tax expense.
We reported consolidated federal income tax benefit of $52,176 for the nine-month period ended September 30, 2020 compared to income tax expense of $7,595 during the same period of 2019. Our effective tax rate is different than the federal statutory rate of 21 percent, due principally to the impact of the provisions of the CARES Act.
The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If, based on review, it appears not more likely than not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at September 30, 2020 or December 31, 2019. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.
We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2015. The Internal Revenue Service is conducting an examination of our federal income tax return for the 2017 tax year.

Leases

The Company determines if a contract contains a lease at inception of the contract. The Company's inventory of leases consists of operating leases which are recorded as a lease obligation liability disclosed in the "Accrued expenses and other liabilities" line on the Consolidated Balance Sheets and as a lease right-of-use asset disclosed in the "Other assets" line on the Consolidated Balance Sheets. The Company's operating leases consist of office space, vehicles, computer equipment and office equipment. The lease right-of-use asset represents the Company's right to use each underlying asset for the lease term and the lease obligation liability represents the Company's obligation over the lease term. The Company's lease obligation is recorded at the present value of the lease payments based on the term of the applied lease. Short-term leases of 12 months or less are recorded on the Consolidated Balance Sheets and lease payments are recognized on the Consolidated Statements of Income and Comprehensive Income. For more information on leases refer to Note 10 "Leases."


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Variable Interest Entities
The Company and certain related parties are equity investors in one investment in which the Company determined is a variable interest entity ("VIE") as a result of participation in the risks and rewards of the VIE based on the objectives and strategies of the VIE. The VIE is a limited liability company that primarily invests in commercial real estate. The Company and certain related parties are not the primary beneficiary largely due to their inability to influence management or direct the activities that most significantly impact the VIE's economic performance. Based on these facts and circumstances, the Company has a variable interest in the VIE, but has not consolidated the VIE's financial results as it is not the primary beneficiary. The Company's investment is reported in other long-term investments in the Consolidated Balance Sheets and accounted for under the equity method of accounting. The fair value of the VIE at September 30, 2020 was $3,638 and there are no future funding commitments.
Credit Losses
The Company recognizes credit losses for our available-for-sale fixed-maturity portfolio, reinsurance receivables, mortgage loans and premium receivables by setting up allowances which are remeasured each reporting period and recorded in the Consolidated Statements of Income and Comprehensive Income.
For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history.
The Company does not recognize an allowance for credit losses for accrued interest receivable for available-for-sale fixed-maturity securities, which is recorded in "Accrued investment income" in the Consolidated Balance Sheets and "Investment income, net of investment expenses" in the Consolidated Statements of Income and Comprehensive Income. The Company considers collections of accrued investment income within six months to be timely and therefore not requiring a write-off. If a write-off is required for accrued investment income outstanding greater than six months, the Company writes off accrued interest by reversing net investment income. For more information on credit losses and the allowance for credit losses for available-for-sale fixed-maturity portfolio, see Note 2 "Summary of Investments."
An allowance for mortgage loan losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments which have similar risk characteristics. To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. On a quarterly basis, quantitative credit risk metrics, including for example, cash-flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations. This allowance is presented as a separate line in the Consolidated Balance Sheets beneath the asset value as well as presented net and recorded through "Net realized investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income. For more information on credit losses and the allowance for credit losses for our investment in mortgage loans see Note 3 "Fair Value of Financial Instruments."
For reinsurance receivables, the Company's model estimates expected credit loss by multiplying the exposure at default by both the probability of default and loss given default ("LGD"). The LGD is estimated by the rating of the Company, historical relationship with UFG, existence of letters of credit and known regulation the Company may be held accountable for. The ultimate LGD percentage is estimated after considering Moody’s experience with unsecured year 1 bond recovery rates from 1983-2017. The allowance calculated as of September 30, 2020 is recorded through the line "Reinsurance receivables and recoverables" in the Consolidated Balance Sheets and through the line "Other underwriting expenses" in the Consolidated Statements of Income and Other Comprehensive Income. As of September 30, 2020, the Company had a credit loss allowance for reinsurance receivables of $241.
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Rollforward of credit loss allowance for reinsurance receivable:
As of
September 30, 2020
Beginning balance, January 1, 2020$38 
Current-period provision for expected credit losses203 
Write-off charged against the allowance, if any— 
Recoveries of amounts previously written off, if any— 
Ending balance of the allowance for reinsurance receivable, September 30, 2020$241 

With respect to premiums receivable, the Company utilizes an aging method to estimate credit losses. An allowance for doubtful accounts is based on a periodic evaluation of the aging and collectability of amounts due from agents and policyholders. "Premiums receivable" are presented in the Consolidated Balance Sheets net of an estimated allowance for doubtful accounts and recorded through "Other underwriting expenses" in the Consolidated Statements of Income and Comprehensive Income.

Subsequent Events

In the preparation of the accompanying financial statements, the Company has evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure in the Company's financial statements.

COVID-19 Pandemic

The COVID-19 pandemic caused significant financial market volatility, economic uncertainty and interruptions to normal business activities in the first nine months of 2020. As of the date of this report, we expect the effect of COVID-19 on claims currently under our coverages to be manageable, based on the information presently available. However, the effects of the COVID-19 pandemic continue to evolve and we cannot predict the extent to which our business, results of operations, financial condition, liquidity, capital position, the value of investments we hold in our investment portfolio, premiums and the demand for our products and our ability to collect premiums or requirement to return premiums to our policyholders, will ultimately be impacted. Additionally, if established written contract policy exclusions of business interruption coverage for losses attributable to the COVID-19 pandemic are voided or changed through legislation, regulations or interpretations by the courts, such changes have the potential to materially increase claims, losses and legal expenses which may impact our business, financial condition, results of operations or liquidity. See further discussion in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2020

Intangibles - Other Internal Use Software

In August 2018, the FASB issued guidance to align the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance requires the Company to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The new guidance was effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance as of January 1, 2020. The adoption did not have a significant impact on the Company's financial position or results of operations.


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Financial Instruments - Credit Losses
In June 2016, the FASB issued new guidance on the measurement of credit losses for most financial instruments. The new guidance replaces the incurred loss model for recognizing credit losses with an expected loss model for instruments measured at amortized cost and requires allowances to be recorded for available-for-sale debt securities rather than reduce the carrying amount. These allowances are remeasured each reporting period. The new guidance was effective for annual periods beginning after December 15, 2019 and interim periods within those years. The new guidance impacted the Company's impairment model related to our available-for-sale fixed-maturity portfolio, reinsurance receivables and mortgage loans. The Company has performed a run of the credit loss models as of January 1, 2020. These models resulted in an immaterial expected credit loss at January 1, 2020. Prior to the adoption of the new guidance, the Company utilized an aging method to estimate credit losses on premiums receivable. This aging method is permitted under the new guidance. The Company adopted the new guidance prospectively as of January 1, 2020 with an immaterial estimated cumulative effect adjustment to opening retained earnings. This cumulative effect adjustment is an allowance related to the Company's reinsurance receivables. The adoption of the new guidance did not have a material impact on the Company's financial position and results of operations.
Goodwill
In January 2017, the FASB issued new guidance which simplifies the test for goodwill impairment. The new guidance eliminates the implied fair value calculation when measuring a goodwill impairment charge. Under the new guidance, impairment charges are based on the excess of the carrying value over fair value of goodwill. The new guidance was effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance as of January 1, 2020. The adoption did not have a significant impact on the Company's financial position or results of operations.
Financial Instruments - Disclosures
In August 2018, the FASB issued new guidance which modifies the disclosure requirements on fair value measurements of financial instruments. The new guidance removes the requirement for disclosing the amount and reason for transfers between Level 1 and Level 2 investment securities and the valuation processes for Level 3 fair value measurements. The guidance also requires additional disclosures on the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance as of January 1, 2020. The adoption modified existing fair value disclosures, but did not have an impact on the Company's financial position or results of operations.
Pending Adoption of Accounting Standards
Defined Benefit Plans - Disclosures
In August 2018, the FASB issued new guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension and postretirement plans. The new guidance removes the requirement for disclosing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs in the next year and the sensitivity of postretirement health plans to one-percentage-point changes in medical trend rates. The new guidance is effective for annual periods beginning after December 15, 2020. The Company will adopt the new guidance as of January 1, 2021. Management currently believes the new guidance will modify existing disclosures, but will not have an impact on the Company's financial position and results of operations.
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NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in available-for-sale fixed maturity and equity securities, presented on a consolidated basis, as of September 30, 2020 and December 31, 2019, is provided below:
September 30, 2020
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair ValueAllowance for Credit LossesCarrying Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$53,877 $730 $8 $54,599 $— $54,599 
U.S. government agency60,503 4,457 — 64,960 — 64,960 
States, municipalities and political subdivisions
General obligations:
Midwest79,872 4,106 — 83,978 — 83,978 
Northeast29,124 1,426 — 30,550 — 30,550 
South105,290 5,295 — 110,585 — 110,585 
West102,772 7,175 — 109,947 — 109,947 
Special revenue:
Midwest126,251 8,590 — 134,841 — 134,841 
Northeast58,287 4,557 — 62,844 — 62,844 
South220,904 17,446 — 238,350 — 238,350 
West133,934 9,168 — 143,102 — 143,102 
Foreign bonds26,413 1,835 230 28,018 — 28,018 
Public utilities77,147 7,155 — 84,302 — 84,302 
Corporate bonds
Energy24,912 2,589 — 27,501 — 27,501 
Industrials39,558 3,499 — 43,057 — 43,057 
Consumer goods and services45,250 3,790 12 49,028 — 49,028 
Health care6,674 895 — 7,569 — 7,569 
Technology, media and telecommunications37,241 4,330 — 41,571 — 41,571 
Financial services95,696 7,030 267 102,459 8 102,451 
Mortgage-backed securities14,333 305 109 14,529 — 14,529 
Collateralized mortgage obligations
Government national mortgage association71,992 5,206 1 77,197 — 77,197 
Federal home loan mortgage corporation119,006 3,019 349 121,676 — 121,676 
Federal national mortgage association83,276 2,579 406 85,449 — 85,449 
Asset-backed securities314 621 — 935 — 935 
Total Available-for-Sale Fixed Maturities$1,612,626 $105,803 $1,382 $1,717,047 $8 $1,717,039 


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December 31, 2019
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized DepreciationFair Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$69,300 $203 $12 $69,491 
U.S. government agency97,962 2,344 104 100,202 
States, municipalities and political subdivisions
General obligations:
Midwest85,607 2,987 — 88,594 
Northeast30,120 1,150 — 31,270 
South111,688 3,515 — 115,203 
West105,569 4,748 — 110,317 
Special revenue:
Midwest133,717 6,175 — 139,892 
Northeast58,665 2,878 — 61,543 
South224,214 10,452 — 234,666 
West138,557 6,287 — 144,844 
Foreign bonds4,936 181 — 5,117 
Public utilities60,950 2,701 — 63,651 
Corporate bonds
Energy28,695 1,429 — 30,124 
Industrials52,249 1,766 — 54,015 
Consumer goods and services47,131 2,335 — 49,466 
Health care8,998 482 — 9,480 
Technology, media and telecommunications25,931 1,739 — 27,670 
Financial services96,613 3,870 230 100,253 
Mortgage-backed securities6,250 127 21 6,356 
Collateralized mortgage obligations
Government national mortgage association78,400 2,053 97 80,356 
Federal home loan mortgage corporation123,572 1,150 220 124,502 
Federal national mortgage association70,322 1,631 108 71,845 
Asset-backed securities314 436 — 750 
Total Available-for-Sale Fixed Maturities$1,659,760 $60,639 $792 $1,719,607 
Maturities
The amortized cost and fair value of available-for-sale and trading fixed maturity securities at September 30, 2020, by contractual maturity, are shown in the following tables. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
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Maturities
Available-For-Sale Trading
September 30, 2020Amortized Cost Fair Value Amortized Cost Fair Value
Due in one year or less$53,911  $54,386  $1,957  $3,935 
Due after one year through five years365,831  388,192  9,221  9,265 
Due after five years through 10 years401,105  433,321  —  — 
Due after 10 years502,858  541,362  1,080  1,611 
Asset-backed securities314 935 — — 
Mortgage-backed securities14,333  14,529  —  — 
Collateralized mortgage obligations274,274  284,322  —  — 
Allowance for credit losses— (8)— — 
 $1,612,626  $1,717,039  $12,258  $14,811 
Net Realized Investment Gains and Losses
Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020 201920202019
Net realized investment gains (losses):   
Fixed maturities:
Available-for-sale$52 $129 $52 $271 
Allowance for credit losses2 — (8)— 
Trading securities
Change in fair value248 43 (760)2,290 
Sales134 8 (20)100 
Equity securities
Change in fair value21,962 9,692 (38,876)46,825 
Sales(7,186)(50)(22,772)655 
Mortgage loans allowance for credit losses— — (4)(15)
Real estate— — (28)— 
Total net realized investment gains (losses)$15,212  $9,822 $(62,416)$50,126 

The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities are as follows:
 Three Months Ended September 30,Nine Months Ended September 30,
2020 201920202019
Proceeds from sales$—  $— $16,907 $36,490 
Gross realized gains—  — 198 30 
Gross realized losses—  — 495 13 

Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily convertible securities which are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains. Our portfolio of trading securities had a fair value of $14,811 and $15,256 at September 30, 2020 and December 31, 2019, respectively.
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Funding Commitment

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through July 10, 2030 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $10,284 at September 30, 2020.

In addition, the Company invested $25,000 in December 2019 in a limited liability partnership investment fund which is subject to a 3-year lockup with a 60 day minimum notice, with 4 possible repurchase dates per year, after the 3-year lockup period is met. The fair value of the investment at September 30, 2020 was $24,035 and there are no remaining capital contributions with this investment.
Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 Nine Months Ended September 30,
2020 2019
Change in net unrealized investment appreciation   
Available-for-sale fixed maturities$44,574 $77,103 
Income tax effect(9,361)(16,192)
Total change in net unrealized investment appreciation, net of tax$35,213  $60,911 
Credit Risk
An allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history. The following table contains a rollforward of the allowance for credit losses for available-for-sale fixed maturity securities at September 30, 2020:
Rollforward of allowance for credit losses for available-for-sale fixed maturity securities:
As of
September 30, 2020
Beginning balance, January 1, 2020$— 
Additions to the allowance for credit losses for which credit losses were not previously recorded8 
Reductions for securities sold during the period (realized)— 
Writeoffs charged against the allowance— 
Recoveries of amounts previously written off— 
Ending balance, September 30, 2020$8 







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The following tables summarize our fixed maturity securities that were in an unrealized loss position reported on a consolidated basis at September 30, 2020 and December 31, 2019. The securities are presented by the length of time they have been continuously in an unrealized loss position. Non-credit related unrealized losses are recognized as a component of other comprehensive income and represent other market movements that are not credit related, for example interest rate changes. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.
September 30, 2020Less than 12 months12 months or longerTotal
Type of InvestmentNumber
of Issues		Fair
Value		Gross Unrealized
Depreciation		Number
of Issues		Fair
Value		Gross Unrealized DepreciationFair
Value		Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury2 $11,804 $8 — $— $— $11,804 $8 
Foreign bonds1 $2,776 $230 — $— $— $2,776 $230 
Corporate bonds
Consumer goods and services1 2,196 12 — — — 2,196 12 
Financial services1 2,998 2 1 3,000 9 5,998 11 
Mortgage-backed securities2 9,118 107 6 157 2 9,275 109 
Collateralized mortgage obligations
Federal home loan mortgage corporation14 48,062 348 1 57 1 48,119 349 
Federal national mortgage association10 43,684 406 — — — 43,684 406 
Government national mortgage association— — — 1 76 1 76 1 
Total Available-for-Sale Fixed Maturities31 $120,638 $1,113 9 $3,290 $13 $123,928 $1,126 

The unrealized losses on our investments in available-for-sale fixed maturities were the result of interest rate movements. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.
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December 31, 2019Less than 12 months12 months or longerTotal
Type of InvestmentNumber
of Issues		Fair
Value		Gross Unrealized DepreciationNumber
of Issues		Fair
Value		Gross Unrealized DepreciationFair
Value		Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury— $— $— 2 $4,733 $12 $4,733 $12 
U.S. government agency3 13,846 104 — — — 13,846 104 
Corporate bonds
Financial services3 10,906 142 1 4,913 88 15,819 230 
Mortgage-backed securities— — — 13 1,585 21 1,585 21 
Collateralized mortgage obligations
Federal home loan mortgage corporation12 50,829 183 3 4,844 37 55,673 220 
Federal national mortgage association4 23,515 90 3 1,102 18 24,617 108 
Government national mortgage association2 8,444 38 5 3,053 59 11,497 97 
Total Available-for-Sale Fixed Maturities24 $107,540 $557 27 $20,230 $235 $127,770 $792 
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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. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years' experience and who have demonstrated knowledge of the subject security.
In order to determine the proper classification in the fair value hierarchy, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.
The mortgage loan portfolio consists entirely of commercial mortgage loans. The fair value of our mortgage loans is determined by modeling performed by our third party fund manager based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value.
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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 September 30, 2020, the cash surrender value of the COLI policies was $7,670, which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.

A summary of the carrying value and estimated fair value of our financial instruments at September 30, 2020 and December 31, 2019 is as follows:
 September 30, 2020December 31, 2019
Fair ValueCarrying ValueFair ValueCarrying Value
Assets    
Investments    
Fixed maturities:
Available-for-sale securities$1,717,047 $1,717,039 $1,719,607 $1,719,607 
Trading securities14,811 14,811 15,256 15,256 
Equity securities198,791 198,791 299,203 299,203 
Mortgage loans48,977 47,733 43,992 42,448 
Other long-term investments62,903 62,903 78,410 78,410 
Short-term investments175 175 175 175 
Cash and cash equivalents99,604 99,604 120,722 120,722 
Corporate-owned life insurance7,670 7,670 6,777 6,777 





















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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 September 30, 2020 and December 31, 2019:
September 30, 2020Fair Value Measurements
DescriptionTotalLevel 1Level 2Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$54,599 $— $54,599 $— 
U.S. government agency64,960 — 64,960 — 
States, municipalities and political subdivisions
General obligations
Midwest83,978 — 83,978 — 
Northeast30,550 — 30,550 — 
South110,585 — 110,585 — 
West109,947 — 109,947 — 
Special revenue
Midwest134,841 — 134,841 — 
Northeast62,844 — 62,844 — 
South238,350 — 238,350 — 
West143,102 — 143,102 — 
Foreign bonds28,018 — 28,018 — 
Public utilities84,302 — 84,302 — 
Corporate bonds
Energy27,501 — 27,501 — 
Industrials43,057 — 43,057 — 
Consumer goods and services49,028 — 49,028 — 
Health care7,569 — 7,569 — 
Technology, media and telecommunications41,571 — 41,571 — 
Financial services102,459 — 102,209 250 
Mortgage-backed securities14,529 — 14,529 — 
Collateralized mortgage obligations
Government national mortgage association77,197 — 77,197 — 
Federal home loan mortgage corporation121,676 — 121,676 — 
Federal national mortgage association85,449 — 85,449 — 
Asset-backed securities935 — — 935 
Total Available-for-Sale Fixed Maturities$1,717,047 $— $1,715,862 $1,185 
TRADING
Fixed maturities:
Bonds
Corporate bonds
Industrials$2,004 $— $2,004 $— 
Consumer goods and services1,171 — 1,171 — 
Health care4,965 — 4,965 — 
Financial services1,622 — 1,622 — 
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Redeemable preferred stocks5,049 5,049 — — 
Total Trading Securities$14,811 $5,049 $9,762 $— 
EQUITY SECURITIES
Common stocks
Public utilities$16,344 $16,344 $— $— 
Energy8,833 8,833 — — 
Industrials30,935 30,935 — — 
Consumer goods and services31,432 31,432 — — 
Health care24,646 24,646 — — 
Technology, media and telecommunications16,003 16,003 — — 
Financial services63,957 63,957 — — 
Nonredeemable preferred stocks6,641 6,046 — 595 
Total Equity Securities$198,791 $198,196 $— $595 
Short-Term Investments$175 $175 $— $— 
Money Market Accounts$54,590 $54,590 $— $— 
Corporate-Owned Life Insurance$7,670 $— $7,670 $— 
Total Assets Measured at Fair Value$1,993,084 $258,010 $1,733,294 $1,780 

December 31, 2019Fair Value Measurements
DescriptionTotalLevel 1Level 2Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$69,491 $— $69,491 $— 
U.S. government agency100,202 — 100,202 — 
States, municipalities and political subdivisions
General obligations
Midwest88,594 — 88,594 — 
Northeast31,270 — 31,270 — 
South115,203 — 115,203 — 
West110,317 — 110,317 — 
Special revenue
Midwest139,892 — 139,892 — 
Northeast61,543 — 61,543 — 
South234,666 — 234,666 — 
West144,844 — 144,844 — 
Foreign bonds5,117 — 5,117 — 
Public utilities63,651 — 63,651 — 
Corporate bonds
Energy30,124 — 30,124 — 
Industrials54,015 — 54,015 — 
Consumer goods and services49,466 — 49,466 — 
Health care9,480 — 9,480 — 
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Technology, media and telecommunications27,670 — 27,670 — 
Financial services100,253 — 100,003 250 
Mortgage-backed securities6,356 — 6,356 — 
Collateralized mortgage obligations
Government national mortgage association80,356 — 80,356 — 
Federal home loan mortgage corporation124,502 — 124,502 — 
Federal national mortgage association71,845 — 71,845 — 
Asset-backed securities750 — — 750 
Total Available-for-Sale Fixed Maturities$1,719,607 $— $1,718,607 $1,000 
TRADING
Fixed maturities:
Bonds
Corporate bonds
Consumer goods and services$2,276 $— $2,276 $— 
Health care4,701 — 4,701 — 
Technology, media and telecommunications1,732 — 1,732 — 
Financial services2,460 — 2,460 — 
Redeemable preferred stocks4,087 4,087 — — 
Total Trading Securities$15,256 $4,087 $11,169 — 
EQUITY SECURITIES
Common stocks
Public utilities$16,295 $16,295 $— $— 
Energy14,639 14,639 — — 
Industrials57,330 57,330 — — 
Consumer goods and services29,935 29,935 — — 
Health care27,285 27,285 — — 
Technology, media and telecommunications19,265 19,265 — — 
Financial services127,780 127,780 — — 
Nonredeemable preferred stocks6,674 6,079 — 595 
Total Equity Securities$299,203 $298,608 $— $595 
Short-Term Investments$175 $175 $— $— 
Money Market Accounts$9,334 $9,334 $— $— 
Corporate-Owned Life Insurance$6,777 $— $6,777 $— 
Total Assets Measured at Fair Value$2,050,352 $312,204 $1,736,553 $1,595 
The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit
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quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. In addition, on a quarterly basis, we also test all securities in the portfolio and independently corroborate the valuations obtained from our third-party valuation service providers. Quarterly, we also perform deep dive analysis of the pricing method used by our third-party valuation service provider by selecting a random sample of securities by asset class and reviewing methodologies. In our opinion, the pricing obtained at September 30, 2020 and December 31, 2019 was reasonable.
For the three- and nine-month periods ended September 30, 2020, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes. The following table provides a quantitative information about our Level 3 securities at September 30, 2020:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value atValuation Technique(s)Unobservable inputsRange of weighted average significant unobservable inputs
September 30, 2020
Corporate bonds - financial services$250 Fair value equals costNANA
Fixed Maturities asset-backed securities935 Discounted cash flowProbability of default
4% - 6%
Nonredeemable preferred stocks595 Discounted cash flowMultiplier
3x - 4x
During the three- and nine-month periods ended September 30, 2020, there were no securities transferred in or out of Level 3.

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended September 30, 2020:
Corporate bonds Asset-backed securitiesEquitiesTotal
Balance at June 30, 2020$250 $927 $595 $1,772 
Net unrealized gains(1)
— 8 — 8 
Balance at September 30, 2020$250  $935 $595 $1,780 
(1) Net unrealized gains are recorded as a component of comprehensive income.



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The following table provides a summary of the changes in fair value of our Level 3 securities for the nine-month period ended September 30, 2020:

Corporate bondsAsset-backed securitiesEquitiesTotal
Balance at January 1, 2020$250 $750 $595 $1,595 
Net unrealized gains(1)
— 185 — 185 
Balance at September 30, 2020$250 $935 $595 $1,780 
(1) Net unrealized gains are recorded as a component of comprehensive income.

Commercial Mortgage Loans
The following tables present the carrying value of our commercial mortgage loans and additional information at September 30, 2020 and December 31, 2019:
Commercial Mortgage Loans
September 30, 2020December 31, 2019
Loan-to-valueCarrying ValueCarrying Value
Less than 65%$30,467 $34,024 
65%-75%17,342 8,496 
Total amortized cost$47,809 $42,520 
Allowance for mortgage loan losses(76)(72)
Mortgage loans, net$47,733 $42,448 

Mortgage Loans by Region
September 30, 2020December 31, 2019
Carrying ValuePercent of TotalCarrying ValuePercent of Total
East North Central$3,245 6.8 %$3,245 7.6 %
Southern Atlantic9,794 20.5 7,026 16.5 
East South Central8,238 17.2 8,358 19.7 
New England6,588 13.8 6,588 15.5 
Middle Atlantic14,971 31.3 15,076 35.5 
Mountain2,227 4.6 2,227 5.2 
West North Central2,746 5.8 — — 
Total mortgage loans at amortized cost$47,809 100.0 %$42,520 100.0 %
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Mortgage Loans by Property Type
September 30, 2020December 31, 2019
Carrying ValuePercent of TotalCarrying ValuePercent of Total
Commercial   
Multifamily$17,051 35.6 %$11,741 27.6 %
Office11,932 25.0 11,848 27.9 
Industrial
10,124 21.2 10,124 23.8 
Retail
2,227 4.7 2,227 5.2 
Mixed use/Other
6,475 13.5 6,580 15.5 
Total mortgage loans at amortized cost$47,809 100.0 %$42,520 100.0 %
Amortized Cost Basis by Year of Origination and Credit Quality Indicator
202020192018Total
Commercial mortgage loans:
Risk Rating:
1-2 internal grade$5,551 $8,404 $18,770 $32,725 
3-4 internal grade— 8,496 6,588 15,084 
5 internal grade— — — — 
6 internal grade— — — — 
7 internal grade— — — — 
Total commercial mortgage loans$5,551 $16,900 $25,358 $47,809 
Current-period write-offs— — — — 
Current-period recoveries— — — — 
Current-period net write-offs$— $— $— $— 
Commercial mortgage loans carrying value excludes accrued interest of $167. As of September 30, 2020, all loan receivables were current, with no delinquencies. The commercial mortgage loans originate with an initial loan-to-value ratio to provide sufficient collateral to absorb losses should a loan be required to foreclose. Mortgage loans are evaluated on a quarterly basis for impairment on an individual basis through a monitoring process and review of key credit indicators, such as economic trends, delinquency rates, property valuations, occupancy and rental rates and loan-to-value ratios. A loan is considered impaired when the Company believes it will not collect the contractual principal and interest set forth in the contractual terms of the loan. An internal grade is assigned to each mortgage loan, with a grade of 1 being the highest and least likely for an impairment and the lowest rating of 7 being the most likely for an impairment. An allowance for mortgage loan losses is established on each loan recognizing a loss for amounts which we believe will not be collected according to the contractual terms of the respective loan agreement. As of September 30, 2020, the Company had an allowance for mortgage loan losses of $76, summarized in the following rollforward:
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Rollforward of allowance for mortgage loan losses:
As of
September 30, 2020
Beginning balance, January 1, 2020$72 
Current-period provision for expected credit losses4 
Write-off charged against the allowance, if any— 
Recoveries of amounts previously written off, if any— 
Ending balance of the allowance for mortgage loan losses, September 30, 2020$76 
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NOTE 4. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.

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

The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we will take action that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc., to render an opinion as to the reasonableness of our statutory reserves annually. The actuarial opinion is filed in those states where we are licensed.

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

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

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The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves at September 30, 2020 and December 31, 2019 (net of reinsurance amounts):
  
September 30, 2020December 31, 2019
Gross liability for losses and loss settlement expenses
at beginning of year		$1,421,754 $1,312,483 
Ceded losses and loss settlement expenses(68,536)(57,094)
Net liability for losses and loss settlement expenses
at beginning of year		$1,353,218 $1,255,389 
Losses and loss settlement expenses incurred
for claims occurring during
   Current year$656,207 $835,507 
   Prior years(30,038)(5,335)
Total incurred$626,169 $830,172 
Losses and loss settlement expense payments
for claims occurring during
   Current year$263,898 $333,975 
   Prior years330,190 398,368 
Total paid$594,088 $732,343 
Net liability for losses and loss settlement expenses
at end of year		$1,385,299 $1,353,218 
Ceded loss and loss settlement expenses169,784 68,536 
Gross liability for losses and loss settlement expenses
at end of period		$1,555,083 $1,421,754 

There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific monetary impact of any individual factor on the development of reserves.
Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year. However, conditions and trends that have affected the reserve development for a given year do change. Therefore, such development cannot be used to project future reserve redundancies or deficiencies.
We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our underwriters are aware of these exposures and use riders or endorsements to limit exposure.







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Reserve Development

For the three-month period ended September 30, 2020, the majority of favorable development came from workers' compensation and commercial liability lines of business. This favorable development was partially offset by unfavorable development of commercial auto and reinsurance assumed lines. All other lines combined contributed a relatively modest amount of overall favorable development during this three-month period. For the nine-month period ended September 30, 2020 the majority of favorable development came from workers' compensation and commercial fire and allied lines of business. This favorable development was partially offset by unfavorable development of the assumed reinsurance and commercial auto lines of business. All other lines combined contributed a relatively modest amount of overall favorable development during this nine-month period.

For the three-month period ended September 30, 2019, the majority of favorable development came from workers'
compensation with a partial offset coming primarily from unfavorable development for commercial liability. The
favorable development for workers' compensation was primarily from reductions in reserves for reported claims
which were more than sufficient to offset paid loss. The unfavorable development for commercial liability is due to
paid losses and an increase in loss adjustment expenses. All other lines combined contributed additional overall
favorable development during this three-month period. For the nine-month period ended September 30, 2019 the
majority of favorable development came from workers' compensation, which was more than offset by unfavorable
development for commercial liability. The favorable development for workers' compensation was primarily from
reductions in reserves for reported claims, which were more than sufficient to offset paid loss. Also, loss adjustment
expense contributed favorable development with reductions in reserves more than sufficient to offset payments. The
unfavorable development for commercial liability is due to paid losses and an increase in loss adjustment expenses.
All other lines combined contributed additional overall favorable development during this nine-month period.
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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 PlanPostretirement Benefit Plan
Three Months Ended September 30,2020201920202019
Net periodic benefit cost
Service cost$2,707 $1,997 $432 $456 
Interest cost2,066 2,080 253 319 
Expected return on plan assets(3,385)(2,696)— — 
Amortization of prior service credit— — (2,021)(2,221)
Amortization of net loss979 901 94 224 
Net periodic benefit cost$2,367 $2,282 $(1,242)$(1,222)

Pension PlanPostretirement Benefit Plan
Nine Months Ended September 30,2020201920202019
Net periodic benefit cost
Service cost$8,122 $5,991 $1,296 $1,368 
Interest cost6,199 6,240 760 956 
Expected return on plan assets(10,154)(8,088)— — 
Amortization of prior service credit— — (6,063)(6,463)
Amortization of net loss2,936 2,703 282 671 
Net periodic benefit cost$7,103 $6,846 $(3,725)$(3,468)

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

Employer Contributions

We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 that we expected to contribute $10,000 to the pension plan in 2020. For the nine-month period ended September 30, 2020, we contributed $10,000 to the pension plan.

NOTE 6. STOCK-BASED COMPENSATION

Non-Qualified Employee Stock Award Plan
The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, restricted stock units, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of UFG common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of UFG common stock issuable at any time and from time to time pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc. Stock Plan (as amended, the "Stock Plan"). At September 30, 2020, there were 704,760 authorized shares remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the
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Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees.
Options granted pursuant to the Stock Plan are granted to buy shares of UFG's common stock at the market value of the stock on the date of grant. Options granted prior to March 2017 vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. Options granted after March 2017 vest and are exercisable in installments of 33.3 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the Stock Plan are granted at the market value of UFG's common stock on the date of the grant. Restricted stock units fully vest after 3 years or 5 years from the date of grant, unless accelerated upon the approval of the Board of Directors, at which time UFG common stock will be issued to the awardee.
The activity in the Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award GrantsNine Months Ended September 30, 2020 From Inception to September 30, 2020
Beginning balance834,910  1,900,000 
Additional shares authorized— 1,500,000 
Number of awards granted(165,024) (3,281,445)
Number of awards forfeited or expired34,874  586,205 
Ending balance704,760  704,760 
Number of option awards exercised7,200  1,450,389 
Number of unrestricted stock awards granted— 10,090 
Number of restricted stock awards vested63,600  164,378 

Non-Qualified Non-Employee Director Stock Plan
The United Fire Group, Inc. Non-Employee Director Stock Plan (formerly known as the 2005 Non-Qualified Non- Employee Director Stock Option and Restricted Stock Plan) (the "Director Stock Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of UFG's common stock to non-employee directors. On May 20, 2020, the Company’s shareholders approved amendments to the Director Stock Plan, previously approved by the Company’s Board of Directors, to (i) increase the number of shares available for future awards under the Director Stock Plan from 300,000 to 450,000, (ii) extend the expiration date of the Director Stock Plan from December 31, 2020 to December 31, 2029, (iii) allow for the grant of awards of restricted stock units, and (iv) rename the Director Stock Plan as the "United Fire Group, Inc. Non-Employee Director Stock Plan." At September 30, 2020, the Company had 160,135 authorized shares available for future issuance.
The Board of Directors has the authority to determine which non-employee directors receive awards, when restricted stock, restricted stock units and options shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options, restricted stock and restricted stock units (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option, restricted stock or restricted stock unit agreements (subject to limits set forth in the Director Stock Plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Stock Plan.



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The activity in the Director Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award GrantsNine Months Ended September 30, 2020 From Inception to September 30, 2020
Beginning balance34,863  300,000 
Additional authorization150,000 150,000 
Number of awards granted(24,728) (313,868)
Number of awards forfeited or expired—  24,003 
Ending balance160,135  160,135 
Number of option awards exercised14,183  133,275 
Number of restricted stock awards vested14,300 98,491 

Stock-Based Compensation Expense

For the three-month periods ended September 30, 2020 and 2019, we recognized stock-based compensation expense of $1,052 and $1,203, respectively. For the nine-month periods ended September 30, 2020 and 2019, we recognized stock-based compensation expense of $3,979 and $5,248, respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.

As of September 30, 2020, we had $5,004 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized over the remainder of 2020 and subsequent years according to the table below, except with respect to awards that are accelerated by the Board of Directors, in which case we will recognize any remaining compensation expense in the period in which the awards are accelerated.
2020$1,060 
20212,584 
20221,056 
2023211 
202482 
202511 
Total$5,004 
NOTE 7. EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options, restricted stock awards and restricted stock unit awards.
We determine the dilutive effect of our outstanding stock options using the "treasury stock" method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average market value of our common stock during the reporting period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.


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The components of basic and diluted earnings per share were as follows for the three-month periods ended September 30, 2020 and 2019:
 Three Months Ended September 30,
(In Thousands, Except Share Data)20202019
BasicDilutedBasicDiluted
Net income (loss)$(37,241)$(37,241)$(2,342)$(2,342)
Weighted-average common shares outstanding25,031,234 25,031,234 25,176,334 25,176,334 
Add dilutive effect of restricted stock unit awards— — — — 
Add dilutive effect of stock options— — — — 
Weighted-average common shares outstanding25,031,234 25,031,234 25,176,334 25,176,334 
Earnings (loss) per common share$(1.49)$(1.49)$(0.09)$(0.09)
Awards excluded from diluted earnings per share calculation(1)
— 820,124 — 63,897 
(1)Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.
The components of basic and diluted earnings per share were as follows for the nine-month periods ended September 30, 2020 and 2019:

Nine Months Ended September 30,
(In Thousands, Except Share Data)20202019
BasicDilutedBasicDiluted
Net income (loss)$(103,815)$(103,815)$37,983 $37,983 
Weighted-average common shares outstanding25,023,401 25,023,401 25,172,716 25,172,716 
Add dilutive effect of restricted stock unit awards— — — 249,605 
Add dilutive effect of stock options— — — 221,423 
Weighted-average common shares outstanding25,023,401 25,023,401 25,172,716 25,643,744 
Earnings (loss) per common share$(4.15)$(4.15)$1.51 $1.48 
Awards excluded from diluted earnings per share calculation(1)
— 515,984 — 63,897 
(1)Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.

NOTE 8. CREDIT FACILITY

On March 31, 2020, United Fire & Casualty Company (the "Borrower"), a wholly owned subsidiary of the Company, entered into a credit agreement (the "New Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent (the "Administrative Agent"), issuing lender, swing-line lender and lender, and the other lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), providing for a $50,000 revolving credit facility, which includes a $20,000 letter of credit sub-facility and a $5,000 swing-line loan for working capital and other general corporate purposes. The New Credit Agreement is provided by the Lenders on an unsecured basis, and the Borrower has the option to increase the New Credit Agreement by $100,000 if agreed to by the Lenders providing such incremental facility.

The New Credit Agreement includes customary events of default, including default in payments of principals, default in payment of other indebtedness, change of control and voluntary and involuntary insolvency proceedings, the occurrence of which would allow the Lenders to accelerate payment of all amounts outstanding thereunder and terminate any further commitments to lend.
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The entry into the New Credit Agreement was completed as part of the Company’s regular course of financial planning and was not initiated as a result of market conditions resulting from the COVID-19 pandemic.
Prior to February 2, 2020, the Company had a credit agreement (the "Previous Credit Agreement") which it entered into on February 2, 2016. The Company, as borrower, entered into the Previous Credit Agreement with the lenders from time to time party thereto and KeyBank National Association ("Key Bank"), as administrative agent, swingline lender and letter of credit issuer. The Previous Credit Agreement provided for a $50,000 four-year unsecured revolving credit facility that included a $20,000 letter of credit subfacility and a swingline subfacility in the amount up to $5,000. The Previous Credit Agreement allowed the Company to increase the aggregate amount of the commitments thereunder by up to $100,000, provided that no event of default had occurred and was continuing and certain other conditions were satisfied. The Previous Credit Agreement was available for the Company's general corporate purposes, including liquidity, acquisitions and working capital. All unpaid principal and accrued interest under the Previous Credit Agreement was due and payable in full at maturity on February 2, 2020. Based on the type of loan, advances under the Previous Credit Agreement bore interest on either the London Interbank Offered Rate ("LIBOR") or a base rate plus, in each case, a calculated margin amount.
There was no outstanding balance on either the New Credit Agreement or the Previous Credit Agreement at September 30, 2020 and 2019, respectively. For the nine-month periods ended September 30, 2020 and 2019, we did not incur any interest expense related to either credit facility. We were in compliance with all covenants of the New Credit Agreement at September 30, 2020.

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the three-month period ended September 30, 2020:
Liability for
Net unrealizedunderfunded
appreciationemployee
on investments
benefit costs(1)
Total
Balance as of June 30, 202079,283 (32,433)$46,850 
Change in accumulated other comprehensive income before reclassifications3,252 — 3,252 
Reclassification adjustments from accumulated other comprehensive income (loss)(43)848 805 
Balance as of September 30, 2020$82,492 $(31,585)$50,907 
(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.
















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The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the nine-month period ended September 30, 2020:

Liability for
Net unrealizedunderfunded
appreciationemployee
on investments
benefit costs(1)
Total
Balance as of January 1, 202047,279 (34,127)$13,152 
Change in accumulated other comprehensive income before reclassifications35,223 — 35,223 
Reclassification adjustments from accumulated other comprehensive income (loss)(10)2,542 2,532 
Balance as of September 30, 2020$82,492 $(31,585)$50,907 
(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.

NOTE 10. LEASES

The Company has operating leases consisting of office space, vehicle leases, computer equipment, and office equipment. Lease terms and options vary in the Company's operating leases dependent upon the underlying leased asset. We exclude options to extend or terminate a lease from our recognition as part of our right-of-use assets and lease liabilities until those options are known and/or executed, as we typically do not exercise options to purchase the underlying leased asset. As of September 30, 2020, we have leases with remaining terms of 1 year to 7 years, some of which may include no options for renewal and others with options to extend the lease terms from 6 months to 5 years.
The components of our operating leases were as follows for the three- and nine-month periods ended September 30, 2020 and 2019:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Components of lease expense:
Operating lease expense$1,832 $1,910 $5,788 $5,730 
Less sublease income53 119 239 371 
Net lease expense1,779 1,791 5,549 5,359 
Cash flows information related to leases:
Operating cash outflow from operating leases1,796 1,812 5,265 5,420 


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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, 2019. There have been no changes in our critical accounting policies from December 31, 2019.

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, 2019. 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 48 states plus the District of Columbia and are represented by approximately 1,000 independent agencies.
Our primary sources of revenue are premiums and investment income. Major categories of expenses from our continuing operations include losses and loss settlement expenses, underwriting and other operating expenses.
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. For more information, refer to Part I, Item 1, Note 1. "Nature of Operations and Basis of Presentation."



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Personal Lines Business

In May 2020, the Company entered into a renewal rights agreement for our personal lines business, providing our independent insurance agents with the opportunity to transfer their personal lines policies to Nationwide Mutual Insurance Company beginning in the third quarter of 2020, subject to the receipt of applicable regulatory approvals.

As part of this agreement, Nationwide will offer contracts to all of our personal lines agents across the country, with the exception of agents in Louisiana and Florida. We are continuing to evaluate our strategic plan for the personal lines business in Louisiana and Florida.

Nationwide will provide replacement policies to most of our personal lines policyholders at the time of renewal. However, recently Nationwide has identified three categories of policies where they are refusing to offer replacement coverage directly. We remain in active discussions on that topic.

UFG’s entry into a renewal rights agreement with Nationwide was completed as part of our long-term strategic planning, allowing us to focus on the success of our core commercial lines business, which represented 94 percent of our business mix at the time of the agreement. It was not initiated as a result of market conditions from the COVID-19 pandemic.

The Company recognized other income of $6.3 million before tax during 2020 as a result of the personal lines renewal rights agreement with Nationwide Mutual Insurance Company.

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 nine-month period ended September 30, 2020, approximately 50.4 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri, and New Jersey.
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.

COVID-19

The spread of the COVID-19 virus, beginning in mid-March 2020, caused significant financial market volatility, economic uncertainty and interruptions to normal business activities. The COVID-19 pandemic has had a profound impact on day-to-day life, financial markets and the economy in the United States. The Company, in response to the challenges presented by the COVID-19 pandemic, activated its pre-existing business continuity plans to respond to a pandemic in mid-March 2020. With the exception of our essential services employees, UFG has dispatched its staff to work remotely for the safety, health and well-being of our employees. We are fully operational, but have limited some non-essential travel. Our essential services employees are following recommended health and safety policies. We are and will continue to monitor the state and federal responses to the pandemic and, when appropriate, will adjust our operations in response. We are developing a return to workplace plan for our employees, but have not
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finalized plans as of the date of this report. Our return to workplace plan will be implemented at the appropriate time and in a way that is designed to ensure the health and safety of our employees.

The implementation of our business continuity plans did not have a material effect on our internal control environment. We believe our operational processes, internal controls over financial reporting and disclosures, and financial reporting systems are operating effectively in the present environment. Our business teams are working remotely and continue to support our customers, agents and claimants as they did when we were in the office.
Nearly all of the policies we have issued contain contract language that specifically excludes business interruption coverage for losses due to viruses such as the COVID-19 pandemic, but we continue to carefully scrutinize each claim and will afford coverage when appropriate. At this time, we expect the effect of the COVID-19 pandemic on claims currently under our coverages to be manageable, based on the information presently available. However, the effects of the COVID-19 pandemic continue to evolve and we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. Additionally, if established written contract policy exclusions of business interruption coverage for losses attributable to the COVID-19 pandemic are voided or changed through legislation, regulations or interpretations by the courts, such changes have the potential to materially increase claims, losses and legal expenses which could impact our business, financial condition, results of operations and liquidity.

We anticipate that the larger impact on our financial condition and results of operations will likely result from developments in the economy as a whole and the effect on financial markets and the investments we hold in our investment portfolio, premiums and demand for our products, and our ability to collect premiums or any requirement to return premiums to policyholders. We believe our current liquidity position is sufficient to maintain our current operations and we have the ability to access our credit facility if needed, but we have not yet had the need to do so. See Part 1, Item 1, Note 8 "Credit Facility" for more information. We implemented state-mandated and optional payment leniency programs for our policyholders, all of which have expired as of September 30, 2020. As of September 30, 2020, we did not see a significant impact to cash flows or an increase in our allowance for doubtful accounts as a result of these programs. During the third quarter of 2020, management did not repurchase any shares of stock, and the share repurchase program has been suspended since mid-March 2020. Also, the Company maintained the same level of cash dividend payments of $0.33 per share during the third quarter of 2020 as were paid in each of the first and second quarters of 2020.

Stockholders' equity decreased to $820.3 million at September 30, 2020, from $910.5 million at December 31, 2019. This decrease was primarily attributed to a net loss of $103.8 million, shareholder dividends of $24.8 million and share repurchases of $2.7 million, partially offset by an increase in net unrealized investment gains on fixed maturity securities of $35.2 million, net of tax, during the nine months ended September 30, 2020.

Statutory capital and surplus decreased to $605.5 million at September 30, 2020, from $707.6 million at December 31, 2019. The decrease was primarily attributed to the change in the fair value of equity security investments. We are directed by the state insurance departments' solvency regulations to calculate a required minimum level of statutory capital and surplus based on insurance risk factors, which the Company reviews on a monthly basis. The risk-based capital results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. United Fire & Casualty Company and its property and casualty insurance subsidiaries and affiliates had statutory capital and surplus in regards to policyholders in excess of their required levels at September 30, 2020.

We evaluate goodwill and other intangible assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible assets may exceed their implied fair value. Goodwill is evaluated at the reporting unit level. Any impairment is charged to operations in the period that the impairment is identified. As a result of the COVID-19 pandemic and its impact on equity markets and the economy, we performed a quantitative impairment assessment of our goodwill at September 30, 2020. As a result of this assessment, we recorded an impairment charge of $15.1 million on our remaining goodwill balance at September 30, 2020.

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As of September 30, 2020, we intend to keep all assets currently leased and honor the terms of the contracts. Also, we have four lease contracts where we are the lessor which we evaluated for impairment. As of September 30, 2020, all payments on these contracts had been received and we fully expect to receive all future payments on time. In the event that we receive any lease-related relief provided to mitigate the economic effects of the COVID-19 pandemic, we elect not to evaluate whether or not the relief represents a lease modification.
The decline in equity markets in the first nine months of 2020 due to the COVID-19 pandemic did have a material impact on the fair value of our investments in equity securities and limited liability partnerships. The Company's investment philosophy, objectives, approach and program have not changed as a result of the COVID-19 pandemic. During the three-month period ended September 30, 2020 we had a recovery in the fair value of equity securities of $22.0 million and a decrease in value of our investments in limited liability partnerships of $4.7 million from the values reported at June 30, 2020. Year-to-date in 2020 the decrease in the fair value of equity securities from December 31, 2019 was $38.9 million.
The Company has a highly rated fixed maturity portfolio, with low credit risk. The Company recognized an unrealized gain of $35.2 million, net of tax, at September 30, 2020 on its available-for-sale fixed maturity portfolio. In addition, we also adopted new accounting guidance on January 1, 2020, which changes the measurement of credit losses for our investment in available-for-sale fixed maturities and our mortgage loans and also impacts our reinsurance receivables. The adoption of this new guidance resulted in an immaterial allowance for credit losses to be recorded for each of these assets on our balance sheet as of September 30, 2020. For more information on credit losses recognized in the three- and nine-month periods ended September 30, 2020, please refer to the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q.

















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FINANCIAL HIGHLIGHTS
 Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands, Except Ratios)2020 2019 %20202019%
Revenues     
Net premiums earned$259,061  $274,942  (5.8)%$791,519 $813,742 (2.7)%
Investment income, net of investment expenses7,244  13,291  (45.5)22,303 43,923 (49.2)
Net realized investment gains (losses)15,212  9,822  54.9 (62,416)50,126 (224.5)
Other income604  —  NM6,323 — NM
Total revenues$282,121  $298,055  (5.3)%$757,729 $907,791 (16.5)%
     
Benefits, Losses and Expenses    
Losses and loss settlement expenses$234,693  $211,752  10.8 %$626,169 $596,001 5.1 %
Amortization of deferred policy acquisition costs52,095  54,828  (5.0)158,440 161,842 (2.1)
Other underwriting expenses35,470  36,003  (1.5)114,020 104,370 9.2 
Goodwill impairment15,091 — NM15,091 — NM
Total benefits, losses and expenses$337,349  $302,583  11.5 %$913,720 $862,213 6.0 %
Income (loss) before income taxes$(55,228) $(4,528) NM$(155,991)$45,578 NM
Federal income tax expense (benefit)(17,987) (2,186) NM(52,176)7,595 NM
Net income (loss)$(37,241) $(2,342) NM$(103,815)$37,983 NM
GAAP Ratios:   
Net loss ratio (without catastrophes)69.2 % 70.0 %(1.1)%63.8 %67.8 %(5.9)%
Catastrophes - effect on net loss ratio21.4  7.0 205.7 15.3 5.5 178.2 
Net loss ratio(1)
90.6 % 77.0 %17.7 %79.1 %73.3 %7.9 %
Expense ratio(2)
33.8  33.0 2.4 34.4 32.7 5.2 
Combined ratio(3)
124.4 % 110.0 %13.1 %113.5 %106.0 %7.1 %
(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 other 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

The following is a summary of our financial performance for the three- and nine-month periods ended September 30, 2020:

RESULTS OF OPERATIONS

For the three-month period ended September 30, 2020, the net loss was $37.2 million compared to a net loss of $2.3 million for the same period of 2019. In the three-month period ended September 30, 2020, the increase in the net loss was primarily due to an increase in losses and loss settlement expenses, namely from catastrophe losses, and decrease in net premiums earned.

For the nine-month period ended September 30, 2020, the net loss was $103.8 million compared to net income of $38.0 million for the same period of 2019. In the nine-month period ended September 30, 2020, the decrease in net
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income was primarily due to a decrease in the fair value of equity securities, a decrease in net investment income, a decrease in net premiums earned and increases in losses and loss settlement expenses.

Net premiums earned decreased 5.8 percent and 2.7 percent during the three- and nine-month periods ended September 30, 2020, respectively, compared to the same periods of 2019. The decrease in both the three- and nine-month periods ended September 30, 2020 was primarily due to our focus on improving profitability through non-renewal of under-performing accounts in our commercial auto line of business. Also, during the third quarter of 2020, we paid $9.0 million of reinstatement premium with our reinsurance program as a result of the August Midwest derecho catastrophe exceeding the reinsurance contract stated retention. The COVID-19 pandemic also impacted net premiums earned, but the impact was less significant than the impact from our commercial auto profitability initiatives in the three- and nine-month periods ended September 30, 2020. During 2020, the Company implemented state-mandated and optional payment leniency programs for our policyholders as a result of the COVID-19 pandemic. As of September 30, 2020, this has not significantly impacted cash flows or an increase in our allowance for doubtful accounts as a result of these programs. These payment modifications did not have a material impact on our financial condition, liquidity or capital position.

Net investment income was $7.2 million for the third quarter of 2020 as compared to net investment income of $13.3 million for the same period in 2019. Year-to date, net investment income was $22.3 million, compared to net investment income of $43.9 million for the same period in 2019. The decrease in net investment income in both periods in 2020 as compared to the same periods in 2019 was due to a combination of a decrease in the fair value of our investments in limited liability partnerships and an overall decrease in invested assets. The valuation of these investments in limited liability partnerships varies from period to period due to the current equity market conditions, specifically related to financial institutions.

The Company recognized net realized investment gains of $15.2 million during the third quarter of 2020, compared to net realized investment gains of $9.8 million for the same period in 2019. Year-to-date, the Company recognized net realized investment losses of $62.4 million compared to net realized gains of $50.1 million in the same period in 2019. The change in the three- and nine-month periods ended September 30, 2020 as compared to the same periods in 2019 was primarily due to the change in the fair value of equity securities and net realized losses on sales of equity securities.

Losses and loss settlement expenses increased by 10.8 percentage points and by 5.1 percentage points during the three- and nine-month periods ended September 30, 2020, respectively, compared to the same periods of 2019. The increase in losses and loss settlement expenses primarily was due to an increase in catastrophe losses as compared to the same period in 2019.

The GAAP combined ratio increased by 14.4 percentage points to 124.4 percent for the third quarter of 2020, compared to 110.0 percent in the same period in 2019. For the nine-month period ended September 30, 2020, the GAAP combined ratio increased 7.5 percentage points to 113.5 percent compared to 106.0 percent for the nine-month period ended September 30, 2019. The increase in the combined ratio was primarily driven by an increase in the net loss ratio.

The GAAP net loss ratio deteriorated 13.6 percentage points and 5.8 percentage points, respectively, during three- and nine-month periods ended September 30, 2020 as compared to the same periods in 2019. The increase in the net loss ratio was primarily due to an increase in catastrophe losses.

Pre-tax catastrophe losses in the third quarter of 2020 were higher when compared to third quarter of 2019, with catastrophe losses adding 21.4 percentage points to the combined ratio in 2020 as compared to 7.0 percentage points in 2019. During the third quarter of 2020, the Company incurred losses from 25 catastrophe events, with the most significant losses from the August Midwest derecho and Hurricane Laura. Our 10-year historical average for third quarter catastrophe losses is 8.9 percentage points added to the combined ratio. Year-to-date, catastrophe losses totaled $121.3 million ($3.83 per diluted share) compared to $44.9 million ($1.38 per diluted share) for the same period in 2019.

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The expense ratio for the third quarter of 2020 was 33.8 percent compared to 33.0 percent for the third quarter in 2019. Year-to-date, the expense ratio was 34.4 percent compared to 32.7 percent in the same period in 2019. The increase in the expense ratio during the three- and nine-month periods ended September 30, 2020 as compared to the same periods in 2019 is primarily due to our continued investment in technology, including our multi-year Oasis project, an upgrade to our technology platform designed to enhance core underwriting decisions, selection of risks and productivity.

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.

2020 Development

The property and casualty insurance business experienced $6.3 million and $30.0 million of favorable development in our net reserves for prior accident years for the three- and nine-month periods ended September 30, 2020, respectively. For the three-month period ended September 30, 2020, the majority of favorable development was from the combination of workers' compensation with $5.6 million favorable development and commercial liability with $5.5 million favorable development. Partially offsetting favorable development was commercial automobile with $2.2 million of unfavorable development and reinsurance assumed with $1.6 million of unfavorable development. The favorable development for workers' compensation was primarily from reductions in claim reserves which were more than sufficient to offset paid loss. The favorable development for commercial liability was due to the combination of both loss and loss adjustment expense where reserve reductions were more than sufficient to offset payments. The adverse development for commercial automobile was attributed to an increase in severity of losses with paid losses greater than the reductions of unpaid claim reserves, paid loss adjustment expense was more than offset by reductions of reserves for unpaid loss adjustment expense. All other lines of insurance, in total, contributed $1.0 million of unfavorable development during the third quarter of 2020.

For the nine-month period ended September 30, 2020 the majority of favorable development was from workers' compensation with $21.6 million favorable development, followed by commercial fire and allied lines which contributed $12.6 million of favorable development. Partially offsetting favorable development was reinsurance assumed with $4.4 million of unfavorable development and commercial automobile with $2.1 million of unfavorable
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development. The favorable development for workers' compensation was primarily from reductions in claim reserves which were more than sufficient to offset paid loss. The adverse development for reinsurance assumed was attributed to paid loss which was greater than the reductions of unpaid claim reserves. All other lines of insurance, in total, contributed $2.3 million of favorable development during the third quarter of 2020.

2019 Development

The property and casualty insurance business experienced $5.5 million and $0.8 million of favorable development in
our net reserves for prior accident years for the three- and nine-month periods ended September 30, 2019,
respectively. For the three-month period ended September 30, 2019 the majority of favorable development was from
workers' compensation with $14.9 million favorable development, followed by assumed reinsurance which
contributed $1.2 million of favorable development. The favorable development for workers' compensation was
primarily from reductions in reserves for reported claims which were more than sufficient to offset paid losses. The
favorable development for assumed reinsurance was primarily from reductions in incurred but not reported
("IBNR") reserves which were more than sufficient to offset paid losses. The favorable development was partially
offset by unfavorable development for two lines, primarily from commercial liability which experienced $11.5
million of unfavorable development due to paid loss and loss adjustment expense. Commercial fire and allied lines also contributed $1.1 million of unfavorable development due to paid loss and paid loss adjustment expense. All
other lines of insurance, in total, contributed an additional $2.0 million of favorable development during the quarter.

For the nine-month period ended September 30, 2019 the majority of favorable development was from workers'
compensation with $26.3 million favorable development, followed by fidelity and surety which was $3.1 million
favorable. The favorable development for workers' compensation was primarily from reductions in reserves for
reported claims, which were more than sufficient to offset paid losses; loss adjustment expense also contributed
favorable development with reductions in reserves more than sufficient to offset payments. The favorable
development for fidelity and surety was from reductions in IBNR reserves, reductions in claim reserves and salvage
recoveries. The favorable development was partially offset by unfavorable development for two lines, primarily from commercial liability which experienced $27.4 million of unfavorable development due to paid loss and loss
adjustment expense. Commercial fire and allied lines also contributed $3.5 million of unfavorable development due
to paid losses. All other lines of insurance, in total, contributed an additional $2.3 million of favorable year-to-date
development.

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 September 30, 2020, 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 September 30,20202019
  Net Losses  Net Losses 
  and Loss  and Loss 
 NetSettlementNetNetSettlementNet
(In Thousands, Except Ratios)PremiumsExpensesLossPremiumsExpensesLoss
UnauditedEarnedIncurredRatioEarnedIncurredRatio
Commercial lines      
Other liability$78,302 $45,111 57.6 %$80,421 $50,656 63.0 %
Fire and allied lines59,267 52,436 88.5 61,628 49,628 80.5 
Automobile73,403 82,675 112.6 80,574 85,227 105.8 
Workers' compensation19,245 10,250 53.3 22,041 3,076 14.0 
Fidelity and surety7,356 (128)(1.7)6,755 1,437 21.3 
Miscellaneous378 78 20.6 428 63 14.7 
Total commercial lines$237,951 $190,422 80.0 %$251,847 $190,087 75.5 %
   
Personal lines  
Fire and allied lines$5,144 $29,451 NM$10,370 $13,469 129.9 %
Automobile7,055 8,322 118.0 7,870 6,946 88.3 
Miscellaneous295 (97)(32.9)312 (130)(41.7)
Total personal lines$12,494 $37,676 NM$18,552 $20,285 109.3 %
Reinsurance assumed$8,616 $6,595 76.5 %$4,543 $1,380 30.4 %
Total$259,061 $234,693 90.6 %$274,942 $211,752 77.0 %
NM = Not meaningful


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Nine Months Ended September 30,20202019
Net LossesNet Losses
and Lossand Loss
NetSettlementNetNetSettlementNet
(In Thousands, Except Ratios)PremiumsExpensesLossPremiumsExpensesLoss
UnauditedEarnedIncurredRatioEarnedIncurredRatio
Commercial lines
Other liability$235,018 $135,748 57.8 %$238,300 $146,513 61.5 %
Fire and allied lines183,528 171,416 93.4 181,417 142,265 78.4 
Automobile225,103 205,994 91.5 234,280 225,564 96.3 
Workers' compensation57,873 24,205 41.8 66,537 18,399 27.7 
Fidelity and surety20,106 14 0.1 19,276 536 2.8 
Miscellaneous1,158 266 23.0 1,291 63 4.9 
Total commercial lines$722,786 $537,643 74.4 %$741,101 $533,340 72.0 %
Personal lines
Fire and allied lines$24,933 $55,372 222.1 %$30,892 $34,137 110.5 %
Automobile22,203 15,935 71.8 23,050 19,422 84.3 
Miscellaneous905 2,561 283.0 920 354 38.5 
Total personal lines$48,041 $73,868 153.8 %$54,862 $53,913 98.3 %
Reinsurance assumed$20,692 $14,658 70.8 %$17,779 $8,748 49.2 %
Total$791,519 $626,169 79.1 %$813,742 $596,001 73.3 %

Below are explanations regarding significant changes in the net loss ratios by line of business:
•Commercial fire and allied lines - The net loss ratio deteriorated 8.0 and 15.0 percentage points in the three- and nine-month periods ended September 30, 2020, respectively, as compared to the same periods of 2019. The deterioration in both periods is attributable to an increase in catastrophe losses.

•Workers compensation - The net loss ratio deteriorated 39.3 and 14.1 percentage points in the three- and nine-month periods ended September 30, 2020, respectively, as compared to the same periods of 2019. The deterioration is attributable to a few large claims. The current periods loss ratios are more in line with an average year vs. 2019 which had less than average losses.

•Fidelity and surety - The net loss ratio improved 23.0 and 2.7 percentage points in the three- and nine-month periods ended September 30, 2020, respectively, as compared to the same periods of 2019. The improvement is attributable to the absence of large single claims in 2020 vs. the presence of large claims in 2019.

•Personal fire and allied lines - The net loss ratio deteriorated significantly in the three- and nine-month periods ended September 30, 2020, respectively, as compared to the same periods of 2019. The deterioration in both periods is attributable to an increase in catastrophe losses.

•Personal automobile - The net loss ratio deteriorated 29.7 and improved 12.5 percentage points in the three- and nine-month periods ended September 30, 2020, respectively, as compared to the same periods of 2019. The quarterly deterioration was attributed to increased claims in 2020 vs. a decrease in 2019. The year-to-date improvement is attributable to continued attention to careful underwriting resulting in lower paid losses and loss adjustment expenses.
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•Reinsurance assumed - The net loss ratio deteriorated in the three- and nine-month periods ended September 30, 2020, respectively, as compared to the same periods of 2019. The deterioration in both periods is due to an increase in loss reserves and assumed catastrophe losses in 2020 as compared to the same periods in 2019.

Financial Condition

Stockholders' equity decreased to $820.3 million at September 30, 2020, from $910.5 million at December 31, 2019. This decrease was primarily attributed to a net loss of $103.8 million, shareholder dividends of $24.8 million and share repurchases of $2.7 million, partially offset by an increase in net unrealized investment gains on fixed maturity securities of $35.2 million, net of tax, during the nine months ended September 30, 2020.

The Company's book value per share was $32.77, which is a decrease of $3.63 per share, or 10.0 percent from December 31, 2019. During the third quarter of 2020 we did not repurchase any shares of our common stock as we suspended share repurchases in mid-March. During the nine-month period ended September 30, 2020, 70,467 shares of common stock were repurchased for a total of $2.7 million. Under our share repurchase program, which is scheduled to expire on August 31, 2022, we were authorized to repurchase an additional 1,786,977 shares of our common stock as of September 30, 2020.

Investment Portfolio

Our invested assets totaled $2.0 billion at September 30, 2020, compared to $2.2 billion at December 31, 2019, a decrease of $113.6 million. At September 30, 2020, fixed maturity securities and equity securities made up 84.8 percent and 9.7 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.

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.

The composition of our investment portfolio at September 30, 2020 is presented at carrying value in the following table:
 Property & Casualty Insurance
   Percent
(In Thousands, Except Ratios)  of Total
Fixed maturities (1)
 
Available-for-sale$1,717,039 84.1 %
Trading securities14,811 0.7 
Equity securities198,791  9.7 
Mortgage loans47,733  2.3 
Other long-term investments62,903  3.2 
Short-term investments175  — 
Total$2,041,452  100.0 %
(1) Available-for-sale securities and trading fixed maturities are carried at fair value.
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At both September 30, 2020 and December 31, 2019, we classified $1.7 billion, or 99.1 percent, and $1.7 billion, or 99.1 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 September 30, 2020 and December 31, 2019, 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 and trading security portfolios, by credit rating at September 30, 2020 and December 31, 2019. 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)September 30, 2020 December 31, 2019
RatingCarrying Value % of Total Carrying Value % of Total
AAA$679,729  39.3 % $721,446  41.6 %
AA666,448  38.5  664,238  38.3 
A187,467  10.8  179,553  10.3 
Baa/BBB184,209  10.6  157,350  9.1 
Other/Not Rated13,997  0.8  12,276  0.7 
 $1,731,850  100.0 % $1,734,863  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.
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 decreased by 45.5 percent and 49.2 percent, respectively, in the three- and nine-month periods ended September 30, 2020, compared with the same period of 2019.
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 nine-month periods ended September 30, 2020, the change in value of our investments in limited liability partnerships resulted in investment losses of $4.7 million and $13.8 million, respectively, as compared to an investment loss $0.7 million and income of $1.9 million, respectively, in the same periods of 2019. This resulted in a decrease of $4.0 million and a decrease of $15.7 million, respectively, in investment income in the three- and nine-month periods ended September 30, 2020.
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We had net realized investment gains of $15.2 million and net realized investment losses of $62.4 million, respectively, during the three- and nine-month periods ended September 30, 2020, as compared to net realized investment gains of $9.8 million and $50.1 million, respectively, in the same periods of 2019. The change in the fair value of equity securities resulted in gains of $22.0 million and losses of $38.9 million, respectively, during the three- and nine-month periods ended September 30, 2020 as compared to gains of $9.7 million and $46.8 million, respectively, in the same periods in 2019. The remaining change in net realized investment gains and losses is due to the sale of equity securities.
We regularly monitor the difference between our cost basis and the estimated fair value of our investments. For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history.
Non-credit related changes in unrealized gains and losses on available-for-sale fixed maturity securities are recognized as a component of other comprehensive income, impact stockholders' equity and book value per share, but do not affect net income. We believe that any unrealized losses on our available-for-sale securities at September 30, 2020 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. 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.
For mortgage loans, an allowance for losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments that have similar risk characteristics. This allowance is presented as a separate line in the Consolidated Balance Sheets with an offset to "Net realized investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income.
To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. An example of a market linked adjustment is the change in commercial market price appreciation or change in gross domestic product, with every point of fall leading to an increase in loss reserve. Local market economics are also considered. On a quarterly basis, quantitative credit risk metrics, including for example, cash-flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations.
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.
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
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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 nine-month periods ended September 30, 2020 and 2019:
Cash Flow SummaryNine Months Ended September 30,
(In Thousands)2020 2019
Cash provided by (used in)   
Operating activities$(12,868) $56,165 
Investing activities19,836  39,589 
Financing activities(28,086) (30,500)
Net increase (decrease) in cash and cash equivalents$(21,118) $65,254 
Our cash flows were sufficient to meet our liquidity needs for the nine-month periods ended September 30, 2020 and 2019 and we anticipate they will be sufficient to meet our future liquidity needs. Our year-to-date cash flows provided by operations were negative due to an increase in catastrophe losses. Although there was a net decrease in cash and cash equivalents during the nine-months ended September 30, 2020, the Company had a cash balance of $99.6 million at September 30, 2020, which is more than sufficient to meet future liquidity needs. We also have the ability to access our credit facility if needed, but we have not yet had the need to do so. See Note 8 "Credit Facility" for more information. During 2020, the Company implemented state-mandated and optional payment leniency programs for our policyholders as a result of the COVID-19 pandemic. As of September 30, 2020, we did not see a significant impact to cash flows or an increase in our allowance for doubtful accounts as a result of these programs. These payment modifications did not have a material impact on our financial condition, liquidity or capital position.
Operating Activities
Net cash flows in operations had outflows of $12.9 million and inflows of $56.2 million for the nine-month periods ended September 30, 2020 and 2019, 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, $416.4 million, or 24.0 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 September 30, 2020, our cash and cash equivalents included $54.6 million related to these money market accounts, compared to $9.3 million at December 31, 2019.
Net cash flows provided by investing activities were $19.8 million and $39.6 million for the nine-month periods ended September 30, 2020 and 2019, respectively. For the nine-month periods ended September 30, 2020 and 2019,
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we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $261.7 million and $246.6 million, respectively.
Our cash outflows for investment purchases were $226.4 million for the nine-month period ended September 30, 2020, compared to $179.2 million for the same period of 2019.
Financing Activities
Net cash flows used in financing activities was $28.1 million for the nine-month period ended September 30, 2020 which decreased $2.4 million compared to $30.5 million used in the nine-month period ended September 30, 2019.
Credit Facilities

On March 31, 2020, United Fire & Casualty Company, as borrower ("Borrower"), wholly owned subsidiary of United Fire Group, Inc. entered into a credit agreement (the "New Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, issuing lender, swing line lender and lender, and the other lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), providing for a $50,000 revolving credit facility, which includes a $20,000 letter of credit sub-facility and a $5,000 swing line loan for working capital and other general corporate purposes. The New Credit Agreement is provided on an unsecured basis, and the Borrower has the option to increase the New Credit Agreement by $100,000 if agreed to by the Lenders providing such incremental facility. As of September 30, 2020 and 2019, there were no balances outstanding under the New Credit Agreement or the Borrower's previous credit agreement (which matured on February 2, 2020). For the nine-month period ended September 30, 2020 and 2019, we did not incur any interest expense related to either credit facility. For further discussion of the New Credit Agreement and the Borrower's previous credit agreement, refer to Part I, Item 1, Note 8 "Credit Facility."
Dividends
Dividends paid to shareholders totaled $24.8 million and $24.4 million in the nine-month periods ended September 30, 2020 and 2019, 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 September 30, 2020, UFG's sole direct insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $40.8 million in dividend payments without prior regulatory approval. We do not believe that these restrictions have a material impact in meeting the cash obligations of UFG.
Stockholders' Equity
Stockholders' equity decreased 9.9 percent to $820.3 million at September 30, 2020, from $910.5 million at December 31, 2019. At September 30, 2020, the book value per share of our common stock was $32.77 compared to $36.40 at December 31, 2019. This decrease was primarily attributed to a net loss of $103.8 million, shareholder
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dividends of $24.8 million and share repurchases of $2.7 million, partially offset by an increase in net unrealized investment gains on fixed maturity securities of $35.2 million, net of tax, during the first nine months of 2020.

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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 10, 2030, to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $10.3 million at September 30, 2020.

In addition, the Company invested $25,000 in December 2019 in a limited liability partnership investment fund which is subject to a 3 year lockup with a 60 day minimum notice, with 4 possible repurchase dates per year after the 3 year lockup period is met. The fair value of the investment at September 30, 2020 was $24.0 million and there are no remaining capital contributions with this investment.


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 September 30,Nine Months Ended September 30,
(In Thousands)2020 201920202019
ISO catastrophes$54,878 $18,549 $121,089 $41,643 
Non-ISO catastrophes (1)
483 743 172 3,284 
Total catastrophes$55,361 $19,292 $121,261 $44,927 
(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 September 30, 2020, we did not have direct exposure to investments in sub-prime mortgages or other credit-enhancement exposures.

Our primary market risks are exposure to changes in interest rates and equity prices, and we have limited exposure to foreign currency exchange rates.

The decline and volatility in equity markets in the first nine months of 2020 due to the COVID-19 pandemic did have a material impact on the fair value of our investments in equity securities and limited liability partnerships. The COVID-19 pandemic presents new and emerging uncertainty to the financial markets. See further discussion in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A, Risk Factors, our Form 10-Q for this quarter ended March 31, 2020 filed with the SEC on May 6, 2020.

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. The implementation of our business continuity plans related to the COVID-19 pandemic did not have a material effect on our internal control environment. We believe our operational processes, internal controls over financial reporting and disclosures, and financial reporting systems are operating effectively in the present environment. Our business teams are working remotely and continue to support our customers, agents and claimants as they did when we were in the office.

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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 September 30, 2020 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, 2019 filed with the SEC on February 28, 2020, as updated in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 filed with the SEC on May 6, 2020. These risks 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 September 30, 2020:
   Total Number of SharesMaximum Number of
 Total Purchased as a Part ofShares that may yet be
 Number ofAverage PricePublicly AnnouncedPurchased Under the
PeriodShares PurchasedPaid per SharePlans or Programs
Plans or Programs(1)
7/1/2020 - 7/31/2020— $— — 1,786,977 
8/1/2020 - 8/31/2020— — — 1,786,977 
9/1/2020 - 9/30/2020— — — 1,786,977 
Total— $— — 1,786,977 
(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. In August 2020, our Board of Directors extended our share repurchase program through the end of August 2022. As of September 30, 2020, we remained authorized to repurchase 1,786,977 shares of common stock. During the third quarter of 2020 we did not repurchase any shares of our common stock as we suspended share repurchases in mid-March in the interim.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

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ITEM 5. OTHER INFORMATION

None.
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ITEM 6. EXHIBIT INDEX
Exhibit numberExhibit descriptionFurnished herewithFiled herewith
31.1X
31.2X
32.1X
32.2X
101.1

X
104.1X
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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. RamloDawn M. Jaffray
President, Chief Executive Officer, Director and Principal Executive Officer Executive Vice President, Chief Financial Officer and Principal Accounting Officer
 
   
November 4, 2020 November 4, 2020
(Date)(Date)
 

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