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

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

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

Commission File Number 001-34257

________________________

UNITED FIRE GROUP INC.

(Exact name of registrant as specified in its charter)


Iowa						45-2302834
(State of incorporation)						(I.R.S. Employer Identification No.)

118 Second Avenue SE

Cedar Rapids

Iowa

52401

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (319) 399-5700

Securities Registered Pursuant to Section 12(b) of the Exchange Act of 1934:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value	UFCS	The NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐

No ☒

As of August 3, 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

June 30, 2020


			Page
Forward-Looking Information			1

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets as of June 3 0 , 2020 (unaudited) and December 31, 2019			2

Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and six-month periods ended June 3 0 , 2020 and 2019			3

Consolidated Statement of Stockholders’ Equity (unaudited) for the three- and six-month periods ended June 3 0 , 2020 and 2019			4

Consolidated Statements of Cash Flows (unaudited) for the three- and six-month periods ended June 3 0 , 2020 and 2019			6

Notes to Unaudited Consolidated Financial Statements			7


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37

Item 3. Quantitative and Qualitative Disclosures About Market Risk			53

Item 4. Controls and Procedures			53

Part II. Other Information

Item 1. Legal Proceedings			54

Item 1A. Risk Factors			54

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			54

Item 3. Defaults Upon Senior Securities			54

Item 4. Mine Safety Disclosures			54

Item 5. Other Information			55

Item 6. Exhibits			56

Signatures			57

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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)	June 30, 2020		December 31, 2019
	(unaudited)
ASSETS
Investments
Fixed maturities
Available-for-sale, at fair value (amortized cost $1,595,817 in 2020 and $1,659,760 in 2019; allowance for credit losses $10 in 2020 and $— in 2019)	$	1,696,166	$	1,719,607
Trading securities, at fair value (amortized cost $8,916 in 2020 and $11,941 in 2019)	11,223		15,256
Equity securities at fair value (cost $63,615 in 2020 and $67,529 in 2019)	207,626		299,203
Mortgage loans	47,685		42,520
Less: allowance for mortgage loan losses	76		72
Mortgage loans, net	47,609		42,448
Other long-term investments	68,941		78,410
Short-term investments	175		175
	2,031,740		2,155,099
Cash and cash equivalents	146,262		120,722
Accrued investment income	14,485		15,182
Premiums receivable (net of allowance for doubtful accounts of $947 in 2020 and $1,239 in 2019)	376,808		357,632
Deferred policy acquisition costs	97,566		94,292
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $52,630 in 2020 and $50,183 in 2019)	126,036		116,989
Reinsurance receivables and recoverables (net of allowance for credit losses of $41 in 2020 and $— in 2019)	127,881		72,369
Prepaid reinsurance premiums	14,506		9,550
Goodwill and intangible assets	22,188		22,542

Income taxes receivable	38,374		19,190
Other assets	39,067		29,905
TOTAL ASSETS	$	3,034,913	$	3,013,472
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Future policy benefits and losses, claims and loss settlement expenses
Losses and loss settlement expenses	$	1,477,689	$	1,421,754
Unearned premiums	530,801		505,162
Accrued expenses and other liabilities	151,257		155,498

Deferred tax liability	14,499		20,586
TOTAL LIABILITIES	$	2,174,246	$	2,103,000
Stockholders’ Equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,031,234 and 25,015,963 shares issued and outstanding in 2020 and 2019, respectively	$	25	$	25
Additional paid-in capital	199,796		200,179
Retained earnings	613,996		697,116
Accumulated other comprehensive income, net of tax	46,850		13,152
TOTAL STOCKHOLDERS’ EQUITY	$	860,667	$	910,472
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,034,913	$	3,013,472

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

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United Fire Group, Inc.

Consolidated Statements of Income and Comprehensive Income (Unaudited)


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

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

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United Fire Group, Inc.

Consolidated Statement of Stockholders’ Equity (Unaudited)


	Common Stock
(In Thousands, Except Share Data)	Shares outstanding	Common stock		Additional paid-in capital		Retaining Earnings		Accumulated other comprehensive income		Total

Balance, January 1, 2020	25,015,963	$	25	$	200,179	$	697,116	$	13,152	$	910,472
Net income (loss)	—	—		—		(72,534)		—		(72,534)
Shares repurchased	(70,467)	—		(2,741)		—		—		(2,741)
Stock based compensation	70,597	—		879		—		—		879
Dividends on common stock ($0.33 per share)	—	—		—		(8,249)		—		(8,249)
Change in net unrealized investment appreciation⁽¹⁾	—	—		—		—		4,500		4,500
Change in liability for underfunded employee benefit plans⁽²⁾	—	—		—		—		847		847
Cumulative effect of change in accounting principle	—	—		—		(30)		—		(30)
Balance, March 31, 2020	25,016,093	$	25	$	198,317	$	616,303	$	18,499	$	833,144

Net income	—	$	—	$	—	$	5,960	$	—	$	5,960

Stock based compensation	15,141	—		1,479		—		—		1,479
Dividends on common stock ($0.33 per share)	—	—		—		(8,267)		—		(8,267)
Change in net unrealized investment appreciation⁽¹⁾	—	—		—		—		27,504		27,504
Change in liability for underfunded employee benefit plans⁽²⁾	—	—		—		—		847		847

Balance, June 30, 2020	25,031,234	$	25	$	199,796	$	613,996	$	46,850	$	860,667

(1)The change in net unrealized appreciation is net of reclassification adjustments and income taxes.

(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.

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	Common Stock
(In Thousands, Except Share Data)	Shares outstanding		Common stock		Additional paid-in capital		Retaining Earnings		Accumulated other comprehensive income		Total

Balance, January 1, 2019	25,097,408		$	25	$	203,350	$	715,472	$	(30,472)	888,375
Net income	—		—		—		44,521		—		44,521

Stock based compensation	70,414		—		3,438		—		—		3,438
Dividends on common stock $0.31 per share)	—		—		—		(7,797)		—		(7,797)
Change in net unrealized investment appreciation⁽¹⁾	—		—		—		—		26,279		26,279
Change in liability for underfunded employee benefit plans⁽²⁾	—		—		—		—		888		888
Cumulative effect of change in accounting principle	—		—		—		(513)		—		(513)
Balance, March 31, 2019	25,167,822		$	25	$	206,788	$	751,683	$	(3,305)	$	955,191

Net income (loss)	$	—	$	—	$	—	$	(4,196)	$	—	$	(4,196)
Shares repurchased	(1,507)		—		(69)		—		—		(69)
Stock based compensation	78,885		—		2,252		—		—		2,252
Dividends on common stock $0.33 per share)	—		—		—		(8,325)		—		(8,325)
Change in net unrealized investment appreciation⁽¹⁾	—		—		—		—		22,562		22,562
Change in liability for underfunded employee benefit plans⁽²⁾	—		—		—		—		888		888

Balance, June 30, 2019	25,245,200		$	25	$	208,971	$	739,162	$	20,145	$	968,303

(1)The change in net unrealized appreciation is net of reclassification adjustments and income taxes.

(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.

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

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United Fire Group, Inc.

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,
(In Thousands)	2020		2019
Cash Flows From Operating Activities
Net income (loss)	$	(66,574)	$	40,325
Adjustments to reconcile net income to net cash provided by operating activities
Net accretion of bond premium	5,501		5,039
Depreciation and amortization	3,318		2,618
Stock-based compensation expense	2,927		4,045
Net realized investment (gains) losses	77,628		(40,304)
Net cash flows from equity and trading investments	17,148		639
Deferred income tax benefit	(19,229)		7,716
Changes in:
Accrued investment income	697		574
Premiums receivable	(19,176)		(56,062)
Deferred policy acquisition costs	(3,274)		(8,767)
Reinsurance receivables	(55,512)		8,558
Prepaid reinsurance premiums	(4,956)		(1,049)
Income taxes receivable	(19,184)		5,913
Other assets	(9,162)		(18,706)
Losses and loss settlement expenses	55,935		29,183
Unearned premiums	25,639		47,062
Accrued expenses and other liabilities	(2,098)		10,562

Deferred income taxes	4,184		—
Other, net	10,420		(1,070)
Cash from operating activities	70,806		(4,049)

Net cash provided by operating activities	$	4,232	$	36,276
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	16,907	$	36,490

Proceeds from call and maturity of available-for-sale investments	159,709		111,824
Proceeds from sale of other investments	2,750		2,315
Purchase of investments Mortgage Loans	(5,323)		(10,723)
Purchase of investments available-for-sale	(117,299)		(44,400)
Purchase of other investments	(3,577)		(11,986)

Purchase of property and equipment	$	(12,040)	(20,920)
Net cash provided by investing activities	41,127		62,600
Cash Flows From Financing Activities
Issuance of common stock	$	(562)	$	1,645
Repurchase of common stock	(2,741)		(69)
Payment of cash dividends	(16,516)		(16,122)
Net cash used in financing activities	$	(19,819)	(14,546)

Net Change in Cash and Cash Equivalents	$	25,540	$	84,330
Cash and Cash Equivalents at Beginning of Period	120,722		64,454
Cash and Cash Equivalents at End of Period	$	146,262	$	148,784

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

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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 46 states and the District of Columbia.

Basis of Presentation

The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K for the year ended December 31, 2019, including certain financial statement footnote disclosures, is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; loss settlement expenses; and pension and post-retirement benefit obligations.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Management of UFG believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.

Segment Information

On September 19, 2017, the Company announced that it had agreed to sell its subsidiary, United Life Insurance Company ("United Life"), to Kuvare US Holdings, Inc. ("Kuvare"). The sale closed on March 30, 2018. Prior to the announcement to sell United Life, we had two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance business has six domestic locations from which it conducts its direct business. The life insurance segment operated from our home office in Cedar Rapids, Iowa. Because all of our insurance is sold domestically, we have no revenues from foreign operations.

After the announcement of the United Life transaction, our continuing operations, the property and casualty insurance business, was reported as one reportable segment. The property and casualty insurance business profit or loss is consistent with consolidated reporting as disclosed on the Consolidated Statements of Income and Comprehensive Income. We analyze the property and casualty insurance business results based on profitability (i.e., loss ratios), expenses and return on equity. The Company's property and casualty insurance business was determined using a management approach to make decisions on operating matters, including allocating resources, assessing performance, determining which products to market and sell, determining distribution networks with insurance

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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 six-month periods ended June 30, 2020 and 2019, we made payments for income taxes totaling $35 and $1,537, respectively. We did not receive a tax refund during the six-month period ended June 30, 2020 and we received a tax refund of $5,401 during the six-month period ended June 30, 2019.

For the six-month periods ended June 30, 2020 and 2019, we made no interest payments (excluding interest credited to policyholders’ accounts).

Deferred Policy Acquisition Costs ("DAC")

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the six-month period ended June 30, 2020.




	Total
Recorded asset at beginning of period	$	94,292
Underwriting costs deferred	109,619
Amortization of deferred policy acquisition costs	(106,345)
Recorded asset at June 30, 2020	$	97,566

Property and casualty insurance policy acquisition costs deferred are amortized as premium revenue is recognized. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value. This takes into account the premium to be earned, losses and loss settlement expenses expected to be incurred and certain other costs expected to be incurred as the premium is earned.

Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss ("NOL") carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has considered the

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implications of the CARES Act on its tax provision and has included an income tax benefit of $11.1 million as the result of this Act.

Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders' equity and do not impact federal income tax expense.

We reported consolidated federal income tax benefit of $34,189 for the six-month period ended June 30, 2020 compared to income tax expense of $9,781 during the same period of 2019. Our effective tax rate is different than the federal statutory rate of 21 percent, due principally to the impact of the provisions of the CARES Act.

The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If, based on review, it appears not more likely than not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at June 30, 2020 or December 31, 2019. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.

We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2015. The Internal Revenue Service is conducting an examination of our federal income tax return for the 2017 tax year.

Leases

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

Variable Interest Entities

The Company and certain related parties are equity investors in one investment in which the Company determined is a variable interest entity ("VIE") as a result of participation in the risks and rewards of the VIE based on the objectives and strategies of the VIE. The VIE is a limited liability company that primarily invests in commercial real estate. The Company and certain related parties are not the primary beneficiary largely due to their inability to influence management or direct the activities that most significantly impact the VIE's economic performance. Based on these facts and circumstances, the Company has a variable interest in the VIE, but has not consolidated the VIE's financial results as it is not the primary beneficiary. The Company's investment is reported in other long-term investments in the Consolidated Balance Sheets and accounted for under the equity method of accounting. The fair value of the VIE at June 30, 2020 was $6,849 and there are no future funding commitments.

Credit Losses

The Company recognizes credit losses for our available-for-sale fixed-maturity portfolio, reinsurance receivables, mortgage loans and premium receivables by setting up allowances which are remeasured each reporting period and recorded in the Consolidated Statements of Income and Comprehensive Income.

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For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history.

The Company does not recognize an allowance for credit losses for accrued interest receivable for available-for-sale fixed-maturity securities, which is recorded in "Accrued investment income" in the Consolidated Balance Sheets and "Investment income, net of investment expenses" in the Consolidated Statements of Income and Comprehensive Income. The Company considers collections of accrued investment income within six months to be timely and therefore not requiring a write-off. If a write-off is required for accrued investment income outstanding greater than six months, the Company writes off accrued interest by reversing net investment income. For more information on credit losses and the allowance for credit losses for available-for-sale fixed-maturity portfolio, see Note 2 "Summary of Investments."

An allowance for mortgage loan losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments which have similar risk characteristics. To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. On a quarterly basis, quantitative credit risk metrics, including for example, cash-flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations. This allowance is presented as a separate line in the Consolidated Balance Sheets beneath the asset value as well as presented net and recorded through "Net realized investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income. For more information on credit losses and the allowance for credit losses for our investment in mortgage loans see Note 3 "Fair Value of Financial Instruments."

For reinsurance receivables, the Company's model estimates expected credit loss by multiplying the exposure at default by both the probability of default and loss given default ("LGD"). The LGD is estimated by the rating of the Company, historical relationship with UFG, existence of letters of credit and known regulation the Company may be held accountable for. The ultimate LGD percentage is estimated after considering Moody’s experience with unsecured year 1 bond recovery rates from 1983-2017. The allowance calculated as of June 30, 2020 is recorded through the line "Reinsurance receivables and recoverables" in the Consolidated Balance Sheets and through the line "Other underwriting expenses" in the Consolidated Statements of Income and Other Comprehensive Income. As of June 30, 2020, the Company had a credit loss allowance for reinsurance receivables of $41.


Rollforward of credit loss allowance for reinsurance receivable:
	As of
	June 30, 2020
Beginning balance, January 1, 2020	$	38
Current-period provision for expected credit losses	3
Write-off charged against the allowance, if any	—
Recoveries of amounts previously written off, if any	—
Ending balance of the allowance for reinsurance receivable, June 30, 2020	$	41

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

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Subsequent Events

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

Recently Issued Accounting Standards

Accounting Standards Adopted in 2020

Intangibles - Other Internal Use Software

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

Financial Instruments - Credit Losses

In June 2016, the FASB issued new guidance on the measurement of credit losses for most financial instruments. The new guidance replaces the incurred loss model for recognizing credit losses with an expected loss model for instruments measured at amortized cost and requires allowances to be recorded for available-for-sale debt securities rather than reduce the carrying amount. These allowances are remeasured each reporting period. The new guidance was effective for annual periods beginning after December 15, 2019 and interim periods within those years. The new guidance impacted the Company's impairment model related to our available-for-sale fixed-maturity portfolio, reinsurance receivables and mortgage loans. The Company has performed a run of the credit loss models as of January 1, 2020. These models resulted in an immaterial expected credit loss at January 1, 2020. Prior to the adoption of the new guidance, the Company utilized an aging method to estimate credit losses on premiums receivable. This aging method is permitted under the new guidance. The Company adopted the new guidance prospectively as of January 1, 2020 with an immaterial estimated cumulative effect adjustment to opening retained earnings. This cumulative effect adjustment is an allowance related to the Company's reinsurance receivables. The adoption of the new guidance did not have a material impact on the Company's financial position and results of operations.

Goodwill

In January 2017, the FASB issued new guidance which simplifies the test for goodwill impairment. The new guidance eliminates the implied fair value calculation when measuring a goodwill impairment charge. Under the new guidance, impairment charges are based on the excess of the carrying value over fair value of goodwill. The new guidance was effective for annual and interim periods beginning after December 15, 2019. The Company

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adopted the new guidance as of January 1, 2020. The adoption did not have a significant impact on the Company's financial position or results of operations.

Financial Instruments - Disclosures

In August 2018, the FASB issued new guidance which modifies the disclosure requirements on fair value measurements of financial instruments. The new guidance removes the requirement for disclosing the amount and reason for transfers between Level 1 and Level 2 investment securities and the valuation processes for Level 3 fair value measurements. The guidance also requires additional disclosures on the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance as of January 1, 2020. The adoption modified existing fair value disclosures, but did not have an impact on the Company's financial position or results of operations.

Pending Adoption of Accounting Standards

Defined Benefit Plans - Disclosures

In August 2018, the FASB issued new guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension and postretirement plans. The new guidance removes the requirement for disclosing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs in the next year and the sensitivity of postretirement health plans to one-percentage-point changes in medical trend rates. The new guidance is effective for annual periods beginning after December 15, 2020. The Company will adopt the new guidance as of January 1, 2021. Management currently believes the new guidance will modify existing disclosures, but will not have an impact on the Company's financial position and results of operations.

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NOTE 2. SUMMARY OF INVESTMENTS

Fair Value of Investments

A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in available-for-sale fixed maturity and equity securities, presented on a consolidated basis, as of June 30, 2020 and December 31, 2019, is provided below:


June 30, 2020
Type of Investment	Cost or Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value		Allowance for Credit Losses		Carrying Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	50,353	$	869	$	—	$	51,222	$	—	$	51,222
U.S. government agency	63,503		4,005		—		67,508		—		67,508
States, municipalities and political subdivisions
General obligations:
Midwest	81,486		4,068		—		85,554		—		85,554
Northeast	30,012		1,487		—		31,499		—		31,499
South	105,479		5,126		—		110,605		—		110,605
West	105,196		6,647		—		111,843		—		111,843
Special revenue:
Midwest	127,824		8,508		—		136,332		—		136,332
Northeast	58,414		4,218		—		62,632		—		62,632
South	221,309		15,894		—		237,203		—		237,203
West	134,462		8,532		—		142,994		—		142,994
Foreign bonds	26,428		1,739		106		28,061		—		28,061
Public utilities	77,529		6,713		—		84,242		—		84,242
Corporate bonds
Energy	25,928		2,353		11		28,270		—		28,270
Industrials	39,625		3,115		—		42,740		—		42,740
Consumer goods and services	47,134		3,726		52		50,808		—		50,808
Health care	7,327		869		—		8,196		—		8,196
Technology, media and telecommunications	35,253		4,010		—		39,263		—		39,263
Financial services	96,415		6,680		317		102,778		10		102,768
Mortgage-backed securities	15,737		335		2		16,070		—		16,070
Collateralized mortgage obligations
Government national mortgage association	74,741		5,707		1		80,447		—		80,447
Federal home loan mortgage corporation	95,076		2,862		160		97,778		—		97,778
Federal national mortgage association	76,272		3,015		83		79,204		—		79,204
Asset-backed securities	314		613		—		927		—		927

Total Available-for-Sale Fixed Maturities	$	1,595,817	$	101,091	$	732	$	1,696,176	$	10	$	1,696,166

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December 31, 2019
Type of Investment	Cost or Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	69,300	$	203	$	12	$	69,491
U.S. government agency	97,962		2,344		104		100,202
States, municipalities and political subdivisions
General obligations:
Midwest	85,607		2,987		—		88,594
Northeast	30,120		1,150		—		31,270
South	111,688		3,515		—		115,203
West	105,569		4,748		—		110,317
Special revenue:
Midwest	133,717		6,175		—		139,892
Northeast	58,665		2,878		—		61,543
South	224,214		10,452		—		234,666
West	138,557		6,287		—		144,844
Foreign bonds	4,936		181		—		5,117
Public utilities	60,950		2,701		—		63,651
Corporate bonds
Energy	28,695		1,429		—		30,124
Industrials	52,249		1,766		—		54,015
Consumer goods and services	47,131		2,335		—		49,466
Health care	8,998		482		—		9,480
Technology, media and telecommunications	25,931		1,739		—		27,670
Financial services	96,613		3,870		230		100,253
Mortgage-backed securities	6,250		127		21		6,356
Collateralized mortgage obligations
Government national mortgage association	78,400		2,053		97		80,356
Federal home loan mortgage corporation	123,572		1,150		220		124,502
Federal national mortgage association	70,322		1,631		108		71,845
Asset-backed securities	314		436		—		750

Total Available-for-Sale Fixed Maturities	$	1,659,760	$	60,639	$	792	$	1,719,607

Maturities

The amortized cost and fair value of available-for-sale and trading fixed maturity securities at June 30, 2020, by contractual maturity, are shown in the following tables. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.

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Maturities
	Available-For-Sale						Trading
June 30, 2020	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	54,841	$	55,305	$	1,122	$	3,085
Due after one year through five years	324,957		343,117		6,703		6,565
Due after five years through 10 years	434,946		468,553		—		—
Due after 10 years	518,933		554,775		1,091		1,573
Asset-backed securities	314		927		—		—
Mortgage-backed securities	15,737		16,070		—		—
Collateralized mortgage obligations	246,089		257,429		—		—
Allowance for credit losses	—		(10)		—		—
	$	1,595,817	$	1,696,166	$	8,916	$	11,223

Net Realized Investment Gains and Losses

Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net realized investment gains (losses):
Fixed maturities:
Available-for-sale	$	30	$	(8)	$	—	$	142
Allowance for credit losses	49		—		(10)		—
Trading securities
Change in fair value	1,601		501		(1,008)		2,247
Sales	(305)		92		(154)		92
Equity securities
Change in fair value	29,809		12,499		(60,838)		37,133
Sales	(15,406)		507		(15,586)		705
Mortgage loans allowance for credit losses	1		—		(4)		(15)





Real estate	—		—		(28)		—
Total net realized investment gains (losses)	$	15,779	$	13,591	$	(77,628)	$	40,304

The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Proceeds from sales	$	4,996	$	—	$	16,907	$	36,490
Gross realized gains	26		—		198		30
Gross realized losses	113		—		495		13

Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily convertible securities which are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains. Our portfolio of trading securities had a fair value of $11,223 and $15,256 at June 30, 2020 and December 31, 2019, respectively.

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Funding Commitment

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through July 31, 2028 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $10,886 at June 30, 2020.

In addition, the Company invested $25,000 in December 2019 in a limited liability partnership investment fund which is subject to a 3-year lockup with a 60 day minimum notice, with 4 possible repurchase dates per year, after the 3-year lockup period is met. The fair value of the investment at June 30, 2020 was $24,541 and there are no remaining capital contributions with this investment.

Unrealized Appreciation

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


	Six Months Ended June 30,
	2020		2019
Change in net unrealized investment appreciation
Available-for-sale fixed maturities	$	40,511	$	61,824
Income tax effect	(8,507)		(12,983)
Total change in net unrealized investment appreciation, net of tax	$	32,004	$	48,841

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 June 30, 2020:


Rollforward of allowance for credit losses for available-for-sale fixed maturity securities:
	As of
	June 30, 2020
Beginning balance, January 1, 2020	$	—
Additions to the allowance for credit losses for which credit losses were not previously recorded	10
Reductions for securities sold during the period (realized)	—
Writeoffs charged against the allowance	—
Recoveries of amounts previously written off	—
Ending balance, June 30, 2020	$	10

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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 June 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.



June 30, 2020	Less than 12 months								12 months or longer						Total
Type of Investment	Number of Issues	Fair Value		Gross Unrealized Depreciation		Number of Issues	Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds













Foreign bonds	1	$	2,900	$	106	—	$	—	$	—	$	2,900	$	106

Corporate bonds
Energy	1	451		11		—	—		—		451		11

Consumer goods and services	1	3,090		52		—	—		—		3,090		52


Financial services	1	2,985		60		—	—		—		2,985		60
Mortgage-backed securities	—	—		—		7	188		2		188		2
Collateralized mortgage obligations
Federal home loan mortgage corporation	12	24,455		160		1	89		1		24,544		160
Federal national mortgage association	4	17,986		83		—	—		—		17,986		83
Government national mortgage association	—	—		—		1	145		1		145		1


Total Available-for-Sale Fixed Maturities	20	$	51,867	$	471	9	$	422	$	4	$	52,289	$	475

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, 2019	Less than 12 months								12 months or longer						Total
Type of Investment	Number of Issues	Fair Value		Gross Unrealized Depreciation		Number of Issues	Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	—	$	—	$	—	2	$	4,733	$	12	$	4,733	$	12
U.S. government agency	3	13,846		104		—	—		—		13,846		104













Corporate bonds





Financial services	3	10,906		142		1	4,913		88		15,819		230
Mortgage-backed securities	—	—		—		13	1,585		21		1,585		21
Collateralized mortgage obligations
Federal home loan mortgage corporation	12	50,829		183		3	4,844		37		55,673		220
Federal national mortgage association	4	23,515		90		3	1,102		18		24,617		108
Government national mortgage association	2	8,444		38		5	3,053		59		11,497		97


Total Available-for-Sale Fixed Maturities	24	$	107,540	$	557	27	$	20,230	$	235	$	127,770	$	792

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NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.

Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:

•Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.

•Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.

•Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.

We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.

To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years' experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.

In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.

When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.

The mortgage loan portfolio consists entirely of commercial mortgage loans. The fair value of our mortgage loans is determined by modeling performed by our third party fund manager based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value.

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Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.

For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Supplemental Executive Retirement and Deferral Plan (the "Executive Retirement Plan"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plan. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of June 30, 2020, the cash surrender value of the COLI policies was $7,107, which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.

A summary of the carrying value and estimated fair value of our financial instruments at June 30, 2020 and December 31, 2019 is as follows:


	June 30, 2020						December 31, 2019
	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Fixed maturities:
Available-for-sale securities	$	1,696,176	$	1,696,166	$	1,719,607	$	1,719,607
Trading securities	11,223		11,223		15,256		15,256
Equity securities	207,626		207,626		299,203		299,203
Mortgage loans	48,499		47,609		43,992		42,448
Other long-term investments	68,941		68,941		78,410		78,410
Short-term investments	175		175		175		175
Cash and cash equivalents	146,262		146,262		120,722		120,722
Corporate-owned life insurance	7,107		7,107		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 June 30, 2020 and December 31, 2019:


June 30, 2020			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	51,222	$	—	$	51,222	$	—
U.S. government agency	67,508		—		67,508		—
States, municipalities and political subdivisions
General obligations
Midwest	85,554		—		85,554		—
Northeast	31,499		—		31,499		—
South	110,605		—		110,605		—
West	111,843		—		111,843		—
Special revenue
Midwest	136,332		—		136,332		—
Northeast	62,632		—		62,632		—
South	237,203		—		237,203		—
West	142,994		—		142,994		—
Foreign bonds	28,061		—		28,061		—
Public utilities	84,242		—		84,242		—
Corporate bonds
Energy	28,270		—		28,270		—
Industrials	42,740		—		42,740		—
Consumer goods and services	50,808		—		50,808		—
Health care	8,196		—		8,196		—
Technology, media and telecommunications	39,263		—		39,263		—
Financial services	102,778		—		102,528		250
Mortgage-backed securities	16,070		—		16,070		—
Collateralized mortgage obligations
Government national mortgage association	80,447		—		80,447		—
Federal home loan mortgage corporation	97,778		—		97,778		—
Federal national mortgage association	79,204		—		79,204		—
Asset-backed securities	927		—		—		927

Total Available-for-Sale Fixed Maturities	$	1,696,176	$	—	$	1,694,999	$	1,177
TRADING
Fixed maturities:
Bonds















Corporate bonds

Industrials	$	982	$	—	$	982	$	—
Consumer goods and services	1,169		—		1,169		—
Health care	4,717		—		4,717		—

Financial services	1,588		—		1,588		—

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Redeemable preferred stocks	2,767		2,767		—		—
Total Trading Securities	$	11,223	$	2,767	$	8,456	$	—
EQUITY SECURITIES
Common stocks
Public utilities	$	14,873	$	14,873	$	—	$	—
Energy	9,913		9,913		—		—
Industrials	30,737		30,737		—		—
Consumer goods and services	27,977		27,977		—		—
Health care	27,216		27,216		—		—
Technology, media and telecommunications	16,470		16,470		—		—
Financial services	74,353		74,353		—		—
Nonredeemable preferred stocks	6,087		5,492		—		595
Total Equity Securities	$	207,626	$	207,031	$	—	$	595
Short-Term Investments	$	175	$	175	$	—	$	—
Money Market Accounts	$	71,785	$	71,785	$	—	$	—
Corporate-Owned Life Insurance	$	7,107	$	—	$	7,107	$	—
Total Assets Measured at Fair Value	$	1,994,092	$	281,758	$	1,710,562	$	1,772


December 31, 2019			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	69,491	$	—	$	69,491	$	—
U.S. government agency	100,202		—		100,202		—
States, municipalities and political subdivisions
General obligations
Midwest	88,594		—		88,594		—
Northeast	31,270		—		31,270		—
South	115,203		—		115,203		—
West	110,317		—		110,317		—
Special revenue
Midwest	139,892		—		139,892		—
Northeast	61,543		—		61,543		—
South	234,666		—		234,666		—
West	144,844		—		144,844		—
Foreign bonds	5,117		—		5,117		—
Public utilities	63,651		—		63,651		—
Corporate bonds
Energy	30,124		—		30,124		—
Industrials	54,015		—		54,015		—
Consumer goods and services	49,466		—		49,466		—
Health care	9,480		—		9,480		—

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Technology, media and telecommunications	27,670		—		27,670		—
Financial services	100,253		—		100,003		250
Mortgage-backed securities	6,356		—		6,356		—
Collateralized mortgage obligations
Government national mortgage association	80,356		—		80,356		—
Federal home loan mortgage corporation	124,502		—		124,502		—
Federal national mortgage association	71,845		—		71,845		—
Asset-backed securities	750		—		—		750

Total Available-for-Sale Fixed Maturities	$	1,719,607	$	—	$	1,718,607	$	1,000
TRADING
Fixed maturities:
Bonds















Corporate bonds


Consumer goods and services	$	2,276	$	—	$	2,276	$	—
Health care	4,701		—		4,701		—
Technology, media and telecommunications	1,732		—		1,732		—
Financial services	2,460		—		2,460		—






Redeemable preferred stocks	4,087		4,087		—		—
Total Trading Securities	$	15,256	$	4,087	$	11,169	—
EQUITY SECURITIES
Common stocks
Public utilities	$	16,295	$	16,295	$	—	$	—
Energy	14,639		14,639		—		—
Industrials	57,330		57,330		—		—
Consumer goods and services	29,935		29,935		—		—
Health care	27,285		27,285		—		—
Technology, media and telecommunications	19,265		19,265		—		—
Financial services	127,780		127,780		—		—
Nonredeemable preferred stocks	6,674		6,079		—		595
Total Equity Securities	$	299,203	$	298,608	$	—	$	595
Short-Term Investments	$	175	$	175	$	—	$	—
Money Market Accounts	$	9,334	$	9,334	$	—	$	—
Corporate-Owned Life Insurance	$	6,777	$	—	$	6,777	$	—
Total Assets Measured at Fair Value	$	2,050,352	$	312,204	$	1,736,553	$	1,595

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

We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit

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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 June 30, 2020 and December 31, 2019 was reasonable.

For the three- and six-month periods ended June 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 June 30, 2020:

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at

Valuation Technique(s)

Unobservable inputs

Range of weighted average significant unobservable inputs

June 30, 2020

Corporate bonds - financial services

250

Fair value equals cost

Fixed Maturities asset-backed securities

927

Discounted cash flow

Probability of default

4% - 6%

Nonredeemable preferred stocks

595

Discounted cash flow

Multiplier

3x - 4x

During the three- and six-month periods ended June 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 June 30, 2020:


	Corporate bonds		Asset-backed securities		Equities		Total
Balance at April 1, 2020	$	250	$	921	$	595	$	1,766

Net unrealized gains⁽¹⁾	—		6		—		6





Balance at June 30, 2020	$	250	$	927	$	595	$	1,772

(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 six-month period ended June 30, 2020:


	Corporate bonds		Asset-backed securities		Equities		Total
Balance at January 1, 2020	$	250	$	750	$	595	$	1,595

Net unrealized gains⁽¹⁾	—		177		—		177





Balance at June 30, 2020	$	250	$	927	$	595	$	1,772

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

Commercial Mortgage Loans

The following tables present the carrying value of our commercial mortgage loans and additional information at June 30, 2020 and December 31, 2019:


Commercial Mortgage Loans
	June 30, 2020		December 31, 2019
Loan-to-value	Carrying Value		Carrying Value
Less than 65%	$	39,189	$	34,024
65%-75%	8,496		8,496
Total amortized cost	$	47,685	$	42,520
Allowance for mortgage loan losses	(76)		(72)
Mortgage loans, net	$	47,609	$	42,448


Mortgage Loans by Region
	June 30, 2020						December 31, 2019
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
East North Central	$	3,245	6.8	%	$	3,245	7.6	%
Southern Atlantic	9,594		20.1		7,026		16.5
East South Central	8,278		17.4		8,358		19.7
New England	6,588		13.8		6,588		15.5
Middle Atlantic	15,007		31.4		15,076		35.5
Mountain	2,227		4.7		2,227		5.2
West North Central	2,746		5.8		—		—
Total mortgage loans at amortized cost	$	47,685	100.0	%	$	42,520	100.0	%

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Mortgage Loans by Property Type
	June 30, 2020						December 31, 2019
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
Commercial
Multifamily	$	17,064	35.7	%	$	11,741	27.6	%
Office	11,759		24.7		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	6,511		13.7		6,580		15.5
Total mortgage loans at amortized cost	$	47,685	100.0	%	$	42,520	100.0	%


Amortized Cost Basis by Year of Origination and Credit Quality Indicator
	2020		2019		2018		Total
Commercial mortgage loans:
Risk Rating:
1-2 internal grade	$	5,323	$	8,416	$	18,862	$	32,601
3-4 internal grade	—		8,496		6,588		15,084
5 internal grade	—		—		—		—
6 internal grade	—		—		—		—
7 internal grade	—		—		—		—
Total commercial mortgage loans	$	5,323	$	16,912	$	25,450	$	47,685
Current-period write-offs	—		—		—		—
Current-period recoveries	—		—		—		—
Current-period net write-offs	$	—	$	—	$	—	$	—

Commercial mortgage loans carrying value excludes accrued interest of $168. As of June 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 June 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
	June 30, 2020
Beginning balance, January 1, 2020	$	72
Current-period provision for expected credit losses	4
Write-off charged against the allowance, if any	—
Recoveries of amounts previously written off, if any	—
Ending balance of the allowance for mortgage loan losses, June 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 June 30, 2020 and December 31, 2019 (net of reinsurance amounts):



	June 30, 2020		December 31, 2019
Gross liability for losses and loss settlement expenses at beginning of year	$	1,421,754	$	1,312,483
Ceded losses and loss settlement expenses	(68,536)		(57,094)
Net liability for losses and loss settlement expenses at beginning of year	$	1,353,218	$	1,255,389
Losses and loss settlement expenses incurred for claims occurring during
Current year	$	415,246	$	835,507
Prior years	(23,770)		(5,335)
Total incurred	$	391,476	$	830,172
Losses and loss settlement expense payments for claims occurring during
Current year	$	143,828	$	333,975
Prior years	246,197		398,368
Total paid	$	390,025	$	732,343
Net liability for losses and loss settlement expenses at end of year	$	1,354,669	$	1,353,218
Ceded loss and loss settlement expenses	123,020		68,536
Gross liability for losses and loss settlement expenses at end of period	$	1,477,689	$	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 June 30, 2020 the majority of favorable development came from workers' compensation and commercial fire and allied lines. 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 six-month period ended June 30, 2020 the majority of favorable development came from workers' compensation and commercial fire and allied lines. This favorable development was partially offset by unfavorable development of the commercial liability line. All other lines combined contributed a relatively modest amount of overall favorable development during this six-month period.

For the three-month period ended June 30, 2019, the majority of unfavorable development came from the commercial liability line with a partial offset coming primarily from favorable development in workers compensation and commercial fire and allied lines of business. All other lines combined contributed a relatively minimal amount of overall unfavorable development during this three-month period. For the six-month period ended June 30, 2019, the majority of unfavorable development came from the commercial liability line,with a partial offset coming primarily from favorable development in workers' compensation, and fidelity and surety lines. All other lines combined contributed a relatively minimal amount of overall unfavorable development during this six-month period. The unfavorable development in both periods in the commercial liability line was primarily from prior year reserve strengthening on auto liability and other liability claims.

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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 Plan						Postretirement Benefit Plan
Three Months Ended June 30,	2020		2019		2020		2019

Net periodic benefit cost
Service cost	$	2,707	$	1,997	$	432	$	456
Interest cost	2,066		2,080		253		318
Expected return on plan assets	(3,385)		(2,696)		—		—
Amortization of prior service credit	—		—		(2,021)		(2,221)
Amortization of net loss	979		901		94		224
Net periodic benefit cost	$	2,367	$	2,282	$	(1,242)	$	(1,223)


	Pension Plan						Postretirement Benefit Plan
Six Months Ended June 30,	2020		2019		2020		2019

Net periodic benefit cost
Service cost	$	5,414	$	3,994	$	864	$	912
Interest cost	4,132		4,160		506		637
Expected return on plan assets	(6,770)		(5,392)		—		—
Amortization of prior service credit	—		—		(4,042)		(4,242)
Amortization of net loss	1,958		1,802		188		447
Net periodic benefit cost	$	4,734	$	4,564	$	(2,484)	$	(2,246)

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 six-month period ended June 30, 2020, we contributed $5,000 to the pension plan.

NOTE 6. STOCK-BASED COMPENSATION

Non-Qualified Employee Stock Award Plan

The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, restricted stock units, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of UFG common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of UFG common stock issuable at any time and from time to time pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc. Stock Plan (as amended, the "Stock Plan"). At June 30, 2020, there were 704,260 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

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Board of Directors may also take any action it deems necessary and appropriate for the administration of the Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees.

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

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


Authorized Shares Available for Future Award Grants	Six Months Ended June 30, 2020	From Inception to June 30, 2020
Beginning balance	834,910	1,900,000
Additional shares authorized	—	1,500,000
Number of awards granted	(165,024)	(3,281,445)
Number of awards forfeited or expired	34,374	585,705
Ending balance	704,260	704,260
Number of option awards exercised	7,200	1,450,389
Number of unrestricted stock awards granted	—	10,090
Number of restricted stock awards vested	63,600	164,378

Non-Qualified Non-Employee Director Stock Plan

The United Fire Group, Inc. Non-Employee Director Stock Plan (formerly known as the 2005 Non-Qualified Non- Employee Director Stock Option and Restricted Stock Plan) (the "Director Stock Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of UFG's common stock to non-employee directors. On May 20, 2020, the Company’s shareholders approved amendments to the Director Stock Plan, previously approved by the Company’s Board of Directors, to (i) increase the number of shares available for future awards under the Director Stock Plan from 300,000 to 450,000, (ii) extend the expiration date of the Director Stock Plan from December 31, 2020 to December 31, 2029, (iii) allow for the grant of awards of restricted stock units, and (iv) rename the Director Stock Plan as the "United Fire Group, Inc. Non-Employee Director Stock Plan." At June 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 Grants	Six Months Ended June 30, 2020	From Inception to June 30, 2020
Beginning balance	34,863	300,000
Additional authorization	150,000	150,000
Number of awards granted	(24,728)	(313,868)
Number of awards forfeited or expired	—	24,003
Ending balance	160,135	160,135
Number of option awards exercised	14,183	133,275
Number of restricted stock awards vested	14,300	98,491

Stock-Based Compensation Expense

For the three-month periods ended June 30, 2020 and 2019, we recognized stock-based compensation expense of $1,292 and $1,357, respectively. For the six-month periods ended June 30, 2020 and 2019, we recognized stock-based compensation expense of $2,927 and $4,045, respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.

As of June 30, 2020, we had $6,289 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	$	2,159
2021	2,666
2022	1,146
2023	225
2024	82
2025	11
Total	$	6,289

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 June 30, 2020 and 2019:


	Three Months Ended June 30,
(In Thousands, Except Share Data)	2020						2019
	Basic		Diluted		Basic		Diluted
Net income (loss)	$	5,960	$	5,960	$	(4,196)	$	(4,196)
Weighted-average common shares outstanding	25,024,855		25,024,855		25,210,354		25,210,354
Add dilutive effect of restricted stock unit awards	—		213,203		—		—
Add dilutive effect of stock options	—		17,546		—		—
Weighted-average common shares outstanding	25,024,855		25,255,604		25,210,354		25,210,354
Earnings (loss) per common share	$	0.24	$	0.24	$	(0.17)	$	(0.17)
Awards excluded from diluted earnings per share calculation⁽¹⁾	—		815,279		—		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.


	Six Months Ended June 30,
(In Thousands, Except Share Data)	2020						2019
	Basic		Diluted		Basic		Diluted
Net income (loss)	$	(66,574)	$	(66,574)	$	40,325	$	40,325
Weighted-average common shares outstanding	25,019,441		25,019,441		25,170,877		25,170,877
Add dilutive effect of restricted stock unit awards	—		—		—		257,810
Add dilutive effect of stock options	—		—		—		231,116
Weighted-average common shares outstanding	25,019,441		25,019,441		25,170,877		25,659,803
Earnings (loss) per common share	$	(2.66)	$	(2.66)	$	1.60	$	1.57
Awards excluded from diluted earnings per share calculation⁽¹⁾	—		515,984		—		63,897

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

NOTE 8. CREDIT FACILITY

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

The New Credit Agreement includes customary events of default, including default in payments of principals, default in payment of other indebtedness, change of control and voluntary and involuntary insolvency proceedings, the occurrence of which would allow the Lenders to accelerate payment of all amounts outstanding thereunder and terminate any further commitments to lend.

The entry into the New Credit Agreement was completed as part of the Company’s regular course of financial planning and was not initiated as a result of market conditions resulting from the COVID-19 pandemic.

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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 June 30, 2020 and 2019, respectively. For the six-month periods ended June 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 June 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 June 30, 2020:


			Liability for
	Net unrealized		underfunded
	appreciation		employee
	on investments		benefit costs⁽¹⁾		Total
Balance as of March 31, 2020	51,779		(33,280)		$	18,499
Change in accumulated other comprehensive income before reclassifications	27,566		—		27,566
Reclassification adjustments from accumulated other comprehensive income (loss)	(62)		847		785
Balance as of June 30, 2020	$	79,283	$	(32,433)	$	46,850

(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 six-month period ended June 30, 2020:


			Liability for
	Net unrealized		underfunded
	appreciation		employee
	on investments		benefit costs⁽¹⁾		Total
Balance as of January 1, 2020	47,279		(34,127)		$	13,152
Change in accumulated other comprehensive income before reclassifications	31,971		—		31,971
Reclassification adjustments from accumulated other comprehensive income (loss)	33		1,694		1,727
Balance as of June 30, 2020	$	79,283	$	(32,433)	$	46,850

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 June 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 six-month periods ended June 30, 2020 and 2019:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

Components of lease expense:
Operating lease expense	$	1,926	$	1,912	$	3,956	$	3,820
Less sublease income	63		126		186		252
Net lease expense	1,863		1,786		3,770		3,568
Cash flows information related to leases:
Operating cash outflow from operating leases	1,829		1,808		3,469		3,608

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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 46 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. We are continuing to evaluate our strategic plan for the personal lines business in Louisiana.

To ensure no lapse in coverage to policyholders, Nationwide will provide replacement policies to our personal lines policyholders at the time of renewal. Nationwide has agreed that these replacement policies will reflect substantially similar or improved coverage and pricing.

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 currently represents 94 percent of our business mix. It was not initiated as a result of market conditions from the COVID-19 pandemic.

The Company recognized other income of $5.7 million before tax during the second quarter of 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 six-month period ended June 30, 2020, approximately 49.5 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

Subsequent to December 31, 2019, the spread of the COVID-19 virus 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 since the middle of March 2020. The Company, in response to the challenges presented by COVID-19, 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 travel for non-essential employees. Additionally, certain routine work completed by our field marketing, claims and risk control representatives, such as premium audits and inspections, is being completed following social distancing recommendations. 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

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pandemic and, when appropriate, will adjust our operations in response. We are developing a return to workplace plan for our employees, but have not 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 be affording coverage when appropriate. At this time, 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 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 capital and liquidity positions are 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 Note 8 "Credit Facility" for more information. Our year-to-date cash flows provided by operations remained positive and our cash and cash equivalents have increased during the first six-months of 2020 since prior year-end. We have implemented state-mandated and optional payment leniency programs for our policyholders. As of June 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 second quarter of 2020, management did not repurchase any shares of stock, suspending it's share repurchase program in mid-March 2020 for the time being. Also, the Company maintained the same level of cash dividend payments of $0.33 per share during the second quarter of 2020 as were paid in the first quarter of 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 tjeir 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 qualitative impairment assessment of our goodwill and intangible assets at June 30, 2020. As a result of this assessment, we did not recognize an impairment charge for goodwill or intangible assets at June 30, 2020.

As of June 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 June 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 six 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 June 30, 2020 we had a recovery in the fair value of equity securities of $29.8 million and an increase in value of our investments in limited liability partnerships of $1.0 million from the values

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reported at March 31, 2020. Year-to-date in 2020 the decrease in the fair value of equity securities from December 31, 2019 was $60.8 million.

The Company has a highly rated fixed maturity portfolio, with low credit risk. The Company recognized an unrealized gain of $32.0 million, net of tax, at June 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 June 30, 2020. For more information on credit losses recognized in the three- and six-month periods ended June 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 June 30,														Six Months Ended June 30,
(In Thousands, Except Ratios)	2020			2019			%		2020			2019			%
Revenues
Net premiums earned	$	263,609		$	276,486		(4.7)	%	$	532,458		$	538,800		(1.2)	%
Investment income, net of investment expenses	12,696			14,120			(10.1)		15,059			30,632			(50.8)
Change in the value of equity securities	29,809			12,499			138.5		(60,838)			37,133			(263.8)
All other net realized gains (losses)	(14,030)			1,092			NM		(16,790)			3,171			NM
Net realized investment gains (losses)	15,779			13,591			16.1		(77,628)			40,304			(292.6)
Other income	5,719			—			NM		5,719			—			NM
Total revenues	$	297,803		$	304,197		(2.1)	%	$	475,608		$	609,736		(22.0)	%

Benefits, Losses and Expenses
Losses and loss settlement expenses	$	204,973		$	220,009		(6.8)	%	$	391,476		$	384,249		1.9	%
Amortization of deferred policy acquisition costs	51,893			54,795			(5.3)		106,345			107,014			(0.6)
Other underwriting expenses	36,701			33,964			8.1		78,550			68,367			14.9
Total benefits, losses and expenses	$	293,567		$	308,768		(4.9)	%	$	576,371		$	559,630		3.0	%

Income (loss) before income taxes	$	4,236		$	(4,571)		(192.7)		$	(100,763)		$	50,106		NM
Federal income tax expense (benefit)	(1,724)			(375)			NM		(34,189)			9,781			NM
Net income (loss)	$	5,960		$	(4,196)		(242.0)		$	(66,574)		$	40,325		(265.1)	%

GAAP Ratios:
Net loss ratio (without catastrophes)	58.6		%	71.6		%	(18.2)	%	61.1		%	66.5		%	(8.1)	%
Catastrophes - effect on net loss ratio	19.2			8.0			140.0		12.4			4.8			158.3
Net loss ratio⁽¹⁾	77.8		%	79.6		%	(2.3)	%	73.5		%	71.3		%	3.1	%
Expense ratio⁽²⁾	33.6			32.1			4.7		34.7			32.6			6.4
Combined ratio⁽³⁾	111.4		%	111.7		%	(0.3)	%	108.2		%	103.9		%	4.1	%

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

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

NM = Not meaningful

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

RESULTS OF OPERATIONS

For the three-month period ended June 30, 2020, net income was $6.0 million compared to net loss of $4.2 million for the same period of 2019. In the three-month period ended June 30, 2020, the increase in net income was primarily due to an increase in net realized investment gains, a decrease in losses and loss settlement expenses and other income all partially offset by decreases in net premiums earned and net investment income.

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For the six-month period ended June 30, 2020, net loss was $66.6 million compared to net income of $40.3 million for the same period of 2019. In the six-month period ended June 30, 2020, the decrease in net income was primarily due to a decrease in the fair value of equity securities, a decrease in net investment income and increases in losses and loss settlement expenses.

Net premiums earned decreased to 4.7 percent and 1.2 percent during the three- and six-month periods ended June 30, 2020 compared to the same periods of 2019 primarily due to our focus on improving profitability through non-renewal of under-performing accounts in our commercial auto line of business. There was some impact to net premiums earned from the COVID-19 pandemic but it was less significant than the impact from our commercial auto profitability initiatives in the three- and six-month periods ended June 30, 2020. The Company has implemented state-mandated and optional payment leniency programs for our policyholders as a result of the COVID-19 pandemic. As of June 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. We currently do not believe these payment modifications will have a material impact on our financial condition, liquidity or capital position.

Net investment income was $12.7 million for the second quarter of 2020 as compared to net investment income of $14.1 million for the same period in 2019. The decrease in net investment income in the second quarter of 2020 was primarily due to a decrease in invested assets as compared to the same period in 2019. Year-to date, net investment income was $15.1 million, compared to net investment income of $30.6 million for the same period in 2019. The decrease in net investment income was due to a combination of a decrease in the fair value of our investments in limited liability partnerships in the first quarter and a decrease in invested assets as compared to the same period in 2019. 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 $15.8 million during the second quarter of 2020, compared to net realized investment gains of $13.6 million for the same period in 2019. The change in the three-month period ended June 30, 2020, as compared to the same period in 2019, was primarily due to the increase in the fair value of equity securities. Year-to-date, the Company recognized net realized investment losses of $77.6 million compared to net realized gains of $40.3 million. The decrease in the six-month period ended June 30, 2020 as compared to the same period in 2019 was primarily due to a decrease in the value of equity securities of $60.8 million, compared with an increase of $37.1 million, respectively.

Other income of $5.7 million before tax recognized during the second quarter of 2020 was the result of our previously announced personal lines renewal rights agreement with Nationwide Mutual Insurance Company.

Losses and loss settlement expenses decreased by 6.8 percentage points and increased by 1.9 percentage points during the three- and six-month periods ended June 30, 2020 compared to the same periods of 2019. The decrease in losses and loss settlement expenses primarily was due to an improvement in the performance of our core book of business, specifically our commercial auto and liability lines of businesses partially offset by an increase in catastrophe losses. Year-to-date, the increase in losses and loss settlement expenses as compared to the same period in 2019 was primarily due to an increase in severity of non-catastrophe losses and an increase in catastrophe losses.

The GAAP combined ratio decreased by 0.3 percentage points to 111.4 percent for the second quarter of 2020, compared to 111.7 percent in the same period in 2019. The decrease in the combined ratio was primarily driven by a decrease in the loss ratio offset by an increase in the expense ratio. For the six-month period ended June 30, 2020, the GAAP combined ratio increased 4.3 percentage points to 108.2 percent compared to 103.9 percent for the six-month period ended June 30, 2019. The increase in the combined ratio was primarily driven by a combination of increases in the net loss ratio and expense ratio.

The GAAP net loss ratio improved 1.8 percentage points during the second quarter of 2020 as compared to the same period in 2019. The decrease in the second quarter of 2020 was primarily due to the improvement in the performance of our core book of business, specifically our commercial auto and liability lines of business partially offset by an increase in catastrophe losses. During the six-month period ended June 30, 2020, the net loss ratio

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deteriorated 2.2 percentage points as compared to the same period in 2019 primarily due to an increase in catastrophe losses.

Pre-tax catastrophe losses in the second quarter of 2020 were higher when compared to second quarter of 2019, with catastrophe losses adding 19.2 percentage points to the combined ratio in 2020 as compared to 8.0 percentage points in 2019. During the second quarter of 2020, the Company incurred losses from 20 catastrophic events primarily from severe convective storms in the Midwest and Southern United States. Our 10-year historical average for second quarter catastrophe losses is 12.2 percentage points added to the combined ratio. Year-to-date, catastrophe losses totaled $65.9 million ($2.08 per diluted share) compared to $25.6 million ($0.79 per diluted share) for the same period in 2019.

The expense ratio for the second quarter of 2020 was 33.6 percent, compared to 32.1 percent for the second quarter in 2019. The increase in the expense ratio during the second quarter of 2020 as compared to the same period 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. Year-to-date, the expense rate was 34.7 percent compared to 32.6 percent in the same period in 2019. The increase in our investment in technology contributed to the increase in the expense ratio, along with the acceleration

of the amortization of our deferred acquisition costs in our commercial auto line of business from lower than expected profitability.

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 $10.0 million and $23.8 million of favorable development in our net reserves for prior accident years for the three- and six-month periods ended June 30, 2020, respectively. For the three-month period ended June 30, 2020 the majority of favorable development was from workers' compensation with $7.8 million of favorable development, followed by commercial fire and allied lines which

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contributed $4.9 million of favorable development. Partially offsetting this favorable development was unfavorable development contributed primarily by commercial automobile and other liability with $1.9 million of unfavorable development and reinsurance assumed with $1.5 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 adverse development for commercial automobile and other liability is attributed to paid loss which was greater than the reductions of unpaid claim reserves, paid loss adjustment expense ("LAE") was more than offset by reductions of reserves for unpaid LAE. All other lines of insurance, in total, contributed $0.7 million of favorable development during the quarter.

For the six-month period ended June 30, 2020 the majority of favorable development was from workers' compensation with $16.0 million favorable development, followed by commercial fire and allied lines which contributed $12.8 million of favorable development. Partially offsetting was unfavorable development contributed primarily by commercial liability with $6.5 million of unfavorable development and reinsurance assumed with $2.7 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 adverse development for commercial liability is attributed to paid loss which was greater than the reductions of unpaid claim reserves, paid LAE was more than offset by reductions of reserves for unpaid LAE. All other lines of insurance, in total, contributed $4.2 million of favorable development during the quarter.

2019 Development

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

For the six-month period ended June 30, 2019 the majority of unfavorable development resulted from the commercial liability line with $16.0 million unfavorable development, followed by commercial fire and allied lines which contributed $2.4 million unfavorable development and then then assumed reinsurance line, which contributed $1.2 million of unfavorable development. The unfavorable development in the commercial liability line was primarily from prior year reserve strengthening on auto liability and other liability claims in our Gulf Coast region. Commercial fire and allied lines developed unfavorably due to an increase in paid loss. Reductions in unpaid claim reserves did not fully offset paid loss, but loss adjustment expense did provide a partial offset to the loss development by contributing favorable development. The apparent adverse development for the assumed reinsurance line is attributed to the acquisition of a new reinsurance program, which was noted when discussing quarterly results above. All other lines of insurance, in total, contributed $14.9 million of favorable development during the year, which partially offset unfavorable development from commercial liability, commercial fire and allied and assumed reinsurance lines.

Development amounts can vary significantly from quarter-to-quarter and year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business. At June 30, 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 June 30,	2020										2019
			Net Losses						Net Losses
			and Loss						and Loss
	Net		Settlement		Net		Net		Settlement		Net
(In Thousands, Except Ratios)	Premiums		Expenses		Loss		Premiums		Expenses		Loss
Unaudited	Earned		Incurred		Ratio		Earned		Incurred		Ratio
Commercial lines
Other liability	$	77,407	$	46,914	60.6	%	$	79,452	$	57,582	72.5	%
Fire and allied lines	62,592		67,055		107.1		60,615		55,851		92.1
Automobile	73,682		58,014		78.7		78,472		69,766		88.9
Workers' compensation	19,200		6,247		32.5		22,621		9,378		41.5
Fidelity and surety	6,332		110		1.7		6,146		(650)		(10.6)
Miscellaneous	385		96		24.9		436		99		22.7
Total commercial lines	$	239,598	$	178,436	74.5	%	$	247,742	$	192,026	77.5	%

Personal lines
Fire and allied lines	$	9,819	$	19,187	195.4	%	$	10,302	$	14,386	139.6	%
Automobile	7,518		2,464		32.8		7,698		6,809		88.5
Miscellaneous	304		52		17.1		307		552		179.8
Total personal lines	$	17,641	$	21,703	123.0	%	$	18,307	$	21,747	118.8	%
Reinsurance assumed	$	6,370	$	4,834	75.9	%	$	10,437	$	6,236	59.7	%
Total	$	263,609	$	204,973	77.8	%	$	276,486	$	220,009	79.6	%

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Six Months Ended June 30,	2020										2019
			Net Losses						Net Losses
			and Loss						and Loss
	Net		Settlement		Net		Net		Settlement		Net
(In Thousands, Except Ratios)	Premiums		Expenses		Loss		Premiums		Expenses		Loss
Unaudited	Earned		Incurred		Ratio		Earned		Incurred		Ratio
Commercial lines
Other liability	$	156,716	$	90,637	57.8	%	$	157,879	$	95,857	60.7	%
Fire and allied lines	124,261		118,980		95.8		119,789		92,637		77.3
Automobile	151,700		123,319		81.3		153,706		140,337		91.3
Workers' compensation	38,628		13,955		36.1		44,496		15,323		34.4
Fidelity and surety	12,750		142		1.1		12,521		(901)		(7.2)
Miscellaneous	780		188		24.1		863		—		—
Total commercial lines	$	484,835	$	347,221	71.6	%	$	489,254	$	343,253	70.2	%

Personal lines
Fire and allied lines	$	19,789	$	25,921	131.0	%	$	20,522	$	20,668	100.7	%
Automobile	15,148		7,613		50.3		15,180		12,476		82.2
Miscellaneous	610		2,658		435.7		608		484		79.6
Total personal lines	$	35,547	$	36,192	101.8	%	$	36,310	$	33,628	92.6	%
Reinsurance assumed	$	12,076	$	8,063	66.8	%	$	13,236	$	7,368	55.7	%
Total	$	532,458	$	391,476	73.5	%	$	538,800	$	384,249	71.3	%

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

•Other liability - The net loss ratio improved 11.9 and 2.9 percentage points, respectively, in the three- and six-month periods ended June 30, 2020, compared to the same periods of 2019. The decrease in both periods was primarily due to lower paid losses, improvement in the core book of business and lower prior year unfavorable reserve development.

•Commercial fire and allied lines - The net loss ratio deteriorated 15.0 and 18.5 percentage points, respectively, in the three- and six-month periods ended June 30, 2020, compared to the same periods of 2019. The deterioration in both periods was primarily due to an increase in paid LAE and catastrophe losses. During the second quarter, the Company incurred losses from 20 catastrophic events primarily from severe convective storms in the Midwest and Southern United States.

•Commercial automobile - The net loss ratio improved 10.2 and 10.0 percentage points, respectively, in the three- and six-month periods ended June 30, 2020, compared to the same periods of 2019. The improvement in both periods was primarily attributable to a decrease in frequency of commercial auto claims and our portfolio management strategy to reduce the number of insured auto units, aggressively increasing commercial auto pricing and non-renew underperforming accounts.

•Personal fire and allied lines - The net loss ratio deteriorated 55.8 and 30.3 percentage points, respectively, in the three- and six-month periods ended June 30, 2020, compared to the same periods of 2019. The deterioration in both periods is attributable to an increase in catastrophe losses.

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•Personal automobile - The net loss ratio improved by 55.7 and 31.9 percentage points in the three- and six-month periods ended June 30, 2020, compared to the same periods of 2019. The improvement in both periods is attributable to a decrease in claim frequency.

Financial Condition

Stockholders' equity decreased to $860.7 million at June 30, 2020, from $910.5 million at December 31, 2019. This decrease was primarily attributed to a net loss of $66.6 million, shareholder dividends of $16.5 million and share repurchases of $2.7 million, partially offset by an increase in net unrealized investment gains on fixed maturity securities of $32.0 million, net of tax, during the six months ended June 30, 2020.

The Company's book value per share was $34.38, which is a decrease of $2.02 per share, or 5.5 percent from December 31, 2019. During the second quarter of 2020 we did not repurchase any shares of our common stock as we suspended share repurchases in mid-March in the interim. During the six-month period ended June 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, 2020, we were authorized to repurchase an additional 1,786,977 shares of our common stock as of June 30, 2020.

Investment Portfolio

Our invested assets totaled $2.0 billion at June 30, 2020, compared to $2.2 billion at December 31, 2019, a decrease of $123.4 million. At June 30, 2020, fixed maturity securities and equity securities made up 84.0 percent and 10.2 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 June 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	$	1,696,166	83.5	%
Trading securities	11,223		0.5
Equity securities	207,626		10.2
Mortgage loans	47,609		2.3
Other long-term investments	68,941		3.5
Short-term investments	175		—
Total	$	2,031,740	100.0	%

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

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At both June 30, 2020 and December 31, 2019, we classified $1.7 billion, or 99.3 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 June 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 June 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)	June 30, 2020						December 31, 2019
Rating	Carrying Value		% of Total		Carrying Value		% of Total
AAA	$	658,389	38.6	%	$	721,446	41.6	%
AA	660,048		38.6		664,238		38.3
A	197,943		11.6		179,553		10.3
Baa/BBB	178,820		10.5		157,350		9.1
Other/Not Rated	12,189		0.7		12,276		0.7
	$	1,707,389	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 10.1 and 50.8 percent in the three- and six-month periods ended June 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 six-month periods ended June 30, 2020, the change in value of our investments in limited liability partnerships resulted in investment gains of $1.0 million and investment losses of $9.1 million, respectively, as compared to investment income of $0.1 million and $2.6 million, respectively, in the same periods of 2019. This resulted in an increase of $0.9 million and a decrease of $11.7 million, respectively, in investment income in the three- and six-month periods ended June 30, 2020.

Our net realized investment gains were $15.8 million and net realized investment losses were $77.6 million, respectively, during the three- and six-month periods ended June 30, 2020, as compared with net realized investment

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gains of $13.6 million and $40.3 million, respectively, in the same periods of 2019. A change in the fair value of equity securities was responsible for $17.3 million of the gains and $98.0 million of the losses, respectively, $2.2 million of the gains and $117.9 million of the losses in the three- and six-month periods ended June 30, 2020 as compared to the same periods in 2019.

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 June 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 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

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for losses and loss settlement expenses. The majority of our assets are invested in available-for-sale fixed maturity securities.

The following table displays a consolidated summary of cash sources and uses for the six-month periods ended June 30, 2020 and 2019:


Cash Flow Summary	Six Months Ended June 30,
(In Thousands)	2020		2019
Cash provided by (used in)
Operating activities	$	4,232	$	36,276
Investing activities	41,127		62,600
Financing activities	(19,819)		(14,546)
Net increase in cash and cash equivalents	$	25,540	$	84,330

Our cash flows from operations were sufficient to meet our liquidity needs for the six-month periods ended June 30, 2020 and 2019 and we anticipate they will be sufficient to meet our 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. Our year-to-date cash flows provided by operations remained positive and our cash and cash equivalents have increased during the first six-months of 2020. We have implemented state-mandated and optional payment leniency programs for our policyholders as a result of the COVID-19 pandemic. As of June 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.

Operating Activities

Net cash flows provided by operating activities totaled $4.2 million and totaled $36.3 million for the six-month periods ended June 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, $371.5 million, or 21.8 percent, of our fixed maturity portfolio will mature.

We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At June 30, 2020, our cash and cash equivalents included $71.8 million related to these money market accounts, compared to $9.3 million at December 31, 2019.

Net cash flows provided by investing activities were $41.1 million and $62.6 million for the six-month periods ended June 30, 2020 and 2019, respectively. For the six-month periods ended June 30, 2020 and 2019, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $179.4 million and $150.6 million, respectively.

Our cash outflows for investment purchases were $126.2 million for the six-month period ended June 30, 2020, compared to $67.1 million for the same period of 2019.

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Financing Activities

Net cash flows used in financing activities was $19.8 million for the six-month period ended June 30, 2020 which increased $5.3 million compared to $14.5 million used in the six-month period ended June 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 June 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 six-month period ended June 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 $16.5 million and $16.1 million in the six-month periods ended June 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 June 30, 2020, UFG's sole direct insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $25.8 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 5.5 percent to $860.7 million at June 30, 2020, from $910.5 million at December 31, 2019. At June 30, 2020, the book value per share of our common stock was $34.38 compared to $36.40 at December 31, 2019. This decrease was primarily attributed to a net loss of $66.6 million, shareholder dividends of $16.5 million and share repurchases of $2.7 million, partially offset by an increase in net unrealized investment gains on fixed maturity securities of $32.0 million, net of tax, during the first six 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 31, 2028, to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $10.9 million at June 30, 2020.

In addition, the Company invested $25,000 in December 2019 in a limited liability partnership investment fund which is subject to a 3 year lockup with a 60 day minimum notice, with 4 possible repurchase dates per year after the 3 year lockup period is met. The fair value of the investment at June 30, 2020 was $24.5 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 June 30,						Six Months Ended June 30,
(In Thousands)	2020		2019		2020		2019
ISO catastrophes	$	51,090	$	19,549	$	66,211	$	23,095
Non-ISO catastrophes ⁽¹⁾	(456)		2,456		(311)		2,541
Total catastrophes	$	50,634	$	22,005	$	65,900	$	25,636

(1) This number includes international assumed losses.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

It is our philosophy that we do not utilize financial hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but attempt to mitigate our exposure through active portfolio management. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer. At June 30, 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 six 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, of this Quarterly Report on Form 10-Q.

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 June 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 June 30, 2020:


				Total Number of Shares	Maximum Number of
	Total			Purchased as a Part of	Shares that may yet be
	Number of	Average Price		Publicly Announced	Purchased Under the
Period	Shares Purchased	Paid per Share		Plans or Programs	Plans or Programs⁽¹⁾
4/1/2020 - 4/30/2020	—	$	—	—	1,786,977
5/1/2020 - 5/31/2020	—	—		—	1,786,977
6/1/2020 - 6/30/2020	—	—		—	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. As of June 30, 2020, we remained authorized to repurchase 1,786,977 shares of common stock. During the second 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 number

Exhibit description

Furnished herewith

Filed herewith

10.1

United Fire Group, Inc. Non-Employee Director Stock Plan, as amended (incorporated by reference to Exhibit 10.1 on United Fire Group, Inc.’s Current Report on Form 8-K, filed with the SEC on May 22, 2020).

10.2

Form of Stock Award Agreement (Restricted Stock Units) under the United Fire Group, Inc. Non-Employee Director Stock Plan.

31.1

Certification of Randy A. Ramlo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Dawn M. Jaffray pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Randy A. Ramlo pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Dawn M. Jaffray pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1

The following financial information from United Fire Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 formatted in Inline eXtensible Business Reporting Language (Inline XBRL): (i) Consolidated Balance Sheets as of June 3 0 , 2020 (unaudited) and December 31, 2019; (ii) Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and six-months ended June 3 0 , 2020 and 2019; (iii) Consolidated Statement of Stockholders’ Equity (unaudited) for the three- and six-months ended June 3 0 , 2020 and 2019; (iv) Consolidated Statements of Cash Flows (unaudited) for the three- and six-months ended June 3 0 , 2020 and 2019; and (v) Notes to Unaudited Consolidated Financial Statements, tagged as a block of text.

104.1

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.1)

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SIGNATURES

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


UNITED FIRE GROUP, INC.
(Registrant)

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


August 5, 2020						August 5, 2020
(Date)						(Date)