0000101199 ufcs:EnergyMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CommonStockMember ufcs:ContinuingandDiscontinuingOperationsMember 2017-12-31
Table of Contents


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


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172018
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34257
ufglogo2017a03.jpgufglogo2017color600.gif
________________________
UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
____________________________
 
  Iowa 45-2302834  
  (State of Incorporation) (IRS Employer Identification No.)  


118 Second Avenue, S.E., Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)


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


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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. (Check one):Act:
Large accelerated filer
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth company
      


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
NO
As of November 6, 20175, 2018, 24,877,64325,071,751 shares of common stock were outstanding.
     
     
     

United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
September 30, 20172018
 Page
  
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  

FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will, continue," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 20162017 and Part II, Item 1A "Risk Factors" of this report for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:


The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy; the occurrence of catastrophic events, including international events, significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics;
The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses and our life insurance reserve for future policy benefits;expenses;
Geographic concentration risk in boththe property and casualty insurance and life insurance segments;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;
Our ability to effectively underwrite and adequately price insured risks;
Changes in industry trends, an increase in competition and significant industry developments;
Litigation or regulatory actions that could require us to pay significant damages, fines or penalties or change the way we do business;
Lowering of one or more of the financial strength ratings of our operating subsidiaries or our issuer credit ratings and the adverse impact such action may have on our premium writings, policy retention, profitability and liquidity;
Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions; changes in laws, regulations and stock exchange requirements relating to corporate governance and the cost of compliance;
Our relationship with and the financial strength of our reinsurers; and
Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network; andnetwork.
The satisfaction of the conditions precedent to the consummation of the sale of our life insurance subsidiary, including the receipt of regulatory approvals.


These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission ("SEC"), we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.






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PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 

United Fire Group, Inc.
Consolidated Balance Sheets
United Fire Group, Inc.
Consolidated Balance Sheets
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)September 30,
2017
 December 31,
2016
September 30,
2018
 December 31,
2017
(unaudited)  (unaudited)  
ASSETS      
Investments      
Fixed maturities      
Held-to-maturity, at amortized cost (fair value $150 in 2017 and $150 in 2016)$150
 $150
Available-for-sale, at fair value (amortized cost $1,480,730 in 2017 and $1,458,235 in 2016)1,498,662
 1,453,286
Trading securities, at fair value (amortized cost $11,833 in 2017 and $13,054 in 2016)13,673
 14,390
Equity securities   
Available-for-sale, at fair value (cost $57,387 in 2017 and $59,994 in 2016)269,341
 246,370
Trading securities, at fair value (cost $5,888 in 2017 and $5,434 in 2016)6,330
 5,644
Held-to-maturity, at amortized cost (fair value $0 in 2018 and $150 in 2017)$
 $150
Available-for-sale, at fair value (amortized cost $1,764,380 in 2018 and $1,516,610 in 2017)1,730,031
 1,535,070
Trading securities, at fair value (amortized cost $12,047 in 2018 and $14,582 in 2017)14,399
 16,842
Equity securities at fair value (cost $65,458 in 2018 and $63,275 in 2017)276,253
 287,344
Mortgage loans14,896
 
Other long-term investments49,966
 51,769
40,432
 49,352
Short-term investments175
 175
175
 175
1,838,297
 1,771,784
2,076,186
 1,888,933
Cash and cash equivalents98,610
 89,194
52,252
 95,562
Accrued investment income14,911
 13,617
16,873
 13,841
Premiums receivable (net of allowance for doubtful accounts of $1,170 in 2017 and $1,255 in 2016)351,410
 306,202
Premiums receivable (net of allowance for doubtful accounts of $968 in 2018 and $1,255 in 2017)379,293
 328,513
Deferred policy acquisition costs97,477
 93,362
95,140
 88,102
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $52,081 in 2017 and $50,925 in 2016)64,520
 55,524
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $50,431 in 2018 and $51,603 in 2017)88,882
 68,992
Reinsurance receivables and recoverables68,116
 62,707
66,148
 63,194
Prepaid reinsurance premiums3,821
 3,782
5,856
 3,749
Income taxes receivable21,360
 14,285
10,269
 6,031
Goodwill and intangible assets24,163
 24,740
23,429
 23,971
Other assets15,302
 13,943
16,632
 16,409
Assets held for sale1,592,846
 1,605,618

 1,586,134
TOTAL ASSETS$4,190,833
 $4,054,758
$2,830,960
 $4,183,431
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Liabilities      
Losses and loss settlement expenses$1,237,280
 $1,123,896
$1,278,077
 $1,224,183
Unearned premiums490,443
 443,802
508,850
 465,391
Accrued expenses and other liabilities130,618
 147,104
158,761
 167,396
Deferred income taxes24,707
 7,849
1,056
 5,953
Liabilities held for sale1,363,737
 1,390,223

 1,347,135
TOTAL LIABILITIES$3,246,785
 $3,112,874
$1,946,744
 $3,210,058
Stockholders’ Equity      
Common stock, $0.001 par value; authorized 75,000,000 shares; 24,849,889 and 25,429,769 shares issued and outstanding in 2017 and 2016, respectively$25
 $25
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,066,384 and 24,916,806 shares issued and outstanding in 2018 and 2017, respectively$25
 $25
Additional paid-in capital193,114
 216,482
201,361
 196,334
Retained earnings600,988
 616,322
752,581
 608,700
Accumulated other comprehensive income, net of tax149,921
 109,055
Accumulated other comprehensive income (loss), net of tax(69,751) 168,314
TOTAL STOCKHOLDERS’ EQUITY$944,048
 $941,884
$884,216
 $973,373
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$4,190,833
 $4,054,758
$2,830,960
 $4,183,431
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.




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United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands, Except Share Data)2017 2016 2017 20162018 2017 2018 2017
Revenues              
Net premiums earned$255,758
 $239,469
 $737,424
 $691,976
$264,747
 $255,758
 $766,767
 $737,424
Investment income, net of investment expenses13,792
 14,027
 38,561
 35,017
13,192
 13,792
 43,933
 38,561
Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $419 and $5,799 in 2017 and $2,320 and $4,666 in 2016; previously included in accumulated other comprehensive income)67

2,129
 3,397
 4,832
Net realized investment gains (includes reclassifications for net unrealized investment gains/(losses) on available-for-sale securities of ($496) and ($655) in 2018 and $419 and $5,799 in 2017; previously included in accumulated other comprehensive income)13,971

67
 7,404
 3,397
Total revenues$269,617
 $255,625
 $779,382
 $731,825
$291,910
 $269,617
 $818,104
 $779,382
Benefits, Losses and Expenses              
Losses and loss settlement expenses$223,208
 $169,303
 $568,356
 $475,568
$193,667
 $223,208
 $527,541
 $568,356
Amortization of deferred policy acquisition costs52,986
 52,240
 154,845
 151,216
51,758
 52,986
 152,207
 154,845
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,352 and $4,056 in 2017 and $1,371 and $4,113 in 2016; previously included in accumulated other comprehensive income)25,817
 20,047
 69,900
 61,469
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,661 and $4,982 in 2018 and $1,352 and $4,056 in 2017; previously included in accumulated other comprehensive income)33,887
 25,817
 105,994
 69,900
Total benefits, losses and expenses$302,011
 $241,590
 $793,101
 $688,253
$279,312
 $302,011
 $785,742
 $793,101
Income (loss) from continuing operations before income taxes$(32,394) $14,035
 $(13,719) $43,572
$12,598
 $(32,394) $32,362
 $(13,719)
Federal income tax expense (benefit) (includes reclassifications of $327 and ($610) in 2017 and ($332) and ($194) in 2016; previously included in accumulated other comprehensive income)(13,312) 2,407
 (13,330) 6,489
Federal income tax expense (benefit) (includes reclassifications of $453 and $1,184 in 2018 and $327 and ($610) in 2017; previously included in accumulated other comprehensive income)1,528
 (13,312) 771
 (13,330)
Income (loss) from continuing operations$(19,082) $11,628
 $(389) $37,083
$11,070
 $(19,082) $31,591
 $(389)
Income from discontinued operations, net of taxes1,218
 740
 5,419
 826
Income (loss) from discontinued operations, net of taxes
 1,218
 (1,912) 5,419
Gain on sale of discontinued operations, net of taxes
 
 27,307
 
Net income (loss)$(17,864) $12,368
 $5,030
 $37,909
$11,070
 $(17,864) $56,986
 $5,030
Other comprehensive income (loss)              
Change in net unrealized appreciation on investments$18,995
 $(9,440) $64,614
 $83,768
$(15,389) $18,995
 $(73,402) $64,614
Change in liability for underfunded employee benefit plans
 
 
 

 
 
 
Other comprehensive income , before tax and reclassification adjustments$18,995
 $(9,440) $64,614
 $83,768
Other comprehensive income (loss), before tax and reclassification adjustments$(15,389) $18,995
 $(73,402) $64,614
Income tax effect(6,648) 3,304
 (22,615) (29,320)3,232
 (6,648) 15,414
 (22,615)
Other comprehensive income, after tax, before reclassification adjustments$12,347
 $(6,136) $41,999
 $54,448
Reclassification adjustment for net realized investment gains included in income$(419) $(2,320) $(5,799) $(4,666)
Other comprehensive income (loss), after tax, before reclassification adjustments$(12,157) $12,347
 $(57,988) $41,999
Reclassification adjustment for net realized investment (gains) losses included in income$496
 $(419) $655
 $(5,799)
Reclassification adjustment for employee benefit costs included in expense1,352
 1,371
 4,056
 4,113
1,661
 1,352
 4,982
 4,056
Total reclassification adjustments, before tax$933
 $(949) $(1,743) $(553)$2,157
 $933
 $5,637
 $(1,743)
Income tax effect(327) 332
 610
 194
(453) (327) (1,184) 610
Total reclassification adjustments, after tax$606
 $(617) $(1,133) $(359)$1,704
 $606
 $4,453
 $(1,133)
Comprehensive income (loss)$(4,911) $5,615
 $45,896
 $91,998
$617
 $(4,911) $3,451
 $45,896
       
Diluted weighted average common shares outstanding24,960,086
 25,815,346
 25,666,405
 25,711,014
25,626,951
 24,960,086
 25,607,305
 25,666,405
Earnings per common share from continuing operations:       
Earnings (loss) per common share from continuing operations:       
Basic$(0.77) $0.46
 $(0.01) $1.47
$0.44
 $(0.77) $1.26
 $(0.01)
Diluted(0.77) 0.45
 (0.01) 1.44
0.43
 (0.77) 1.23
 (0.01)
Earnings per common share:       
Earnings (loss) per common share:       
Basic$(0.72) $0.49
 $0.20
 $1.50
$0.44
 $(0.72) $2.28
 $0.20
Diluted(0.72) 0.48
 0.20
 1.47
0.43
 (0.72) 2.23
 0.20
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)


(In Thousands, Except Share Data)Nine Months Ended September 30, 2018
  
Common stock 
Balance, beginning of year$25
Shares repurchased (120,372 shares)
Shares issued for stock-based awards (269,950 shares)
Balance, end of period$25
  
Additional paid-in capital 
Balance, beginning of year$196,334
Compensation expense and related tax benefit for stock-based award grants4,040
Shares repurchased(5,404)
Shares issued for stock-based awards6,391
Balance, end of period$201,361
  
Retained earnings 
Balance, beginning of year$608,700
Cumulative effect of change in accounting principle191,244
Net unrealized investment depreciation of discontinued operations, sold(6,714)
Net income56,986
Dividends on common stock ($3.90 per share)(97,635)
Balance, end of period$752,581
  
Accumulated other comprehensive income (loss), net of tax 
Balance, beginning of year$168,314
Cumulative effect of change in accounting principle(191,244)
Change in net unrealized investment appreciation(1)
(50,756)
Change in liability for underfunded employee benefit plans(2)
3,935
Balance, end of period$(69,751)
  
Summary of changes 
Balance, beginning of year$973,373
Net income56,986
All other changes in stockholders’ equity accounts(146,143)
Balance, end of period$884,216
(In Thousands, Except Share Data)Nine Months Ended September 30, 2017
  
Common stock 
Balance, beginning of year$25
Shares repurchased (701,899 shares)
Shares issued for stock-based awards (131,777 shares)
Balance, end of period$25
  
Additional paid-in capital 
Balance, beginning of year$216,482
Compensation expense and related tax benefit for stock-based award grants3,456
Shares repurchased(29,784)
Shares issued for stock-based awards2,960
Balance, end of period$193,114
  
Retained earnings 
Balance, beginning of year$616,322
Net income5,030
Dividends on common stock ($0.81 per share)(20,364)
Balance, end of period$600,988
  
Accumulated other comprehensive income, net of tax 
Balance, beginning of year$109,055
Change in net unrealized investment appreciation(1)
38,230
Change in liability for underfunded employee benefit plans(2)
2,636
Balance, end of period$149,921
  
Summary of changes 
Balance, beginning of year$941,884
Net income5,030
All other changes in stockholders’ equity accounts(2,866)
Balance, end of period$944,048

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


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






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United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2017 20162018 2017
Cash Flows From Operating Activities      
Net income$5,030
 $37,909
$56,986
 $5,030
Less net income from discontinued operations, net of taxes5,419
 826
Less net income (loss) from discontinued operations, net of taxes(1,912) 5,419
Adjustments to reconcile net income to net cash provided by operating activities      
Net accretion of bond premium6,663
 5,181
6,518
 6,663
Depreciation and amortization3,501
 4,879
4,015
 3,501
Stock-based compensation expense3,456
 2,731
4,040
 3,456
Net realized investment gains(3,397) (4,832)(7,404) (3,397)
Net cash flows from trading investments816
 (36)
Net cash flows from equity and trading investments21,253
 816
Deferred income tax benefit(4,979) (3,847)(6,259) (4,979)
Changes in:      
Accrued investment income(1,294) (831)(3,032) (1,294)
Premiums receivable(45,208) (54,725)(50,780) (45,208)
Deferred policy acquisition costs(4,115) (10,268)(7,038) (4,115)
Reinsurance receivables(5,409) (12,224)(2,954) (5,409)
Prepaid reinsurance premiums(39) (212)(2,107) (39)
Income taxes receivable(7,075) (11,370)(4,238) (7,075)
Other assets(1,358) 659
(223) (1,358)
Future policy benefits and losses, claims and loss settlement expenses113,384
 86,272
Losses and loss settlement expenses53,894
 113,384
Unearned premiums46,641
 53,699
43,459
 46,641
Accrued expenses and other liabilities(12,430) (6,198)(3,654) (12,430)
Income taxes payable
 (4,917)
Deferred income taxes1,794
 2,665
(8,298) 1,794
Other, net1,920
 (1,605)3,951
 1,920
Cash from operating activities - continuing operations92,871
 45,021
41,143
 92,871
Cash from operating activities - discontinued operations23,814
 45,965
4,024
 23,814
Cash from operating activities - gain on sale of discontinued operations(34,851) 
Total adjustments$116,685
 $90,986
$10,316
 $116,685
Net cash provided by operating activities$116,296
 $128,069
$69,214
 $116,296
Cash Flows From Investing Activities      
Proceeds from sale of available-for-sale investments$3,388
 $1,968
$129,865
 $3,388
Proceeds from call and maturity of available-for-sale investments134,503
 260,520
101,837
 134,503
Proceeds from short-term and other investments4,846
 1,725
8,527
 4,846
Proceeds from the sale of discontinued operations276,055
 
Purchase of available-for-sale investments(162,121) (313,060)(485,656) (162,121)
Purchase of mortgage loans(14,896) 
Purchase of short-term and other investments(4,864) (2,772)(3,824) (4,864)
Net purchases and sales of property and equipment(11,630) (6,090)(23,760) (11,630)
Cash from investing activities - continuing operations(35,878) (57,709)(11,852) (35,878)
Cash from investing activities - discontinued operations31,517
 37,685
14,343
 31,517
Net cash used in investing activities$(4,361) $(20,024)
Net cash provided by (used in) investing activities$2,491
 $(4,361)
Cash Flows From Financing Activities      
Payment of cash dividends$(20,364) $(18,246)$(97,635) $(20,364)
Repurchase of common stock(29,784) (2,867)(5,404) (29,784)
Issuance of common stock2,960
 7,149
6,391
 2,960
Tax impact from issuance of common stock
 (482)
Cash from financing activities - continuing operations(47,188) (14,446)(96,648) (47,188)
Cash from financing activities - discontinued operations(46,239) (59,104)(11,547) (46,239)
Net cash used in financing activities$(93,427) $(73,550)$(108,195) $(93,427)
Net Change in Cash and Cash Equivalents$18,508
 $34,495
$(36,490) $18,508
Less: decrease (increase) in cash and cash equivalents - discontinued operations(9,092) (24,546)
Net increase in cash and cash equivalents - continuing operations9,416
 9,949
Less: increase in cash and cash equivalents - discontinued operations(6,820) (9,092)
Net (decrease) increase in cash and cash equivalents - continuing operations(43,310) 9,416
Cash and Cash Equivalents at Beginning of Period - Continuing Operations89,194
 89,496
95,562
 89,194
Cash and Cash Equivalents at End of Period - Continuing Operations$98,610
 $99,445
$52,252
 $98,610
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 and life insurance and selling annuities through a network of independent agencies. Our insurance company subsidiaries are licensed as a property and casualty insurer in 46 states and the District of Columbia, and as a life insurer in 37 states.Columbia.
Discontinued Operations
We have historically reported our operations in two business segments: property and casualty insurance and life insurance. On September 18, 2017, the Company signed a definitive agreement to sell its subsidiary, United Life Insurance Company ("United Life"), to Kuvare US Holdings, Inc. ("Kuvare"). and on March 30, 2018, the sale closed. As a result, ourthe life insurance business, previously a separate segment, has beenwas considered held for sale and reported as discontinued operations in the Consolidated Balance Sheets, Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Cash Flows for all periods presented in this Form 10-Q (collectively, the "Consolidated Financial Statements"). Subsequent to the announcement of this sale, our continuing operations are nowwere reported as one business segment. All current and prior periods reflected in this Form 10-Q have been presented as continuing and discontinued operations, as applicable, unless otherwise noted. The sale is expected to close in the first half of 2018, subject to customary conditions, including regulatory approval. For more information, refer to Note 11. Discontinued Operations.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K for the year ended December 31, 2017, including certain financial statement footnote disclosures, areis not required by the rules and regulations of the SEC for interim financial reporting and have been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; future policy benefits and losses, claims and loss settlement expenses; and pension and postretirement benefit obligations.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management of UFG believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20162017. The review report of Ernst & Young LLP as of September 30, 20172018 and for the three- and nine-month periods ended September 30, 20172018 and 20162017 accompanies the unaudited Consolidated Financial Statements included in Part I, Item 1 "Financial Statements."




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Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.
For the nine-month periods ended September 30, 20172018 and 2016,2017, we made payments for income taxes for continuing operations totaling $7,648$24,055 and $24,026,$7,648, respectively. We received a tax refund of $1,503 and $10,000 duringfor the nine-month period ended September 30, 2017. We did not receive a tax refund during the nine-month period ended September 30, 2016.
For the nine-month periods ended September 30, 2018 and 2017, respectively.
For the nine-month periods ended September 30, 2018 and 2016,2017, we made no interest payments (excluding interest credited to policyholders’ accounts).
Deferred Policy Acquisition Costs ("DAC")


Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the nine-month period ended September 30, 20172018.
    
 Continuing Operations Discontinued Operations  
 Property & Casualty Insurance Life Insurance Total
Recorded asset at beginning of period$88,102
 $71,151
 $159,253
Underwriting costs deferred159,245
 1,376
 160,621
Amortization of deferred policy acquisition costs(152,207) (1,895) (154,102)
Ending unamortized deferred policy acquisition costs$95,140
 $70,632
 $165,772
Impact of unrealized gains and losses on available-for-sale securities
 7,274
 7,274
Sale of discontinued operations
 (77,906) (77,906)
Recorded asset at September 30, 2018$95,140
 $
 $95,140

    
 Continuing Operations Discontinued Operations  
 Property & Casualty Insurance Life Insurance Total
Recorded asset at beginning of period$93,362
 $70,750
 $164,112
Underwriting costs deferred158,960
 4,192
 163,152
Amortization of deferred policy acquisition costs(154,845) (5,524) (160,369)
Ending unamortized deferred policy acquisition costs$97,477
 $69,418
 $166,895
Impact of unrealized gains and losses on available-for-sale securities
 (3,582) (3,582)
Recorded asset at September 30, 2017$97,477
 $65,836
 $163,313


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.


For traditional life insurance policies, DAC is amortized to income over the premium-paying period in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue. Expected premium revenue and gross profits are based on the same mortality and withdrawal assumptions used in determining future policy benefits. These assumptions are not revised after policy issuance unless the recorded DAC asset is deemed to be unrecoverable from future expected profits.


For non-traditional life insurance policies, DAC is amortized over the anticipated terms in proportion to the ratio of the expected annual gross profits to the total expected gross profits. Changes in the amount or timing of expected gross profits result in adjustments to the cumulative amortization of these costs. The effect on amortization of DAC for revisions to estimated gross profits is reported in earnings in the period the estimated gross profits are revised.


The effect on DAC that results from the assumed realization of unrealized gains (losses) on investments allocated to non-traditional life insurance business is recognized with an offset to net unrealized investment appreciation as of the balance sheet date. The impact of unrealized gains and losses on available-for-sale securities decreased the DAC asset by $9,995 and $6,413$6,294 at September 30, 2017 and December 31, 2016, respectively.2017. There was no impact of unrealized gains and losses on available-for-sale




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securities on the DAC asset at September 30, 2018 because the non-traditional life insurance business is part of discontinued operations, which was sold on March 30, 2018.
Income Taxes

The Tax Cuts and Jobs Act of 2017 (the "Tax Act") was enacted on December 22, 2017. The Tax Act significantly revised the U.S. corporate income tax laws including lowering the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. As of September 30, 2018 we had not completed accounting for the tax effects of enactment of the Tax Act, however for certain items, we have made a reasonable estimate of the effects on our deferred tax balances. For other items where we could not make a reasonable estimate, we are still using existing accounting guidance and the provisions of the tax laws that were in place prior to the enactment. The Company will continue to refine this estimated provisional adjustment as we gain a more thorough understanding of the effects of enactment of the Tax Act on the Company, and the Company will take future guidance into consideration when it becomes available.
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 aconsolidated federal income tax benefitexpense from consolidated continuing operations and discontinued operations on a consolidated basis of $10,400$1,528 and a federal income tax expenses $6,904$8,878 for the three- and nine-month periods ended September 30, 20172018, respectively, compared to income tax benefit of $12,650 and 2016, respectively.$10,400 during the same periods of 2017. Our effective tax rate is different than the federal statutory rate of 35.021 percent, due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.
The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If, based on review, it appears not more likely than not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at September 30, 20172018 or December 31, 2016.2017. 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.


With regard to the sale of ourthe life insurance subsidiary, federal income taxes will bewere allocated to continuing and discontinued operations in accordance with the Company’s tax allocation agreement and the terms of the definitive agreement related to the sale.
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 2014. The Internal Revenue Service is conducting routine examinations of our income tax return for the 2015 tax year.2015.


Subsequent Events


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


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uded there are no material subsequent events or transactions that have occurred after the balance sheet date through the date on which the financial statements were issued.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2017
Share-Based Payments
In March 2016, the Financial Accounting Standards Board ("FASB") issued new guidance on the accounting for share-based payments. The new guidance was issued to simplify the accounting of share-based payments, specifically in the areas of income taxes, classification on the balance sheets as liabilities or equity and classification in the cash flow statement. The new guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those years. The Company adopted the new guidance prospectively as of January 1, 2017. The new guidance resulted in classification changes between the financing and operating section of the Statement of Cash Flow for stock based compensation expense. The adoption also resulted in a tax benefit of $62 and $546 during the three- and nine-months ended September 30, 2017.




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Income Taxes
In December 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. The new guidance eliminates the requirement to split deferred tax liabilities and assets between current and non-current in a classified balance sheet. The new guidance allows deferred tax liabilities and assets to be included in non-current accounts. The Company adopted the new guidance as of January 1, 2017. The adoption had no impact on the Company's financial position and results of operations since we do not currently report deferred taxes in classified balance sheets.
Pending Adoption of Accounting Standards2018
Revenue Recognition
In May 2014, the FASB issued comprehensive new guidance on revenue recognition which supersedes nearly all existing revenue recognition guidance under GAAP. The new guidance requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. Insurance contracts are not within the scope of this new guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company will adoptadopted the guidance as of January 1, 2018. The Company has completed its review of revenue streams under this new guidance and concluded that the adoption of the new guidance will havehad no impact on the Company's reporting and disclosure of net premiums earned from insurance contracts, net investment income or net realized gains and losses, as these itemsrevenue streams are not within the scope of this new guidance. The Company's primary revenue streams from insurance contracts, investment income and net realized gains and losses, are out of scope under this new guidance. The remaining revenue streams are immaterial and not impacted by the new standard.
Financial Instruments
In January 2016, the FASB issued guidance updating certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (for example, trading or available-for-sale) and require equity securities to be measured at fair value with changes in the fair value recognized through net income. The new guidance also simplifies the impairment process for equity investments without readily determinable fair values. The new guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company will adoptadopted the new guidance as of January 1, 2018. IfThe adoption of the new guidance were adopted as of September 30, 2017, there would beresulted in a reclassification from accumulated other comprehensive income to retained earnings of $191,244 after tax, which is equal to the amount of net unrealized gains and losses on available-for-sale equity securities at December 31, 2016 disclosedon January 1, 2018. Also, in Note 2 "Summary of Investments," of this section. The impact tothe three- and nine-month periods ended September 30, 2018, the Company recognized an after-tax net realized gains (losses) would equalinvestment gain from continuing operations of $11,361 and $4,343, respectively, in net income from the change in net unrealized gains and losses on available-for-salevalue of equity securities between September 30, 2017 and December 31, 2016, indue to the same tables.adoption of this new accounting guidance.
Statement of Cash Flows - Classification of Certain Cash Receipts and Payments
In August 2016, the FASB issued an update that clarifies the classification of certain cash receipts and payments in the Statement of Cash Flows. The update addresses eight existing cash flow issues by clarifying the correct classification to establish uniformity in practice. The updated guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company will adoptadopted the new guidance as of January 1, 2018 and is currently reviewing the updates to the eight existing cash flow issues. Currently, management believes that one existing cash flow issue will be impacted by these updates. Management believes the update will have2018. The adoption had no impact on the Company's financial position and results of operations but may effect the current classification of the cash flow in the Statement of Cash Flows.



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operations.
Defined Benefit Retirement Plan Cost
In March 2017, the FASB issued guidance on the presentation of net periodic benefit costs of defined benefit retirement benefit plans in the Statements of Income. The new guidance requires the service cost component of net periodic benefit cost of defined benefit plans to be presented in the same line in the Statements of Income as other employee compensation expenses. Also, under the new guidance, the service cost component of the net periodic benefit costs will be the only portion of costs subject to be capitalized in assets. The new guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company will adoptadopted the new guidance as of January 1, 20182018. The adoption of the new guidance resulted in a change in the capitalization of deferred acquisition costs to only include the pension and is currently evaluatingpost retirement service costs in place of the presentation oftotal net periodic benefit costs in its financial statements and thecosts. The adoption had an immaterial impact on the Company's financial position and results of


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operations. Additionally, the adoption did not impact the Company's presentation in the Statements of Income as all net periodic benefit costs and employee compensation expenses are included within the same category in the Statements of Income.
Share-Based Payments
In May 2017, the FASB issued new guidance which clarifies and addresses the diversity in practice when there is a change in the terms of a share-based payment award. The updated guidance clarifies when to use modification accounting when there is a change in the terms of a share-based payment and provides three conditions where modification accounting should not be applied. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company adopted the new guidance as of January 1, 2018. The adoption had no impact on the Company's financial position and results of operations.
Pending Adoption of Accounting Standards
Intangibles - Other Internal Use Software

In August 2018, the FASB issued guidance to align the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance requires the Company to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2018 and is2020. Management currently evaluatingbelieves that the adoption will not have an impact on the Company's financial position andor results of operations.
Leases
In February 2016, the FASB issued guidance on the accounting for leases. The new guidance requires lessees to place most leasesa right-of-use asset and a lease liability on their balance sheets with expensessheets. The lease liability will be based on the present value of the future lease payments and the right-of-use asset will be based on the liability. Expenses will be recognized on the income statement in a similar manner as previous methods. The new guidance also requires companies to classify all leases as operating leases or financing leases. We believe all of our leases will be classified as operating leases. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those years. The Company will adopt the new guidance under a modified retrospective transition approach using the package of practical expedients and the Company will not adopt the hindsight practical expedient as of January 1, 2019. We expect to use the accounting standard adoption date as our date of initial application.
The Company has created an inventory of its operating leases and has calculated the currenttotal undiscounted future minimum future lease payment,payments, which isare disclosed in Note 13 "Lease Commitments"Lease Commitments of ourthe Company's Annual Report on Form 10-K for the year ended December 31, 2016.2017. The undiscounted future minimum lease payments at December 31, 2017 are $22.5 million, which represents less than 1.0 percent of the Company's total assets at December 31, 2017. The Company plans to use their incremental borrowing rate of their credit facility described in Note 9 Credit Facility of this Form 10-Q, as the discount rate for calculating the minimum lease payments. For leases that exist prior to the date of initial application, the Company has elected to use the remaining lease term as of the date of initial application to measure its incremental borrowing rate. The Company has reviewed and updated its processes and controls under the new guidance. Management currently believes that the adoption will not have a significant impact on the Company's financial position or results of operations.
Financial Instruments - Credit Losses
In June 2016, the FASB issued new guidance on the measurement of credit losses for most financial instruments. The new guidance replaces the current incurred loss model for recognizing credit losses with an expected loss model for instruments measured at amortized cost and requires allowances to be recorded for available-for-sale debt securities rather than reduce the carrying amount. These allowances will be remeasured each reporting period. The new guidance is effective for annual periods beginning after December 15, 20202019 and interim periods within those


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years. The new guidance will impact the Company's portfolio of mortgage loan investments which are carried at amortized cost and are impairment model related to our available-for-sale portfolio. The Company will adopt the new guidance as of January 1, 20212020 and is currently evaluating the impact on the Company's financial position, results of operations and key processes.
Income Taxes - Intra-entity Transfers
In October 2016, the FASB issued new guidance on the income tax treatment of intra-entity transfers. The new guidance replaces the current guidance which prohibits the recognition of current and deferred income taxes of intra-entity transfers until the asset is sold externally. Under the new guidance, the exemption is eliminated and income taxes will be recognized on transfers of intra-entity assets. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2019 and is2019. Management currently evaluatingbelieves that the adoption will not have a significant 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 will be based on the excess of the carrying value over fair value of goodwill. The


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new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020 and it currently believes the adoption will have no impact on the Company's financial position and results of operations.
Financial Instruments - Disclosures
In August 2018, the FASB issued new guidance which modifies the disclosure requirements on fair value measurements of financial instruments. The new guidance removes the requirement for disclosing the amount and reason for transfers between Level 1 and Level 2 investment securities and the valuation processes for Level 3 fair value measurements. The guidance also requires additional disclosures on the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The new guidance is currently evaluatingeffective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020. The new guidance will modify existing fair value disclosures, but will not have an impact on the Company's financial position and results of operations.
Defined Benefit Plans - Disclosures
In August 2018, the FASB issued new guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension and postretirement plans. The new guidance removes the requirement for disclosing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs in the next year and the sensitivity of postretirement health plans to one-percentage-point changes in medical trend rates. The new guidance is effective for annual periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020. The new guidance will modify existing disclosures, but will not have an impact on the Company's financial position and results of operations.
NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities, presented on a consolidated basis, including both continuing and discontinued operations as of September 30, 20172018 and December 31, 20162017, is as follows:

September 30, 2017 
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair Value
HELD-TO-MATURITY       
Fixed maturities:       
Bonds       
Corporate bonds - financial services$150
 $
 $
 $150
Mortgage-backed securities38
 1
 
 39
Total Held-to-Maturity Fixed Maturities$188
 $1
 $
 $189
AVAILABLE-FOR-SALE       
Fixed maturities:       
Bonds       
U.S. Treasury$22,032
 $40
 $91
 $21,981
U.S. government agency98,523
 1,518
 516
 99,525
States, municipalities and political subdivisions       
General obligations:       
Midwest120,549
 2,388
 499
 122,438
Northeast50,174
 1,478
 73
 51,579
South142,172
 2,463
 1,210
 143,425
West113,135
 2,474
 963
 114,646
Special revenue:       
Midwest151,634
 3,646
 494
 154,786
Northeast79,159
 1,061
 795
 79,425
South261,141
 4,421
 2,974
 262,588
West157,622
 2,676
 1,940
 158,358
Foreign bonds54,300
 1,907
 
 56,207
Public utilities201,418
 4,538
 200
 205,756
Corporate bonds
 
 
 
Energy96,373
 2,367
 95
 98,645
Industrials209,076
 5,323
 109
 214,290
Consumer goods and services181,471
 5,049
 135
 186,385
Health care75,775
 2,600
 
 78,375
Technology, media and telecommunications143,024
 3,308
 193
 146,139
Financial services252,373
 6,939
 303
 259,009



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September 30, 2018 
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair Value
AVAILABLE-FOR-SALE       
Fixed maturities:       
Bonds       
U.S. Treasury$27,195
 $
 $354
 $26,841
U.S. government agency212,542
 310
 5,862
 206,990
States, municipalities and political subdivisions       
General obligations:       
Midwest99,023
 574
 1,359
 98,238
Northeast37,389
 251
 289
 37,351
South115,440
 333
 2,559
 113,214
West107,993
 643
 1,998
 106,638
Special revenue:       
Midwest140,245
 817
 1,735
 139,327
Northeast63,758
 240
 1,901
 62,097
South241,007
 611
 6,177
 235,441
West145,072
 737
 3,411
 142,398
Foreign bonds9,722
 49
 24
 9,747
Public utilities54,606
 129
 1,191
 53,544
Corporate bonds
 
 
 
Energy26,929
 77
 320
 26,686
Industrials56,127
 103
 699
 55,531
Consumer goods and services52,398
 42
 763
 51,677
Health care18,062
 58
 134
 17,986
Technology, media and telecommunications26,622
 34
 534
 26,122
Financial services77,788
 164
 1,888
 76,064
Mortgage-backed securities14,496
 169
 179
 14,486
7,985
 13
 260
 7,738
Collateralized mortgage obligations              
Government national mortgage association153,896
 2,292
 1,458
 154,730
78,797
 121
 3,602
 75,316
Federal home loan mortgage corporation191,246
 2,410
 3,132
 190,524
108,666
 7
 2,957
 105,716
Federal national mortgage association106,326
 2,240
 832
 107,734
53,776
 2
 1,924
 51,854
Asset-backed securities4,280
 345
 3
 4,622
3,238
 318
 41
 3,515
Total Available-for-Sale Fixed Maturities$2,880,195
 $61,652
 $16,194
 $2,925,653
$1,764,380
 $5,633
 $39,982
 $1,730,031
Equity securities:
 
 
 
Common stocks
 
 
 
Public utilities$6,394
 $15,750
 $58
 $22,086
Energy6,514
 7,998
 106
 14,406
Industrials13,117
 49,890
 164
 62,843
Consumer goods and services10,070
 14,872
 154
 24,788
Health care7,763
 29,463
 
 37,226
Technology, media and telecommunications6,006
 10,215
 136
 16,085
Financial services11,630
 101,813
 73
 113,370
Nonredeemable preferred stocks992
 161
 
 1,153
Total Available-for-Sale Equity Securities$62,486
 $230,162
 $691
 $291,957
Total Available-for-Sale Securities$2,942,681
 $291,814
 $16,885
 $3,217,610










































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December 31, 2016 
December 31, 2017 
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair ValueCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair Value
HELD-TO-MATURITY              
Fixed maturities:              
Bonds              
Corporate bonds - financial services$150
 $
 $
 $150
$150
 $
 $
 $150
Mortgage-backed securities48
 1
 
 49
34
 
 
 34
Total Held-to-Maturity Fixed Maturities$198
 $1
 $
 $199
$184
 $
 $
 $184
AVAILABLE-FOR-SALE
 
 
 

 
 
 
Fixed maturities:
 
 
 

 
 
 
Bonds
 
 
 

 
 
 
U.S. Treasury$23,216
 $87
 $108
 $23,195
$17,073
 $4
 $186
 $16,891
U.S. government agency76,692
 1,445
 540
 77,597
121,574
 1,311
 717
 122,168
States, municipalities and political subdivisions              
General obligations:              
Midwest143,747
 1,808
 1,412
 144,143
107,689
 2,446
 439
 109,696
Northeast57,731
 909
 231
 58,409
47,477
 1,174
 10
 48,641
South129,475
 1,249
 2,355
 128,369
139,870
 2,462
 813
 141,519
West114,524
 1,380
 2,173
 113,731
111,123
 2,351
 463
 113,011
Special revenue:              
Midwest167,430
 2,313
 1,433
 168,310
155,475
 3,620
 351
 158,744
Northeast70,202
 487
 2,624
 68,065
79,028
 1,351
 619
 79,760
South244,225
 1,753
 6,791
 239,187
260,145
 5,218
 1,851
 263,512
West134,287
 1,509
 4,052
 131,744
156,576
 2,929
 1,198
 158,307
Foreign bonds62,995
 2,239
 
 65,234
51,361
 1,441
 49
 52,753
Public utilities212,360
 3,761
 447
 215,674
206,028
 3,386
 270
 209,144
Corporate bonds
 

 
 

 

 
 
Energy107,084
 2,195
 419
 108,860
93,191
 1,972
 110
 95,053
Industrials225,526
 5,359
 982
 229,903
218,067
 3,881
 241
 221,707
Consumer goods and services178,135
 3,847
 295
 181,687
183,253
 3,498
 494
 186,257
Health care81,211
 2,063
 151
 83,123
74,125
 1,312
 29
 75,408
Technology, media and telecommunications143,402
 2,029
 819
 144,612
146,853
 2,376
 250
 148,979
Financial services269,981
 5,328
 1,358
 273,951
277,824
 5,769
 442
 283,151
Mortgage-backed securities17,288
 201
 241
 17,248
13,828
 101
 238
 13,691
Collateralized mortgage obligations              
Government national mortgage association145,947
 1,279
 2,766
 144,460
157,836
 1,921
 2,274
 157,483
Federal home loan mortgage corporation176,226
 1,638
 3,406
 174,458
201,320
 1,879
 4,047
 199,152
Federal national mortgage association101,414
 1,816
 1,334
 101,896
104,903
 1,703
 1,174
 105,432
Asset-backed securities4,407
 145
 282
 4,270
4,282
 362
 8
 4,636
Total Available-for-Sale Fixed Maturities$2,887,505
 $44,840
 $34,219
 $2,898,126
$2,928,901
 $52,467
 $16,273
 $2,965,095
Equity securities:
 
 
 
Common stocks
 
 
 




13

Table of Contents


Equity securities:
 
 
 
Common stocks
 
 
 
Public utilities$6,394
 $13,465
 $188
 $19,671
$6,394
 $16,075
 $30
 $22,439
Energy6,514
 8,555
 22
 15,047
6,514
 8,171
 120
 14,565
Industrials13,252
 38,715
 173
 51,794
13,117
 53,522
 120
 66,519
Consumer goods and services10,324
 13,851
 58
 24,117
10,110
 15,742
 164
 25,688
Health care7,763
 19,657
 
 27,420
7,763
 32,340
 
 40,103
Technology, media and telecommunications5,931
 9,476
 38
 15,369
6,067
 11,556
 115
 17,508
Financial services17,289
 98,728
 67
 115,950
11,529
 104,985
 67
 116,447
Nonredeemable preferred stocks1,037
 11
 
 1,048
992
 305
 
 1,297
Total Available-for-Sale Equity Securities$68,504
 $202,458
 $546
 $270,416
$62,486
 $242,696
 $616
 $304,566
Total Available-for-Sale Securities$2,956,009
 $247,298
 $34,765
 $3,168,542
$2,991,387
 $295,163
 $16,889
 $3,269,661


The following table is a reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities for continuing and discontinued operations by investment type at September 30, 20172018 and December 31, 2016:2017:


September 30, 2017 
September 30, 2018 
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair ValueCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair Value
HELD-TO-MATURITY       
Fixed maturities:       
Continuing operations$150
 $
 $
 $150
Discontinued operations38
 1
 
 39
Total Held-to-Maturity Fixed Maturities$188
 $1
 $
 189
AVAILABLE-FOR-SALE              
Fixed maturities:              
Continuing operations$1,480,730
 $28,606
 $10,674
 $1,498,662
$1,764,380
 $5,633
 $39,982
 $1,730,031
Discontinued operations1,399,465
 33,046
 5,520
 1,426,991

 
 
 
Total Available-for-Sale Fixed Maturities$2,880,195
 $61,652
 $16,194
 $2,925,653
$1,764,380
 $5,633
 $39,982
 $1,730,031
Equity securities:       
Continuing operations$57,387
 $212,545
 $591
 $269,341
Discontinued operations5,099
 17,617
 100
 22,616
Total Available-for-Sale Equity Securities$62,486
 $230,162
 $691
 $291,957
Total Available-for-Sale Securities$2,942,681
 $291,814
 $16,885
 $3,217,610

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







14

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December 31, 2017 
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair Value
HELD-TO-MATURITY       
Fixed maturities:       
Continuing operations$150
 $
 $
 $150
Discontinued operations34
 
 
 34
Total Held-to-Maturity Fixed Maturities$184
 $
 $
 $184
AVAILABLE-FOR-SALE       
Fixed maturities:       
Continuing operations$1,516,610
 $27,412
 $8,952
 $1,535,070
Discontinued operations1,412,291
 25,055
 7,321
 1,430,025
Total Available-for-Sale Fixed Maturities2,928,901
 52,467
 16,273
 2,965,095
Equity securities:       
Continuing operations$57,387
 $224,065
 $539
 $280,913
Discontinued operations5,099
 18,631
 77
 23,653
Total Available-for-Sale Equity Securities62,486
 242,696
 616
 304,566
Total Available-for-Sale Securities$2,991,387
 $295,163
 $16,889
 $3,269,661

December 31, 2016 
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair Value
HELD-TO-MATURITY       
Fixed maturities:       
Continuing operations$150
 $
 $
 $150
Discontinued operations48
 1
 
 49
Total Held-to-Maturity Fixed Maturities$198
 $1
 $
 $199
AVAILABLE-FOR-SALE       
Fixed maturities:       
Continuing operations$1,458,235
 $18,725
 $23,674
 $1,453,286
Discontinued operations1,429,270
 26,115
 10,545
 1,444,840
Total Available-for-Sale Fixed Maturities2,887,505
 44,840
 34,219
 2,898,126
Equity securities:       
Continuing operations$59,994
 $186,692
 $316
 $246,370
Discontinued operations8,510
 15,766
 230
 24,046
Total Available-for-Sale Equity Securities68,504
 202,458
 546
 270,416
Total Available-for-Sale Securities$2,956,009
 $247,298
 $34,765
 $3,168,542
Maturities
Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at September 30, 20172018, by contractual maturity, are shown in the following tables. The first table below includes consolidated investments from both continuing and discontinued operations. The second and third tables separate maturities into continuing and discontinued operations. 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.
Maturities        
  Available-For-Sale Trading
September 30, 2018 Amortized Cost Fair Value Amortized Cost Fair Value
Due in one year or less $48,539
 $48,703
 $3,347
 $3,431
Due after one year through five years 212,322
 211,709
 6,835
 8,797
Due after five years through 10 years 518,809
 513,464
 
 
Due after 10 years 732,248
 712,016
 1,865
 2,171
Asset-backed securities 3,238
 3,515
 
 
Mortgage-backed securities 7,985
 7,738
 
 
Collateralized mortgage obligations 241,239
 232,886
 
 
  $1,764,380
 $1,730,031
 $12,047
 $14,399

Maturities - Consolidated:           
 Held-To-Maturity Available-For-Sale Trading
September 30, 2017Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Due in one year or less$150
 $150
 $128,884
 $129,945
 $1,401
 $1,821
Due after one year through five years
 
 782,192
 803,774
 6,979
 8,233
Due after five years through 10 years
 
 751,756
 771,205
 1,302
 1,185
Due after 10 years
 
 747,119
 748,633
 2,151
 2,434
Asset-backed securities
 
 4,280
 4,622
 
 
Mortgage-backed securities38
 39
 14,496
 14,486
 
 
Collateralized mortgage obligations
 
 451,468
 452,988
 
 
 $188
 $189
 $2,880,195
 $2,925,653
 $11,833
 $13,673









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Maturities - Continuing Operations:        
 Held-To-Maturity Available-For-Sale Trading
September 30, 2017Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Due in one year or less$150
 $150
 $54,340
 $54,762
 $1,401
 $1,821
Due after one year through five years
 
 224,804
 230,986
 6,979
 8,233
Due after five years through 10 years
 
 344,553
 354,308
 1,302
 1,185
Due after 10 years
 
 675,795
 676,310
 2,151
 2,434
Asset-backed securities
 
 3,174
 3,517
 
 
Mortgage-backed securities
 
 9,664
 9,783
 
 
Collateralized mortgage obligations
 
 168,400
 168,996
 
 
 $150
 $150
 $1,480,730
 $1,498,662
 $11,833
 $13,673

Maturities - Discontinued Operations:        
 Held-To-Maturity Available-For-Sale Trading
September 30, 2017Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Due in one year or less$
 $
 $74,544
 $75,183
 $
 $
Due after one year through five years
 
 557,388
 572,788
 
 
Due after five years through 10 years
 
 407,203
 416,897
 
 
Due after 10 years
 
 71,324
 72,323
 
 
Asset-backed securities
 
 1,107
 1,105
 
 
Mortgage-backed securities38
 39
 4,832
 4,703
 
 
Collateralized mortgage obligations
 
 283,067
 283,992
 
 
 $38
 $39
 $1,399,465
 $1,426,991
 $
 $
















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Table of Contents

Net Realized Investment Gains and Losses
Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:
 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2018 2017
Net realized investment gains (losses) from continuing operations:       
Fixed maturities:       
Available-for-sale$22
 $118
 $(171) $645
Trading securities       
Change in fair value351
 (43) 92
 504
Sales171
 72
 1,076
 117
Equity securities13,944
 (80) 6,924
 1,842
Real estate(517) 
 (517) 289
Total net realized investment gains from continuing operations$13,971
 $67
 $7,404
 $3,397
Total net realized investment gains (losses) from discontinued operations
 296
 (1,057) 3,600
Total net realized investment gains$13,971
 $363
 $6,347
 $6,997

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Net realized investment gains (losses) from continuing operations:       
Fixed maturities:       
Available-for-sale$118
 $484
 $645
 $898
Trading securities       
Change in fair value(43) 148
 504
 519
Sales72
 107
 117
 568
Equity securities:       
Available-for-sale3
 1,375
 1,553
 2,359
Trading securities       
Change in fair value(124) (5) 232
 325
Sales41
 20
 57
 (6)
Cash equivalents
 
 
 169
Real estate
 
 289
 
Total net realized investment gains from continuing operations$67
 $2,129
 $3,397
 $4,832
Total net realized investment gains from discontinued operations296
 461
 3,600
 1,409
Total net realized investment gains$363
 $2,590
 $6,997
 $6,241

The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities from continuing operations are as follows:
 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2018 2017
Proceeds from sales$105,871
 $2,293
 $129,865
 $3,388
Gross realized gains
 
 140
 1,046
Gross realized losses(94) 
 (401) 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Proceeds from sales$2,293
 $
 $3,388
 $1,968
Gross realized gains
 
 1,046
 921
Gross realized losses
 
 
 

The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities from discontinued operations are as follows:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 20162018 2017 2018 2017
Proceeds from sales$1,844
 $2,007
 $5,807
 $3,081
$
 $1,844
 $
 $5,807
Gross realized gains
 11
 1,254
 65

 
 
 1,254
Gross realized losses
 
 (78) 

 
 
 (78)
Note: The sale of the life insurance business was completed on March 30, 2018.
There were no sales of held-to-maturity securities during the three- and nine-month periods ended September 30, 20172018 and 2016.2017.


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 $20,003$14,399 and $20,034$16,842 at September 30, 20172018 and December 31, 2016,2017, respectively.








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Funding Commitment


Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through DecemberJuly 31, 20232028 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $3,738$23,702 at September 30, 2017.2018.
Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 Nine Months Ended September 30,
 2018 2017
Change in net unrealized investment appreciation   
Available-for-sale fixed maturities$(80,023) $34,837
Available-for-sale equity securities
 27,559
Deferred policy acquisition costs7,274
 (3,582)
Income tax effect15,279
 (20,584)
Net unrealized investment depreciation of discontinued operations, sold6,714
 
Cumulative change in accounting principles(191,244) 
Total change in net unrealized investment appreciation, net of tax$(242,000) $38,230
 Nine Months Ended September 30,
 2017 2016
Change in net unrealized investment appreciation   
Available-for-sale fixed maturities$34,837
 $83,498
Available-for-sale equity securities27,559
 15,459
Deferred policy acquisition costs(3,582) (19,857)
Income tax effect(20,584) (27,685)
Total change in net unrealized investment appreciation, net of tax$38,230
 $51,415

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date or based on the value calculated using a discounted cash flow model. Credit-related impairments on fixed maturity securities that we do not plan to sell, and for which we are not more likely than not to be required to sell, are recognized in net income. Any non-credit related impairment is recognized as a component of other comprehensive income. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position on a consolidated basis, including both continuing and discontinued operations at September 30, 20172018 and December 31, 2016.2017. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at September 30, 2017,2018, if future events or information cause us to determine that a decline in fair value is other-than-temporary.
We have evaluated the near-term prospects of the issuers of our fixed maturity securities in relation to the severity and duration of the unrealized loss and determined that these losses did not warrant the recognition of an OTTI charge at September 30, 20172018 or at September 30, 2016.2017. 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.
We have evaluated the near-term prospects


17

Table of the issuers of our equity securities in relation to the severity and duration of the unrealized loss and determined that these losses did not warrant the recognition of an OTTI charge at September 30, 2017 or at September 30, 2016. Our largest unrealized loss greater than 12 months on an individual equity security at September 30, 2017 was $152. We have no intention to sell any of these securities prior to a recovery in value, but will continue to monitor the fair value reported for these securities as part of our overall process to evaluate investments for OTTI recognition.Contents



                
September 30, 2018Less than 12 months 12 months or longer Total
Type of InvestmentNumber
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. Treasury5
 $18,989
 $107
 5
 $7,852
 $247
 $26,841
 $354
U.S. government agency34
 158,156
 4,096
 7
 34,516
 1,766
 192,672
 5,862
States, municipalities and political subdivisions               
General obligations               
Midwest17
 26,098
 234
 5
 21,109
 1,125
 47,207
 1,359
Northeast5
 14,211
 152
 1
 3,500
 137
 17,711
 289
South23
 46,353
 700
 12
 29,344
 1,859
 75,697
 2,559
West21
 47,340
 680
 8
 24,676
 1,318
 72,016
 1,998
Special revenue               
Midwest31
 56,940
 672
 8
 20,569
 1,063
 77,509
 1,735
Northeast7
 18,451
 336
 11
 27,327
 1,565
 45,778
 1,901
South40
 102,910
 1,578
 32
 70,521
 4,599
 173,431
 6,177
West19
 37,030
 573
 23
 52,433
 2,838
 89,463
 3,411
Foreign bonds1
 2,973
 24
 
 
 
 2,973
 24
Public utilities19
 39,011
 916
 1
 4,860
 275
 43,871
 1,191
Corporate bonds            

 

Energy10
 17,219
 320
 
 
 
 17,219
 320
Industrials16
 39,427
 513
 1
 3,860
 186
 43,287
 699
Consumer goods and services18
 40,446
 737
 1
 974
 26
 41,420
 763
Health care5
 11,515
 134
 
 
 
 11,515
 134
Technology, media and telecommunications9
 20,569
 406
 1
 1,833
 128
 22,402
 534
Financial services24
 54,884
 1,445
 2
 6,154
 443
 61,038
 1,888
Mortgage-backed securities32
 2,355
 55
 13
 3,602
 205
 5,957
 260
Collateralized mortgage obligations               
Government national mortgage association11
 27,027
 856
 18
 39,403
 2,746
 66,430
 3,602
Federal home loan mortgage corporation21
 77,751
 967
 11
 27,390
 1,990
 105,141
 2,957
Federal national mortgage association16
 29,346
 684
 8
 22,072
 1,240
 51,418
 1,924
Asset-backed securities1
 2,882
 41
 
 
 
 2,882
 41
Total Available-for-Sale Fixed Maturities385
 $891,883
 $16,226
 168
 $401,995
 $23,756
 $1,293,878
 $39,982














18

Table of Contents


                
December 31, 2017Less than 12 months 12 months or longer Total
Type of InvestmentNumber
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. Treasury5
 $10,370
 $67
 2
 $5,765
 $119
 $16,135
 $186
U.S. government agency11
 64,842
 390
 5
 19,372
 327
 84,214
 717
States, municipalities and political subdivisions               
General obligations               
Midwest2
 2,177
 8
 3
 19,729
 431
 21,906
 439
Northeast
 
 
 1
 3,644
 10
 3,644
 10
South3
 7,959
 32
 11
 29,545
 781
 37,504
 813
West2
 5,944
 18
 8
 25,755
 445
 31,699
 463
Special revenue               
Midwest2
 3,486
 15
 7
 19,130
 336
 22,616
 351
Northeast1
 4,471
 37
 11
 28,476
 582
 32,947
 619
South8
 7,749
 107
 27
 69,917
 1,744
 77,666
 1,851
West3
 5,424
 16
 22
 56,753
 1,182
 62,177
 1,198
Foreign bonds1
 857
 49
 
 
 
 857
 49
Public utilities8
 19,186
 79
 5
 8,446
 191
 27,632
 270
Corporate bonds               
Energy1
 2,236
 13
 1
 1,606
 97
 3,842
 110
Industrials10
 27,773
 146
 2
 4,275
 95
 32,048
 241
Consumer goods and services14
 32,781
 248
 3
 6,813
 246
 39,594
 494
Health care4
 9,947
 29
 
 
 
 9,947
 29
Technology, media and telecommunications12
 35,319
 122
 3
 10,413
 128
 45,732
 250
Financial services22
 50,144
 256
 4
 11,389
 186
 61,533
 442
Mortgage-backed securities10
 2,458
 18
 10
 6,641
 220
 9,099
 238
Collateralized mortgage obligations               
Government national mortgage association20
 49,764
 629
 17
 46,969
 1,645
 96,733
 2,274
Federal home loan mortgage corporation11
 37,543
 577
 20
 75,679
 3,470
 113,222
 4,047
Federal national mortgage association11
 31,958
 342
 11
 20,123
 832
 52,081
 1,174
Asset-backed securities1
 992
 8
 
 
 
 992
 8
Total Available-for-Sale Fixed Maturities162
 $413,380
 $3,206
 173
 $470,440
 $13,067
 $883,820
 $16,273
Equity securities:               
Common stocks               
Public utilities
 $
 $
 1
 $278
 $30
 $278
 $30
Energy2
 528
 120
 
 
 
 528
 120
Industrials1
 99
 13
 5
 193
 107
 292
 120
Consumer goods and services
 
 
 2
 151
 164
 151
 164
Technology, media and telecommunications2
 466
 95
 1
 4
 20
 470
 115
Financial services2
 193
 55
 1
 9
 12
 202
 67
Total Available-for-Sale Equity Securities7
 $1,286
 $283
 10
 $635
 $333
 $1,921
 $616
Total Available-for-Sale Securities169
 $414,666
 $3,489
 183
 $471,075
 $13,400
 $885,741
 $16,889

                
September 30, 2017Less than 12 months 12 months or longer Total
Type of InvestmentNumber
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. Treasury3
 $8,920
 $44
 3
 $2,829
 $47
 $11,749
 $91
U.S. government agency8
 33,607
 306
 3
 12,789
 210
 46,396
 516
States, municipalities and political subdivisions               
General obligations               
Midwest3
 4,343
 46
 3
 19,742
 453
 24,085
 499
Northeast
 
 
 1
 3,587
 73
 3,587
 73
South7
 14,594
 56
 11
 27,919
 1,154
 42,513
 1,210
West2
 3,600
 29
 8
 25,333
 934
 28,933
 963
Special revenue               
Midwest2
 3,990
 10
 7
 19,034
 484
 23,024
 494
Northeast6
 27,751
 312
 9
 15,275
 483
 43,026
 795
South13
 32,415
 433
 27
 66,978
 2,541
 99,393
 2,974
West8
 20,369
 135
 22
 55,836
 1,805
 76,205
 1,940
Public utilities2
 3,201
 52
 4
 7,491
 148
 10,692
 200
Corporate bonds            

 

Energy2
 6,166
 13
 1
 1,807
 82
 7,973
 95
Industrials
 
 
 2
 4,271
 109
 4,271
 109
Consumer goods and services5
 7,469
 62
 2
 5,097
 73
 12,566
 135
Technology, media and telecommunications6
 15,263
 88
 2
 8,384
 105
 23,647
 193
Financial services11
 21,623
 163
 1
 7,243
 140
 28,866
 303
Mortgage-backed securities11
 4,411
 43
 3
 4,790
 136
 9,201
 179
Collateralized mortgage obligations               
Government national mortgage association16
 40,243
 439
 13
 38,573
 1,019
 78,816
 1,458
Federal home loan mortgage corporation16
 64,647
 1,166
 12
 42,472
 1,966
 107,119
 3,132
Federal national mortgage association13
 35,709
 496
 6
 10,008
 336
 45,717
 832
Asset-backed securities1
 997
 3
 
 
 
 997
 3
Total Available-for-Sale Fixed Maturities135
 $349,318
 $3,896
 140
 $379,458
 $12,298
 $728,776
 $16,194
Equity securities:               
Common stocks               
Public utilities
 $
 $
 1
 $250
 $58
 $250
 $58
Energy2
 546
 102
 1
 182
 4
 728
 106
Industrials1
 106
 6
 5
 141
 158
 247
 164
Consumer goods and services
 
 
 4
 178
 154
 178
 154
Technology, media and telecommunications2
 445
 115
 1
 4
 21
 449
 136
Financial services1
 30
 25
 2
 165
 48
 195
 73
Total Available-for-Sale Equity Securities6
 $1,127
 $248
 14
 $920
 $443
 $2,047
 $691
Total Available-for-Sale Securities141
 $350,445
 $4,144
 154
 $380,378
 $12,741
 $730,823
 $16,885





19

Table of Contents

                
December 31, 2016Less than 12 months 12 months or longer Total
Type of InvestmentNumber
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. Treasury9
 $10,800
 $108
 
 $
 $
 $10,800
 $108
U.S. government agency10
 36,593
 540
 
 
 
 36,593
 540
States, municipalities and political subdivisions               
General obligations               
Midwest27
 40,545
 1,412
 
 
 
 40,545
 1,412
Northeast9
 9,874
 231
 
 
 
 9,874
 231
South37
 53,699
 2,355
 
 
 
 53,699
 2,355
West30
 55,265
 2,173
 
 
 
 55,265
 2,173
Special revenue               
Midwest41
 62,937
 1,433
 
 
 
 62,937
 1,433
Northeast22
 54,993
 2,624
 
 
 
 54,993
 2,624
South79
 152,979
 6,791
 
 
 
 152,979
 6,791
West44
 81,676
 4,052
 
 
 
 81,676
 4,052
Public utilities20
 38,511
 423
 2
 2,122
 24
 40,633
 447
Corporate bonds               
Energy8
 15,938
 313
 3
 8,232
 106
 24,170
 419
Industrials24
 42,854
 596
 3
 5,641
 386
 48,495
 982
Consumer goods and services11
 21,059
 295
 
 
 
 21,059
 295
Health care9
 20,918
 151
 
 
 
 20,918
 151
Technology, media and telecommunications16
 41,230
 516
 3
 10,241
 303
 51,471
 819
Financial services37
 75,286
 1,358
 
 
 
 75,286
 1,358
Mortgage-backed securities16
 9,611
 187
 5
 1,198
 54
 10,809
 241
Collateralized mortgage obligations               
Government national mortgage association36
 82,430
 2,261
 9
 13,603
 505
 96,033
 2,766
Federal home loan mortgage corporation41
 105,775
 3,165
 3
 5,141
 241
 110,916
 3,406
Federal national mortgage association27
 46,633
 1,091
 4
 4,341
 243
 50,974
 1,334
Asset-backed securities1
 971
 29
 1
 2,559
 253
 3,530
 282
Total Available-for-Sale Fixed Maturities554
 $1,060,577
 $32,104
 33
 $53,078
 $2,115
 $1,113,655
 $34,219
Equity securities:               
Common stocks               
Public utilities
 $
 $
 3
 $120
 $188
 $120
 $188
Energy
 
 
 1
 163
 22
 163
 22
Industrials
 
 
 6
 239
 173
 239
 173
Consumer goods and services3
 282
 55
 2
 15
 3
 297
 58
Technology, media and telecommunications7
 26
 5
 8
 33
 33
 59
 38
Financial services3
 53
 3
 2
 150
 64
 203
 67
Total Available-for-Sale Equity Securities13
 $361
 $63
 22
 $720
 $483
 $1,081
 $546
Total Available-for-Sale Securities567
 $1,060,938
 $32,167
 55
 $53,798
 $2,598
 $1,114,736
 $34,765


20

Table of Contents



The tables on the following pages are a reconciliation for continuing and discontinued operations of our total fixed maturity and equity securities that were in an unrealized loss position at September 30, 20172018 and December 31, 2016.2017. The sale of our life insurance business was completed on March 30, 2018. The securities are presented by the length of time they have been continuously in an unrealized loss position:


                              
September 30, 2017Less than 12 months 12 months or longer Total
September 30, 2018Less than 12 months 12 months or longer Total
Type of InvestmentNumber
of Issues
 Fair
Value
 Gross Unrealized
Depreciation
 Number
of Issues
 Fair
Value
 Gross Unrealized Depreciation Fair
Value
 Gross Unrealized DepreciationNumber
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:                              
Continuing operations85
 $206,874
 $2,059
 101
 $259,297
 $8,615
 $466,171
 $10,674
385
 $891,883
 $16,226
 168
 $401,995
 $23,756
 $1,293,878
 $39,982
Discontinued operations50
 142,444
 1,837
 39
 120,161
 3,683
 262,605
 5,520

 
 
 
 
 
 
 
Total Available-for-Sale Fixed Maturities135
 $349,318
 $3,896
 140
 $379,458
 $12,298
 $728,776
 $16,194
385
 $891,883
 $16,226
 168
 $401,995
 $23,756
 $1,293,878
 $39,982
Equity securities:               
Continuing operations6
 $1,127
 $248
 10
 $540
 $343
 $1,667
 $591
Discontinued operations
 
 
 4
 380
 100
 380
 100
Total Available-for-Sale Equity Securities6
 $1,127
 $248
 14
 $920
 $443
 $2,047
 $691
Total Available-for-Sale Securities141
 $350,445
 $4,144
 154
 $380,378
 $12,741
 $730,823
 $16,885

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

                
December 31, 2017Less than 12 months 12 months or longer Total
Type of InvestmentNumber
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:               
Continuing operations88
 $232,489
 $1,791
 112
 $302,815
 $7,161
 $535,304
 $8,952
Discontinued operations74
 180,891
 1,415
 61
 167,625
 5,906
 348,516
 7,321
Total Available-for-Sale Fixed Maturities162
 $413,380
 $3,206
 173
 $470,440
 $13,067
 $883,820
 $16,273
Equity securities:               
Continuing operations5
 $1,129
 $236
 6
 $385
 $303
 $1,514
 $539
Discontinued operations2
 157
 47
 4
 250
 30
 407
 77
Total Available-for-Sale Equity Securities7
 $1,286
 $283
 10
 $635
 $333
 $1,921
 $616
Total Available-for-Sale Securities169
 $414,666
 $3,489
 183
 $471,075
 $13,400
 $885,741
 $16,889

                
December 31, 2016Less than 12 months 12 months or longer Total
Type of InvestmentNumber
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:               
Continuing operations404
 $654,235
 $23,359
 12
 $6,288
 $315
 $660,523
 $23,674
Discontinued operations150
 406,342
 8,745
 21
 46,790
 1,800
 453,132
 10,545
Total Available-for-Sale Fixed Maturities554
 $1,060,577
 $32,104
 33
 $53,078
 $2,115
 $1,113,655
 $34,219
Equity securities:               
Continuing operations12
 $351
 $62
 17
 $477
 $254
 $828
 $316
Discontinued operations1
 10
 1
 5
 243
 229
 253
 230
Total Available-for-Sale Equity Securities13
 $361
 $63
 22
 $720
 $483
 $1,081
 $546
Total Available-for-Sale Securities567
 $1,060,938
 $32,167
 55
 $53,798
 $2,598
 $1,114,736
 $34,765






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Table of Contents


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.
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 yearsyears' 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 usour 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, which is a Level 3 fair value measurement.value.




2221



The fair value of our policy loans is equivalent to carrying value, which is a reasonable estimate of fair value and is classified as Level 2. We do not make policy loans for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders' account balance for non-traditional policies.
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 Non-qualified Deferred Compensation Plan and United Fire Group Supplemental Executive Retirement and Deferral Plan (collectively, the(the "Executive Retirement Plans"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 Plans.Plan. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of September 30, 2017,2018, the cash surrender value of the COLI policies was $3,759,$4,998, 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.


Policy reserves are developed and recorded for deferred annuities, which is an interest-sensitive product, and income annuities. The fair value of the reserve liability for these annuity products is based upon an estimate of the discounted pretax cash flows that are forecast for the underlying business, which is a Level 3 fair value measurement. We base the discount rate on the current U.S. Treasury spot yield curve, which is then risk-adjusted for nonperformance risk and, for interest-sensitive business and market risk factors. The risk-adjusted discount rate is developed using interest rates that are available in the market and representative of the risks applicable to the underlying business.

























23



A summary of the carrying value and estimated fair value of our financial instruments from continuing operations at September 30, 20172018 and December 31, 20162017 is as follows:
 September 30, 2018 December 31, 2017
 Fair Value Carrying Value Fair Value Carrying Value
Assets       
Investments       
Fixed maturities:       
Held-to-maturity securities$
 $
 $150
 $150
Available-for-sale securities1,730,031
 1,730,031
 1,535,070
 1,535,070
Trading securities14,399
 14,399
 16,842
 16,842
Equity securities276,253
 276,253
 287,344

287,344
Mortgage loans14,749
 14,896
 
 
Other long-term investments40,432
 40,432
 49,352
 49,352
Short-term investments175
 175
 175
 175
Cash and cash equivalents52,252
 52,252
 95,562
 95,562
Corporate-owned life insurance4,998
 4,998
 4,029
 4,029









22

 September 30, 2017 December 31, 2016
 Fair Value Carrying Value Fair Value Carrying Value
Assets       
Investments       
Fixed maturities:       
Held-to-maturity securities$150
 $150
 $150
 $150
Available-for-sale securities1,498,662
 1,498,662
 1,453,286
 1,453,286
Trading securities13,673
 13,673
 14,390
 14,390
Equity securities:       
Available-for-sale securities269,341
 269,341
 246,370
 246,370
Trading securities6,330
 6,330
 5,644
 5,644
Other long-term investments49,966
 49,966
 51,769
 51,769
Short-term investments175
 175
 175
 175
Cash and cash equivalents98,610
 98,610
 89,194
 89,194
Corporate-owned life insurance3,759
 3,759
 2,592
 2,592


A summary of the carrying value and estimated fair value of our financial instruments from discontinued operations at September 30, 20172018 and December 31, 20162017 is as follows:
September 30, 2017 December 31, 2016September 30, 2018 December 31, 2017
Fair Value Carrying Value Fair Value Carrying ValueFair Value Carrying Value Fair Value Carrying Value
Assets              
Investments              
Fixed maturities:              
Held-to-maturity securities$39
 $38
 $49
 $48
$
 $
 $34
 $34
Available-for-sale securities1,426,991
 1,426,991
 1,444,840
 1,444,840

 
 1,430,025
 1,430,025
Equity securities:              
Available-for-sale securities22,616
 22,616
 24,046
 24,046

 
 23,653
 23,653
Mortgage loans3,690
 3,504
 3,895
 3,706

 
 3,594
 3,435
Policy loans5,770
 5,770
 5,366
 5,366

 
 5,815
 5,815
Other long-term investments16,299
 16,299
 15,780
 15,870

 
 16,437
 16,437
Cash and cash equivalents30,751
 30,751
 21,659
 21,659

 
 15,851
 15,851
Liabilities              
Policy reserves              
Annuity (accumulations) (1)
$617,819
 $620,037
 $646,764
 $666,711
$
 $
 $591,702
 $611,866
Annuity (benefit payments)144,901
 95,086
 144,283
 95,129

 
 147,038
 93,560

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














24

Table of Contents


The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table includes financial instruments from both continuing and discontinued operations at September 30, 20172018 and December 31, 2016:2017:
September 30, 2017  Fair Value Measurements
September 30, 2018  Fair Value Measurements
DescriptionTotal Level 1 Level 2 Level 3Total Level 1 Level 2 Level 3
AVAILABLE-FOR-SALE              
Fixed maturities:              
Bonds              
U.S. Treasury$21,981
 $
 $21,981
 $
$26,841
 $
 $26,841
 $
U.S. government agency99,525
 
 99,525
 
206,990
 
 206,990
 
States, municipalities and political subdivisions              
General obligations              
Midwest122,438
 
 122,438
 
98,238
 
 98,238
 
Northeast51,579
 
 51,579
 
37,351
 
 37,351
 
South143,425
 
 143,425
 
113,214
 
 113,214
 
West114,646
 
 114,646
 
106,638
 
 106,638
 
Special revenue              
Midwest154,786
 
 154,709
 77
139,327
 
 139,327
 
Northeast79,425
 
 79,425
 
62,097
 
 62,097
 
South262,588
 
 262,588
 
235,441
 
 235,441
 
West158,358
 
 158,358
 
142,398
 
 142,398
 
Foreign bonds56,207
 
 56,207
 
9,747
 
 9,747
 
Public utilities205,756
 
 205,756
 
53,544
 
 53,544
 
Corporate bonds              
Energy98,645
 
 98,645
 
26,686
 
 26,686
 
Industrials214,290
 
 214,290
 
55,531
 
 55,531
 
Consumer goods and services186,385
 
 185,686
 699
51,677
 
 51,677
 
Health care78,375
 
 78,375
 
Technology, media and telecommunications146,139
 
 146,139
 
Financial services259,009
 
 250,992
 8,017
Mortgage-backed securities14,486
 
 14,486
 
Collateralized mortgage obligations       
Government national mortgage association154,730
 
 154,730
 
Federal home loan mortgage corporation190,524
 
 190,524
 
Federal national mortgage association107,734
 
 107,734
 
Asset-backed securities4,622
 
 3,991
 631
Total Available-for-Sale Fixed Maturities$2,925,653
 $
 $2,916,229
 $9,424
Equity securities:       
Common stocks       
Public utilities$22,086
 $22,086
 $
 $
Energy14,406
 14,406
 
 
Industrials62,843
 62,843
 
 
Consumer goods and services24,788
 24,788
 
 
Health care37,226
 37,226
 
 




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Health care17,986
 
 17,986
 
Technology, media and telecommunications26,122
 
 26,122
 
Financial services76,064
 
 75,814
 250
Mortgage-backed securities7,738
 
 7,738
 
Collateralized mortgage obligations       
Government national mortgage association75,316
 
 75,316
 
Federal home loan mortgage corporation105,716
 
 105,716
 
Federal national mortgage association51,854
 
 51,854
 
Asset-backed securities3,515
 
 2,883
 632
Total Available-for-Sale Fixed Maturities$1,730,031
 $
 $1,729,149
 $882
TRADING       
Fixed maturities:       
Bonds       
U.S. Treasury$200
 $
 $200
 $
Corporate bonds

 
 
 
Industrials1,812
 
 1,812
 $
Consumer goods and services1,750
 
 1,750
 
Health care3,182
 
 3,182
 
Technology, media and telecommunications2,694
 
 2,694
 
Financial services2,114
 
 2,114
 
Redeemable preferred stocks2,647
 2,647
 
 
Total Trading Securities$14,399
 $2,647
 $11,752
 $
EQUITY SECURITIES       
Common stocks       
Public utilities$15,563
 $15,563
 $
 $
Energy13,647
 13,647
 
 
Industrials62,741
 62,741
 
 
Consumer goods and services25,870
 25,870
 
 
Health care22,991
 22,991
 
 
Technology, media and telecommunications15,047
 15,047
 
 
Financial services114,708
 114,708
 
 
Nonredeemable preferred stocks5,686
 5,091
 
 595
Total Equity Securities$276,253
 $275,658
 $
 $595
Short-Term Investments$175
 $175
 $
 $
Money Market Accounts$3,824
 $3,824
 $
 $
Corporate-Owned Life Insurance$4,998
 $
 $4,998
 $
Total Assets Measured at Fair Value$2,029,680
 $282,304
 $1,745,899
 $1,477
Note: The sale of the life insurance business was completed on March 30, 2018.



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December 31, 2017  Fair Value Measurements
DescriptionTotal Level 1 Level 2 Level 3
AVAILABLE-FOR-SALE       
Fixed maturities:       
Bonds       
U.S. Treasury$16,891
 $
 $16,891
 $
U.S. government agency122,168
 
 122,168
 
States, municipalities and political subdivisions       
General obligations       
Midwest109,696
 
 109,696
 
Northeast48,641
 
 48,641
 
South141,519
 
 141,519
 
West113,011
 
 113,011
 
Special revenue       
Midwest158,744
 
 158,744
 
Northeast79,760
 
 79,760
 
South263,512
 
 263,512
 
West158,307
 
 158,307
 
Foreign bonds52,753
 
 52,753
 
Public utilities209,144
 
 209,144
 
Corporate bonds       
Energy95,053
 
 95,053
 
Industrials221,707
 
 221,707
 
Consumer goods and services186,257
 
 185,589
 668
Health care75,408
 
 75,408
 
Technology, media and telecommunications148,979
 
 148,979
 
Financial services283,151
 
 275,474
 7,677
Mortgage-backed securities13,691
 
 13,691
 
Collateralized mortgage obligations       
Government national mortgage association157,483
 
 157,483
 
Federal home loan mortgage corporation199,152
 
 199,152
 
Federal national mortgage association105,432
 
 105,432
 
Asset-backed securities4,636
 
 3,989
 647
Total Available-for-Sale Fixed Maturities$2,965,095
 $
 $2,956,103
 $8,992
Equity securities:       
Common stocks       
Public utilities$22,439
 $22,439
 $
 $
Energy14,565
 14,565
 
 
Industrials66,519
 66,517
 2
 
Consumer goods and services25,688
 25,688
 
 
Health care40,103
 40,103
 
 
Technology, media and telecommunications17,508
 17,508
 
 
Financial services116,447
 116,447
 
 



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Nonredeemable preferred stocks1,297
 415
 
 882
Total Available-for-Sale Equity Securities$304,566
 $303,682
 $2
 $882
Total Available-for-Sale Securities$3,269,661
 $303,682
 $2,956,105
 $9,874
TRADING       
Fixed maturities:       
Bonds       
Corporate bonds       
Industrials$2,220
 $
 $2,220
 $
Consumer goods and services1,535
 
 1,535
 
Health care3,741
 
 3,741
 
Technology, media and telecommunications1,221
 
 1,221
 
Financial services5,566
 
 5,566
 
Redeemable preferred stocks2,559
 2,559
 
 
Equity securities:       
Public utilities874
 874
 
 
Energy190
 190
 
 
Industrials989
 989
 
 
Consumer goods and services1,314
 1,314
 
 
Health care325
 325
 
 
Financial services198
 198
 
 
Nonredeemable preferred stocks2,541
 2,541
 
 
Total Trading Securities$23,273
 $8,990
 $14,283
 $
Short-Term Investments$175
 $175
 $
 $
Money Market Accounts$16,824
 $16,824
 $
 $
Corporate-Owned Life Insurance$4,029
 $
 $4,029
 $
Total Assets Measured at Fair Value$3,313,962
 $329,671
 $2,974,417
 $9,874

Technology, media and telecommunications16,085
 16,085
 
 
Financial services113,370
 113,370
 
 
Nonredeemable preferred stocks1,153
 419
 
 734
Total Available-for-Sale Equity Securities$291,957
 $291,223
 $
 $734
Total Available-for-Sale Securities$3,217,610
 $291,223
 $2,916,229
 $10,158
TRADING       
Fixed maturities:       
Corporate bonds

 

 

 

Industrials$2,117
 $
 $2,117
 $
Consumer goods and services289
 
 289
 
Health care3,557
 
 3,557
 
Technology, media and telecommunications1,373
 
 1,373
 
Financial services4,780
 
 4,780
 
Redeemable preferred stocks1,557
 1,557
 
 
Equity securities:       
Public utilities831
 831
 
 
Energy206
 206
 
 
Industrials900
 900
 
 
Consumer goods and services1,209
 1,209
 
 
Health care369
 369
 
 
Financial services218
 218
 
 
Nonredeemable preferred stocks2,597
 2,597
 
 
Total Trading Securities$20,003
 $7,887
 $12,116
 $
Short-Term Investments$175
 $175
 $
 $
Money Market Accounts$13,897
 $13,897
 $
 $
Corporate-Owned Life Insurance$3,759
 $
 $3,759
 $
Total Assets Measured at Fair Value$3,255,444
 $313,182
 $2,932,104
 $10,158























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December 31, 2016  Fair Value Measurements
DescriptionTotal Level 1 Level 2 Level 3
AVAILABLE-FOR-SALE       
Fixed maturities:       
Bonds       
U.S. Treasury$23,195
 $
 $23,195
 $
U.S. government agency77,597
 
 77,597
 
States, municipalities and political subdivisions       
General obligations       
Midwest144,143
 
 144,143
 
Northeast58,409
 
 58,409
 
South128,369
 
 128,369
 
West113,731
 
 113,731
 
Special revenue       
Midwest168,310
 
 168,142
 168
Northeast68,065
 
 68,065
 
South239,187
 
 239,187
 
West131,744
 
 131,744
 
Foreign bonds65,234
 
 65,234
 
Public utilities215,674
 
 215,674
 
Corporate bonds       
Energy108,860
 
 108,860
 
Industrials229,903
 
 229,903
 
Consumer goods and services181,687
 
 180,590
 1,097
Health care83,123
 
 83,123
 
Technology, media and telecommunications144,612
 
 144,612
 
Financial services273,951
 
 265,154
 8,797
Mortgage-backed securities17,248
 
 17,248
 
Collateralized mortgage obligations       
Government national mortgage association144,460
 
 144,460
 
Federal home loan mortgage corporation174,458
 
 174,458
 
Federal national mortgage association101,896
 
 101,896
 
Asset-backed securities4,270
 
 3,821
 449
Total Available-for-Sale Fixed Maturities$2,898,126
 $
 $2,887,615
 $10,511
Equity securities:       
Common stocks       
Public utilities$19,671
 $19,671
 $
 $
Energy15,047
 15,047
 
 
Industrials51,794
 51,794
 
 
Consumer goods and services24,117
 24,117
 
 
Health care27,420
 27,420
 
 
Technology, media and telecommunications15,369
 15,369
 
 
Financial services115,950
 111,958
 
 3,992


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Nonredeemable preferred stocks1,048
 453
 
 595
Total Available-for-Sale Equity Securities$270,416
 $265,829
 $
 $4,587
Total Available-for-Sale Securities$3,168,542
 $265,829
 $2,887,615
 $15,098
TRADING       
Fixed maturities:       
Bonds       
Corporate bonds       
Industrials$3,919
 $
 $3,919
 $
Consumer goods and services127
 
 127
 
Health care3,410
 
 3,410
 
Technology, media and telecommunications787
 
 787
 
Financial services4,842
 
 4,842
 
Redeemable preferred stocks1,305
 1,305
 
 
Equity securities:       
Public utilities613
 613
 
 
Energy286
 286
 
 
Industrials877
 877
 
 
Consumer goods and services1,202
 1,202
 
 
Health care339
 339
 
 
Financial services206
 206
 
 
Nonredeemable preferred stocks2,121
 2,121
 
 
Total Trading Securities$20,034
 $6,949
 $13,085
 $
Short-Term Investments$175
 $175
 $
 $
Money Market Accounts$16,802
 $16,802
 $
 $
Corporate-Owned Life Insurance$2,592
 $
 $2,592
 $
Total Assets Measured at Fair Value$3,208,145
 $289,755
 $2,903,292
 $15,098




















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The following tables are a reconciliation for both continuing and discontinued operations of the presentation of the categorization for our financial instruments measured at fair value on a recurring basis at September 30, 20172018 and December 31, 2016:2017:
September 30, 2017  Fair Value Measurements
September 30, 2018  Fair Value Measurements
DescriptionTotal Level 1 Level 2 Level 3Total Level 1 Level 2 Level 3
AVAILABLE-FOR-SALE              
Fixed maturities:              
Continuing operations$1,498,662
 $
 $1,497,931
 $731
$1,730,031
 

 $1,729,149
 $882
Discontinued operations1,426,991
 
 1,418,298
 8,693

 
 
 
Total Available-for-Sale Fixed Maturities$2,925,653
 $
 $2,916,229
 $9,424
$1,730,031
 $
 $1,729,149
 $882
Equity securities:       
Continuing operations$269,341
 $268,607
 $
 $734
Discontinued operations22,616
 22,616
 
 
Total Available-for-Sale Equity Securities$291,957
 $291,223
 $
 $734
Total Available-for-Sale Securities$3,217,610
 $291,223
 $2,916,229
 $10,158
TRADING              
Fixed maturities:              
Continuing operations$13,673
 $1,557
 $12,116
 $
$14,399
 $2,647
 $11,752
 $
Discontinued operations
 
 
 

 
 
 
Equity securities:       
Total Trading Securities$14,399
 $2,647
 $11,752
 $
EQUITY SECURITIES       
Continuing operations6,330
 6,330
 
 
$276,253
 $275,658
 $
 $595
Discontinued operations
 
 
 

 
 
 
Total Trading Securities$20,003
 $7,887
 $12,116
 $
Total Equity Securities$276,253
 $275,658
 $
 $595
SHORT-TERM INVESTMENTS              
Continuing operations$175
 $175
 $
 $
$175
 $175
 


 


Discontinued operations
 
 
 $

 
 
 $
Short-Term Investments$175
 $175
 $
 $
$175
 $175
 $
 $
MONEY MARKET ACCOUNTS              
Continuing operations$13,203
 $13,203
 $
 $
$3,824
 $3,824
 

 

Discontinued operations694
 694
 
 

 
 
 
Money Market Accounts$13,897
 $13,897
 $
 $
$3,824
 $3,824
 $
 $
CORPORATE-OWNED LIFE INSURANCE              
Continuing operations$3,759
 $
 $3,759
 $
$4,998
 


 $4,998
 


Discontinued operations
 
 
 

 
 
 
Corporate-Owned Life Insurance$3,759
 $
 $3,759
 $
$4,998
 $
 $4,998
 $
Total Assets Measured at Fair Value$3,255,444
 $313,182
 $2,932,104
 $10,158
$2,029,680
 $282,304
 $1,745,899
 $1,477

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




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December 31, 2017  Fair Value Measurements
DescriptionTotal Level 1 Level 2 Level 3
AVAILABLE-FOR-SALE       
Fixed maturities:       
Continuing operations$1,535,070
 $
 $1,534,323
 $747
Discontinued operations1,430,025
 
 1,421,780
 8,245
Total Available-for-Sale Fixed Maturities$2,965,095
 $
 $2,956,103
 $8,992
Equity securities:       
Continuing operations$280,913
 $280,031
 $
 $882
Discontinued operations23,653
 23,651
 2
 
Total Equity Securities$304,566
 $303,682
 $2
 $882
Total Available-for-Sale Securities$3,269,661
 $303,682
 $2,956,105
 $9,874
TRADING       
Fixed maturities:       
Continuing operations$16,842
 $2,559
 $14,283
 $
Discontinued operations
 
 
 
Equity securities:       
Continuing operations6,431
 6,431
 
 
Discontinued operations
 
 
 
Total Trading Securities$23,273
 $8,990
 $14,283
 $
SHORT-TERM INVESTMENTS       
Continuing operations$175
 $175
 $
 $
Discontinued operations
 
 
 
Short-Term Investments$175
 $175
 $
 $
MONEY MARKET ACCOUNTS       
Continuing operations$6,147
 $6,147
 $
 $
Discontinued operations10,677
 10,677
 
 
Money Market Accounts$16,824
 $16,824
 $
 $
CORPORATE-OWNED LIFE INSURANCE       
Continuing operations$4,029
 $
 $4,029
 $
Discontinued operations
 
 
 
Corporate-Owned Life Insurance$4,029
 $
 $4,029
 $
Total Assets Measured at Fair Value$3,313,962
 $329,671
 $2,974,417
 $9,874









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December 31, 2016  Fair Value Measurements
DescriptionTotal Level 1 Level 2 Level 3
AVAILABLE-FOR-SALE       
Fixed maturities:       
Continuing operations$1,453,286
 $
 $1,452,737
 $549
Discontinued operations1,444,840
 
 1,434,878
 9,962
Total Available-for-Sale Fixed Maturities$2,898,126
 $
 $2,887,615
 $10,511
Equity securities:       
Continuing operations$246,370
 $243,627
 $
 $2,743
Discontinued operations24,046
 22,202
 
 1,844
Total Available-for-Sale Equity Securities$270,416
 $265,829
 $
 $4,587
Total Available-for-Sale Securities$3,168,542
 $265,829
 $2,887,615
 $15,098
TRADING       
Fixed maturities:       
Continuing operations$14,390
 $1,305
 $13,085
 $
Discontinued operations
 
 
 
Equity securities:       
Continuing operations5,644
 5,644
 
 
Discontinued operations
 
 
 
Total Trading Securities$20,034
 $6,949
 $13,085
 $
SHORT-TERM INVESTMENTS       
Continuing operations$175
 $175
 $
 $
Discontinued operations
 
 
 
Short-Term Investments$175
 $175
 $
 $
MONEY MARKET ACCOUNTS       
Continuing operations$4,810
 $4,810
 $
 $
Discontinued operations11,992
 11,992
 
 
Money Market Accounts$16,802
 $16,802
 $
 $
CORPORATE-OWNED LIFE INSURANCE       
Continuing operations$2,592
 $
 $2,592
 $
Discontinued operations
 
 
 
Corporate-Owned Life Insurance$2,592
 $
 $2,592
 $
Total Assets Measured at Fair Value$3,208,145
 $289,755
 $2,903,292
 $15,098

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


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


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collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. Unusual fluctuations outside of our expectations are independently corroborated with additional third-party sources that use similar valuation techniques as discussed above. In addition, we also randomly select securities and independently corroborate the valuations obtained from our third-party valuation service providers. In our opinion, the pricing obtained at September 30, 20172018 and December 31, 20162017 was reasonable.
For the three- and nine-month periods ended September 30, 2017,2018, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities. During the three- and nine-month periods ended September 30, 2017,2018, there were no securities transferred between Level 1 and Level 2.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes. If pricing cannot be obtained from these sources, which occurs on a limited basis, management will perform a discounted cash flow analysis, using an appropriate risk-adjusted discount rate, on the underlying security to estimate fair value. During the three- and nine-month periods ended September 30, 2017,2018, 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 from both continuing and discontinued operations for the three-month period ended September 30, 2017:2018:
 States, municipalities and political subdivisions Corporate bonds Asset-backed securities Equities Total
Balance at June 30, 2017$77
 $9,056
 $622
 $595
 $10,350
Net unrealized gains (losses)(1)

 (7) 9
 139
 141
Purchases
 100
 
 
 100
Disposals
 (433) 
 
 (433)
Balance at September 30, 2017$77
 $8,716
 $631
 $734
 $10,158
 Corporate bonds Asset-backed securities Equities Total
Balance at June 30, 2018$100
 $639
 $669
 $1,408
Net unrealized gains (losses)(1)
150
 (7) (74) 69
Balance at September 30, 2018$250
 $632
 $595
 $1,477
(1) Net unrealized gains (losses) 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 from both continuing and discontinued operations for the nine-month period ended September 30, 2017:2018:
 States, municipalities and political subdivisions Corporate bonds Asset-backed securities Equities Total
Balance at January 1, 2017$168
 $9,894
 $449
 $4,587
 $15,098
Net unrealized gains (losses)(1)
(6) (6) 182
 139
 309
Purchases
 100
 
 145
 245
Disposals(85) (1,272) 
 (4,137) (5,494)
Balance at September 30, 2017$77
 $8,716
 $631
 $734
 $10,158
 Corporate bonds Asset-backed securities Equities Total
Balance at January 1, 2018$100
 $647
 $882
 $1,629
Net unrealized gains (losses)(1)
150
 (15) (287) (152)
Balance at September 30, 2018$250
 $632
 $595
 $1,477
(1) Net unrealized gains (losses)losses are recorded as a component of comprehensive income.

Commercial Mortgage Loans
The fixed maturities reportedfollowing tables present the carrying value of our commercial mortgage loans and additional information at September 30, 2018 and December 31, 2017:
Commercial Mortgage Loans
 September 30, 2018 December 31, 2017
Loan-to-valueCarrying Value Carrying Value
Less than 65%$14,896
 
Total commercial mortgage loans$14,896
 $


Mortgage Loans by Region
 September 30, 2018 December 31, 2017
 Carrying Value Percent of Total Carrying Value Percent of Total
East North Central$3,245
 21.8% $
 %
Southern Atlantic6,651
 44.7
 
 
East South Central5,000
 33.5
 
 
Total mortgage loans$14,896
 100.0% $
 %
Mortgage Loans by Property Type
 September 30, 2018 December 31, 2017
 Carrying Value Percent of Total Carrying Value Percent of Total
Commercial       
Multifamily$3,245
 21.8% $
 %
Office11,651
 78.2
 
 
Total mortgage loans$14,896
 100.0% $
 %

The commercial mortgage loans originate with an initial loan-to-value ratio to provide sufficient collateral to absorb losses should a loan be required to foreclose. Mortgage loans are evaluated on a quarterly basis for impairment on an individual basis through a monitoring process and review of key credit indicators, such as disposals relateeconomic trends, delinquency rates, property valuations, occupancy and rental rates and loan-to-value ratios. A loan is considered impaired when the Company believes it will not collect the contractual principal and interest set forth in the contractual terms of the loan. A valuation allowance is established on each loan recognizing a loss for amounts which we believe will not be collected according to the receiptcontractual terms of principal on calls or sinking fund bonds, in accordance with the indentures.respective loan agreement. As of September 30, 2018 there were no mortgage loan impairments.



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NOTE 4. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.


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


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


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


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





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The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves at September 30, 20172018 and December 31, 20162017 (net of reinsurance amounts):
    
 September 30, 2018 December 31, 2017
Gross liability for losses and loss settlement expenses
at beginning of year
$1,224,183
 $1,123,896
Ceded losses and loss settlement expenses(59,871) (59,794)
Net liability for losses and loss settlement expenses
at beginning of year
$1,164,312
 $1,064,102
Losses and loss settlement expenses incurred
for claims occurring during
   
   Current year$575,214
 $779,966
   Prior years(47,673) (54,253)
Total incurred$527,541
 $725,713
Losses and loss settlement expense payments
for claims occurring during
   
   Current year$212,138
 $311,972
   Prior years263,552
 313,531
Total paid$475,690
 $625,503
Net liability for losses and loss settlement expenses
at end of year
$1,216,163
 $1,164,312
Ceded loss and loss settlement expenses61,914
 59,871
Gross liability for losses and loss settlement expenses
at end of period
$1,278,077
 $1,224,183

    
 September 30, 2017 December 31, 2016
Gross liability for losses and loss settlement expenses
at beginning of year
$1,123,896
 $1,003,895
Ceded losses and loss settlement expenses(59,794) (54,653)
Net liability for losses and loss settlement expenses
at beginning of year
$1,064,102
 $949,242
Losses and loss settlement expenses incurred
for claims occurring during
   
   Current year$606,344
 $683,662
   Prior years(37,988) (31,229)
Total incurred$568,356
 $652,433
Losses and loss settlement expense payments
for claims occurring during
   
   Current year$212,591
 $277,053
   Prior years247,608
 260,520
Total paid$460,199
 $537,573
Net liability for losses and loss settlement expenses
at end of year
$1,172,259
 $1,064,102
Ceded loss and loss settlement expenses65,021
 59,794
Gross liability for losses and loss settlement expenses
at end of period
$1,237,280
 $1,123,896


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 dollarmonetary impact of any individual factor on the development of reserves.


For the three-month period ended September 30, 2018 the majority of unfavorable development came from two lines, commercial liability and commercial automobile with a partial offset coming from favorable development for the three lines of reinsurance assumed, workers compensation and fidelity and surety. All other lines combined contributed a relatively minimal amount of overall unfavorable development during this three-month period. The unfavorable development for the quarter is attributable to the combination of latent emergence of commercial automobile claims that increased sufficiently to also generate an umbrella liability claim combined with a very large but independent general liability claim. For the nine-month period ended September 30, 2018 the majority of favorable development came from four lines: workers compensation, commercial automobile, commercial liability, and reinsurance assumed. Each of the other individual lines also contributed favorable development during this nine-month period (none were unfavorable).

The significant drivers of the favorable reserve development in 2017 came from two lines, commercial liability and workers compensation, partially offset by unfavorable development from commercial fire and allied lines, assumed reinsurance and commercial automobile. Much of the favorable long-tail liability development continues to come from loss adjustment expense and is attributed to our continued litigation management efforts. There was also a reduction in reserves for incurred but not reported claims because our long tail liability has experienced fewer late reported claims than what was initially anticipated. The majority of the favorable workers compensation development is due to reductions in reserves for reported claims which were greater than what was necessary to offset claim payments. Assumed reinsurance was adversely affected by increases in reserves for reported claims while commercial fire adverse development is attributable to loss payments which were greater than reductions in reported loss reserves and reserves for claims incurred but not reported. The majority of adverse commercial fire development resulted from claim payments that exceeded reductions in reserves for reported claims.

The significant drivers of the favorable reserve development in 2016 were our commercial liability and workers compensation.compensation lines of business. Much of the favorable commercial other liability development came from loss adjustment expense and is attributed to our continued litigation management efforts.efforts combined with some favorable development coming from decreases in reserves, which were more than sufficient to pay claims as they closed. Workers compensation favorable development was due to the combined effects of decreases in claim reserves along with favorable changes affecting loss adjustment expense. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial property, commercial automobile and assumed reinsurance exhibitedOur personal lines also contributed favorable development. The lines that experienced adverse development during the year, which provided a partialpartially offset to the favorable development previously noted.mentioned earlier, were assumed reinsurance and commercial automobile. The adverse development for all three linesassumed reinsurance is due to increases in prior year reserves for unpaid claims while the adverse development for commercial automobile is due to paid losslosses which waswere greater than reductions in reported loss reserves and


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reserves for claims incurred but not reported. No other single line of business contributed a significant portion of the total development.


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


NOTE 5. EMPLOYEE BENEFITS


Net Periodic Benefit Cost


The components of the net periodic benefit cost for our pension and postretirement benefit plans are as follows:
Pension Plan Postretirement Benefit PlanPension Plan Postretirement Benefit Plan
Three Months Ended September 30,2017 2016 2017 20162018 2017 2018 2017
              
Net periodic benefit cost              
Service cost$1,714
 $1,623
 $505
 $932
$2,175
 $1,714
 $750
 $505
Interest cost1,765
 1,663
 482
 754
1,875
 1,765
 502
 482
Expected return on plan assets(2,413) (1,988) 
 
(2,626) (2,413) 
 
Amortization of prior service credit
 
 (1,352) 

 
 (1,352) (1,352)
Amortization of net loss891
 992
 462
 379
1,072
 891
 589
 462
Net periodic benefit cost$1,957
 $2,290
 $97
 $2,065
$2,496
 $1,957
 $489
 $97


 Pension Plan Postretirement Benefit Plan
Nine Months Ended September 30,2018 2017 2018 2017
        
Net periodic benefit cost       
Service cost$6,525
 $5,141
 $2,249
 $1,515
Interest cost5,625
 5,295
 1,506
 1,446
Expected return on plan assets(7,877) (7,237) 
 
Amortization of prior service credit
 
 (4,056) (4,056)
Amortization of net loss3,215
 2,673
 1,767
 1,384
Net periodic benefit cost$7,488
 $5,872
 $1,466
 $289

 Pension Plan Postretirement Benefit Plan
Nine Months Ended September 30,2017 2016 2017 2016
        
Net periodic benefit cost       
Service cost$5,141
 $4,869
 $1,515
 $2,796
Interest cost5,295
 4,989
 1,446
 2,262
Expected return on plan assets(7,237) (5,964) 
 
Amortization of prior service credit
 
 (4,056) 
Amortization of net loss2,673
 2,976
 1,384
 1,137
Net periodic benefit cost$5,872
 $6,870
 $289
 $6,195


Employer Contributions


We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 20162017 that we expected to contribute $6,400$6,400 to the pension plan in 2017.2018. For the nine-month period ended September 30, 2017,2018, we contributed $11,396$16,400 to the pension plan. In September 2017,2018, the Company contributed an additional $5,000$10,000 to the pension plan for tax advantages and to reduce future obligations.









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NOTE 6. STOCK-BASED COMPENSATION


Non-qualifiedNon-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


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stock options for up to 1,900,000 shares of UFG common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of UFG common stock issuable at any time and from time to time pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc. Stock Plan (as amended, the "Stock Plan"). At September 30, 2017,2018, there were 996,839879,913 authorized shares remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees who are in positions of substantial responsibility with UFG.
Options granted pursuant to the Stock Plan are granted to buy shares of UFG's common stock at the market value of the stock on the date of grant. All outstanding option awards have graded vesting over 3 years or 5 years from the grant date, unless the Board of Directors authorizes acceleration of vesting. Performance stock units cliff-vest after 3 years and the certification of performance results by UFG’s Compensation Committee. 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 issuance, unless accelerated upon the approval of the Board of Directors, at which time UFG common stock will be issued to the awardee.
The activity in the Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award GrantsNine Months Ended September 30, 2018 From Inception to September 30, 2018
Beginning balance996,828
 1,900,000
Additional shares authorized
 1,500,000
Number of awards granted(157,188) (3,029,159)
Number of awards forfeited or expired40,273
 509,072
Ending balance879,913
 879,913
Number of option awards exercised211,789
 1,297,684
Number of unrestricted stock awards granted


 8,470
Number of restricted stock awards vested19,658
 57,826

Authorized Shares Available for Future Award GrantsNine Months Ended September 30, 2017 From Inception to September 30, 2017
Beginning balance1,248,651
 1,900,000
Additional shares authorized
 1,500,000
Number of awards granted(255,040) (2,867,606)
Number of awards forfeited or expired3,228
 464,445
Ending balance996,839
 996,839
Number of option awards exercised101,189
 1,050,257
Number of unrestricted stock awards granted1,145
 8,470
Number of restricted stock awards vested
 36,970


Non-qualified Non-employeeNon-Qualified Non-Employee Director Stock Option and Restricted Stock Plan
The United Fire Group, Inc. 2005 Non-qualified Non-employeeNon-Qualified Non-Employee Director Stock Option and Restricted Stock Plan (the "Director Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of UFG's common stock to non-employee directors. At September 30, 2017,2018, we had 61,81349,163 authorized shares available for future issuance.
The Board of Directors has the authority to determine which non-employee directors receive awards, when options and restricted stock shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement (subject to limits set forth in the plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Plan.














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The activity in the Director Plan is displayed in the following table:
Authorized Shares Available for Future Award GrantsNine Months Ended September 30, 2018 From Inception to September 30, 2018
Beginning balance61,813
 300,000
Number of awards granted(12,650) (274,840)
Number of awards forfeited or expired


 24,003
Ending balance49,163
 49,163
Number of option awards exercised24,953
 114,234
Number of restricted stock awards vested17,269
 71,541

Authorized Shares Available for Future Award GrantsNine Months Ended September 30, 2017 From Inception to June 30, 2017
Beginning balance74,771
 300,000
Number of awards granted(12,958) (262,190)
Number of awards forfeited or expired
 24,003
Ending balance61,813
 61,813
Number of option awards exercised6,727
 59,200
Number of restricted stock awards vested22,716
 54,272

Stock-Based Compensation Expense


For the three-month periods ended September 30, 20172018 and 20162017, we recognized stock-based compensation expense of $1,202$1,320 and $865,$1,202, respectively. For the nine-month periods ended September 30, 20172018 and 2016,2017, we recognized stock-based compensation expense of $3,456$4,040 and $2,731,$3,456, respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.


As of September 30, 2017,2018, we had $9,586$8,287 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 20172018 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.
2018 $1,318
2019 4,032
2020 2,355
2021 544
2022 38
Total $8,287

2017 $1,202
2018 4,047
2019 2,784
2020 1,120
2021 393
2022 40
Total $9,586


NOTE 7. SEGMENT INFORMATION


On September 19, 2017, the Company announced that it had agreed to sell its subsidiary, United Life, Insurance Company, to Kuvare. The sale closed on March 30, 2018. As a result, ourthe life insurance segmentbusiness has been considered held for sale and reported as discontinued operations in the Consolidated Financial Statements and all comparable prior periods have been presented to conform to the current yearperiod presentation. The sale is expected to close in the first half of 2018, subject to customary conditions, including regulatory approval. For more information, refer to Note 11. Discontinued Operations.


Prior to the announcement to sell our subsidiary, United Life, Insurance Company, we had two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance segmentbusiness has six domestic locations from which it conducts its business. The life insurance segment operatesoperated 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 sale ofUnited Life transaction, our life insurance segment, the Company has one reportable segment,continuing operations, the property and casualty insurance segment, which includes all continuing operations.business, was reported as one reportable segment. The property and casualty insurance segmentbusiness 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 segmentbusiness results based on profitability (i.e., loss ratios), expenses and return on equity. The Company's property and casualty insurance segmentbusiness 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


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networks with insurance agents and monitoring the regulatory environment. The property and casualty insurance segmentbusiness products have similar economic characteristics and use a similar marketing and distribution strategy with our independent agents. The property and casualty insurance segmentbusiness geographic concentration did not change after the announcement of


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the sale of the life insurance segment.business. We will continue to evaluate our segmentcontinuing operations on the basis of both statutory accounting principles prescribed or permitted by our states of domicile and GAAP.
NOTE 8. EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options, restricted stock awards and restricted stock unit awards.
We determine the dilutive effect of our outstanding stock options using the "treasury stock" method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average market value of our common stock during the reporting period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.

The components of basic and diluted earnings per share were as follows for the three-month periods ended September 30, 20172018 and 2016:2017:
Three Months Ended September 30,Three Months Ended September 30,
(In Thousands, Except Share Data)2017 20162018 2017
Basic Diluted Basic DilutedBasic Diluted Basic Diluted
Net income (loss) from continuing operations$(19,082) $(19,082) $11,628
 $11,628
$11,070
 $11,070
 $(19,082) $(19,082)
Weighted-average common shares outstanding24,960,086
 24,960,086
 25,389,633
 25,389,633
25,052,627
 25,052,627
 24,960,086
 24,960,086
Add dilutive effect of restricted stock unit awards
 
 
 155,270

 279,636
 
 
Add dilutive effect of stock options
 
 
 270,443

 294,688
 
 
Weighted-average common shares outstanding24,960,086
 24,960,086
 25,389,633
 25,815,346
25,052,627
 25,626,951
 24,960,086
 24,960,086
Earnings (loss) per common share from continuing operations$(0.77) $(0.77) $0.46
 $0.45
$0.44
 $0.43
 $(0.77) $(0.77)
Earnings per common share from discontinued operations0.05
 0.05
 0.03
 0.03

 
 0.05
 0.05
Earnings (loss) per common share$(0.72) $(0.72) $0.49
 $0.48
$0.44
 $0.43
 $(0.72) $(0.72)
Awards excluded from diluted earnings per share calculation(1)

 
 
 

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






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The components of basic and diluted earnings per share were as follows for the nine-month periods ended September 30, 20172018 and 2016:2017:
Nine Months Ended September 30,Nine Months Ended September 30,
(In Thousands, Except Share Data)2017 20162018 2017
Basic Diluted Basic DilutedBasic Diluted Basic Diluted
Net income (loss) from continuing operations$(389) $(389) $37,083
 $37,083
$31,591
 $31,591
 $(389) $(389)
Weighted-average common shares outstanding25,177,133
 25,177,133
 25,322,427
 25,322,427
24,982,155
 24,982,155
 25,177,133
 25,177,133
Add dilutive effect of restricted stock unit awards
 253,082
 
 155,270

 279,636
 
 253,082
Add dilutive effect of stock options
 236,190
 
 233,317

 345,514
 
 236,190
Weighted-average common shares outstanding25,177,133
 25,666,405
 25,322,427
 25,711,014
24,982,155
 25,607,305
 25,177,133
 25,666,405
Earnings (loss) per common share from continuing operations$(0.01) $(0.01) $1.47
 $1.44
$1.26
 $1.23
 $(0.01) $(0.01)
Earnings per common share from discontinued operations0.21
 0.21
 0.03
 0.03
(0.08) (0.07) 0.21
 0.21
Earnings (loss) per common share$0.20
 $0.20
 $1.50
 $1.47
Gain on sale of discontinued operations, net of taxes1.10
 1.07
 
 
Earnings per common share$2.28
 $2.23
 $0.20
 $0.20
Awards excluded from diluted earnings per share calculation(1)

 
 
 

 2,681
 
 
(1)Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.


NOTE 9. CREDIT FACILITY


On February 2, 2016, the Company, as borrower, entered into a Credit Agreement (the "Credit Agreement") by and among the Company, with the lenders from time to time party thereto and KeyBank National Association ("Key Bank"), as administrative agent, swingline lender and letter of credit issuer. The Credit Agreement provides for a $50,000 four-year unsecured revolving credit facility that includes a $20,000 letter of credit subfacility and a swingline subfacility in the amount up to $5,000. The Credit Agreement allows the Company to increase the aggregate amount of the commitments thereunder by up to $100,000, provided that no event of default has occurred and is continuing and certain other conditions are satisfied.
The Credit Agreement is available for the Company's general corporate purposes, including liquidity, acquisitions and working capital. All unpaid principal and accrued interest under the Credit Agreement is due and payable in full at maturity on February 2, 2020. Based on the type of loan, advances under the Credit Agreement would bear interest on either the London interbank offered rate ("LIBOR") or a base rate plus, in each case, a calculated margin amount.
The unused commitments under the Credit Agreement will be subject to a commitment fee that will be calculated at a per annum rate. The applicable margins for borrowings under the Credit Agreement and the commitment fee thereunder will be determined by reference to a pricing grid based on the Company’s issuer credit rating by A.M. Best Company, Inc.
The Credit Agreement contains customary representations, conditions to borrowing, covenants and events of default, including certain covenants that limit or restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to sell or transfer assets, enter into a merger or consolidate with another company, create liens, impose restrictions on subsidiary dividends, enter into sale-leaseback transactions, make investments or acquisitions, enter into certain reinsurance agreements, pay dividends during any period of default, enter into transactions with affiliates, change the nature of its business, or incur indebtedness. The Credit Agreement also includes financial covenants that require the Company to (i) maintain a minimum consolidated net worth, (ii) maintain a minimum consolidated statutory surplus and (iii) not exceed a 0.35 to 1.0 debt to total capitalization ratio.
There was no outstanding balance on the Credit Agreement at September 30, 20172018 and 20162017, respectively. For the nine-month periods ended September 30, 20172018 and 2016,2017, we did not incur any interest expense related to either credit facility. We were in compliance with all covenants of the Credit Agreement at September 30, 20172018.





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NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)


The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the three-month period ended September 30, 2017:2018:
  Liability for    Liability for  
Net unrealized underfunded  Net unrealized underfunded  
appreciation employee  appreciation employee  
on investments 
benefit costs(1)
 Totalon investments 
benefit costs(1)
 Total
Balance as of June 30, 2017$160,048
 $(23,080) $136,968
Balance as of June 30, 2018$(15,370) $(43,928) $(59,298)
Change in accumulated other comprehensive income before reclassifications12,347
 
 12,347
(12,157) 
 (12,157)
Reclassification adjustments from accumulated other comprehensive income (loss)(273) 879
 606
392
 1,312
 1,704
Balance as of September 30, 2017$172,122
 $(22,201) $149,921
Balance as of September 30, 2018$(27,135) $(42,616) $(69,751)
(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.


The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the nine-month period ended September 30, 2017:2018:
  Liability for    Liability for  
Net unrealized underfunded  Net unrealized underfunded  
appreciation employee  appreciation employee  
on investments 
benefit costs(1)
 Totalon investments 
benefit costs(1)
 Total
Balance as of January 1, 2017$133,892
 $(24,837) $109,055
Balance as of January 1, 2018$214,865
 $(46,551) $168,314
Cumulative effect of change in accounting principle(191,244) 
 (191,244)
Change in accumulated other comprehensive income before reclassifications41,999
 
 41,999
(51,274) 
 (51,274)
Reclassification adjustments from accumulated other comprehensive income (loss)(3,769) 2,636
 (1,133)518
 3,935
 4,453
Balance as of September 30, 2017$172,122
 $(22,201) $149,921
Balance as of September 30, 2018$(27,135) $(42,616) $(69,751)
(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.


NOTE 11. DISCONTINUED OPERATIONS


On September 18, 2017, we signed a definitive agreement to sell our subsidiary, United Life, Insurance Company, to Kuvare for $280,000 in cash, subject to specified adjustmentsless a $21 adjustment as set forth in the definitive agreement. Asagreement, for a result, ournet amount of $279,979. The sale closed on March 30, 2018 and we reported an after-tax gain on the sale of discontinued operations of $27,307. The life insurance business (previously reported as a separate segment) has beenwas considered held for sale and reported as discontinued operations and its financial position, results of operations and cash flows are separatelywere reported separately for all periods presented, as applicable, unless otherwise noted. The sale is expected
UFG has agreed to close in the first half of 2018, subject to customary conditions, including regulatory approval.

Subsequent to the close of the sale in the first half of 2018, UFG will provide services to Kuvare through a transition services agreement ("TSA"). The TSA will be put in place to ensureensures a seamless transfer of the business between UFG and Kuvare. The TSA includes, among other considerations,


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accounting management, human resources, legal


39

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and information technology services, from the closing date for up to 24 months. Since the close date, the Company has received $317 as part of the TSA agreement.
The assets and liabilities associated with discontinued operations prior to the closing of the sale have been presented separately in our Consolidated Balance Sheets. The major assets and liability categories were as follows as of the dates indicated:
Discontinued OperationsBalance Sheets
(In Thousands, Except Share Data)September 30,
2017
 December 31,
2016
September 30,
2018
 December 31,
2017
(unaudited)  (unaudited)  
Assets      
Investments      
Fixed maturities      
Held-to-maturity, at amortized cost (fair value $39 in 2017 and $49 in 2016)$38
 $48
Available-for-sale, at fair value (amortized cost $1,399,465 in 2017 and $1,429,270 in 2016)1,426,991
 1,444,840
Equity Securities available-for-sale, at fair value (cost $5,099 in 2017 and $8,510 in 2016)22,616
 24,046
Held-to-maturity, at amortized cost (fair value $0 in 2018 and $34 in 2017)$
 $34
Available-for-sale, at fair value (amortized cost $0 in 2018 and $1,412,291 in 2017)
 1,430,025
Equity Securities at fair value (cost $0 in 2018 and $5,099 in 2017)
 23,653
Mortgage loans3,504
 3,706

 3,435
Policy loans5,770
 5,366

 5,815
Other long-term investments16,299
 15,870

 16,437
1,475,218
 1,493,876

 1,479,399
Cash and cash equivalents30,751
 21,659

 15,851
Deferred policy acquisition costs65,836
 70,750

 71,151
Other assets21,041
 19,333

 19,733
Total assets held for sale$1,592,846
 $1,605,618
$
 $1,586,134
Liabilities      
Future policy benefits and losses

$1,324,029
 $1,350,503
$
 $1,320,401
Deferred income taxes
 18,716
Accrued expenses and other liabilities39,708
 39,720

 8,018
Total liabilities held for sale$1,363,737
 $1,390,223
$
 $1,347,135

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























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Summary operating results of discontinued operations were as follows for the periods indicated:
Discontinued Operations
Statements of Income (Unaudited)
 Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands, Except Share Data)2018 2017 2018 2017
        
Revenues       
Net premiums earned$
 $14,230
 $13,003
 $45,999
Investment income, net of investment expenses
 12,354
 12,663
 37,230
Net realized investment gains (losses)

296
 (1,057) 3,600
Other income
 174
 146
 498
Total revenues$
 $27,054
 $24,755
 $87,327
        
Benefits, Losses and Expenses       
Losses and loss settlement expenses$
 $10,506
 $10,823
 $30,679
Increase in liability for future policy benefits
 5,481
 5,023
 19,341
Amortization of deferred policy acquisition costs
 2,156
 1,895
 5,524
Other underwriting expenses
 2,444
 3,864
 9,452
Interest on policyholders’ accounts
 4,587
 4,499
 13,982
Total benefits, losses and expenses$
 $25,174
 $26,104
 $78,978
        
Income (loss) from discontinued operations before income taxes$
 $1,880
 $(1,349) $8,349
Federal income tax expense
 662
 563
 2,930
Net income (loss) from discontinued operations$
 $1,218
 $(1,912) $5,419
Earnings (loss) per common share from discontinued operations:       
Basic$
 $0.05
 $(0.08) $0.21
Diluted
 0.05
 (0.07) 0.21

Discontinued Operations
Statements of Income
 Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands, Except Share Data)2017 2016 2017 2016
        
Revenues       
Net premiums earned$14,230
 $20,600
 $45,999
 $62,878
Investment income, net of investment expenses12,354
 12,663
 37,230
 38,404
Net realized investment gains296
 461
 3,600
 1,409
Other income174
 145
 498
 436
Total revenues$27,054
 $33,869
 $87,327
 $103,127
        
Benefits, Losses and Expenses       
Losses and loss settlement expenses$10,506
 $7,252
 $30,679
 $23,527
Increase in liability for future policy benefits5,481
 14,091
 19,341
 42,645
Amortization of deferred policy acquisition costs2,156
 1,876
 5,524
 5,716
Other underwriting expenses2,444
 4,527
 9,452
 14,630
Interest on policyholders’ accounts4,587
 4,983
 13,982
 15,368
Total benefits, losses and expenses$25,174
 $32,729
 $78,978
 $101,886
        
Income from discontinued operations before income taxes$1,880
 $1,140
 $8,349
 $1,241
Federal income tax expense662
 400
 2,930
 415
Net income from discontinued operations$1,218
 $740
 $5,419
 $826
Earnings per common share from discontinued operations:       
Basic$0.05
 $0.03
 $0.21
 $0.03
Diluted0.05
 0.03
 0.21
 0.03
Note: The sale of the life insurance business was completed on March 30, 2018.


The Company's Consolidated Statement of Cash Flows presents operating, investing and financing cash flows of the discontinued operations separately. The Company's cash management and financial management of both continued and discontinued operations is consolidated as a centralized corporate function in our Finance Department. Cash and cash equivalents of the discontinued operations at September 30, 2017 and December 31, 2016 were $30,751 and $21,659, respectively.




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Review Report of Independent Registered Public Accounting Firm


To the Stockholders and Board of Directors and Stockholders
of United Fire Group, Inc.


Results of Review of Interim Financial Statements

We have reviewed the accompanying consolidated balance sheet of United Fire Group, Inc. (the "Company") as of September 30, 2017,2018, and the related consolidated statements of income and comprehensive income for the three- and nine-month periods ended September 30, 20172018 and 2016,2017, the consolidated statements of cash flows for the nine-month periods ended September 30, 20172018 and 2016, and2017, the consolidated statement of stockholders' equity for the nine-month period ended September 30, 20172018, and the related notes (collectively referred to as the “consolidated interim financial statements”). TheseBased on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements are the responsibility of the Company's management.for them to be in conformity with U.S. generally accepted accounting principles.


We conducted our reviewhave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the year then ended, and the related notes and schedules (not presented herein); and in our report dated February 28, 2018, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial informationstatements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of United Fire Group, Inc. as of December 31, 2016, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 28, 2017. In our opinion, the accompanying consolidated balance sheet of United Fire Group, Inc. as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


 /s/ Ernst & Young LLP   
 Ernst & Young LLP  



Des Moines, Iowa
November 8, 20177, 2018






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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 and financial condition on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with GAAP.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, 20162017. There have been no changes in our critical accounting policies from December 31, 2016.2017.


INTRODUCTION


The purpose of this Management's Discussion and Analysis is to provide an understanding of our results of operations and consolidated financial position.condition. Our Management's Discussion and Analysis should be read in conjunction with our consolidated financial statementsConsolidated 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, 20162017. 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 46states states plus the District of Columbia and are represented by approximately 1,2001,100 independent agencies. Our life insurance subsidiary is licensed in 37 states and is represented by approximately 1,550 independent agencies.
Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, future policy benefits, underwriting and other operating expenses and interest on policyholders' accounts.
Discontinued Operations
On September 18, 2017, the Company signed a definitive agreement to sell its subsidiary, United Life Insurance Company ("United Life"), to Kuvare US Holdings, Inc. ("Kuvare"). As a result, ourThe sale closed on March 30, 2018. The life insurance business has been considered held for sale and accounted for as discontinued operations in the Consolidated Balance Sheets, Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Cash Flows. All periods presented have been revised to show results from continuing and discontinued operations, as applicable, unless otherwise noted. The sale is expected to close in the first half of 2018, subject to customary conditions, including regulatory approval. For more information, refer to Part I, Item 1, Note 11. "Discontinued Operations".





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11. "Discontinued Operations."

Reportable Segments


Prior to the announcement of the sale of ourthe life insurance business, we have historically reported our operations in two business segments, each with a wide range of products:


property and casualty insurance, which includes commercial lines insurance, personal lines insurance, surety bonds and assumed reinsurance; and


life insurance, which includes deferred and immediate annuities, universal life products and traditional life (primarily single premium whole life) insurance products.


We managemanaged these business segments separately, as they generally do not share the same customer base, and each has different products, pricing, and expense structures.


Subsequent to the announcement of the sale of ourthe life insurance segmentbusiness on September 19, 2017, we operate and report as one business segment, which contains our continuing operations. OurThe life insurance business ishas been considered held for sale and is reported as discontinued operations throughoutfor all periods presented in this Form 10-Q, as applicable, unless otherwise noted. For more information, refer to Part I, Item 1, Note 7. "Segment Information".Information."


Pooling Arrangement


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


Geographic Concentration


For the nine-month period ended September 30, 2017,2018, approximately 48.248.6 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri and Colorado.
Profit Factors
Our profitability is influenced by many factors, including price, competition, economic conditions, investment returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, prudent management of our investments, appropriate matching of assets and liabilities, effective use of ceded reinsurance and effective and efficient use of technology.
































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FINANCIAL HIGHLIGHTS
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands)2017 2016 % 2017 2016 %
(In Thousands, Except Ratios)2018 2017 % 2018 2017 %
Revenues                      
Net premiums earned$255,758
 $239,469
 6.8 % $737,424
 $691,976
 6.6 %$264,747
 $255,758
 3.5 % $766,767
 $737,424
 4.0 %
Investment income, net of investment expenses13,792
 14,027
 (1.7) 38,561
 35,017
 10.1
13,192
 13,792
 (4.4) 43,933
 38,561
 13.9
Net realized investment gains (losses)     
      
Change in the value of equity securities14,381
 (124) NM
 5,498
 232
 NM
All other net realized gains(410) 191
 NM
 1,906
 3,165
 (39.8)
Net realized investment gains67
 2,129
 (96.9) 3,397
 4,832
 (29.7)13,971
 67
 NM
 7,404
 3,397
 118.0
Total revenues$269,617
 $255,625
 5.5 % $779,382
 $731,825
 6.5 %$291,910
 $269,617
 8.3 % $818,104
 $779,382
 5.0 %

          
          
Benefits, Losses and Expenses
          
          
Losses and loss settlement expenses$223,208
 $169,303
 31.8 % $568,356
 $475,568
 19.5 %$193,667
 $223,208
 (13.2)% $527,541
 $568,356
 (7.2)%
Amortization of deferred policy acquisition costs52,986
 52,240
 1.4
 154,845
 151,216
 2.4
51,758
 52,986
 (2.3) 152,207
 154,845
 (1.7)
Other underwriting expenses25,817
 20,047
 28.8
 69,900
 61,469
 13.7
33,887
 25,817
 31.3
 105,994
 69,900
 51.6
Total benefits, losses and expenses$302,011
 $241,590
 25.0 % $793,101
 $688,253
 15.2 %$279,312
 $302,011
 (7.5)% $785,742
 $793,101
 (0.9)%


          

          
Income (loss) from continuing operations before income taxes$(32,394) $14,035
 NM
 $(13,719) $43,572
 (131.5)%$12,598
 $(32,394) (138.9) $32,362
 $(13,719) (335.9)%
Federal income tax expense (benefit)(13,312) 2,407
 NM
 (13,330) 6,489
 NM
1,528
 (13,312) (111.5) 771
 (13,330) (105.8)
Net income (loss) from continuing operations$(19,082) $11,628
 (264.1)% $(389) $37,083
 (101.0)%
Income from discontinued operations, net of tax1,218
 740
 64.6 % 5,419
 826
 NM
Net income (loss)$(17,864) $12,368
 (244.4)% $5,030
 $37,909
 (86.7)%
Net income from continuing operations$11,070
 $(19,082) (158.0)% $31,591
 $(389) NM
Income (loss) from discontinued operations, net of tax
 1,218
 (100.0)% (1,912) 5,419
 (135.3)%
Gain on sale of discontinued operations, net of tax
 
  % 27,307
 
 NM
Net income$11,070
 $(17,864) (162.0)% $56,986
 $5,030
 NM
                      
GAAP Ratios:   
           
        
Net loss ratio (without catastrophes)75.3% 65.5% 15.0 % 67.8% 61.1% 11.0 %68.6% 75.3% (8.9)% 64.8% 67.8% (4.4)%
Catastrophes - effect on net loss ratio12.0
 5.2
 130.8 % 9.3
 7.6
 22.4 %4.6
 12.0
 (61.7)% 4.0
 9.3
 (57.0)%
Net loss ratio(1)
87.3% 70.7% 23.5 % 77.1% 68.7% 12.2 %73.2% 87.3% (16.2)% 68.8% 77.1% (10.8)%
Expense ratio(2)
30.8
 30.2
 2.0 % 30.5
 30.8
 (1.0)%32.3
 30.8
 4.9 % 33.7
 30.5
 10.5 %
Combined ratio(3)
118.1% 100.9% 17.0 % 107.6% 99.5% 8.1 %105.5% 118.1% (10.7)% 102.5% 107.6% (4.7)%
(1) The net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our unaudited Consolidated Financial Statements.
(2) The expense ratio is calculated by dividing nondeferred underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance business.
(3) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.
NM = Not meaningful







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The following is a summary of our financial performance from continuing operations for the three- and nine-month periods ended September 30, 20172018:


Results of OperationsRESULTS OF OPERATIONS


For the three-month period ended September 30, 2017,2018, the net income from continuing operations was $11.1 million compared to net loss from continuing operations wasof $19.1 million compared to net income from continuing operations of $11.6 million for the same period of 2016. This decrease2017. In the three-month period ended September 30, 2018, there was driven by an increase in net premiums earned from continued organic growth from new business writings and geographical expansion and rate increases; an increase in net realized investment gains due to the change in value of our equity securities; and a decrease in losses and loss settlement expenses fromdue to lower catastrophe losses and improvement of our core loss ratio, all partially offset by an increase in catastrophe losses and deteriorationother underwriting expenses primarily due to continued investment in upgrading our coreunderwriting technology platforms. Net premiums earned increased to $264.7 million compared to $255.8 million for the same period of 2017,

For the nine-month period ended September 30, 2018, the net income from continuing operations was $31.6 million compared to net loss ratio; partially offsetfrom continuing operations of $0.4 million for the same period of 2017. This increase was driven by an increase in net premiums earned from continued organic growth. Net premiums earned increasedgrowth from new business writings and geographical expansion and rate increases; an increase in investment income due to $255.8 million compared to $239.5 million for the same period of 2016.


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For the nine-month period ended September 30, 2017, the net loss from continuing operations was $0.4 million compared to net income from continuing operations of $37.1 million for the same period of 2016. The decreasean increase in invested assets; an increase in net income was driven by an increaserealized investment gains due to the change in value of our equity securities; and a decrease in losses and loss settlement expenses from an increasea decrease in catastrophe losses and deterioration inimprovement of our core loss ratio;ratio as compared to the same period in 2017. Net premiums earned increased to $766.8 million compared to $737.4 million for the same period of 2017. These results were all partially offset by an increase in net premiums earnedother underwriting expenses primarily from organic growth. Net premiums earned increasedcontinued investment in upgrading our underwriting technology platforms and acceleration of the amortization of deferred acquisition costs in our commercial and personal automobile lines of business due to $737.4 million compared to $692.0 million for the same period of 2016.lower than expected profitability in these lines.


Losses and loss settlement expenses increaseddecreased by $53.9 million during the three-month period ended September 30, 2017 compared to the same period of 2016, and the net loss ratio increased by 16.613.2 percentage points during the three-month period ended September 30, 20172018 compared to the same period of 2016.2017. The increasedecrease was primarily due to an increasea decrease in catastrophe losses and deteriorationan improvement in our core loss ratio. This deterioration was primarily due toratio from a decrease in frequency of losses, partially offset by an increase in the numberseverity of severe losses in our commercial automobile line of business from the current accident year and prior period reserve development.non-catastrophe losses. Pre-tax catastrophe losses for the three-month period ended September 30, 20172018 were $30.7$12.3 million compared to $12.5$30.7 million in the same period of 2016.2017.


Losses and loss settlement expenses increaseddecreased by $92.8 million during the nine-month period ended September 30, 2017 compared to the same period of 2016, and the net loss ratio increased by 8.47.2 percentage points during the nine-month period ended September 30, 20172018 compared to the same period of 2016. The increase2017. This decrease was primarily due todriven by a decrease in catastrophe losses; an increase in catastrophe lossesprior year favorable reserve development primarily on our workers compensation, commercial automobile, assumed reinsurance, other liability and deteriorationcommercial fire and allied lines of business; and an improvement in our core loss ratio. This deterioration was primarily due toratio from a decrease in frequency of losses, partially offset by an increase in the numberseverity of severe losses in our commercial automobile line of business from current accident year and prior period reserve development.non-catastrophe losses. Pre-tax catastrophe losses for the nine-month period ended September 30, 20172018 were $68.8$30.7 million compared to $52.4$68.8 million in the same period of 2016.2017.


Investment income decreased slightly by $0.2$0.6 million and increased $3.5$5.4 million during the three- and nine-month periods ended September 30, 2017, respectively,2018, compared to the same periods of 2016.2017. The change in net investment income for the three-month period ended September 30, 2018 was due to a decrease in the value of our investments in limited liability partnerships, partially offset by an increase in invested assets. The change in net investment income in the nine-month period ended September 30, 20172018 was primarily driven by an increase in invested assets and partially due to the change in the valuation of our investments in limited liability partnerships and not due to a change in our investment philosophy. The valuation of these investments in limited liability partnerships varies from period to period due to current equity market conditions, specifically related to financial institutions.


The combined ratio increased 17.2decreased 12.6 percentage points and 5.1 percentage points to 118.1105.5 percent and 102.5 percent, respectively, for the three-month periodthree- and nine-month periods ended September 30, 2017,2018, compared to 100.9118.1 percent and 107.6 percent for the same periodperiods of 2016.2017. The combined ratio increased 8.1 percentage points to 107.6 percent, for the nine-month period ended September 30, 2017, compared to 99.5 percent for the same period of 2016. The increasedecrease in the combined ratio in the three- and nine-month periods ended September 30, 2017,2018 was primarily due to a decrease in the net loss ratio with a decrease in catastrophe losses offset by an increase in the expense ratio as compared to the same periods of 2016, was primarily attributable to an increase in the net loss ratio. The increase in net loss ratio was primarily driven by an increase in catastrophe losses and a deterioration in our core loss ratio, primarily in our commercial automobile line2017.



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Table of business, which experienced an increase in the number of severe losses on current accident year and prior year reserve development.Contents


The net loss ratio, a component of the combined ratio, increaseddecreased by 16.614.1 percentage points and 8.3 percentage points to 87.373.2 percent and 8.4 percentage points to 77.168.8 percent in the three- and nine-month periods ended September 30, 2017,2018, respectively, as compared to the same periods of 2016.2017. The increasedecrease in net loss ratio was primarily due to an increasedriven by a decrease in catastrophe losses and deteriorationan improvement in our core loss ratio. This deterioration was primarily due toratio from a decrease in frequency of losses, partially offset by an increase in the numberseverity of severe losses in our commercial automobile line of business from prior period reserve development. Pre-tax catastrophe losses totaled $30.7 million and $68.8 million and for the three- and nine-month periods ended September 30, 2017, as compared to $12.5 million and $52.4 million in the same periods of 2016. The increase in the three- and nine-month periods ended September 30, 2017 was primarily driven by losses from hurricanes in the third quarter of 2017.non-catastrophe losses.


The expense ratio, a component of the combined ratio, was 30.832.3 percent and 30.533.7 percent, respectively, for the three- and nine-month periods ended September 30, 2017, respectively,2018, an increase of 0.61.5 percentage points and a decrease of 0.33.2 percentage points, respectively, as compared with the same periods of 2016.2017. The increase in the three-month period ended September 30, 2017 was2018 is primarily due to two items: first, deteriorationour continued investment in our multi-year Oasis project. The increase in the profitability of the commercial and personal auto lines of business, which accelerates the amortization ofnine-month period ended September 30, 2018 was primarily split between two items. First, we continued to invest in our deferred acquisition costs; and second, we have invested in a new multi-year Oasis project to upgrade our technology platform to enhance core underwriting decisions, selection of risks and productivity. The expectation is this project will add 1.0 to 2.0 percentage points annually to the expense ratio for the duration of the project. Second, the acceleration of the amortization of our deferred acquisition costs in our underperforming commercial and personal auto lines of business which resulted from lower than expected profitability in these lines as discussed in prior quarters.



On March 30, 2018, the sale of United Life closed, resulting in a gain on sale of discontinued operations after-tax of $27.3 million.
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productivity. These were both partially offset by a decrease in post-retirement benefit expenses and a decrease in contingent commission expenses.


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.


2018 Development

The property and casualty insurance business experienced $0.7 million of unfavorable and $47.7 million of favorable development in our net reserves for prior accident years for the three- and nine-month periods ended September 30, 2018, respectively. For the three-month period ended September 30, 2018 the two lines contributing the majority of unfavorable development were commercial other liability with $7.5 million unfavorable development and commercial automobile with $6.6 million unfavorable development. The unfavorable development for the three-


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month period ended September 30, 2018 is attributable to the combination of latent emergence of commercial automobile claims that increased sufficiently to also generate an umbrella liability claim and also a very large but independent general liability claim. During the three-month period ended September 30, 2018 the three lines contributing the majority of favorable development which partially offset the unfavorable development noted above were reinsurance assumed with $6.5 million of favorable development, workers compensation with $5.4 million of favorable development, and fidelity and surety with $1.6 million of favorable development.

For the nine-month period ended September 30, 2018 the majority of favorable development came from four lines, workers compensation with $19.9 million favorable development, commercial automobile with $8.4 million favorable development, commercial other liability with $5.2 million favorable development, and reinsurance assumed with $5.5 million of favorable development. During the nine-month period ended September 30, 2018 every individual line experienced favorable development. The favorable development in the nine-month period ended September 30, 2018 is attributable to our continued litigation management efforts as well as favorable runoff of reserves for reported claims, reserves for incurred but not reported ("IBNR") claims, and reserve for general loss adjustment expenses.

2017 Development


The property and casualty insurance business experienced $3.2 million of unfavorable and $38.0 million of favorable development in our net reserves for prior accident years for the three- and nine-month periods ended September 30, 2017, respectively. For the three-month period ended September 30, 2017 the majority of unfavorable development came from two lines, commercial automobile with $5.4$2.8 million unfavorable development and commercial liability with $3.6$7.4 million unfavorable development, which was partially offset by favorable development from two other lines, workers compensation with $4.6$4.4 million favorable development and personal fire and allied lines with $1.6$2.2 million favorable development. During the three-month period ended September 30, 2017 all other lines combined contributed $0.4 million unfavorablefavorable development. Commercial automobile and other liability were the primary sources of unfavorable development which is attributable to latent development of more severe claims than what we have historically seen which manifested itself as increased payments and less favorable changes in reserves for unpaid claims.

For the nine-month period ended September 30, 2017 the majority of favorable development came from two lines, commercial liability with $37.9$23.6 million favorable development and workers compensation with $14.6$14.2 million favorable development, which was partially offset by unfavorable development from three other lines, commercial fire and allied lines with $7.1 million unfavorable development, assumed reinsurance with $6.8 million unfavorable development, and commercial automobile with $5.6$6.2 million unfavorable development. During the nine-month period ended September 30, 2017 all other lines combined contributed $5.0$6.4 million favorable development. Much of the favorable year-to-date long-tail liability development continuescontinued to come from loss adjustment expense and is attributed to our continued litigation management efforts. There was also a reduction in reserves for incurred but not reported claims because our long tail liability has experienced fewer late reported claims than what was initially anticipated. The majority of the favorable workers compensation development is due to reductions in reserves for reported claims which were greater than what was necessary to offset claim payments.


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Development amounts can vary significantly from quarter-to-quarter and year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business. At September 30, 2017,2018, our total reserves were within our actuarial estimates.


2016 Development


The property and casualty insurance business experienced $0.7 million and $27.1 million of favorable development in our net reserves for prior accident years for the three- and nine-month periods ended September 30, 2016, respectively. For the three-month period ended September 30, 2016 the majority of favorable development came from two lines, workers compensation with $4.3 million of favorable development and commercial liability with $2.7 million of favorable development. This was offset by unfavorable development from two other lines, commercial auto with $4.9 million of unfavorable development and commercial fire and allied lines with $2.4 million of unfavorable development. The unfavorable development in commercial auto was driven by an increase frequency and severity from an overall increase in miles driven. The unfavorable development in commercial fire and allied lines was due to latent development on weather-related claims. During the three-month period ended September 30, 2016 all other lines combined contributed favorable development of $1.0 million. The lines of business with favorable development in the three-month period ended September 30, 2016 are primarily attributable to successful management of litigation expenses.


For the nine-month period ended September 30, 2016 the majority of favorable development came from four lines, commercial liability with $16.4 million of favorable development, workers compensation with $11.5 million of favorable development, fidelity and surety with $2.2 million of favorable development and personal auto with $2.1 million of favorable development. This was partially offset by unfavorable development from commercial fire and allied lines with $6.9 million. The unfavorable development in commercial fire and allied lines was due to latent development on weather-related claims. During the nine-month period ended September 30, 2016 all other lines combined contributed favorable development of $1.8 million. The favorable development in the nine-month period ended September 30, 2016 is primarily attributable to reductions in reserves for loss adjustment expense which continues to benefit from successful management of litigation expenses.
































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The following table displays our net premiums earned, net losses and loss settlement expenses and net loss ratio from continuing operations by line of business:
          
Three Months Ended September 30,2017
20162018 2017
 
Net Losses
 
 
Net Losses
   Net Losses     Net Losses  
 
and Loss
 
 
and Loss
   and Loss     and Loss  
Net
Settlement
Net
Net
Settlement
NetNet Settlement Net Net Settlement Net
(In Thousands, Except Ratios)Premiums
Expenses
Loss
Premiums
Expenses
LossPremiums Expenses Loss Premiums Expenses Loss
UnauditedEarned
Incurred
Ratio
Earned
Incurred
RatioEarned Incurred Ratio Earned Incurred Ratio
Commercial lines 
 
 
 
 
            
Other liability$77,955

$50,836

65.2 %
$74,784

$32,714

43.7 %$78,943
 $53,581
 67.9 % $77,955
 $54,598
 70.0 %
Fire and allied lines58,568

45,809

78.2

56,451

47,086

83.4
59,056
 40,514
 68.6
 58,568
 44,996
 76.8
Automobile64,470

74,161

115.0

55,111

53,330

96.8
72,773
 68,892
 94.7
 64,470
 71,674
 111.2
Workers' compensation26,387

23,357

88.5

26,766

21,772

81.3
Workers compensation24,127
 17,776
 73.7
 26,387
 23,573
 89.3
Fidelity and surety6,430

(485)
(7.5)
5,711

908

15.9
5,929
 1,379
 23.3
 6,430
 (350) (5.4)
Miscellaneous459

111

24.2

453

39

8.6
436
 (29) (6.7) 459
 107
 23.3
Total commercial lines$234,269

$193,789

82.7 %
$219,276

$155,849

71.1 %$241,264
 $182,113
 75.5 % $234,269
 $194,598
 83.1 %
 
 
 





            
Personal lines 
 
 





            
Fire and allied lines$10,730

$9,077

84.6 %
$10,986

$6,606

60.1 %$10,416
 $11,423
 109.7 % $10,730
 $8,461
 78.9 %
Automobile6,878

8,250

119.9

6,386

6,328

99.1
7,450
 6,731
 90.3
 6,878
 8,046
 117.0
Miscellaneous294

150

51.0

277

(276)
(99.6)307
 25
 8.1
 294
 161
 54.8
Total personal lines$17,902

$17,477

97.6 %
$17,649

$12,658

71.7 %$18,173
 $18,179
 100.0 % $17,902
 $16,668
 93.1 %
Reinsurance assumed$3,587

$11,942

NM

$2,544

$796

31.3 %$5,310
 $(6,625) (124.8)% $3,587
 $11,942
 332.9 %
Total$255,758

$223,208

87.3 %
$239,469

$169,303

70.7 %$264,747
 $193,667
 73.2 % $255,758
 $223,208
 87.3 %
NM = Not meaningful
                     
Nine Months Ended September 30,2017 20162018 2017
  Net Losses     Net Losses    Net Losses     Net Losses  
  and Loss     and Loss    and Loss     and Loss  
Net Settlement Net Net Settlement NetNet Settlement Net Net Settlement Net
(In Thousands, Except Ratios)Premiums Expenses Loss Premiums Expenses LossPremiums Expenses Loss Premiums Expenses Loss
UnauditedEarned Incurred Ratio Earned Incurred RatioEarned Incurred Ratio Earned Incurred Ratio
Commercial lines                      
Other liability$228,250
 $73,597
 32.2% $215,572
 $101,378
 47.0%$230,845
 $117,387
 50.9 % $228,250
 $87,941
 38.5%
Fire and allied lines168,506
 156,702
 93.0
 164,503
 133,823
 81.3
174,451
 125,844
 72.1
 168,506
 150,108
 89.1
Automobile183,688
 208,346
 113.4
 157,106
 140,397
 89.4
209,176
 188,929
 90.3
 183,688
 202,303
 110.1
Workers' compensation78,092
 55,569
 71.2
 77,009
 53,106
 69.0
Workers compensation71,101
 46,838
 65.9
 78,092
 55,885
 71.6
Fidelity and surety18,041
 207
 1.1
 16,221
 432
 2.7
17,144
 2,328
 13.6
 18,041
 308
 1.7
Miscellaneous1,374
 278
 20.2
 1,292
 357
 27.6
1,289
 348
 27.0
 1,374
 272
 19.8
Total commercial lines$677,951
 $494,699
 73.0% $631,703
 $429,493
 68.0%$704,006
 $481,674
 68.4 % $677,951
 $496,817
 73.3%
                      
Personal lines                      
Fire and allied lines$32,300
 $31,361
 97.1% $32,794
 $25,442
 77.6%$31,250
 $28,183
 90.2 % $32,300
 $29,836
 92.4%
Automobile20,031
 22,909
 114.4
 18,686
 16,872
 90.3
21,686
 18,701
 86.2
 20,031
 22,278
 111.2
Miscellaneous860
 80
 9.3
 808
 319
 39.5
903
 (247) (27.4) 860
 118
 13.7
Total personal lines$53,191
 $54,350
 102.2% $52,288
 $42,633
 81.5%$53,839
 $46,637
 86.6 % $53,191
 $52,232
 98.2%
Reinsurance assumed$6,282
 $19,307
 NM
 $7,985
 $3,442
 43.1%$8,922
 $(770) (8.6)% $6,282
 $19,307
 307.3%
Total$737,424
 $568,356
 77.1% $691,976
 $475,568
 68.7%$766,767
 $527,541
 68.8 % $737,424
 $568,356
 77.1%
NM = Not meaningful








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Below are explanations regarding significant changes in the net loss ratios by line of business:
 
Other liability- The net loss ratio improved 2.1 and deteriorated 12.4 percentage points in the three and nine-month periods ended September 30, 2018, respectively, compared to the same periods of 2017. The deterioration is attributable to reductions in loss IBNR that occurred during both the first and second quarters of 2017 which provided a benefit to 2017 compared with no IBNR reduction during the first quarter of 2018 and IBNR increases during the second and third quarters of 2018. The change in reserves for reported claims increased more in 2018 vs. the same nine-month period of 2017. Paid loss was lower in 2018 than in 2017 while paid loss adjustment expense was comparable for 2018 as compared to the same period of 2017.

Commercial fire and allied lines - The net loss ratio improved 8.2 and 17.0 percentage points in the three and nine-month periods ended September 30, 2018, respectively, compared to the same periods of 2017. The improvement in the three-month and nine-month periods is attributable to a decrease in catastrophe losses, a decrease in frequency of claims partially offset by an increase in severity of losses, a decrease in paid losses and a lower increase in reserves for incurred but not reported claims.

Commercial automobile - The net loss ratio improved 16.5 and 19.8 percentage points in the three and nine-month periods ended September 30, 2018, compared to the same periods of 2017. This improvement is attributable to a decrease in frequency of losses in the three-month period ended September 30, 2018 along with changes in loss IBNR compared to the same period in 2017. We continue to make progress in improving our core loss ratio, however, the performance of this line of business remains below our expectation. Our strategy to improve profitability continues to be: aggressively seeking rate increases, focusing on loss control initiatives and reviewing our book of business for underperforming accounts.

Workers compensation - The net loss ratio improved 15.6 and 5.7 percentage points in the three and nine-month periods ended September 30, 2018 compared to the same periods of 2017. This improvement in the three-month period ended September 30, 2018 is attributable to a decrease in paid losses along with decline in the increase in reserves for reported claims. The improvement in the nine-month period ended September 30, 2018 was somewhat muted by an increase in severity of losses with a portion of the severe losses from auto-related claims.

Personal fire and allied lines - The net loss ratio deteriorated 30.8 and improved 2.2 percentage points in the three and nine-month periods ended September 30, 2018, compared to the same periods of 2017. The deterioration for the quarterly results is attributable to changes in loss IBNR which decreased significantly during the third quarter of 2017 due to favorable reserve development compared to a smaller decrease during the three-month period ended September 30, 2018.

Personal automobile - The net loss ratio improved 26.7 and 25.0 percentage points in the three and nine-month periods ended September 30, 2018, compared to the same periods of 2017. This improvement is attributable to a reduction in paid losses as well as changes in reserves for reported claims which increased less in 2018 compared to the same period of 2017.

Reinsurance assumed - The net loss ratio improved in the three and nine-month periods ended September 30, 2018, compared to the same periods of 2017. This improvement in the three-month period ended September 30, 2018 is attributable to a decline in catastrophe losses as compared to the same period in 2017, which was impacted by three large hurricanes (Harvey, Irma and Maria) and a decrease in paid losses along with reductions in reserves for reported claims and reductions in loss IBNR which occurred in 2018 as compared to increases in the same period of 2017. Year-to-date improvement is attributable to the decrease in catastrophe losses mentioned above, reductions in reserves for reported claims which occurred in 2018 as compared to increases in the same period of 2017 along with changes in loss IBNR which increased less in 2018 as compared to 2017.



Other liability - The net loss ratio deteriorated 21.5 percentage points and improved 14.8 percentage points in the three- and nine-month periods ended September 30, 2017, respectively, compared to the same periods
49

Table of 2016. Loss ratio deterioration for the three-month period ended September 30, 2017 is primarily due to an increase in losses on commercial automobile policies with umbrella coverage resulting in an increase in claim payments for prior years, increase in reserves for current year reported claims and an increase in reserves for prior year incurred but not reported claims. Loss ratio improvement for the-nine month period ended September 30, 2017 is due to a decrease in reserves for incurred but not reported claims and a decrease in reserves for unpaid loss adjustment expense which is attributed to our continued litigation management efforts.Contents


Commercial fire and allied lines - The net loss ratio improved 5.2 percentage points and deteriorated 11.7 percentage points in the three- and nine-month periods ended September 30, 2017, respectively, compared to the same periods of 2016. Loss ratio improvement for the three-month period ended September 30, 2017 comes from a decrease in reserves for incurred but not reported claims for the current year which is attributable to lower than expected claim emergence from various storms that had occurred earlier in the year. Loss ratio deterioration for the-nine month period ended September 30, 2017 is due to an increase in claim payments for the current year and first previous year. In addition, the change results from an increase in frequency, with the number of claims increasing in 2017 as compared to the same periods of 2016, along with an increase in paid loss adjustment expenses.

Commercial automobile - The net loss ratio deteriorated 18.2 percentage points and 24.0 percentage points in the three- and nine-month periods ended September 30, 2017, respectively, compared to the same periods of 2016. The change was due to an increase in the number of severe losses, which we define as losses over $500 thousand, in 2017 as compared to the same periods of 2016 along with strengthening of reserves on prior accident years and only partially due to an increase in direct paid losses in the current accident year. We are implementing many initiatives to improve the profitability of this line of business, which include pricing increases, stricter underwriting guidelines, new analytical tools and more rigorous loss control requirements.

Personal fire and allied lines - The net loss ratio deteriorated 24.5 percentage points and 19.5 percentage points in the three- and nine-month periods ended September 30, 2017, respectively, compared to the same periods of 2016. The change results from an increase in frequency, with the number of claims increasing in 2017 as compared to the same periods of 2016.

Personal automobile - The net loss ratio deteriorated 20.8 percentage points and 24.1 percentage points in the three- and nine-month periods ended September 30, 2017, respectively, compared to the same periods of 2016.The change is primarily attributable to an increase in claim frequency in 2017 as compared to the same periods 2016 which resulted in increased paid loss and increased reserves for reported claims.

Reinsurance assumed - The net loss ratio deteriorated in both the three- and nine-month periods ended September 30, 2017 compared to the same periods of 2016.The increase in losses is primarily due to an increase of reserves for incurred but not reported claims for hurricanes that occurred late in the third quarter. An increase in paid losses also contributed to the increased loss ratios for both the three- and nine-month periods. In addition, the nine-month period is also affected by the emergence of prior year losses from the programs in which we participate, which are reported on a lag basis.

Financial Condition


Our stockholders' equity increaseddecreased to $944.0$884.2 million at September 30, 2017,2018, from $941.9$973.4 million at December 31, 2016.2017. The increasedecrease was attributable to net incomeshareholder dividends of $5.0$97.6 million and an increase(of which $75 million or $3.00 per share was a special cash dividend paid to shareholders on August 20, 2018), a decrease in net unrealized investment gains of $38.2$50.8 million, net of tax, partially offset by stockholder dividends of $20.4 million and share repurchases of $29.8 million.$5.4 million, partially offset by net income of $57.0 million, which includes a $27.3 million gain on the sale of discontinued operations.


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Net unrealized investment gains totaled $172.1 million as of September 30, 2017, an increase of $38.2 million, net of tax, or 28.6 percent, since December 31, 2016. The increase in net unrealized investment gains is primarily the result of a decrease in interest rates, which positively impacted the valuation of our fixed maturity security portfolio during 2017 and an increase in the fair value of our equity security portfolio.


At September 30, 2017,2018, the book value per share of our common stock was $37.99.$35.27. During the nine-month period ended September 30, 2017, 701,8992018, 120,372 shares of common stock were repurchased under our share repurchase program at a total cost of $29.8$5.4 million and an average share price of $42.43.$44.90. No shares were repurchased during the three-month period ended September 30, 2018. Under our share repurchase program, which is scheduled to expire on August 31, 2018,2020, we were authorized to repurchase an additional 2,236,5722,116,200 shares of our common stock as of September 30, 2017.2018.






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Discontinued Operations Results
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands)2017 2016 2017 20162018 2017 2018 2017
Revenues              
Net premiums earned$14,230
 $20,600
 $45,999
 $62,878
$
 $14,230
 $13,003
 $45,999
Investment income, net of investment expenses12,354
 12,663
 37,230
 38,404

 12,354
 12,663
 37,230
Net realized investment gains296
 461
 3,600
 1,409
Net realized investment gains (losses)
 296
 (1,057) 3,600
Other income174
 145
 498
 436

 174
 146
 498
Total revenues$27,054
 $33,869
 $87,327
 $103,127
$
 $27,054
 $24,755
 $87,327
              
Benefits, Losses and Expenses              
Losses and loss settlement expenses$10,506
 $7,252
 $30,679
 $23,527
$
 $10,506
 $10,823
 $30,679
Increase in liability for future policy benefits5,481
 14,091
 19,341
 42,645

 5,481
 5,023
 19,341
Amortization of deferred policy acquisition costs2,156
 1,876
 5,524
 5,716

 2,156
 1,895
 5,524
Other underwriting expenses2,444
 4,527
 9,452
 14,630

 2,444
 3,864
 9,452
Interest on policyholders' accounts4,587
 4,983
 13,982
 15,368

 4,587
 4,499
 13,982
Total benefits, losses and expenses$25,174
 $32,729
 $78,978
 $101,886
$
 $25,174
 $26,104
 $78,978
              
Income from discontinued operations, before income taxes$1,880
 $1,140
 $8,349
 $1,241
Income (loss) from discontinued operations, before income taxes$
 $1,880
 $(1,349) $8,349


Income before income taxes fromThe sale of our discontinued operations closed on March 30, 2018, and therefore no income was $1.9 million forearned in the three-monththird quarter of 2018. For the nine-month period ended September 30, 2017,2018, our discontinued operations had a loss before income taxes of $1.3 million, compared to income before income taxes of $1.1$8.3 million for the same period of 2016. Year-to-date, income before income taxes from discontinued operations totaled $8.3 million compared to $1.2 million for the same nine-month period of 2016. The change in net income in both the third quarter and year-to-date was primarily due to a decrease in underwriting expenses and a smaller increase in liability for future benefits offset by a decrease in net premiums earned and an increase in losses and loss settlement expenses. The decrease in underwriting expenses was due to strategic changes made at the beginning of 2017 to increase profitability of our life products through pricing changes and restructuring of our commissions. This strategic change resulted in a decrease in net premiums earned, primarily in sales of single premium whole life policies which in turn reduced the increase in liability for future benefits. Also impacting the results was an increase in death benefits paid compared to the same periods in the prior year.2017.


Investment Portfolio


Our invested assets from continuing operations totaled $1.8$2.1 billion at September 30, 2017,2018, compared to $1.8$1.9 billion at December 31, 2016,2017, an increase of $66.5$187.3 million. At September 30, 2017,2018, fixed maturity securities and equity securities made up 82.384.0 percent and 15.013.3 percent of the value of our investment portfolio, respectively. Because the primary purpose of our investment portfolio is to fund future claims payments, we use a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to keep our cash on hand low in the current interest rate environment. If additional cash is needed, we can borrow funds available under our revolving credit facility.


Composition
We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation, regulatory requirements, interest rates and credit quality of assets. We administer our investment portfolio


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based on investment guidelines approved by management and the investment committee of our Board of Directors that comply with applicable statutory regulations.










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The composition of our investment portfolio at September 30, 20172018 is presented at carrying value in the following table:
Continuing Operations Discontinued Operations        
Property & Casualty Insurance Life Insurance Total Total
  Percent
   Percent
   Percent
   Percent
(In Thousands, Except Ratios)  of Total
   of Total
   of Total
   of Total
Fixed maturities (1)
      

 

 

 

 

Held-to-maturity$150
 % $38
 % $188
 %
Available-for-sale1,498,662
 81.5
 1,426,991
 96.8
 2,925,653
 88.3
 $1,730,031
 83.3%
Trading securities13,673
 0.7
 
 
 13,673
 0.4
 14,399
 0.7
Equity securities            276,253
 13.3
Available-for-sale269,341
 14.7
 22,616
 1.5
 291,957
 8.8
Trading securities6,330
 0.4
 
 
 6,330
 0.2
Mortgage loans
 
 3,504
 0.2
 3,504
 0.1
 14,896
 0.7
Policy loans
 
 5,770
 0.4
 5,770
 0.2
Other long-term investments49,966
 2.7
 16,299
 1.1
 66,265
 2.0
 40,432
 2.0
Short-term investments175
 
 
 
 175
 
 175
 
Total$1,838,297
 100.0% $1,475,218
 100.0% $3,313,515
 100.0% $2,076,186
 100.0%
(1) Available-for-sale securities and trading fixed maturities are carried at fair value. Held-to-maturity fixed maturities are carried at amortized cost.


At both September 30, 20172018 and December 31, 20162017, we classified $1.7 billion, or 99.2 percent, and $1.5 billion, or 99.198.9 percent, respectively, of our fixed maturities portfolio as available-for-sale. We classify our remaining fixed maturities as held-to-maturity or trading. We record held-to-maturity securities at amortized cost. We record available-for-sale fixed maturity securities at fair value, with any changes in fair value recognized in accumulated other comprehensive income. We record trading securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings.


As of September 30, 20172018 and December 31, 20162017, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.


Credit Quality


The table below shows the composition of fixed maturity securities held in our available-for-sale, held-to-maturity and trading security portfolios, by credit rating for both continuing and discontinued operations at September 30, 20172018 and December 31, 20162017. Information contained in the table is generally based upon the issued credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain credit ratings from Standard & Poor's.
(In Thousands, Except Ratios)September 30, 2017 December 31, 2016September 30, 2018 December 31, 2017
RatingCarrying Value % of Total Carrying Value % of TotalCarrying Value % of Total Carrying Value % of Total
AAA$867,490
 29.5% $782,329
 26.9%$722,204
 41.4% $885,000
 29.7%
AA848,295
 28.8
 857,946
 29.4
696,948
 40.0
 839,210
 28.0
A616,366
 21.0
 651,696
 22.4
172,681
 9.9
 616,787
 20.7
Baa/BBB551,478
 18.8
 554,475
 19.0
144,814
 8.3
 585,968
 19.6
Other/Not Rated55,885
 1.9
 66,268
 2.3
7,783
 0.4
 55,156
 1.9
$2,939,514
 100.0% $2,912,714
 100.0%$1,744,430
 100.0% $2,982,121
 100.0%






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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 used to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.




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Investment Results
We invest the premiums received from our policyholders and annuitants in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Our net investment income from continuing operations decreased by 1.74.4 percent and increased 10.1by 13.9 percent respectively, in the three- and nine-month periods ended September 30, 2017,2018, compared with the same periodsperiod of 2016. The increase2017.The change in net investment income for the nine-monththree-month period ended September 30, 20172018 was primarily due to an increasea decrease in invested assets and changes inthe value of our investments in limited liability partnerships, as comparedpartially offset by an increase in invested assets. The change in net investment income in the nine-month period ended September 30, 2018 was driven by an increase in invested assets, partially offset by the change in the value of our investments in limited liability partnerships and not due to the same perioda change in 2016. We are maintaining our investment philosophyphilosophy. The valuation of purchasing fixed incomethese investments rated investment grade or better.in limited liability partnerships varies from period to period due to current equity market conditions, specifically related to financial institutions.
We hold certain investments in limited liability partnerships that are recorded on the equity method of accounting, with changes in value of these investments recorded in investment income. In the three- and nine-month periods ended September 30, 2017,2018, the change in value of our investments in limited liability partnerships from continuing operations resulted in investment losses of $0.6 million and investment income of $2.0 million and $3.3$3.4 million, respectively, as compared to an increase of $3.6$2.0 million and $2.5$3.3 million, respectively in investment income respectively, in the same periods of 2016.2017. This resulted in ana decrease of $1.6$2.6 million and an increase of $0.8$0.1 million in investment income in the three- and nine-month periods ended September 30, 2017, respectively.2018.
Our net realized investment gains from continuing operations were $0.1$14.0 million and $3.4$7.4 million, respectively, during the three- and nine-month periods ended September 30, 2017,2018, as compared with $2.1net realized investment gains of $0.1 million and $4.8$3.4 million, respectively, in the same periods of 20162017. $5.5 million of the $4.0 million change in the nine-months period ended September 30, 2018 as compared to the same period in 2017 is due to the change in the value of equity securities which is now required to be recognized in net income rather than in accumulated other comprehensive income due to the change in accounting principles adopted on January 1, 2018.
We regularly monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
Changes in unrealized gains and losses on available-for-sale securities do not affect net income and earnings per share but do impact comprehensive income, stockholders' equity and book value per share. We believe that any unrealized losses on our available-for-sale securities at September 30, 20172018 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. It is possible that we could recognize impairment charges in future periods on securities that we own at September 30, 20172018 if future events and information cause us to determine that a decline in value is other-than-temporary. However, we endeavor to invest in high qualityhigh-quality assets to provide protection from future credit quality issues and corresponding other-than-temporary impairment write-downs. In the three- and nine-month periods ended September 30, 20172018 and 2016,2017, there were no other-than-temporary impairment write-downs.



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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, annuity deposits, 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, policyholder benefits under life insurance contracts, annuity withdrawals, 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 for losses and loss settlement expenses and future policyholder benefits of the underlying insurance policies, and annuity withdrawals.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 in 2017for the nine-month periods ended September 30, 2018 and 20162017 from continuing and discontinued operations:
Cash Flow SummaryNine Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2017 20162018 2017
Cash provided by (used in)      
Operating activities$116,296
 $128,069
$69,214
 $116,296
Investing activities(4,361) (20,024)2,491
 (4,361)
Financing activities(93,427) (73,550)(108,195) (93,427)
Net increase in cash and cash equivalents$18,508
 $34,495
Net increase (decrease) in cash and cash equivalents$(36,490) $18,508
In the Consolidated Statement of Cash Flows, cash flows from discontinued operations are shown in separate lines in each of the operating, investing and financing sections of the Cash Flow Statement. Our cash flows from continuing operations were sufficient to meet our current liquidity needs for the nine-month periods ended September 30, 20172018 and 20162017 and we anticipate they will be sufficient to meet our future liquidity needs.
Operating Activities
Net cash flows provided by operating activities totaled $116.3$69.2 million and $128.1116.3 million for the nine-month periods ended September 30, 20172018 and 2016,2017, respectively. Cash flows from discontinued operations provided by operating activities totaled $23.8$4.0 million and $46.0$23.8 million for the nine-month periods ended September 30, 2018 and 2017, and 2016, 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




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discussion of our investments, including our philosophy and our strategy for our portfolio, see the "Investment Portfolio" section of this item.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, $0.9 billion,$264.3 million, or 59.115.2 percent,, of our fixed maturity portfolio will mature.
We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At September 30, 20172018, our cash and cash equivalents included $13.9$3.8 million related to these money market accounts, compared to $16.8 million at December 31, 20162017.
Net cash flows provided by investing activities was $2.5 million and used in investing activities was $4.4 million and $20.0$4.4 million for the nine-month periods ended September 30, 20172018 and 2016,2017, respectively. For the nine-month periods ended September 30, 20172018 and 2016,2017, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments, from continuing operations of $240.2 million and $142.7 million, and $264.2respectively. We also had net cash inflows from the sale of discontinued operations of $276.1 million respectively. Forfor the nine-month periodsperiod ended September 30, 2017 and 2016, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments, from discontinued operations of $96.5 million and $171.1 million, respectively.2018.
Our cash outflows for investment purchases from continuing operations were $167.0$504.4 million for the nine-month period ended September 30, 20172018, compared to $315.8$167.0 million for the same period of 2016. Our cash outflows for investment purchases from discontinued operations were $65.0 million for the nine-month period ended September 30, 2017, compared to $133.4 million for the same period of 2016.2017.
Financing Activities
Net cash flows used in financing activities were $93.4from continuing operations was $96.6 million and $73.6 million for the nine-month periodsperiod ended September 30, 2017 and 2016, respectively. The increase is due2018 which increased $49.4 million compared to repurchases of common stock, an increase in the payment of cash dividends and a decrease in the issuance of common stock$47.2 million used in the nine-month period ended September 30, 2017 comparedprimarily due to the same period of 2016.an increase in shareholder dividends partially offset by a decrease in share repurchases.
Credit Facilities
On February 2, 2016, the Company, as borrower, entered into a Credit Agreementcredit agreement by and among the Company, with the lenders from time to time party thereto and KeyBank National Association, as administrative agent, swingline lender and letter of credit issuer. As of September 30, 2018 and 2017,, there were no balances outstanding under this credit agreement. For further discussion of our credit agreement, refer to Part I, Item 1, Note 99. "Credit Facility" to the unaudited Consolidated Financial Statements.Facility."
Dividends
Dividends paid to shareholders totaled $20.4$97.6 million and $18.2$20.4 million in the nine-month periods ended September 30, 20172018 and 20162017, respectively. The increase in dividends paid to shareholders is primarily due to a special cash dividend of $3.00 per share paid to shareholders on August 20, 2018. 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 however, 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, UFG relieswe rely on dividends received from itsour insurance company subsidiaries in order to pay dividends to itsour 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


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calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at September 30, 20172018, UFG's sole direct insurance company subsidiary, United Fire & Casualty Company, was not


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able to make a maximum of $27.1 million in dividend payments without prior regulatory approval. These restrictions will not have a material impact in meeting the cash obligations of UFG.
Stockholders' Equity
Stockholders' equity increased 0.2decreased 9.2 percent to $944.0$884.2 million at September 30, 20172018, from $941.9973.4 million at December 31, 20162017. The increasedecrease was primarily attributableattributed to net incomeshareholder dividends of $5.0$97.6 million, and an increasea decrease in net unrealized investment gains of $38.2$50.8 million, net of tax, during the first nine months of 2017, partially offset by shareholder dividends of $20.4 million2018 and share repurchases of $29.8 million.$5.4 million, partially offset by net income of $57.0 million, which includes $27.3 million of gain on the sale of discontinued operations. At September 30, 2017,2018, the book value per share of our common stock was $37.99$35.27 compared to $37.04$39.06 at December 31, 2016.2017.


OFF BALANCE SHEET ARRANGEMENTS

Funding Commitments


Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through DecemberJuly 31, 2023,2028, to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $3.7$23.7 million at September 30, 20172018.


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 catastrophiccatastrophe 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 segment,business, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in our periodic earnings.
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands)2017 2016 2017 20162018 2017 2018 2017
ISO catastrophes$25,628
 $10,517
 $62,170
 $49,686
$12,441
 $25,628
 $30,990
 $62,170
Non-ISO catastrophes (1)
5,077
 2,014
 6,596
 2,711
(173) 5,077
 (245) 6,596
Total catastrophes$30,705
 $12,531
 $68,766
 $52,397
$12,268
 $30,705
 $30,745
 $68,766
(1) This number includes international assumed losses.




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


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


It is our philosophy that we do not utilize financial hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but attempt to mitigate our exposure through active portfolio management. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer. At September 30, 20172018, we did not have direct exposure to investments in sub-prime mortgages or other credit-enhancement exposures.


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


There have been no material changes in our market risk or market risk factors from what we reported in our Annual Report on Form 10-K for the year ended December 31, 20162017.


ITEM 4. CONTROLS AND PROCEDURES


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


Changes in Internal Control Over Financial Reporting


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






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PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company is a party to a variety of legal proceedings. While the final outcome of these legal proceedings cannot be predicted with certainty, management believes all of the proceedings pending as of September 30, 20172018 to be ordinary and routine and does not expect these legal proceedings to have a material adverse effect on the Company's financial positioncondition 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 2016Annual Report on Form 10-K for the year ended December 31, 2017filed with the SEC on February 28, 20172018, that could have a material effect on our business, results of operations, financial condition, and/or liquidity and that could cause our operating results to vary significantly from period to period. The risks described in the above mentioned report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also have a material effect on our business, results of operations, financial condition and/or liquidity.


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


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


The following table provides information with respect to purchases of shares of common stock made by or on our behalf or by any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, during the three-month period ended September 30, 20172018:
     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
PeriodShares Purchased Paid per Share Plans or Programs 
Plans or Programs(1)
7/1/2017 - 7/31/20174,904
 $43.00
 4,904
 2,436,959
8/1/2017 - 8/31/2017127,387
 42.41
 127,387
 2,309,572
9/1/2017 - 9/30/201773,000
 40.92
 73,000
 2,236,572
Total205,291
 $41.89
 205,291
  
Total Number of SharesMaximum Number of
TotalPurchased as a Part ofShares that may yet be
Number ofAverage PricePublicly AnnouncedPurchased Under the
PeriodShares PurchasedPaid per SharePlans or Programs
Plans or Programs(1)
7/1/2018 - 7/31/2018
$

2,116,200
8/1/2018 - 8/31/2018


2,116,200
9/1/2018 - 9/30/2018


2,116,200
Total
$

2,116,200
(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 September 30, 20172018 we remained authorized to repurchase 2,236,5722,116,200 shares of common stock.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4. MINE SAFETY DISCLOSURES


None.


ITEM 5. OTHER INFORMATION


None.




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ITEM 6. EXHIBIT INDEX
Exhibit number Exhibit description Furnished herewithFiled herewith
2.1†
31.1   X
31.2   X
32.1  X 
32.2  X 
101.1 


  X
† The schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The registrant agrees to furnish a copy of all omitted schedules to the Securities and Exchange Commission upon its request.




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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, Senior Vice President, Chief Financial Officer and
Director and Principal Executive Officer Principal Accounting Officer
   
November 8, 20177, 2018 November 8, 20177, 2018
(Date) (Date)
 






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