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Section 1: 10-Q (10-Q)

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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 March 31, 2019
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34257
397854917_ufglogo2017color600.gif
________________________
 UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
Iowa
 
45-2302834
(State of incorporation)
 
(I.R.S Employer Identification No.)
118 Second Avenue SE
Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 399-5700
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 [X] NO [ ]

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

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

Securities Registered Pursuant to Section 12(b) of the Exchange Act of 1934:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.001 par value
UFCS
The NASDAQ Global Select Market
As of May 6, 2019, 25,202,733 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
March 31, 2019
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will continue," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018 for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:
The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy; the occurrence of catastrophic events, including international events, significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics;
The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses;
Geographic concentration risk in our property and casualty insurance business;
The potential disruption of our operations and reputation due to unauthorized data access, cyber-attacks or cyber-terrorism and other security breaches;
Developments in general economic conditions, domestic and global financial markets, interest rates and other-than-temporary impairment losses that could affect the performance of our investment portfolio;
Litigation or regulatory actions that could require us to pay significant damages, fines or penalties or change the way we do business;
Our ability to effectively underwrite and adequately price insured risks;
Changes in industry trends, an increase in competition and significant industry developments;
Lowering of one or more of the financial strength ratings of our operating subsidiaries or our issuer credit ratings and the adverse impact such action may have on our premium writings, policy retention, profitability and liquidity;
Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions; changes in laws, regulations and stock exchange requirements relating to corporate governance and the cost of compliance;
Our relationship with and the financial strength of our reinsurers; and
Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network.
These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission ("SEC"), we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.


1

Table of Contents

PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
March 31,
2019
 
December 31,
2018
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Available-for-sale, at fair value (amortized cost $1,709,100 in 2019 and $1,761,289 in 2018)
$
1,730,563

 
$
1,749,488

Trading securities, at fair value (amortized cost $12,699 in 2019 and $11,277 in 2018)
16,409

 
13,240

Equity securities at fair value (cost $63,708 in 2019 and $64,819 in 2018)
269,843

 
248,361

Mortgage loans
34,209

 
25,782

Other long-term investments
40,929

 
37,077

Short-term investments
175

 
175

 
2,092,128

 
2,074,123

Cash and cash equivalents
95,536

 
64,454

Accrued investment income
16,483

 
15,774

Premiums receivable (net of allowance for doubtful accounts of $1,125 in 2019 and $785 in 2018)
365,186

 
346,825

Deferred policy acquisition costs
95,891

 
92,796

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $40,856 in 2019 and $39,894 in 2018)
108,223

 
97,194

Reinsurance receivables and recoverables
56,617

 
61,337

Prepaid reinsurance premiums
7,506

 
7,063

Deferred tax asset

 
912

Income taxes receivable
4,388

 
15,035

Goodwill and intangible assets
23,074

 
23,252

Other assets
38,967

 
17,933

TOTAL ASSETS
$
2,903,999

 
$
2,816,698

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Losses and loss settlement expenses
$
1,303,496

 
$
1,312,483

Unearned premiums
510,713

 
492,918

Accrued expenses and other liabilities
123,563

 
122,922

Deferred income liability
11,036

 

TOTAL LIABILITIES
$
1,948,808

 
$
1,928,323

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,167,822 and 25,097,408 shares issued and outstanding in 2019 and 2018, respectively
$
25

 
$
25

Additional paid-in capital
206,788

 
203,350

Retained earnings
751,683

 
715,472

Accumulated other comprehensive income (loss), net of tax
(3,305
)
 
(30,472
)
TOTAL STOCKHOLDERS’ EQUITY
$
955,191

 
$
888,375

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,903,999

 
$
2,816,698

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


2

Table of Contents

United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
Three Months Ended March 31,
(In Thousands, Except Share Data)
2019
 
2018
Revenues
 
 
 
Net premiums earned
$
262,314

 
$
245,167

Investment income, net of investment expenses
16,512

 
13,492

Net realized investment gains (losses) (includes reclassifications for net unrealized investment gains on available-for-sale securities of $90 in 2019 and $37 in 2018; previously included in accumulated other comprehensive income)
26,713


(7,864
)
Total revenues
$
305,539

 
$
250,795

Benefits, Losses and Expenses
 
 
 
Losses and loss settlement expenses
$
164,240

 
$
144,728

Amortization of deferred policy acquisition costs
52,219

 
49,639

Other underwriting expenses (includes reclassifications for employee benefit costs of $1,124 in 2019 and $1,660 in 2018; previously included in accumulated other comprehensive income)
34,403

 
34,855

Total benefits, losses and expenses
$
250,862

 
$
229,222

Income from continuing operations before income taxes
$
54,677

 
$
21,573

Federal income tax expense (includes reclassifications of $217 in 2019 and $341 in 2018; previously included in accumulated other comprehensive income)
10,156

 
1,209

Income from continuing operations
$
44,521

 
$
20,364

Income (loss) from discontinued operations, net of taxes

 
(1,912
)
Gain on sale of discontinued operations, net of taxes

 
$
27,307

Net income
$
44,521

 
$
45,759

Other comprehensive income (loss)
 
 
 
Change in net unrealized appreciation on investments
$
33,354

 
$
(51,814
)
Change in liability for underfunded employee benefit plans

 

Other comprehensive income (loss), before tax and reclassification adjustments
$
33,354

 
$
(51,814
)
Income tax effect
(7,005
)
 
10,881

Other comprehensive income (loss), after tax, before reclassification adjustments
$
26,349

 
$
(40,933
)
Reclassification adjustment for net realized investment (gains) losses included in income
$
(90
)
 
$
(37
)
Reclassification adjustment for employee benefit costs included in expense
1,124

 
1,660

Total reclassification adjustments, before tax
$
1,034

 
$
1,623

Income tax effect
(217
)
 
(341
)
Total reclassification adjustments, after tax
$
817

 
$
1,282

Comprehensive income
$
71,687

 
$
6,108

Diluted weighted average common shares outstanding
25,604,268

 
25,458,090

Earnings per common share from continuing operations:
 
 
 
Basic
$
1.77

 
$
0.82

Diluted
1.74

 
0.80

Earnings per common share:
 
 
 
Basic
$
1.77

 
$
1.84

Diluted
1.74

 
1.80

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


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United Fire Group, Inc.
Consolidated Statement of Stockholders’ Equity (Unaudited)

 
Three Months Ended March 31,
(In Thousands, Except Share Data)
2019
2018
 
 
 
Common stock
 
 
Balance, beginning of year
$
25

$
25

Shares repurchased (0 shares in 2019 and 120,372 shares in 2018)


Shares issued for stock-based awards (70,414 shares in 2019 and 116,314 shares in 2018)


Balance, end of period
$
25

$
25

 
 
 
Additional paid-in capital
 
 
Balance, beginning of year
$
203,350

$
196,334

Compensation expense and related tax benefit for stock-based award grants
2,688

1,281

Shares repurchased

(5,404
)
Shares issued for stock-based awards
750

2,293

Balance, end of period
$
206,788

$
194,504

 
 
 
Retained earnings
 
 
Balance, beginning of year
$
715,472

$
608,700

Cumulative effect of change in accounting principle
(513
)
191,244

Net unrealized investment depreciation of discontinued operations, sold

(6,714
)
Net income
44,521

45,759

Dividends on common stock ($0.31 per share in 2019 and $0.28 per share in 2018)
(7,797
)
(6,958
)
Balance, end of period
$
751,683

$
832,031

 
 
 
Accumulated other comprehensive income (loss), net of tax
 
 
Balance, beginning of year
$
(30,472
)
$
168,314

Cumulative effect of change in accounting principle

(191,244
)
Change in net unrealized investment appreciation(1)
26,279

(34,248
)
Change in liability for underfunded employee benefit plans(2)
888

1,311

Balance, end of period
$
(3,305
)
$
(55,867
)
 
 
 
Summary of changes
 
 
Balance, beginning of year
$
888,375

$
973,373

Net income
44,521

45,759

All other changes in stockholders’ equity accounts
22,295

(48,439
)
Balance, end of period
$
955,191

$
970,693


(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)

Three Months Ended March 31,
(In Thousands)
2019
 
2018
Cash Flows From Operating Activities
 
 
 
Net income
$
44,521

 
$
45,759

Less net loss from discontinued operations, net of taxes

 
(1,912
)
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
2,763

 
2,178

Depreciation and amortization
1,166

 
1,159

Stock-based compensation expense
2,688

 
1,281

Net realized investment (gains) losses
(26,713
)
 
7,864

Net cash flows from equity and trading investments
1,235

 
383

Deferred income tax benefit
4,863

 
(3,879
)
Changes in:
 
 
 
Accrued investment income
(709
)
 
(1,242
)
Premiums receivable
(18,361
)
 
(10,494
)
Deferred policy acquisition costs
(3,095
)
 
(1,734
)
Reinsurance receivables
4,720

 
(312
)
Prepaid reinsurance premiums
(443
)
 
(253
)
Income taxes receivable
10,647

 
6,031

Other assets
(21,034
)
 
104

Losses and loss settlement expenses
(8,987
)
 
(4,202
)
Unearned premiums
17,795

 
11,521

Accrued expenses and other liabilities
1,275

 
(6,925
)
Income taxes payable

 
17,581

Deferred income taxes

 
(14,039
)
Other, net
(1,628
)
 
1,708

Cash from operating activities - continuing operations
(33,818
)
 
6,730

Cash from operating activities - discontinued operations

 
4,024

Cash from operating activities - gain on sale of discontinued operations

 
(34,851
)
Total adjustments
$
(33,818
)
 
$
(24,097
)
Net cash provided by operating activities
$
10,703

 
$
23,574

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
36,490

 
$

Proceeds from call and maturity of available-for-sale investments
38,740

 
30,320

Proceeds from short-term and other investments
1,027

 
3,078

Proceeds from the sale of discontinued operations

 
276,055

Purchase of available-for-sale investments
(25,007
)
 
(93,115
)
Purchase of short-term and other investments
(11,807
)
 
(676
)
Net purchases and sales of property and equipment
(12,017
)
 
(3,851
)
Cash from investing activities - continuing operations
27,426

 
211,811

Cash from investing activities - discontinued operations

 
14,343

Net cash provided by investing activities
$
27,426

 
$
226,154

Cash Flows From Financing Activities
 
 
 
Payment of cash dividends
$
(7,797
)
 
$
(6,960
)
Repurchase of common stock

 
(5,404
)
Issuance of common stock
750

 
2,293

Cash from financing activities - continuing operations
(7,047
)
 
(10,071
)
Cash from financing activities - discontinued operations

 
(11,547
)
Net cash used in financing activities
$
(7,047
)
 
$
(21,618
)
Net Change in Cash and Cash Equivalents
$
31,082

 
$
228,110

Less: increase in cash and cash equivalents - discontinued operations

 
(6,820
)
Net increase in cash and cash equivalents - continuing operations
31,082

 
221,290

Cash and Cash Equivalents at Beginning of Period - Continuing Operations
64,454

 
95,562

Cash and Cash Equivalents at End of Period - Continuing Operations
$
95,536

 
$
316,852

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


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UNITED FIRE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share amounts or as otherwise noted)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance through a network of independent agencies. Our insurance company subsidiaries are licensed as a property and casualty insurer in 46 states and the District of Columbia.
Discontinued Operations
On September 18, 2017, the Company signed a definitive agreement to sell its subsidiary, United Life Insurance Company ("United Life"), to Kuvare US Holdings, Inc. ("Kuvare") and on March 30, 2018, the sale closed. As a result, the life insurance business, previously a separate segment, was reported as discontinued operations in the Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Cash Flows for all periods presented in this Form 10-Q. Subsequent to the announcement of this sale, our continuing operations were reported as one business segment. All current and prior periods reflected in this Form 10-Q have been presented as continuing and discontinued operations, as applicable, unless otherwise noted. For more information, refer to Note 11. Discontinued Operations.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K for the year ended December 31, 2018, including certain financial statement footnote disclosures, is not required by the rules and regulations of the SEC for interim financial reporting and have been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; loss settlement expenses; and pension and postretirement benefit obligations.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management of UFG believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and non-negotiable certificates of deposit with original maturities of three months or less.


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For the three-month periods ended March 31, 2019 and 2018, we made payments for income taxes totaling $19 and $19, respectively. We received a tax refund of $5,401 and $1,503 for the three month periods ended March 31, 2019 and 2018, respectively.
For the three-month periods ended March 31, 2019 and 2018, we made no interest payments (excluding interest credited to policyholders’ accounts).
Deferred Policy Acquisition Costs ("DAC")

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the three-month period ended March 31, 2019.
 
 
 
Total
Recorded asset at beginning of period
$
92,796

Underwriting costs deferred
55,314

Amortization of deferred policy acquisition costs
(52,219
)
Recorded asset at March 31, 2019
$
95,891



Property and casualty insurance policy acquisition costs deferred are amortized as premium revenue is recognized. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value. This takes into account the premium to be earned, losses and loss settlement expenses expected to be incurred and certain other costs expected to be incurred as the premium is earned.
Income Taxes
Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders' equity and do not impact federal income tax expense.
We reported consolidated federal income tax expense from continuing operations of $10,156 for the three-month period ended March 31, 2019 compared to income tax expense from continuing operations and discontinued operations of $9,316 during the same period of 2018. Our effective tax rate is different than the federal statutory rate of 21 percent, due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.
The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If, based on review, it appears not more likely than not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at March 31, 2019 or December 31, 2018. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.
We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2015. The Internal Revenue Service is conducting an examination of our federal income tax return for the 2017 tax year.




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Leases

The Company determines if a contract contains a lease at inception of the contract. The Company's inventory of leases consist of operating leases which are recorded as a lease obligation liability disclosed in accrued expenses and other liabilities line on the Consolidated Balance Sheets and as a lease right-of-use asset disclosed in other assets line on the Consolidated Balance Sheets. The Company's operating leases consist of office space, vehicles, computer equipment and office equipment. The lease right-of-use asset represents the Company's right to use each underlying asset for the lease term and the lease obligation liability represents the Company's obligation over the lease term. The Company's lease obligation is recorded at the present value of the lease payments based on the term of the lease. The Company has elected to categorize its leases into four categories based on length of lease terms and applies an incremental borrowing rate of interest as of the effective date of adoption or the lease effective date equivalent to a collateralized rate with similar terms. The four categories are as follows: less than three years, three to five years, five to ten years and greater than ten years. The discount rate used to calculate the present value of future minimum lease payments is based, where appropriate, on the Company's incremental borrowing rate of its credit facility, described in Note 9 Credit Facility of this Form 10-Q. For leases that existed prior to the adoption of the new accounting guidance on January 1, 2019 or those with terms not similar to the credit facility, the Company has elected to use the remaining lease term based on the four categories noted above as of the date of initial application to measure its incremental borrowing rate. In this case, the incremental borrowing rate is a collateralized rate based on current industry borrowing rates for similar companies with similar ratings.
Certain leases include rental payments adjusted for increases on an annual basis as part of the rental expense and are included in measurement of the lease liability. Lease expenses for lease payments, where appropriate, are recognized on a straight-line basis over the lease term. Short-term leases of 12 months or less are recorded on the Consolidated Balance Sheets and lease payments are recognized on the Consolidated Statement of Income and Comprehensive Income. The Company has agreements with lease and non-lease components, which the Company accounts for separately and continues to follow the guidance and its existing policy for minimum rental payments under Accounting Standard Codification ("ASC") Topic 840 for leases that commenced prior to the effective date. Modified or new leases subsequent to the effective date will follow ASC Topic 842. For more information on leases refer to Note 12 Leases of this Form 10-Q.
Subsequent Events

In the preparation of the accompanying financial statements, the Company has evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure in the Company's financial statements. The Company concluded there are no material subsequent events or transactions that have occurred after the balance sheet date through the date on which the financial statements were issued.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2019
Leases
In February 2016, the FASB issued guidance on the accounting for leases. The new guidance requires lessees to place a right-of-use asset and a lease liability on their balance sheets. The lease liability will be based on the present value of the future lease payments and the right-of-use asset will be based on the liability. Expenses will be recognized on the income statement in a similar manner as previous methods. The new guidance also requires companies to classify all leases as operating leases or financing leases. The Company has classified all of its leases as operating leases. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those years. The Company adopted the new guidance under a modified retrospective transition approach using the package of practical expedients and the Company did not adopt the hindsight practical expedient as of January 1, 2019. The package of practical expedients allowed the Company not to reassess whether the arrangement contains a lease, lease classification and whether previously capitalized costs qualify as initial direct costs. The practical expedients allowed the Company to continue classifying all of its leases as operating leases as


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they were previously classified under ASC Topic 840. Therefore, the Company's disclosures for the comparative periods presented in 2019 continues to be in accordance with previous lease guidance under ASC Topic 840. The Company used the accounting standard adoption date as its date of initial application.
Adoption of the new guidance resulted in the recording of additional net lease right-of-use assets and lease obligations of $19.8 million and $20.3 million, respectively, as of January 1, 2019. The lease amounts recognized were measured based on the present value of discounted future lease payments, net of reversal of prepaid rent and deferred rent balances that existed prior to January 1, 2019. The Company had no adjustments upon adoption related to unrecorded but expected lease abandonments at December 31, 2018. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as a cumulative change in accounting principles adjustment to retained earnings of $387. The adoption did not have a significant impact on the Company's financial position or results of operations and had no impact on cash flows.
Income Taxes - Intra-entity Transfers
In October 2016, the FASB issued new guidance on the income tax treatment of intra-entity transfers. The new guidance replaces the current guidance which prohibits the recognition of current and deferred income taxes of intra-entity transfers until the asset is sold externally. Under the new guidance, the exemption is eliminated and income taxes will be recognized on transfers of intra-entity assets. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. The Company adopted the new guidance as of January 1, 2019. The adoption did not have a significant impact on the Company's financial position and results of operations.
Financial Instruments - Callable Debt Securities
In March 2016, the FASB issued an update to amend the amortization period for certain purchased callable debt securities held at a premium. The update requires the premium to be amortized to the earliest call date. The update doesn’t change the accounting for securities held at a discount, which will continue to be amortized to maturity. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2018. The Company adopted the new guidance as of January 1, 2019. The adoption of the new guidance resulted in cumulative change in accounting principles adjustment to retained earnings, net of the deferred tax, of $126 on January 1, 2019 and did not have a material impact on net income between the comparable periods.
Pending Adoption of Accounting Standards
Intangibles - Other Internal Use Software

In August 2018, the FASB issued guidance to align the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance requires the Company to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020. Management currently believes that the adoption will not have a significant impact on the Company's financial position or results of operations.
Financial Instruments - Credit Losses
In June 2016, the FASB issued new guidance on the measurement of credit losses for most financial instruments. The new guidance replaces the current incurred loss model for recognizing credit losses with an expected loss model for instruments measured at amortized cost and requires allowances to be recorded for available-for-sale debt securities rather than reduce the carrying amount. These allowances will be remeasured each reporting period. The new guidance is effective for annual periods beginning after December 15, 2019 and interim periods within those years. The new guidance will impact the Company's portfolio of mortgage loan investments which are carried at amortized cost and the impairment model related to our available-for-sale fixed-maturity portfolio. The Company will adopt the new guidance as of January 1, 2020 and is currently reviewing it's incurred loss model for recognizing


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credit losses and evaluating the impact of moving to an expected loss model for it's available-for-sale fixed-maturity portfolio on the Company's financial position, results of operations and key processes.
Goodwill
In January 2017, the FASB issued new guidance which simplifies the test for goodwill impairment. The new guidance eliminates the implied fair value calculation when measuring a goodwill impairment charge. Under the new guidance, impairment charges will be based on the excess of the carrying value over fair value of goodwill. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020 and it currently believes the adoption will have no impact on the Company's financial position and results of operations.
Financial Instruments - Disclosures
In August 2018, the FASB issued new guidance which modifies the disclosure requirements on fair value measurements of financial instruments. The new guidance removes the requirement for disclosing the amount and reason for transfers between Level 1 and Level 2 investment securities and the valuation processes for Level 3 fair value measurements. The guidance also requires additional disclosures on the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The new guidance is effective for annual and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020. Management currently believes the new guidance will modify existing fair value disclosures, but will not have an impact on the Company's financial position and results of operations.
Defined Benefit Plans - Disclosures
In August 2018, the FASB issued new guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension and postretirement plans. The new guidance removes the requirement for disclosing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs in the next year and the sensitivity of postretirement health plans to one-percentage-point changes in medical trend rates. The new guidance is effective for annual periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2020. Management currently believes the new guidance will modify existing disclosures, but will not have an impact on the Company's financial position and results of operations.
NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities, presented on a consolidated basis, as of March 31, 2019 and December 31, 2018, is provided below:


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March 31, 2019
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
26,821

 
$
13

 
$
143

 
$
26,691

U.S. government agency
188,529

 
1,417

 
405

 
189,541

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
86,782

 
1,995

 
98

 
88,679

Northeast
31,266

 
866

 

 
32,132

South
114,500

 
1,755

 
475

 
115,780

West
107,580

 
2,592

 
305

 
109,867

Special revenue:
 
 
 
 
 
 
 
Midwest
139,803

 
3,520

 
194

 
143,129

Northeast
62,604

 
1,123

 
406

 
63,321

South
229,505

 
4,532

 
1,101

 
232,936

West
142,974

 
2,905

 
537

 
145,342

Foreign bonds
4,941

 
106

 

 
5,047

Public utilities
62,774

 
878

 
444

 
63,208

Corporate bonds

 

 

 

Energy
28,158

 
536

 
41

 
28,653

Industrials
53,836

 
613

 
171

 
54,278

Consumer goods and services
48,151

 
857

 
209

 
48,799

Health care
13,974

 
294

 
2

 
14,266

Technology, media and telecommunications
25,895

 
463

 
138

 
26,220

Financial services
91,876

 
1,366

 
669

 
92,573

Mortgage-backed securities
7,401

 
48

 
134

 
7,315

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
77,401

 
750

 
763

 
77,388

Federal home loan mortgage corporation
108,333

 
889

 
513

 
108,709

Federal national mortgage association
52,722

 
635

 
204

 
53,153

Asset-backed securities
3,274

 
387

 
125

 
3,536

Total Available-for-Sale Fixed Maturities
$
1,709,100

 
$
28,540

 
$
7,077

 
$
1,730,563











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Table of Contents

December 31, 2018
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
27,632

 
$
6

 
$
220

 
$
27,418

U.S. government agency
215,535

 
896

 
1,749

 
214,682

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
94,806

 
1,091

 
685

 
95,212

Northeast
37,326

 
432

 
103

 
37,655

South
114,710

 
754

 
1,553

 
113,911

West
107,787

 
1,229

 
1,175

 
107,841

Special revenue:
 
 
 
 
 
 
 
Midwest
140,025

 
1,609

 
870

 
140,764

Northeast
62,737

 
452

 
1,241

 
61,948

South
237,848

 
1,669

 
3,708