Our headquarters are located in Cedar Rapids, Iowa, where we own approximately 261,000 square feet of office and building space. In addition, we own and lease office and building space, including underwriting and claims offices, throughout the U.S. We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business.
property and casualty insurance, which includes commercial lines insurance, personal lines insurance and assumed reinsurance; and
We managed these businesses 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 our life insurance business on September 19, 2017, we operate and report one business segment, which contains our continuing operations. Our life insurance business was considered held for sale and reported as discontinued operations throughout this Form 10-K, unless otherwise noted. For more information, refer to Part II, Item 8, Note 10 "Segment Information" and Note 17 "Discontinued Operations."
In 2019, 2018 and 2017 the direct statutory premiums written by our property and casualty insurance operations were distributed as follows:
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
In 2019, the increase in net income from continuing operations compared to 2018 was primarily due to an increase in the value of our investments in equity securities from strong increases in equity markets and an increase in net premiums earned, from rate increases, offset by an increase in losses and loss settlement expenses from an increase
In 2018, the decrease in net income from continuing operations compared to 2017 was due to the decrease in the fair value of equity securities and an increase in other underwriting expenses partially offset by an increase in net premiums earned. The decrease in the fair value of equity securities was the result of volatile equity markets in the fourth quarter 2018. The increase in other underwriting expenses was primarily due to our continued investment in our multi-year Oasis project to upgrade our technology platform to enhance core underwriting decisions, selection of risks and productivity. The increase in net premiums earned was due to organic growth from a combination of new business, geographical expansion and rate increases. In 2017, our net income benefited from the Tax Cuts and Jobs Act ("Tax Act"), which resulted in a tax benefit of $21.9 million for the year.
(1) Net premiums written: Net premiums written is a non-GAAP measure. While not a substitute for any GAAP measure of performance, net premiums written is frequently used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies. Net premiums written are the amount charged for insurance policy contracts issued and recognized on an annualized basis at the effective date of the policy. Management believes net premiums written are a meaningful measure for evaluating insurance company sales performance and geographical expansion efforts. Net premiums written for an insurance company consists of direct premiums written and reinsurance assumed, less reinsurance ceded. Net premiums earned is calculated on a pro rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the unexpired term of insurance policy in force. The difference between net premiums earned and net premiums written is the change in unearned premiums and change in prepaid reinsurance premiums.
Assumed premiums written decreased $1.6 million in 2018 as compared to 2017 due to an increase in cedant premium growth. In 2018, we renewed our participation in all of our assumed programs.
Catastrophe losses are inherent risks of the property and casualty insurance business. Catastrophic events include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds, winter storms and other natural disasters, along with man-made exposures to losses resulting from, without limitation, acts of war, acts of terrorism and political instability. Such events result in insured losses that can be, and may continue to be, a material factor in our results of operations and financial position, as the extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. Because the level of insured losses that may occur in any one year cannot be accurately predicted, these losses contribute to fluctuations in our year-to-year results of operations and financial position. Some types of catastrophes are more likely to occur at certain times within the year than others, which adds an element of seasonality to our property and casualty insurance claims. Our property and casualty insurance business experiences some seasonality with regard to premiums written, which are generally highest in January and July and lowest during the fourth quarter. Losses and loss settlement expenses incurred tend to remain consistent throughout the year, with the exception of catastrophe losses, which generally are highest in the second and third quarters. The frequency and severity of catastrophic events are difficult to accurately predict in any year. However, some geographic locations are more susceptible to these events than others.
Overall, the models indicate increased risk estimates for our exposure to hurricanes in the U.S., but the impact of the models on our book of business varies significantly among the regions that we model for hurricanes. Based on our analysis, we have implemented more targeted underwriting and rate initiatives in some regions. We will continue to take underwriting actions and/or purchase additional reinsurance as necessary to reduce our exposure.
In 2019, our pre-tax catastrophe losses were $64.4 million, an increase as compared to $46.7 million in 2018 and a decrease as compared to $74.0 million in 2017. In 2019, our catastrophe losses included 54 catastrophes with no one event more than $5.0 million. Catastrophe losses in 2019 added 5.9 percentage points to the combined ratio, which is below our historical 10-year average of 6.4 percentage points.
In January 2015, TRIPRA, which extended the Terrorism Risk Insurance Program until December 31, 2020, gradually increased the coverage trigger for shared terrorism losses between the federal government and the insurance industry to $200 billion per year, and gradually increased the industry-wide retention to $37.5 billion per year. TRIPRA coverage includes most direct commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an insurer, with exclusions for commercial automobile insurance, burglary and theft insurance, surety, professional liability insurance and farm owners multiple peril insurance. Under TRIPRA, each insurer has a deductible amount, which is 20.0 percent of the prior year's direct commercial lines earned premiums for the applicable lines of business, and retention of 15.0 percent above the deductible. No insurer that has met its deductible shall be liable for the payment of any portion of that amount that exceeds the annual aggregate loss cap specified in TRIPRA. TRIPRA provides marketplace stability. As a result, coverage for terrorist events in both the insurance and reinsurance markets is often available. The amount of aggregate losses necessary for an act of terrorism to be certified by the U.S. Secretary of Treasury, the Secretary of State and the Attorney General was $100.0 million for 2019 and remains the same for 2020. Our TRIPRA deductible was $137.3 million for 2019 and our TRIPRA deductible is expected to be $140.4 million for 2020. Our catastrophe and non-catastrophe reinsurance programs provide limited coverage for terrorism exposure excluding nuclear, biological and chemical-related claims.
In 2018, our losses and loss settlement expenses were 0.8 percent higher than 2017 and our net loss ratio decreased
2.3 points. The decrease in our net loss ratio was due to a decrease in catastrophe losses slightly offset by a
percent, which was primarily driven by an increase in severity of losses in our other liability line of business from
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 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.
The property and casualty insurance business experienced $54.2 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2018. The majority of favorable development came from four lines, workers' compensation with $27.0 million favorable development, reinsurance assumed with $15.6 million favorable development, commercial automobile with $9.5 million favorable development, and fidelity and surety with $2.8 million favorable development. The only individual line with unfavorable development was commercial liability with $3.7 million of unfavorable development. Workers' compensation favorable development was primarily from reserve reductions for both reported claims and loss IBNR which were more than sufficient to offset paid loss with additional favorable development coming from LAE where the LAE IBNR reduction was more than sufficient to offset paid LAE which continues to benefit from additional litigation management efforts when compared to prior years. Reinsurance assumed favorable development is attributable reductions in reserves for both reported claims and loss IBNR as we reviewed our book of business and released excess reserves during 2018. Commercial automobile favorable development was driven by LAE where LAE IBNR reductions were more than sufficient to offset paid LAE. Fidelity and surety favorable development is attributable to reductions in reserves for both reported claims and loss IBNR which were more than sufficient to offset paid loss. Commercial liability adverse development is attributable to reserve strengthening for both reported claims and loss IBNR primarily in response to an increase in umbrella auto related claims while LAE developed favorably with reductions of LAE IBNR more than sufficient to offset paid LAE.
The property and casualty insurance business experienced $54.3 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2017. The majority of favorable development came from two lines, commercial liability with $35.1 million favorable development and workers' compensation with $19.2 million favorable development, partially offset by $6.3 million of unfavorable development for assumed reinsurance. All other lines combined $6.3 million favorable development with no single line experiencing more than $3.7 million of development, either favorable or unfavorable. Much of the favorable long-tail liability development continues to come from LAE 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 favorable workers' compensation development is due to the combination of reductions in reserves for reported claims and reductions in reserves for incurred but not reported claims for both loss and LAE.
Incurred losses from construction defect claims were $19.4 million in 2019 compared to $15.9 million and $15.7 million in 2018 and 2017, respectively. At December 31, 2019, we had $60.4 million in construction defect loss and loss settlement expense reserves (excluding IBNR reserves which are calculated at the overall other liability commercial line), which consisted of 3,439 claims. In comparison, at December 31, 2018, we had reserves of $44.5 million, excluding IBNR reserves, consisting of 2,706 claims. The increase in the incurred losses is due to continued improvement in the economic environment which increases construction activity. Our West Coast region continue to be the origin of the majority of the construction defect claim activity.
the coverage we offer and our pricing models. In an effort to limit our exposure from residential multi-unit buildings, we started including condominium and townhouse construction policy exclusions in 2012 for our contracting policies in this region. For the majority of our residential contractors we limit the size of any tracts the contractor is working on to 25 homes or less and do not include a continuous trigger with our designated work exclusion. In a majority of the policies in our small service, repair and remodel contractors program, we have a favorable new residential construction exclusion. We also apply strict guidelines when additional insured forms are required and changed our underwriting guidelines to limit our exposure to large, multi-party construction defect claims.
Although we have seen steady improvement in the net loss ratio for the last two years in our worker's compensation line of business, competitive market conditions continue putting downward pressure on rates. The challenges faced by workers' compensation insurance providers to attain profitability include the regulatory climates in some states that make it difficult to obtain appropriate premium rate increases and inflationary medical costs. Consequently, we have increased the utilization of our loss control unit in the analysis of current risks, with the intention of increasing the quality of our workers' compensation book of business. We are currently using these modeling analytics to assist us in risk selection, and we will continue to evaluate the model results.
Our personal lines consist primarily of fire and allied lines (including homeowners) and automobile lines. The net loss ratio deteriorated 12.3 percentage points in 2019 compared to 2018. The deterioration is attributable to our personal fire and allied line of business due to the combination of increased in severity of losses and increased loss IBNR in 2019 vs. 2018 which had a modest decrease in loss IBNR in 2018. The improvement in 2018 vs. 2017 was primarily due to a decrease in frequency and severity of losses and loss IBNR.
Our assumed reinsurance is the business we choose to write by participating in programs insuring insurance companies. Our net loss ratio increased slightly in 2019 compared to 2018. Premiums increased due to additional program placements and cedant premium growth. In 2019 we added two additional assumed programs and did not accept to renew one program from 2018.
Our underwriting expense ratio, which is a percentage of other underwriting expenses over net premiums earned, was 32.6 percent, 33.5 percent and 31.2 percent for 2019, 2018, and 2017, respectively. The decrease in the expense ratio during in 2019 as compared to 2018 is primarily due to lower employee benefit accruals and expenses caused by post-retirement benefit plan amendments made at the end of 2018. The underwriting expense ratio increased in 2018 as compared to 2017 primarily due to our investment in our multi-year Oasis project to upgrade our technology platform to enhance core underwriting decisions, selection of risks and productivity.
Each of our insurance company subsidiaries develops an appropriate investment strategy that aligns with its business needs and supports United Fire's strategic plan and risk appetite. The portfolio is structured so as to be in compliance with state insurance laws that prescribe the quality, concentration and type of investments that may be made by insurance companies. All but a very small portion of our investment portfolio is managed internally.
Our invested assets from continuing operations at December 31, 2019 totaled $2.2 billion, compared to $2.1 billion at December 31, 2018, an increase of $81.0 million. At December 31, 2019, fixed maturity securities and equity securities comprised 80.5 percent and 13.9 percent of our investment portfolio, respectively. Because the primary purpose of the investment portfolio is to fund future claims payments, we utilize a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government and government agency bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to stay fully invested (i.e., minimize cash balances). If additional cash is needed we have an ability to borrow funds available under our revolving credit facility.
The composition of our investment portfolio at December 31, 2019 is presented at carrying value in the following table:
At December 31, 2019, we classified $1.7 billion, or 99.1 percent, of our fixed maturities portfolio as available-for-sale, compared to $1.7 billion, or 99.2 percent, at December 31, 2018. Available-for-sale fixed maturity securities are carried at fair value, with changes in fair value recognized as a component of accumulated other comprehensive income in stockholders' equity. We record fixed maturity trading securities, primarily convertible redeemable preferred debt securities, and equity securities at fair value, with any changes in fair value recognized in earnings.
The weighted average effective duration of our portfolio of fixed maturity securities was 4.2 years at December 31, 2019 compared to 5.1 years at December 31, 2018.
We invest the premiums received from our policyholders in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, changes in 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. Net investment income increased 14.2 percent in 2019, compared with the same period of 2018, primarily due to an increase in the fair value of our investments in limited liability partnerships resulting from the increase in the equity markets and an increase in invested assets in 2019 compared to 2018. The valuation of our investments in limited liability partnerships varies from period to period due to current equity market conditions. We expect to maintain our investment philosophy of purchasing quality investments rated investment grade or better.
In 2019, our investment income for continuing operations, net of investment expenses, increased $7.5 million to $60.4 million as compared to 2018, primarily due to an increase in the value of our investments in limited liability
In 2018, our investment income for continuing operations, net of investment expenses, increased $1.7 million to $52.9 million as compared to 2017, primarily due to the increase in our invested assets in our portfolio, partially offset by a decrease in the value of our investments in limited liability partnerships in the fourth quarter, specifically related to financial institutions.
The following table details our annualized yield on average invested assets from continuing operations for 2019 and 2018, and both continuing and discontinued operations for 2017, which is based on our invested assets (including money market accounts) at the beginning and end of the year divided by net investment income:
As of December 31, 2019, net unrealized investment gains, after tax, totaled $47.3 million compared to unrealized losses of $9.3 million and unrealized gains of $214.9 million as of December 31, 2018 and 2017, respectively. The increase in net unrealized investment gains in 2019 is primarily the result of an increase in the value of the fixed maturity portfolio due to lower interest rates during 2019.
The amounts set forth in the following table detail the impact of hypothetical interest rate changes on the fair value of fixed maturity securities held at December 31, 2019. The sensitivity analysis measures the change in fair values arising from immediate changes in selected interest rate scenarios. We employed hypothetical parallel shifts in the yield curve of plus or minus 100 and 200 basis points in the simulations. Additionally, based upon the yield curve shifts, we employ estimates of prepayment speeds for mortgage-related products and the likelihood of call or put options being exercised within the simulations.
Equity price risk is the potential loss arising from changes in the fair value (i.e., market price) of equity securities held in our portfolio. Changes in the price of an equity security may be due to a change in the future earnings capacity or strategic outlook of the security issuer, and what investors are willing to pay for those future earnings and related strategy. The carrying values of our equity securities are based on quoted market prices, from an independent source, as of the balance sheet date. Market prices of equity securities, in general, are subject to
We have no direct exposure in any of the guarantors of our investments. Our largest indirect exposure with a single guarantor totaled $11.7 million or 24.2 percent of our insured municipal securities at December 31, 2019, as compared to $20.0 million or 19.5 percent at December 31, 2018. Our five largest indirect exposures to financial guarantors accounted for 81.2 percent and 73.7 percent of our insured municipal securities at December 31, 2019 and 2018, respectively.
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
The following table displays a summary of cash sources and uses in 2019, 2018 and 2017 from continuing and discontinued operations:
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 full-year periods ended December 31, 2019, 2018 and 2017 and we anticipate they will be sufficient to meet our future liquidity needs.
Net cash flows provided by operating activities totaled $93.8 million, $110.1 million and $170.1 million in 2019, 2018 and 2017, respectively. Our cash flows from operations were sufficient to meet our liquidity needs for 2019, 2018 and 2017.
We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At December 31, 2019, our cash and cash equivalents included $9.3 million related to these money market accounts, compared to $3.3 million at December 31, 2018.
Net cash flows provided by investing activities totaled $4.5 million in 2019 and used in investing activities totaled $19.2 million and $62.0 million in 2018 and 2017, respectively. In 2019, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments, from continuing
Our cash outflows for investment purchases from continuing operations totaled $274.7 million in 2019, compared to $540.4 million and $267.5 million for the same period in 2018 and 2017, respectively. Our cash outflows for investment purchases from discontinued operations totaled $15.4 million in 2018, compared to $131.0 million for the same period in 2017 respectively.
additional 1,857,444 shares of our common stock under our share repurchase program, which expires in August 2020.
Stockholders' equity increased 2.5 percent to $910.5 million at December 31, 2019, from $888.4 million at December 31, 2018. The increase is primarily attributed to the increase in net unrealized investment gains net of tax of $56.6 million, net income of $14.8 million, and stock based compensation of $8.5 million, all offset by payment of stockholder dividends of $32.7 million, share repurchases of $11.7 million, and change in liability for employee benefit plans of $13.0 million. As of December 31, 2019, the book value per share of our common stock was $36.40, compared to $35.40 at December 31, 2018.
The amounts presented are estimates of the dollar amounts and time periods in which we expect to pay out our gross loss and loss settlement expense reserves. Because the timing of future payments may vary from the stated contractual obligation, these amounts are estimates based upon historical payment patterns and may not represent actual future payments. Refer to "Critical Accounting Policies - Loss and Loss Settlement Expenses" in this section for further discussion.
Our operating lease obligations are for the rental of office space, vehicles, computer equipment and office equipment. For further discussion of our operating leases, refer to Part II, Item 8, Note 13 "Lease Commitments."
We estimate the pension contribution for 2020 in accordance with the Pension Protection Act of 2006 (the "Act"). Contributions for future years are dependent on a number of factors, including actual performance versus assumptions made at the time of the actuarial valuations and maintaining certain funding levels relative to regulatory requirements. Contributions in 2020, and in future years, are expected to be at least equal to the IRS minimum required contribution in accordance with the Act.
We hold investments in limited liability partnerships as part of our investment strategy. At December 31, 2019, pursuant to an agreement with our limited liability partnership investments, we are contractually committed to make consolidated capital contributions up to $14.1 million upon request of the partnerships through July 31, 2028. These partnerships are included in our other invested assets on the Consolidated Balance Sheets with a current fair value of $16.5 million, or 0.8% of our total invested assets, at December 31, 2019. We recognized investment income of $0.1 million from these investments during 2019.
The determination of the amount of impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Additionally, our management considers a wide range of factors about the instrument issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the instrument and in assessing the prospects for recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
At December 31, 2019 and 2018, we had a number of securities with fair value less than the cost basis. The total unrealized loss on these securities was $0.8 million at December 31, 2019, compared with $23.6 million at December 31, 2018. Our rationale for not recording OTTI charges on these securities is discussed in Part II, Item 8, Note 2 "Summary of Investments."
The following table illustrates the hypothetical impact on the premium deficiency charge recorded for the quarter ended December 31, 2019, of reasonably likely changes in the assumed loss and loss settlement expense ratios utilized for purposes of this calculation. The entire impact of these changes would be recognized through income as
Reserves for losses and loss settlement expenses are reported using our best estimate of ultimate liability for claims that occurred prior to the end of any given reporting period, but have not yet been paid. Before credit for reinsurance recoverables, these reserves were $1,421.8 million and $1,312.5 million at December 31, 2019 and 2018, respectively. We purchase reinsurance to mitigate the impact of large losses and catastrophic events. Loss and loss settlement expense reserves ceded to reinsurers were $68.5 million for 2019 and $57.1 million for 2018. Our reserves, before credit for reinsurance recoverables, by line of business as of December 31, 2019, were as follows:
Our short-tail lines of business include fire and allied lines, homeowners, commercial property, auto physical damage and inland marine. The amounts of the case-based reserves that we establish for claims in these lines depend upon various factors, such as individual claim facts (including type of coverage and severity of loss), our historical loss experience and trends in general economic conditions (including changes in replacement costs, medical costs and inflation).
to change our case-based reserves include, but are not limited to: evidence that loss severity is different than previously assessed; new claimants who have presented claims; and the assessment that no coverage exists.
Reserves for unpaid ALAE are estimated quarterly by line of business for each individual accident year using three methods: (1) Paid development, (2) Expected emergence of ALAE, and (3) Development of the ratio of paid ALAE to paid loss. Each of the three methods produces an estimate of the ultimate ALAE cost for an individual accident year and the final estimate is generally a weighted average of the various methods. Inception to date paid ALAE is subtracted from the final ultimate ALAE estimate to provide the estimated ALAE IBNR reserve for each individual accident year.
There are three distinct types of reserves ceded to reinsurers: (1) reported claim reserves, (2) loss IBNR, and (3) LAE IBNR. Ceded reserves for reported claims are calculated by subtracting the primary retention from the claim value established by our claim adjuster. Ceded loss IBNR originates solely from our boiler and machinery business which is 100 percent reinsured. For this business ceded loss IBNR is equal to direct loss IBNR. Boiler and machinery business is included in our commercial fire and allied line of business. We will cede some LAE expenses when we cede loss. Our ceded LAE IBNR is estimated based on our ceded unpaid loss reserves and the general relation, by line of business, between LAE and loss. Our primary retention was $2.0 million for 2012 through 2015 and increased to $2.5 million for 2016 through 2019.
Our key assumptions are subject to change as actual claims occur and as we gain additional information about the variables that underlie our assumptions. Accordingly, management reviews and updates these assumptions periodically to ensure that the assumptions continue to be valid. If necessary, management makes changes not only in the estimates derived from the use of these assumptions, but also in the assumptions themselves. Due to the inherent uncertainty in the loss reserving process, management believes that there is a reasonable chance that modification to key assumptions could individually, or in aggregate, result in reserve levels that are either significantly above or below the actual amount for which the related claims will eventually settle.
As an example, if our loss and loss settlement expense reserves of $1,421.8 million as of December 31, 2019, is 10.0 percent inadequate, we would experience a reduction in future pre-tax earnings of up to $142.2 million. This
reduction could be recorded in one year or multiple years, depending on when we identify the deficiency. The deficiency would also affect our financial position in that our equity would be reduced by an amount equivalent to the reduction in net income. Any deficiency that would be recognized in our loss and loss settlement expense reserves usually does not have a material effect on our liquidity because the claims have not been paid. Conversely, if our estimates of ultimate unpaid loss and loss settlement expense reserves prove to be redundant, our future earnings and financial position would be improved. We believe our reserving 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 reasonable as to their relative position within a range of reasonable reserves from year-to-year.
Due to the formula-based nature of our IBNR and loss settlement expense reserve calculations, changes in the key assumptions utilized to generate these reserves can impact our reported results. It is not possible to isolate and measure the potential impact of just one of these factors, and future loss trends could be partially impacted by all factors concurrently. Nevertheless, it is meaningful to view the sensitivity of the reserves to potential changes in these variables. To demonstrate the sensitivity of reserves to changes in significant assumptions, the following example is presented. The amounts reflect the pre-tax impact on earnings from a hypothetical percentage change in the calculation of IBNR and loss settlement expense reserves at December 31, 2019. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards and an increase if the reserves were to be adjusted downwards. We believe that the changes presented are reasonably likely based upon an analysis of our historical IBNR and loss settlement expense reserve experience.
In 2019, we did not change the key method through which we develop our assumptions on which we based our reserving calculations. In estimating our 2019 loss and loss settlement expense reserves, we did not anticipate future events or conditions that were inconsistent with past development patterns.
Other liability is considered a long-tail line of business, as it can take a relatively long period of time to settle claims from prior accident years. This is partly due to the lag time between the date a loss or event occurs that triggers
coverage and the date when the claim is actually reported. Defense costs are also a part of the insured expenses covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims. For the majority of our products, defense costs are outside of the policy limit, meaning that the amounts paid for defense costs are not subtracted from the available policy limit.
Our reserve for other liability claims at December 31, 2019, was $600.0 million and consisted of 6,461 claims, compared with $549.8 million, consisting of 6,542 claims at December 31, 2018. Of the $600.0 million total reserve for other liability claims, $151.2 million is identified as defense costs and $38.7 million is identified as general overhead required in the settlement of claims.
Included in the other liability line of business are gross reserves for construction defect losses and loss settlement expenses. Construction defect is a liability allegation relating to defective work performed in the construction of structures such as commercial buildings, apartments, condominiums, single family dwellings or other housing, as well as the sale of defective building materials. These claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. At December 31, 2019, we had $60.4 million in construction defect loss and loss settlement expense reserves, excluding IBNR reserves that are calculated for the overall other liability commercial line, which consisted of 3,439 claims. At December 31, 2018, our reserves, excluding IBNR reserves, totaled $44.5 million, which consisted of 2,706 claims. The reporting of such claims can be delayed, as the statute of limitations can be up to 10 years. Court decisions in recent years have expanded insurers' exposure to construction defect claims. As a result, claims may be reported more than 10 years after a project has been completed, as litigation can proceed for several years before an insurance company is identified as a potential contributor. Claims have also emerged from parties claiming additional insured status on policies issued to other parties, such as contractors seeking coverage from a subcontractor's policy.
Included in the other liability and assumed reinsurance lines of business are reserves for asbestos and other environmental losses and loss settlement expenses. At December 31, 2019 and 2018, we had $3.1 million and $3.0 million, respectively, in direct and assumed asbestos and environmental loss reserves. The estimation of loss reserves for environmental claims and claims related to long-term exposure to asbestos and other substances is one of the most difficult aspects of establishing reserves, especially given the inherent uncertainties surrounding such claims. Although we record our best estimate of loss and loss settlement expense reserves, the ultimate amounts paid upon settlement of such claims may be more or less than the amount of the reserves, because of the significant uncertainties involved and the likelihood that these uncertainties will not be resolved for many years.
Like the other liability line of business, workers' compensation losses and loss settlement expense reserves are based upon variables that create imprecision in estimating the ultimate reserve. Estimates for workers' compensation are particularly sensitive to assumptions about medical cost inflation, which has been steadily increasing over the past few years. Other variables that we consider and that contribute to the uncertainty in establishing reserves for workers' compensation claims include: state legislative and regulatory environments; trends in jury awards; and mortality rates. Because of these variables, the process of reserving for the ultimate loss and loss settlement expense to be incurred requires the use of informed judgment and is inherently uncertain. Consequently, actual loss and loss settlement expense reserves may deviate from our estimates. Such deviations may be significant. Our reserve for workers' compensation claims at December 31, 2019 was $182.5 million and consisted of 3,869 claims, compared with $210.7 million, consisting of 4,337 claims, at December 31, 2018.
In 2019, 2018 and 2017, we recognized a favorable development in our net reserves for prior accident years totaling $5.3 million, $54.2 million and $54.3 million, respectively.
The factors contributing to our year-to-year redundancy include: establishing reserves at their ultimate expected loss amount as soon as practicable after information becomes available, which produces, on average, prudently conservative case reserves; using claims negotiation to control the size of settlements; assuming that we have liability for all claims, even though the issue of liability may, in some cases, be resolved in our favor; promoting claims management services to encourage return-to-work programs; case management by nurses for serious injuries and management of medical provider services and billings; and using programs and services to help prevent fraud and to assist in favorably resolving cases.
Based upon our comparison of carried reserves to actual claims experience over the last several years, we believe that using our Company's historical premium and claims data to establish reserves for losses and loss settlement expenses results in adequate and reasonable reserves. Reserve development is discussed in more detail under the heading "Reserve Development" in the "Results of Operations for the Years Ended December 31, 2019, 2018 and 2017" section in this Item 7.
We engage an independent actuarial firm to render an opinion as to the reasonableness of the statutory reserves internal management establishes. During 2019 and 2018, we engaged the services of Regnier as our independent actuarial firm for the property and casualty insurance business. We anticipate that this engagement will continue in 2020.
It is management's policy to utilize staff adjusters to develop our estimate of case-basis loss reserves. IBNR and loss settlement expense reserves are established through various formulae that utilize pertinent, recent Company historical data. The calculations are supplemented with knowledge of current trends and events that could result in adjustments to the level of IBNR and loss settlement expense reserves. On a quarterly basis, we compare our estimate of total reserves to the estimates prepared by Regnier by line of business to ensure that our estimates are within the actuary's acceptable range. Regnier performs a review of loss and loss settlement expense reserves at each year end using generally accepted actuarial guidelines to ensure that the recorded reserves appear reasonable. Our net reserves for losses and loss settlement expenses as of December 31, 2019 and 2018 were $1,353.2 million and $1,255.4 million, respectively. In 2019 and 2018, after considering the independent actuary's range of reasonable estimates, management believes that carried reserves were reasonable and therefore did not adjust the recorded amount.
The process of estimating our pension and post-retirement benefit obligations and related benefit expense is inherently uncertain, and the actual cost of benefits may vary materially from the estimates recorded. These liabilities are particularly volatile due to their long-term nature and are based on several assumptions. The main assumptions used in the valuation of our benefit obligations are: estimated mortality of the employees and retirees eligible for benefits; estimated expected long-term rates of return on investments; estimated compensation increases; estimated employee turnover; estimated medical expense trend rate; and estimated rate used to discount the ultimate estimated liability to a present value. We engage a consulting actuary from Principal Financial Group, an independent firm, to assist in evaluating and establishing assumptions used in the valuation of our benefit obligations.
A change in any one or more of these assumptions is likely to result in an ultimate liability different from the original actuarial estimate. Such changes in estimates may be material. For example, a 100 basis point decrease in our estimated discount rate would increase the pension and post-retirement benefit obligation at December 31, 2019,
In addition, for the post-retirement benefit plan, a 100 basis point decrease in the medical trend rate would decrease the post-retirement benefit obligation at December 31, 2019, by $4.3 million, while a 100 basis point increase in the medical trend rate would increase the benefit obligation at December 31, 2019, by $5.3 million.
The accompanying Consolidated Financial Statements include United Fire and its wholly owned subsidiaries: United Fire & Casualty Company, United Real Estate Holdings Company, LLC, Addison Insurance Company, Lafayette Insurance Company, United Fire & Indemnity Company, United Fire Lloyds, UFG Specialty Insurance Company, Financial Pacific Insurance Company, Franklin Insurance Company, Mercer Insurance Company, and Mercer Insurance Company of New Jersey, Inc.
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; losses and loss settlement expenses; and pension and post-retirement benefit obligations.
In 2019, 2018, and 2017, we made cash payments for income taxes of $1,575, $29,071 and $7,667, respectively. In addition, we received federal tax refunds of $5,401, $1,503 and $13,383 in 2019, 2018 and 2017, respectively, which resulted from the utilization of our net operating losses and net capital loss carryforwards and carrybacks. We made no interest payments in 2019, 2018 and 2017. These payments exclude interest credited to policyholders' accounts.
For the discontinued operations traditional life insurance policies, DAC was 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.
Our other intangible assets, which consist primarily of agency relationships, trade names, state insurance licenses, and software, are being amortized by the straight-line method over periods ranging from 2 years to 15 years, with the exception of state insurance licenses, which are indefinite-lived and not amortized. In 2019, 2018 and 2017 we performed a qualitative impairment assessment of our indefinite lived intangible assets. As a result of these assessments, we did not recognize an impairment charge on our intangible assets in 2019, 2018 and 2017. Amortization expense totaled $709 in 2019 and $719 in 2018 and 2017, respectively.
The Company determines if a contract contains a lease at inception of the contract. The Company's inventory of leases consists of operating leases which are recorded as a lease obligation liability disclosed in the "Accrued expenses and other liabilities" line on the Consolidated Balance Sheets and as a lease right-of-use asset disclosed in the "Other assets" line on the Consolidated Balance Sheets. The Company's operating leases consist of office space, vehicles, computer equipment and office equipment. The lease right-of-use asset represents the Company's right to use each underlying asset for the lease term and the lease obligation liability represents the Company's obligation over the lease term. The Company's lease obligation is recorded at the present value of the lease payments based on the term of the applied lease. The Company has elected to categorize its leases into four categories based on length of lease terms and applies an incremental borrowing rate of interest as of the effective date of adoption or the lease effective date equivalent to a collateralized rate with similar terms. The four categories are as follows: less than three years, three to five years, five to ten years and greater than ten years. The collateralized discount rate used to calculate the present value of future minimum lease payments is based, where appropriate, on the Company's incremental borrowing rate of its credit facility, described in Note 9 "Credit Facility". 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
The Company and certain related parties are equity investors in one investment in which the Company determined is a variable interest entity ("VIE") as a result of participation in the risks and rewards of the VIE based on the objectives and strategies of the VIE. The VIE is a limited liability company that primarily invests in commercial real estate. The Company and certain related parties are not the primary beneficiary due to their inability to influence management or direct the activities that most significantly impact the VIE's economic performance. Based on these facts and circumstances, the Company has a variable interest in the VIE, but has not consolidated the VIE's financial results as it is not the primary beneficiary. The Company's investment is reported in other long-term investments in the Consolidated Balance Sheets and accounted for under the equity method of accounting. The Company's initial investment and the fair value of the VIE at December 31, 2019 was $7.5 million. The Company's maximum exposure to loss from this VIE is $7.3 million, its carrying value of the investment, and there are no future funding commitments.
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 the balance sheets. The lease liability is based on the present value of the future lease payments and the right-of-use asset is based on the liability. Expenses are recognized in 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 was effective for annual periods beginning after December 15, 2018 and interim periods within those years. The Company adopted the new guidance under the modified retrospective transition approach using the package of practical expedients and the Company elected to not adopt the hindsight practical expedient as of January 1, 2019. The package of practical expedients allowed the Company not to reassess whether each arrangement contains a lease, lease classification and whether previously capitalized costs qualify as initial direct costs. The practical expedients allowed the Company to continue classifying all of its leases as operating leases as they were previously classified under ASC Topic 840. Therefore, the Company's disclosures for the comparative periods presented in 2019 continues to be in accordance with previous lease guidance under ASC Topic 840. The Company used the accounting standard adoption date as its date of initial application.
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 adopted the new guidance as of January 1, 2020. The adoption will not have a significant impact on the Company's financial position or results of operations.
For reinsurance receivables, the Company developed a model which estimates expected credit loss by multiplying the exposure at default by both the probability of default and loss given default ("LGD"). The LGD is estimated by the rating of the company, historical relationship with UFG, existence of letters of credit and known regulation the company may be held accountable for. The ultimate LGD percentage is estimated on a conservative basis after considering Moody’s experience with unsecured year 1 bond recovery rates from 1983-2017. The Company ran the model as of December 31, 2019 and calculated an immaterial expected credit loss.
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 adopted the new guidance as of January 1, 2020. The adoption will not have an impact on the Company's financial position and results of operations.
In August 2018, the FASB issued new guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension and postretirement plans. The new guidance removes the requirement for disclosing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs in the next year and the sensitivity of postretirement health plans to one-percentage-point changes in medical trend rates. The new guidance is effective for annual periods beginning after December 15, 2020. The Company will adopt the new guidance as of January 1, 2021. The adoption will modify existing disclosures, but will not have an impact on the Company's financial position and results of operations.
new guidance is effective for annual periods beginning after December 15, 2020. The Company will adopt the new guidance as of January 1, 2021. Management is currently evaluating the impact on the Company's financial position and results of operations.
The amortized cost and fair value of available-for-sale and trading fixed maturity securities at December 31, 2019, by contractual maturity, are shown in the following table. 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.
The proceeds and gross realized gains (losses) on the sale of available-for-sale fixed maturity securities from discontinued operations for 2019, 2018 and 2017, are as follows:
Net investment income for the years ended December 31, 2019, 2018 and 2017, is comprised of the following:
At December 31, 2019, pursuant to an agreement with our limited liability partnership investments, we are contractually committed to make capital contributions up to $14,052 upon request of the partnerships through July 31, 2028.
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 at December 31, 2019 and 2018 for continuing operations and discontinued operations. 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 December 31, 2019 if future events or information cause us to determine that a decline in fair value is other-than-temporary.
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 "Executive Retirement Plans"). 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. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of December 31, 2019, the cash surrender value of the COLI policies was $6,777, 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.
The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The tables include financial instruments at December 31, 2019 and 2018:
For the year ended December 31, 2019, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities. During the twelve month period ended December 31, 2019, 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 twelve month period ended December 31, 2019 and 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 for 2018:
The commercial mortgage loans originate with an initial loan-to-value ratio to provide sufficient collateral to absorb losses should a loan be required to foreclose. Mortgage loans are evaluated on a quarterly basis for impairment on an individual basis through a monitoring process and review of key credit indicators, such as economic trends, delinquency rates, property valuations, occupancy and rental rates and loan-to-value ratios. A loan is considered impaired when the Company believes it will not collect the contractual principal and interest set forth in the contractual terms of the loan. A valuation allowance is established on each loan recognizing a loss for amounts which we believe will not be collected according to the contractual terms of the respective loan agreement. For the year end December 31, 2019 the Company had a valuation allowance of $72.
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. ("Regnier"), 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.
Our IBNR methodologies and assumptions are reviewed periodically, but changes are infrequent. In response to an increase in miles driven by commercial vehicles and an increase in distracted driving claims, we revised our commercial automobile assumptions, resulting in an increase to our carried loss IBNR. We also reviewed our methodology and assumptions in our product liability line, associated with our construction defects business, and assumptions due to improvement in development patterns related to the statute of limitations on accident years that
have matured 13 to 15 years which haven't developed to the extent we initially expected. These assumption changes resulted in a release of IBNR in 2017 for our product liability line. Besides the changes to our assumptions used for our commercial automobile line and product liability line, we continually review and revise items affecting our projections of required reserves for unpaid loss and loss adjustment expense ("LAE"). Items reviewed and revised include development factors for paid and reported loss, paid development factors for allocated LAE, and the ratios of paid unallocated LAE to paid loss.
The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves for 2019, 2018 and 2017 (net of reinsurance amounts):
adversely affected by reserve strengthening for both reported claims and loss IBNR in response to an increase in severity of claims. Commercial liability continues to receive umbrella claims which flow in from commercial automobile.
The following tables provide information about incurred and paid losses and loss settlement expense development as of December 31, 2019, net of reinsurance, as well as cumulative development, cumulative claim frequency and IBNR liabilities. Claim data for Mercer Insurance Group, Inc., which was acquired on March 28, 2011, is presented retrospectively.
The reconciliation of the net incurred and loss development tables to the liability for unpaid losses and loss settlement expenses in the consolidated statement of financial position is as follows.
The following is supplementary information about average historical claims duration as of December 31, 2019.
State laws and regulations generally limit the amount of funds that an insurance company may distribute to a parent as a dividend without Commissioner approval. As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at December 31, 2019, our insurance company subsidiary, United Fire & Casualty, is able to make a minimum of $154.2 million in dividend payments without prior regulatory approval. At December 31, 2019, we were in compliance with applicable state laws and regulations.
Our property and casualty subsidiaries are required to prepare and file statutory-basis financial statements in conformity with the National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. The accounting principles used to prepare these statutory-basis financial statements follow prescribed or permitted accounting practices that differ from GAAP. Prescribed statutory accounting principles include state laws, regulations and general administrative rules issued by the state of domicile, as well as a variety of publications and manuals of the NAIC. Permitted accounting practices encompass all accounting practices not prescribed, but allowed by the state of domicile. No material permitted accounting practices were used to prepare our statutory-basis financial statements during 2019, 2018 and 2017. Statutory accounting principles primarily differ from GAAP in that policy acquisition and certain sales inducement costs are charged to expense as incurred, goodwill is amortized, life insurance reserves are established based on different actuarial assumptions and the values reported for investments, pension obligations and deferred taxes are established on a different basis.
We are directed by the state insurance departments' solvency regulations to calculate a required minimum level of statutory capital and surplus based on insurance risk factors. The risk-based capital results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. United Fire & Casualty Company and its property and casualty insurance subsidiaries and affiliates had statutory capital and surplus in regards to policyholders well in excess of their required levels at December 31, 2019.
A reconciliation of income tax expense (benefit) computed at the applicable federal tax rate of 21.0 percent in 2019 and 2018 and 35.0 percent in 2017 to the amount recorded in the accompanying Consolidated Statements of Income and Comprehensive Income is as follows:
We measure certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is 21.0 percent. The significant components of our net deferred tax liability at December 31, 2019 and 2018 are as follows:
We also offer a health and dental benefit plan to all of our eligible employees and retirees that consists of two programs: (1) the self-funded employee health and dental benefit plan and (2) the self-funded (pre-65) and fully-funded (post-65) retiree health and dental benefit plan (the "post-retirement benefit plan"). Effective January 1, 2017, there was a plan amendment, which included the following changes: eliminated the pre-65 retirement plan with a $500 hundred dollar deductible; for retirements after January 1, 2017, the retiree will pay 50 percent of the
The investments held by the pension plan at December 31, 2019 include the following asset categories:
As of December 31, 2019, we had six external investment managers that are allowed to exercise investment discretion, subject to limitations, if any, established by the investment/retirement committee. We utilize multiple investment managers in order to maximize the pension plan's investment return while mitigating risk. None of our investment managers uses leverage in managing the pension plan. Annually, the investment/retirement committee meets with each investment manager to review the investment manager's goals, objectives and the performance of the assets they manage. The decision to establish or terminate a relationship with an investment manager is at the discretion of our investment/retirement committee.
The following is a summary of the pension plan's actual and target asset allocations at December 31, 2019 and 2018 by asset category:
The fair value of fixed maturity securities categorized as Level 2 is determined by management based on fair value
The following tables present the categorization of the pension plan's assets measured at fair value on a recurring basis at December 31, 2019 and 2018:
We anticipate amortization of the net actuarial losses for our pension plan in 2020 to be $3,914. We anticipate amortization of the net actuarial losses for our post-retirement benefit plan in 2020 to be $375
The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of United Fire common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of United Fire 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 December 31, 2019, there were 834,910 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 United Fire.
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
In 2019, 2018 and 2017, we recognized stock-based compensation expense of $6,152, $5,249 and $4,808, respectively. Stock-based compensation expense is recognized over the vesting period of the stock options.
The analysis below details the award activity for the restricted stock and restricted stock unit awards outstanding at December 31, 2019:
In 2019, 2018 and 2017 we recognized $4,659, $3,877 and $2,987, respectively, in compensation expense related to the restricted stock and restricted stock unit awards. At December 31, 2019, we had $3,512 in compensation expense that has yet to be recognized through our results of operations related to the restricted stock and restricted stock unit awards. The intrinsic value of the non-vested restricted stock and restricted stock unit awards outstanding totaled $10,165 and $15,746 at December 31, 2019 and 2018, respectively.
The following table summarizes information regarding the stock options outstanding and exercisable at December 31, 2019:
On September 19, 2017, the Company announced that it had agreed to sell its subsidiary, United Life, to Kuvare. The sale closed on March 30, 2018. As a result, our life insurance business was 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 year presentation. For more information, refer to Note 17 "Discontinued Operations."
The accounting policies of our businesses are the same as those described in Note 1 "Summary of Significant Accounting Policies" to our Consolidated Financial Statements. We analyze results based on profitability (i.e., loss ratios), expenses and return on equity.
The Company's lease obligation is recorded at the present value of the lease payments based on the term of the applied lease. The Company has elected to categorize its leases into four categories based on length of lease terms and applies an incremental borrowing rate of interest as of the effective date of adoption or the lease effective date equivalent to a collateralized rate with similar terms. The four categories are as follows: less than three years, three to five years, five to ten years and greater than ten years. The collateralized discount rate used to calculate the present value of future minimum lease payments is based, where appropriate, on the Company's incremental borrowing rate of its credit facility, described in Note 9 "Credit Facility". 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.
of which may include no options for renewal and others with options to extend the lease terms from 6 months to 5 years.
There was no outstanding balance on the Credit Agreement at December 31, 2019 or 2018. We did not incur any interest expense related to the Credit Agreement in 2019, 2018 or under our prior credit facility in 2017.
Summary operating results of discontinued operations were as follows for the periods indicated:
We have audited the accompanying consolidated balance sheets of United Fire Group, Inc. (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2020 expressed an unqualified opinion thereon.
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the reserving process, including, among others, the review and approval processes that management has in place for the methods and assumptions used in estimating the reserves and the reasonableness of the actuarially determined reserves.
To test the estimated IBNR reserves we, including our actuarial specialists, performed audit procedures that included, among others, evaluating management’s selection and weighting of actuarial methods and assumptions by comparing to those used in prior periods and those used in the industry. We compared management’s best estimate of reserves to our independently calculated range of reasonable reserve estimates and assessed the development of prior year reserves. We also evaluated the results of the reserve analysis prepared by management’s independent third-party actuary for comparison to management’s best estimate.