10-Q 1 ufcs-2017930x10q.htm 10-Q Document

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

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34257
ufglogo2017a03.jpg
________________________
 UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
____________________________
 
 
 
Iowa
 
45-2302834
 
 
 
 
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES NO

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
NO
As of November 6, 2017, 24,877,643 shares of common stock were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
September 30, 2017
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will continue," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 and Part II, Item 1A "Risk Factors" of this report for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:

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

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



1


PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 

United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
September 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturities
 
 
 
Held-to-maturity, at amortized cost (fair value $150 in 2017 and $150 in 2016)
$
150

 
$
150

Available-for-sale, at fair value (amortized cost $1,480,730 in 2017 and $1,458,235 in 2016)
1,498,662

 
1,453,286

Trading securities, at fair value (amortized cost $11,833 in 2017 and $13,054 in 2016)
13,673

 
14,390

Equity securities
 
 
 
Available-for-sale, at fair value (cost $57,387 in 2017 and $59,994 in 2016)
269,341

 
246,370

Trading securities, at fair value (cost $5,888 in 2017 and $5,434 in 2016)
6,330

 
5,644

Other long-term investments
49,966

 
51,769

Short-term investments
175

 
175

 
1,838,297

 
1,771,784

Cash and cash equivalents
98,610

 
89,194

Accrued investment income
14,911

 
13,617

Premiums receivable (net of allowance for doubtful accounts of $1,170 in 2017 and $1,255 in 2016)
351,410

 
306,202

Deferred policy acquisition costs
97,477

 
93,362

Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $52,081 in 2017 and $50,925 in 2016)
64,520

 
55,524

Reinsurance receivables and recoverables
68,116

 
62,707

Prepaid reinsurance premiums
3,821

 
3,782

Income taxes receivable
21,360

 
14,285

Goodwill and intangible assets
24,163

 
24,740

Other assets
15,302

 
13,943

Assets held for sale
1,592,846

 
1,605,618

TOTAL ASSETS
$
4,190,833

 
$
4,054,758

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Losses and loss settlement expenses
$
1,237,280

 
$
1,123,896

Unearned premiums
490,443

 
443,802

Accrued expenses and other liabilities
130,618

 
147,104

Deferred income taxes
24,707

 
7,849

Liabilities held for sale
1,363,737

 
1,390,223

TOTAL LIABILITIES
$
3,246,785

 
$
3,112,874

Stockholders’ Equity
 
 
 
Common stock, $0.001 par value; authorized 75,000,000 shares; 24,849,889 and 25,429,769 shares issued and outstanding in 2017 and 2016, respectively
$
25

 
$
25

Additional paid-in capital
193,114

 
216,482

Retained earnings
600,988

 
616,322

Accumulated other comprehensive income, net of tax
149,921

 
109,055

TOTAL STOCKHOLDERS’ EQUITY
$
944,048

 
$
941,884

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
4,190,833

 
$
4,054,758

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


2


United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands, Except Share Data)
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
255,758

 
$
239,469

 
$
737,424

 
$
691,976

Investment income, net of investment expenses
13,792

 
14,027

 
38,561

 
35,017

Net realized investment gains (includes reclassifications for net unrealized investment gains on available-for-sale securities of $419 and $5,799 in 2017 and $2,320 and $4,666 in 2016; previously included in accumulated other comprehensive income)
67


2,129

 
3,397

 
4,832

Total revenues
$
269,617

 
$
255,625

 
$
779,382

 
$
731,825

Benefits, Losses and Expenses
 
 
 
 
 
 
 
Losses and loss settlement expenses
$
223,208

 
$
169,303

 
$
568,356

 
$
475,568

Amortization of deferred policy acquisition costs
52,986

 
52,240

 
154,845

 
151,216

Other underwriting expenses (includes reclassifications for employee benefit costs of $1,352 and $4,056 in 2017 and $1,371 and $4,113 in 2016; previously included in accumulated other comprehensive income)
25,817

 
20,047

 
69,900

 
61,469

Total benefits, losses and expenses
$
302,011

 
$
241,590

 
$
793,101

 
$
688,253

Income (loss) from continuing operations before income taxes
$
(32,394
)
 
$
14,035

 
$
(13,719
)
 
$
43,572

Federal income tax expense (benefit) (includes reclassifications of $327 and ($610) in 2017 and ($332) and ($194) in 2016; previously included in accumulated other comprehensive income)
(13,312
)
 
2,407

 
(13,330
)
 
6,489

Income (loss) from continuing operations
$
(19,082
)
 
$
11,628

 
$
(389
)
 
$
37,083

Income from discontinued operations, net of taxes
1,218

 
740

 
5,419

 
826

Net income (loss)
$
(17,864
)
 
$
12,368

 
$
5,030

 
$
37,909

Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in net unrealized appreciation on investments
$
18,995

 
$
(9,440
)
 
$
64,614

 
$
83,768

Change in liability for underfunded employee benefit plans

 

 

 

Other comprehensive income , before tax and reclassification adjustments
$
18,995

 
$
(9,440
)
 
$
64,614

 
$
83,768

Income tax effect
(6,648
)
 
3,304

 
(22,615
)
 
(29,320
)
Other comprehensive income, after tax, before reclassification adjustments
$
12,347

 
$
(6,136
)
 
$
41,999

 
$
54,448

Reclassification adjustment for net realized investment gains included in income
$
(419
)
 
$
(2,320
)
 
$
(5,799
)
 
$
(4,666
)
Reclassification adjustment for employee benefit costs included in expense
1,352

 
1,371

 
4,056

 
4,113

Total reclassification adjustments, before tax
$
933

 
$
(949
)
 
$
(1,743
)
 
$
(553
)
Income tax effect
(327
)
 
332

 
610

 
194

Total reclassification adjustments, after tax
$
606

 
$
(617
)
 
$
(1,133
)
 
$
(359
)
Comprehensive income (loss)
$
(4,911
)
 
$
5,615

 
$
45,896

 
$
91,998

 
 
 
 
 
 
 
 
Diluted weighted average common shares outstanding
24,960,086

 
25,815,346

 
25,666,405

 
25,711,014

Earnings per common share from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.77
)
 
$
0.46

 
$
(0.01
)
 
$
1.47

Diluted
(0.77
)
 
0.45

 
(0.01
)
 
1.44

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
(0.72
)
 
$
0.49

 
$
0.20

 
$
1.50

Diluted
(0.72
)
 
0.48

 
0.20

 
1.47

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


3


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

(In Thousands, Except Share Data)
Nine Months Ended September 30, 2017
 
 
Common stock
 
Balance, beginning of year
$
25

Shares repurchased (701,899 shares)

Shares issued for stock-based awards (131,777 shares)

Balance, end of period
$
25

 
 
Additional paid-in capital
 
Balance, beginning of year
$
216,482

Compensation expense and related tax benefit for stock-based award grants
3,456

Shares repurchased
(29,784
)
Shares issued for stock-based awards
2,960

Balance, end of period
$
193,114

 
 
Retained earnings
 
Balance, beginning of year
$
616,322

Net income
5,030

Dividends on common stock ($0.81 per share)
(20,364
)
Balance, end of period
$
600,988

 
 
Accumulated other comprehensive income, net of tax
 
Balance, beginning of year
$
109,055

Change in net unrealized investment appreciation(1)
38,230

Change in liability for underfunded employee benefit plans(2)
2,636

Balance, end of period
$
149,921

 
 
Summary of changes
 
Balance, beginning of year
$
941,884

Net income
5,030

All other changes in stockholders’ equity accounts
(2,866
)
Balance, end of period
$
944,048

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

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



4


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

Nine Months Ended September 30,
(In Thousands)
2017
 
2016
Cash Flows From Operating Activities
 
 
 
Net income
$
5,030

 
$
37,909

Less net income from discontinued operations, net of taxes
5,419

 
826

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Net accretion of bond premium
6,663

 
5,181

Depreciation and amortization
3,501

 
4,879

Stock-based compensation expense
3,456

 
2,731

Net realized investment gains
(3,397
)
 
(4,832
)
Net cash flows from trading investments
816

 
(36
)
Deferred income tax benefit
(4,979
)
 
(3,847
)
Changes in:
 
 
 
Accrued investment income
(1,294
)
 
(831
)
Premiums receivable
(45,208
)
 
(54,725
)
Deferred policy acquisition costs
(4,115
)
 
(10,268
)
Reinsurance receivables
(5,409
)
 
(12,224
)
Prepaid reinsurance premiums
(39
)
 
(212
)
Income taxes receivable
(7,075
)
 
(11,370
)
Other assets
(1,358
)
 
659

Future policy benefits and losses, claims and loss settlement expenses
113,384

 
86,272

Unearned premiums
46,641

 
53,699

Accrued expenses and other liabilities
(12,430
)
 
(6,198
)
Income taxes payable

 
(4,917
)
Deferred income taxes
1,794

 
2,665

Other, net
1,920

 
(1,605
)
Cash from operating activities - continuing operations
92,871

 
45,021

Cash from operating activities - discontinued operations
23,814

 
45,965

Total adjustments
$
116,685

 
$
90,986

Net cash provided by operating activities
$
116,296

 
$
128,069

Cash Flows From Investing Activities
 
 
 
Proceeds from sale of available-for-sale investments
$
3,388

 
$
1,968

Proceeds from call and maturity of available-for-sale investments
134,503

 
260,520

Proceeds from short-term and other investments
4,846

 
1,725

Purchase of available-for-sale investments
(162,121
)
 
(313,060
)
Purchase of short-term and other investments
(4,864
)
 
(2,772
)
Net purchases and sales of property and equipment
(11,630
)
 
(6,090
)
Cash from investing activities - continuing operations
(35,878
)
 
(57,709
)
Cash from investing activities - discontinued operations
31,517

 
37,685

Net cash used in investing activities
$
(4,361
)
 
$
(20,024
)
Cash Flows From Financing Activities
 
 
 
Payment of cash dividends
$
(20,364
)
 
$
(18,246
)
Repurchase of common stock
(29,784
)
 
(2,867
)
Issuance of common stock
2,960

 
7,149

Tax impact from issuance of common stock

 
(482
)
Cash from financing activities - continuing operations
(47,188
)
 
(14,446
)
Cash from financing activities - discontinued operations
(46,239
)
 
(59,104
)
Net cash used in financing activities
$
(93,427
)
 
$
(73,550
)
Net Change in Cash and Cash Equivalents
$
18,508

 
$
34,495

Less: decrease (increase) in cash and cash equivalents - discontinued operations
(9,092
)
 
(24,546
)
Net increase in cash and cash equivalents - continuing operations
9,416

 
9,949

Cash and Cash Equivalents at Beginning of Period - Continuing Operations
89,194

 
89,496

Cash and Cash Equivalents at End of Period - Continuing Operations
$
98,610

 
$
99,445

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


5



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

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance and life insurance and selling annuities through a network of independent agencies. Our insurance company subsidiaries are licensed as a property and casualty insurer in 46 states and the District of Columbia, and as a life insurer in 37 states.
Discontinued Operations
We have historically reported our operations in two business segments: property and casualty insurance and life insurance. On September 18, 2017, the Company signed a definitive agreement to sell its subsidiary, United Life Insurance Company, to Kuvare US Holdings, Inc. ("Kuvare"). As a result, our life insurance business, previously a separate segment, has been considered held for sale and reported as discontinued operations in the Consolidated Balance Sheets, Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Cash Flows (collectively, the "Consolidated Financial Statements"). Subsequent to the announcement of this sale, our continuing operations are now reported as one business segment. All current and prior periods reflected in this Form 10-Q have been presented as continuing and discontinued operations, unless otherwise noted. The sale is expected to close in the first half of 2018, subject to customary conditions, including regulatory approval. For more information, refer to Note 11. Discontinued Operations.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K, including certain financial statement footnote disclosures, are not required by the rules and regulations of the SEC for interim financial reporting and have been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; future policy benefits and losses, claims and loss settlement expenses; and pension and postretirement benefit obligations.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management of UFG believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016. The review report of Ernst & Young LLP as of September 30, 2017 and for the three- and nine-month periods ended September 30, 2017 and 2016 accompanies the unaudited Consolidated Financial Statements included in Part I, Item 1 "Financial Statements."


6


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

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the nine-month period ended September 30, 2017.
 
 
 
 
 
Continuing Operations
 
Discontinued Operations
 
 
 
Property & Casualty Insurance
 
Life Insurance
 
Total
Recorded asset at beginning of period
$
93,362

 
$
70,750

 
$
164,112

Underwriting costs deferred
158,960

 
4,192

 
163,152

Amortization of deferred policy acquisition costs
(154,845
)
 
(5,524
)
 
(160,369
)
Ending unamortized deferred policy acquisition costs
$
97,477

 
$
69,418

 
$
166,895

Impact of unrealized gains and losses on available-for-sale securities

 
(3,582
)
 
(3,582
)
Recorded asset at September 30, 2017
$
97,477

 
$
65,836

 
$
163,313


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

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

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

The effect on DAC that results from the assumed realization of unrealized gains (losses) on investments allocated to non-traditional life insurance business is recognized with an offset to net unrealized investment appreciation as of the balance sheet date. The impact of unrealized gains and losses on available-for-sale securities decreased the DAC asset by $9,995 and $6,413 at September 30, 2017 and December 31, 2016, respectively.


7


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 a federal income tax benefit from continuing and discontinued operations on a consolidated basis of $10,400 and a federal income tax expenses $6,904 for the nine-month periods ended September 30, 2017 and 2016, respectively. Our effective tax rate is different than the federal statutory rate of 35.0 percent due principally to the effect of tax-exempt municipal bond interest income and non-taxable dividend income.
The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If based on review, it appears not more likely than not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at September 30, 2017 or December 31, 2016. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.

With regard to the sale of our life insurance subsidiary, federal income taxes will be allocated to continuing and discontinued operations in accordance with the Company’s tax allocation agreement and the terms of the definitive agreement related to the sale.
We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2014. The Internal Revenue Service is conducting routine examinations of our income tax return for the 2015 tax year.

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 2017
Share-Based Payments
In March 2016, the Financial Accounting Standards Board ("FASB") issued new guidance on the accounting for share-based payments. The new guidance was issued to simplify the accounting of share-based payments, specifically in the areas of income taxes, classification on the balance sheets as liabilities or equity and classification in the cash flow statement. The new guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those years. The Company adopted the new guidance prospectively as of January 1, 2017. The new guidance resulted in classification changes between the financing and operating section of the Statement of Cash Flow for stock based compensation expense. The adoption also resulted in a tax benefit of $62 and $546 during the three- and nine-months ended September 30, 2017.




8


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



9



Defined Benefit Retirement Plan Cost
In March 2017, the FASB issued guidance on the presentation of net periodic benefit costs of defined benefit retirement benefit plans in the Statements of Income. The new guidance requires the service cost component of net periodic benefit cost of defined benefit plans to be presented in the same line in the Statements of Income as other employee compensation expenses. Also, under the new guidance, the service cost component of the net periodic benefit costs will be the only portion of costs subject to be capitalized in assets. The new guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2018 and is currently evaluating the presentation of net periodic benefit costs in its financial statements and the impact on the Company's financial position and results of operations.
Share-Based Payments
In May 2017, the FASB issued new guidance which clarifies and addresses the diversity in practice when there is a change in the terms of a share-based payment award. The updated guidance clarifies when to use modification accounting when there is a change in the terms of a share-based payment and provides three conditions where modification accounting should not be applied. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company will adopt the new guidance as of January 1, 2018 and is currently evaluating the impact on the Company's financial position and results of operations.
Leases
In February 2016, the FASB issued guidance on the accounting for leases. The new guidance requires lessees to place most leases on their balance sheets with expenses recognized on the income statement in a similar manner as previous methods. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2019. The Company has created an inventory of its leases and has calculated the current minimum future lease payment, which is disclosed in Note 13 "Lease Commitments" of our Annual Report on Form 10-K for the year ended December 31, 2016.
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, 2020 and interim periods within those years. The Company will adopt the new guidance as of January 1, 2021 and is currently evaluating the impact on the Company's financial position, results of operations and key processes.
Income Taxes - Intra-entity Transfers
In October 2016, the FASB issued new guidance on the income tax treatment of intra-entity transfers. The new guidance replaces the current guidance which prohibits the recognition of current and deferred income taxes of intra-entity transfers until the asset is sold externally. Under the new guidance, the exemption is eliminated and income taxes will be recognized on transfers of intra-entity assets. The new guidance is effective for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. The Company will adopt the new guidance as of January 1, 2019 and is currently evaluating the impact on the Company's financial position and results of operations.
Goodwill
In January 2017, the FASB issued new guidance which simplifies the test for goodwill impairment. The new guidance eliminates the implied fair value calculation when measuring a goodwill impairment charge. Under the new guidance, impairment charges will be based on the excess of the carrying value over fair value of goodwill. The


10


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 is currently evaluating the impact on the Company's financial position and results of operations.
NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost (cost for equity securities) to fair value of investments in held-to-maturity and available-for-sale fixed maturity and equity securities, presented on a consolidated basis, including both continuing and discontinued operations as of September 30, 2017 and December 31, 2016, is as follows:
September 30, 2017
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds - financial services
$
150

 
$

 
$

 
$
150

Mortgage-backed securities
38

 
1

 

 
39

Total Held-to-Maturity Fixed Maturities
$
188

 
$
1

 
$

 
$
189

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. Treasury
$
22,032

 
$
40

 
$
91

 
$
21,981

U.S. government agency
98,523

 
1,518

 
516

 
99,525

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
120,549

 
2,388

 
499

 
122,438

Northeast
50,174

 
1,478

 
73

 
51,579

South
142,172

 
2,463

 
1,210

 
143,425

West
113,135

 
2,474

 
963

 
114,646

Special revenue:
 
 
 
 
 
 
 
Midwest
151,634

 
3,646

 
494

 
154,786

Northeast
79,159

 
1,061

 
795

 
79,425

South
261,141

 
4,421

 
2,974

 
262,588

West
157,622

 
2,676

 
1,940

 
158,358

Foreign bonds
54,300

 
1,907

 

 
56,207

Public utilities
201,418

 
4,538

 
200

 
205,756

Corporate bonds

 

 

 

Energy
96,373

 
2,367

 
95

 
98,645

Industrials
209,076

 
5,323

 
109

 
214,290

Consumer goods and services
181,471

 
5,049

 
135

 
186,385

Health care
75,775

 
2,600

 

 
78,375

Technology, media and telecommunications
143,024

 
3,308

 
193

 
146,139

Financial services
252,373

 
6,939

 
303

 
259,009



11


Mortgage-backed securities
14,496

 
169

 
179

 
14,486

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
153,896

 
2,292

 
1,458

 
154,730

Federal home loan mortgage corporation
191,246

 
2,410

 
3,132

 
190,524

Federal national mortgage association
106,326

 
2,240

 
832

 
107,734

Asset-backed securities
4,280

 
345

 
3

 
4,622

Total Available-for-Sale Fixed Maturities
$
2,880,195

 
$
61,652

 
$
16,194

 
$
2,925,653

Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
6,394

 
$
15,750

 
$
58

 
$
22,086

Energy
6,514

 
7,998

 
106

 
14,406

Industrials
13,117

 
49,890

 
164

 
62,843

Consumer goods and services
10,070

 
14,872

 
154

 
24,788

Health care
7,763

 
29,463

 

 
37,226

Technology, media and telecommunications
6,006

 
10,215

 
136

 
16,085

Financial services
11,630

 
101,813

 
73

 
113,370

Nonredeemable preferred stocks
992

 
161

 

 
1,153

Total Available-for-Sale Equity Securities
$
62,486

 
$
230,162

 
$
691

 
$
291,957

Total Available-for-Sale Securities
$
2,942,681

 
$
291,814

 
$
16,885

 
$
3,217,610

































12



December 31, 2016
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Corporate bonds - financial services
$
150

 
$

 
$

 
$
150

Mortgage-backed securities
48

 
1

 

 
49

Total Held-to-Maturity Fixed Maturities
$
198

 
$
1

 
$

 
$
199

AVAILABLE-FOR-SALE

 

 

 

Fixed maturities:

 

 

 

Bonds

 

 

 

U.S. Treasury
$
23,216

 
$
87

 
$
108

 
$
23,195

U.S. government agency
76,692

 
1,445

 
540

 
77,597

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations:
 
 
 
 
 
 
 
Midwest
143,747

 
1,808

 
1,412

 
144,143

Northeast
57,731

 
909

 
231

 
58,409

South
129,475

 
1,249

 
2,355

 
128,369

West
114,524

 
1,380

 
2,173

 
113,731

Special revenue:
 
 
 
 
 
 
 
Midwest
167,430

 
2,313

 
1,433

 
168,310

Northeast
70,202

 
487

 
2,624

 
68,065

South
244,225

 
1,753

 
6,791

 
239,187

West
134,287

 
1,509

 
4,052

 
131,744

Foreign bonds
62,995

 
2,239

 

 
65,234

Public utilities
212,360

 
3,761

 
447

 
215,674

Corporate bonds

 


 

 

Energy
107,084

 
2,195

 
419

 
108,860

Industrials
225,526

 
5,359

 
982

 
229,903

Consumer goods and services
178,135

 
3,847

 
295

 
181,687

Health care
81,211

 
2,063

 
151

 
83,123

Technology, media and telecommunications
143,402

 
2,029

 
819

 
144,612

Financial services
269,981

 
5,328

 
1,358

 
273,951

Mortgage-backed securities
17,288

 
201

 
241

 
17,248

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government national mortgage association
145,947

 
1,279

 
2,766

 
144,460

Federal home loan mortgage corporation
176,226

 
1,638

 
3,406

 
174,458

Federal national mortgage association
101,414

 
1,816

 
1,334

 
101,896

Asset-backed securities
4,407

 
145

 
282

 
4,270

Total Available-for-Sale Fixed Maturities
$
2,887,505

 
$
44,840

 
$
34,219

 
$
2,898,126



13


Equity securities:

 

 

 

Common stocks

 

 

 

Public utilities
$
6,394

 
$
13,465

 
$
188

 
$
19,671

Energy
6,514

 
8,555

 
22

 
15,047

Industrials
13,252

 
38,715

 
173

 
51,794

Consumer goods and services
10,324

 
13,851

 
58

 
24,117

Health care
7,763

 
19,657

 

 
27,420

Technology, media and telecommunications
5,931

 
9,476

 
38

 
15,369

Financial services
17,289

 
98,728

 
67

 
115,950

Nonredeemable preferred stocks
1,037

 
11

 

 
1,048

Total Available-for-Sale Equity Securities
$
68,504

 
$
202,458

 
$
546

 
$
270,416

Total Available-for-Sale Securities
$
2,956,009

 
$
247,298

 
$
34,765

 
$
3,168,542


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

September 30, 2017
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Continuing operations
$
150

 
$

 
$

 
$
150

Discontinued operations
38

 
1

 

 
39

Total Held-to-Maturity Fixed Maturities
$
188

 
$
1

 
$

 
189

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Continuing operations
$
1,480,730

 
$
28,606

 
$
10,674

 
$
1,498,662

Discontinued operations
1,399,465

 
33,046

 
5,520

 
1,426,991

Total Available-for-Sale Fixed Maturities
$
2,880,195

 
$
61,652

 
$
16,194

 
$
2,925,653

Equity securities:
 
 
 
 
 
 
 
Continuing operations
$
57,387

 
$
212,545

 
$
591

 
$
269,341

Discontinued operations
5,099

 
17,617

 
100

 
22,616

Total Available-for-Sale Equity Securities
$
62,486

 
$
230,162

 
$
691

 
$
291,957

Total Available-for-Sale Securities
$
2,942,681

 
$
291,814

 
$
16,885

 
$
3,217,610





14


December 31, 2016
 
Type of Investment
Cost or Amortized Cost
 
Gross Unrealized Appreciation
 
Gross Unrealized Depreciation
 
Fair Value
HELD-TO-MATURITY
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Continuing operations
$
150

 
$

 
$

 
$
150

Discontinued operations
48

 
1

 

 
49

Total Held-to-Maturity Fixed Maturities
$
198

 
$
1

 
$

 
$
199

AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Continuing operations
$
1,458,235

 
$
18,725

 
$
23,674

 
$
1,453,286

Discontinued operations
1,429,270

 
26,115

 
10,545

 
1,444,840

Total Available-for-Sale Fixed Maturities
2,887,505

 
44,840

 
34,219

 
2,898,126

Equity securities:
 
 
 
 
 
 
 
Continuing operations
$
59,994

 
$
186,692

 
$
316

 
$
246,370

Discontinued operations
8,510

 
15,766

 
230

 
24,046

Total Available-for-Sale Equity Securities
68,504

 
202,458

 
546

 
270,416

Total Available-for-Sale Securities
$
2,956,009

 
$
247,298

 
$
34,765

 
$
3,168,542

Maturities
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturity securities at September 30, 2017, by contractual maturity, are shown in the following tables. The first table includes consolidated investments from both continuing and discontinued operations. The second and third tables separate maturities into continuing and discontinued operations. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
Maturities - Consolidated:
 
 
 
 
 
 
 
 
 
 
 
 
Held-To-Maturity
 
Available-For-Sale
 
Trading
September 30, 2017
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
150

 
$
150

 
$
128,884

 
$
129,945

 
$
1,401

 
$
1,821

Due after one year through five years

 

 
782,192

 
803,774

 
6,979

 
8,233

Due after five years through 10 years

 

 
751,756

 
771,205

 
1,302

 
1,185

Due after 10 years

 

 
747,119

 
748,633

 
2,151

 
2,434

Asset-backed securities

 

 
4,280

 
4,622

 

 

Mortgage-backed securities
38

 
39

 
14,496

 
14,486

 

 

Collateralized mortgage obligations

 

 
451,468

 
452,988

 

 

 
$
188

 
$
189

 
$
2,880,195

 
$
2,925,653

 
$
11,833

 
$
13,673



15


Maturities - Continuing Operations:
 
 
 
 
 
 
 
 
 
Held-To-Maturity
 
Available-For-Sale
 
Trading
September 30, 2017
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
150

 
$
150

 
$
54,340

 
$
54,762

 
$
1,401

 
$
1,821

Due after one year through five years

 

 
224,804

 
230,986

 
6,979

 
8,233

Due after five years through 10 years

 

 
344,553

 
354,308

 
1,302

 
1,185

Due after 10 years

 

 
675,795

 
676,310

 
2,151

 
2,434

Asset-backed securities

 

 
3,174

 
3,517

 

 

Mortgage-backed securities

 

 
9,664

 
9,783

 

 

Collateralized mortgage obligations

 

 
168,400

 
168,996

 

 

 
$
150

 
$
150

 
$
1,480,730

 
$
1,498,662

 
$
11,833

 
$
13,673


Maturities - Discontinued Operations:
 
 
 
 
 
 
 
 
 
Held-To-Maturity
 
Available-For-Sale
 
Trading
September 30, 2017
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$

 
$

 
$
74,544

 
$
75,183

 
$

 
$

Due after one year through five years

 

 
557,388

 
572,788

 

 

Due after five years through 10 years

 

 
407,203

 
416,897

 

 

Due after 10 years

 

 
71,324

 
72,323

 

 

Asset-backed securities

 

 
1,107

 
1,105

 

 

Mortgage-backed securities
38

 
39

 
4,832

 
4,703

 

 

Collateralized mortgage obligations

 

 
283,067

 
283,992

 

 

 
$
38

 
$
39

 
$
1,399,465

 
$
1,426,991

 
$

 
$

















16


Net Realized Investment Gains and Losses
Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net realized investment gains (losses) from continuing operations:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale
$
118

 
$
484

 
$
645

 
$
898

Trading securities
 
 
 
 
 
 
 
Change in fair value
(43
)
 
148

 
504

 
519

Sales
72

 
107

 
117

 
568

Equity securities:
 
 
 
 
 
 
 
Available-for-sale
3

 
1,375

 
1,553

 
2,359

Trading securities
 
 
 
 
 
 
 
Change in fair value
(124
)
 
(5
)
 
232

 
325

Sales
41

 
20

 
57

 
(6
)
Cash equivalents

 

 

 
169

Real estate

 

 
289

 

Total net realized investment gains from continuing operations
$
67

 
$
2,129

 
$
3,397

 
$
4,832

Total net realized investment gains from discontinued operations
296

 
461

 
3,600

 
1,409

Total net realized investment gains
$
363

 
$
2,590

 
$
6,997

 
$
6,241

The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities from continuing operations are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Proceeds from sales
$
2,293

 
$

 
$
3,388

 
$
1,968

Gross realized gains

 

 
1,046

 
921

Gross realized losses

 

 

 

The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities from discontinued operations are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Proceeds from sales
$
1,844

 
$
2,007

 
$
5,807

 
$
3,081

Gross realized gains

 
11

 
1,254

 
65

Gross realized losses

 

 
(78
)
 

There were no sales of held-to-maturity securities during the three- and nine-month periods ended September 30, 2017 and 2016.

Our investment portfolio includes trading securities with embedded derivatives. These securities are primarily convertible securities which are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of net realized investment gains. Our portfolio of trading securities had a fair value of $20,003 and $20,034 at September 30, 2017 and December 31, 2016, respectively.


17


Funding Commitment

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through December 31, 2023 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $3,738 at September 30, 2017.
Unrealized Appreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 
Nine Months Ended September 30,
 
2017
 
2016
Change in net unrealized investment appreciation
 
 
 
Available-for-sale fixed maturities
$
34,837

 
$
83,498

Available-for-sale equity securities
27,559

 
15,459

Deferred policy acquisition costs
(3,582
)
 
(19,857
)
Income tax effect
(20,584
)
 
(27,685
)
Total change in net unrealized investment appreciation, net of tax
$
38,230

 
$
51,415

We continually monitor the difference between our cost basis and the estimated fair value of our investments. Our accounting policy for impairment recognition requires other-than-temporary impairment ("OTTI") charges to be recorded when we determine that it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the fixed maturity security or that the anticipated recovery in fair value of the equity security will not occur in a reasonable amount of time. Impairment charges on investments are recorded based on the fair value of the investments at the measurement date or based on the value calculated using a discounted cash flow model. Credit-related impairments on fixed maturity securities that we do not plan to sell, and for which we are not more likely than not to be required to sell, are recognized in net income. Any non-credit related impairment is recognized as a component of other comprehensive income. Factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which fair value has been less than cost; the financial condition and near-term prospects of the issuer; our intention to hold the investment; and the likelihood that we will be required to sell the investment.
The tables on the following pages summarize our fixed maturity and equity securities that were in an unrealized loss position on a consolidated basis, including both continuing and discontinued operations at September 30, 2017 and December 31, 2016. The securities are presented by the length of time they have been continuously in an unrealized loss position. It is possible that we could recognize OTTI charges in future periods on securities held at September 30, 2017, if future events or information cause us to determine that a decline in fair value is other-than-temporary.
We have evaluated the near-term prospects of the issuers of our fixed maturity securities in relation to the severity and duration of the unrealized loss and determined that these losses did not warrant the recognition of an OTTI charge at September 30, 2017 or at September 30, 2016. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.
We have evaluated the near-term prospects of the issuers of our equity securities in relation to the severity and duration of the unrealized loss and determined that these losses did not warrant the recognition of an OTTI charge at September 30, 2017 or at September 30, 2016. Our largest unrealized loss greater than 12 months on an individual equity security at September 30, 2017 was $152. We have no intention to sell any of these securities prior to a recovery in value, but will continue to monitor the fair value reported for these securities as part of our overall process to evaluate investments for OTTI recognition.


18


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
Less than 12 months
 
12 months or longer
 
Total
Type of Investment
Number
of Issues
 
Fair
Value
 
Gross Unrealized
Depreciation
 
Number
of Issues
 
Fair
Value
 
Gross Unrealized Depreciation
 
Fair
Value
 
Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
3

 
$
8,920

 
$
44

 
3

 
$
2,829

 
$
47

 
$
11,749

 
$
91

U.S. government agency
8

 
33,607

 
306

 
3

 
12,789

 
210

 
46,396

 
516

States, municipalities and political subdivisions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General obligations