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UNITED FIRE GROUP INC - Quarter Report: 2023 September (Form 10-Q)

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

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34257
ufglogo2017color600a32.gif
________________________
 UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
Iowa 45-2302834
(State of incorporation) (I.R.S. Employer Identification No.)
118 Second Avenue SE
Cedar RapidsIowa
52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 399-5700
Securities Registered Pursuant to Section 12(b) of the Exchange Act of 1934:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par valueUFCSThe NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒

As of November 1, 2023, 25,265,351 shares of common stock were outstanding.

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United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
September 30, 2023
 Page
 
 
 

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FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "remain(s) optimistic," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K/A for the year ended December 31, 2022 and in our other filings with the Securities and Exchange Commission ("SEC") for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:
◦Our ability to effectively underwrite and adequately price insured risks;
◦Risks related to our investment portfolio that could negatively affect our profitability;
◦General macroeconomic conditions, interest rate risk, the impact of inflation and changes in governmental regulations and monetary policy;
◦Geographic concentration risk in our property and casualty insurance business;
◦The properties we insure are exposed to various natural perils that can give rise to significant claims costs;
◦Changing weather patterns and climate change add to the unpredictability, frequency and severity of catastrophe losses and may adversely affect our results of operations, liquidity and financial condition;
◦Further downgrades 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;
◦We may be unable to attract, retain or effectively manage the succession of key personnel;
◦The risk of not being able to predict the rising cost of insurance claims resulting from changing societal expectations that lead to increasing litigation, broader definitions of liability, broader contract interpretations, more plaintiff-friendly legal decisions and larger compensatory jury awards;
◦The potential disruption of our operations and reputation due to unauthorized data access, cyber-attacks or cyber-terrorism and other security breaches;
◦The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses;
◦Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network;
◦Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, and other federal stimulus relief legislation, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions; changes in laws, regulations and stock exchange requirements relating to corporate governance and the cost of compliance;
◦We will be at a competitive disadvantage if, over time, our competitors are more effective than us in their utilization of technology and evolving data analytics;
◦We may be unable to secure reinsurance capacity that provides necessary risk protection at a reasonable cost; and
◦Our stock price could become more volatile and your investment could lose value.
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These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)September 30,
2023		 December 31,
2022
 (unaudited)  
ASSETS   
Investments:   
Fixed maturities   
Available-for-sale, at fair value (amortized cost $1,794,325 in 2023 and $1,662,680 in 2022)
$1,638,512  $1,551,336 
Equity securities at fair value (cost $29,238 in 2023 and $75,292 in 2022)
51,217 169,106 
Mortgage loans45,589  37,947 
Less: allowance for mortgage loan losses55  49 
Mortgage loans, net45,534 37,898 
Other long-term investments93,836  86,276 
Short-term investments —  275 
Total investments1,829,099  1,844,891 
Cash and cash equivalents69,150  96,650 
Accrued investment income17,269  14,480 
Premiums receivable (net of allowance for doubtful accounts of $1,768 in 2023 and $1,575 in 2022)
475,632  365,729 
Deferred policy acquisition costs125,292  104,225 
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $66,257 in 2023 and $59,566 in 2022)
133,887  133,113 
Reinsurance receivables and recoverables (net of allowance for credit losses of $130 in 2023 and $82 in 2022)
211,645  170,953 
Prepaid reinsurance premiums21,425  11,300 
Intangible assets4,793 5,324 
Deferred tax asset36,591 15,531 
Income taxes receivable36,469 31,418 
Other assets90,527  88,672 
TOTAL ASSETS$3,051,779  $2,882,286 
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Liabilities   
Losses and loss settlement expenses$1,636,918  $1,497,274 
Unearned premiums560,663  474,388 
Accrued expenses and other liabilities159,261  120,510 
Long term debt50,000 50,000 
TOTAL LIABILITIES$2,406,842  $2,142,172 
Stockholders’ Equity   
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,263,742 and 25,210,541 shares issued and outstanding in 2023 and 2022, respectively
$25  $25 
Additional paid-in capital209,931  207,030 
Retained earnings559,126  620,555 
Accumulated other comprehensive income, net of tax(124,145) (87,496)
TOTAL STOCKHOLDERS’ EQUITY$644,937  $740,114 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$3,051,779  $2,882,286 
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
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United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands, Except Share Data)2023 202220232022
Revenues   
Net premiums earned$259,456  $238,256 $770,221 $703,746 
Investment income, net of investment expenses16,459  11,606 40,508 32,062 
Net investment gains (losses) (includes reclassifications for net unrealized investment gains (losses) on available-for-sale securities of $(79) and $(771) in 2023 and $(1,079) and $(1,478) in 2022; previously included in accumulated other comprehensive income (loss))
(1,960)(14,250)(2,581)(35,647)
Other income (loss)—  (39)— (38)
Total revenues$273,955  $235,573 $808,148 $700,123 
Benefits, Losses and Expenses  
Losses and loss settlement expenses$172,798  $182,411 $598,125 $464,295 
Amortization of deferred policy acquisition costs62,709  53,107 181,700 156,116 
Other underwriting expenses (includes reclassifications for employee benefit costs of $51 and $155 in 2023 and $900 and $2,700 in 2022; previously included in accumulated other comprehensive income (loss))
29,275  30,487 89,784 87,885 
Interest expense797 797 2,391 2,391 
Total benefits, losses and expenses$265,579  $266,802 $872,000 $710,687 
Income (loss) before income taxes$8,376  $(31,229)$(63,852)$(10,564)
Federal income tax expense (benefit) (includes reclassifications of $28 and $195 in 2023 and $416 and $877 in 2022; previously included in accumulated other comprehensive income (loss))
1,996  (8,248)(14,544)(5,475)
Net Income (loss)$6,380 $(22,981)$(49,308)$(5,089)
Other comprehensive income (loss)
Change in net unrealized appreciation on investments$(43,245) $(65,415)$(44,857) $(199,071)
Change in liability for underfunded employee benefit plans(820)(4,591)(2,460)(13,774)
Other comprehensive income (loss), before tax and reclassification adjustments$(44,065) $(70,006)$(47,317) $(212,845)
Income tax effect9,253  14,701 9,937  44,697 
Other comprehensive income (loss), after tax, before reclassification adjustments$(34,812) $(55,305)$(37,380) $(168,148)
Reclassification adjustment for net investment losses included in income$79  $1,079 $771  $1,478 
Reclassification adjustment for employee benefit costs included in expense51  900 155  2,700 
Total reclassification adjustments, before tax$130 $1,979 $926 $4,178 
Income tax effect(28)(416)(195)(877)
Total reclassification adjustments, after tax$102 $1,563 $731 $3,301 
Comprehensive income (loss)$(28,330) $(76,723)$(85,957) $(169,936)
Diluted weighted average common shares outstanding25,579,334  25,188,958 25,244,502 25,146,318 
Earnings per common share:
Basic$0.25 $(0.91)$(1.95)$(0.20)
Diluted 0.25 (0.91)(1.95)(0.20)
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
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United Fire Group, Inc.
Consolidated Statement of Stockholders’ Equity (Unaudited)

Common Stock
(In Thousands, Except Share Data)Shares outstandingCommon stockAdditional paid-in capitalRetaining EarningsAccumulated other comprehensive incomeTotal
Balance, January 1, 202325,210,541 $25 $207,030 $620,555 $(87,496)$740,114 
Net income— — — 694 — 694 
Stock based compensation21,012 — 980 — — 980 
Dividends on common stock ($0.16 per share)
— — — (4,037)— (4,037)
Change in net unrealized investment appreciation (depreciation)(1)
— — — — 14,650 14,650 
Change in liability for underfunded employee benefit plans(2)
— — — — (607)(607)
Balance, March 31, 202325,231,553 $25 $208,010 $617,213 $(73,453)$751,795 
Net income (loss)— $— $— $(56,382)$— $(56,382)
Stock based compensation31,396 — 977 — — 977 
Dividends on common stock ($0.16 per share)
— — — (4,042)— (4,042)
Change in net unrealized investment appreciation (depreciation)(1)
— — — — (15,376)(15,376)
Change in liability for underfunded employee benefit plans(2)
— — — — (606)(606)
Balance, June 30, 202325,262.949 $25 $208,987 $556,788 $(89,435)$676,365 
Net income (loss)— $— $— $6,380 $— $6,380 
Shares repurchased— — — — — — 
Stock based compensation793 — 944 — — 944 
Dividends on common stock ($0.16 per share)
— — — (4,042)— (4,042)
Change in net unrealized investment appreciation (depreciation)(1)
— — — — (34,103)(34,103)
Change in liability for underfunded employee benefit plans(2)
— — — — (607)(607)
Balance, September 30, 202325,263,742 $25 $209,931 $559,126 $(124,145)$644,937 
(1)The change in net unrealized appreciation (depreciation) is net of reclassification adjustments and income taxes.
(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.
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Common Stock
(In Thousands, Except Share Data)Shares outstandingCommon stockAdditional paid-in capitalRetaining EarningsAccumulated other comprehensive incomeTotal
Balance, January 1, 202225,082,104 $25 $203,375 $621,384 $54,337 $879,121 
Net income— — — 28,349 — 28,349 
Stock based compensation37,140 — 631 — — 631 
Dividends on common stock ($0.15 per share)
— — — (3,767)— (3,767)
Change in net unrealized investment appreciation (depreciation)(1)
— — — — (65,793)(65,793)
Change in liability for underfunded employee benefit plans(2)
— — — — (2,916)(2,916)
Balance, March 31, 202225,119,244 $25 $204,006 $645,966 $(14,372)$835,625 
Net income— $— $— $(10,457)$— $(10,457)
Stock based compensation67,404 — 2,159 — — 2,159 
Dividends on common stock ($0.15 per share)
— — — (4,028)— (4,028)
Change in net unrealized investment appreciation(1)
— — — — (39,480)(39,480)
Change in liability for underfunded employee benefit plans(2)
— — — — (2,916)(2,916)
Balance, June 30, 202225,186,648 $25 $206,165 $631,481 $(56,768)$780,903 
Net income (loss)$— $— $— $(22,981)$— $(22,981)
Stock based compensation4,766 — 646 — — 646 
Dividends on common stock ($0.15 per share)
— — — (4,031)— (4,031)
Change in net unrealized investment appreciation(1)
— — — — (50,826)(50,826)
Change in liability for underfunded employee benefit plans(2)
— — — — (2,916)(2,916)
Balance, September 30, 202225,191,414 $25 $206,811 $604,469 $(110,510)$700,795 
(1)The change in net unrealized appreciation (depreciation) is net of reclassification adjustments and income taxes.
(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.


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United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30,
(In Thousands)2023 2022
Cash Flows From Operating Activities   
Net income$(49,308) $(5,089)
Adjustments to reconcile net income to net cash provided by (used in) operating activities 
Net accretion of bond premium5,238  6,969 
Depreciation and amortization7,841  8,079 
Stock-based compensation expense3,124  2,590 
Net investment (gains) losses2,384  35,647 
Net cash flows from equity and trading investments116,080  29,725 
Deferred income tax expense (benefit)(11,633) (9,224)
Changes in: 
Accrued investment income(2,789) (1,773)
Premiums receivable(109,903) (57,570)
Deferred policy acquisition costs(21,067) (14,930)
Reinsurance receivables(40,692) (28,145)
Prepaid reinsurance premiums(10,125) (2,814)
Income taxes receivable(5,051) (7,215)
Other assets(1,596) 6,758 
Losses and loss settlement expenses139,644  (49,757)
Unearned premiums86,275  48,560 
Accrued expenses and other liabilities36,446  1,403 
Other, net4,638  6,993 
Cash from operating activities198,814 (24,704)
Net cash provided by (used in) operating activities$149,506  $(29,793)
Cash Flows From Investing Activities   
Proceeds from sale of available-for-sale investments$48,749  $83,409 
Proceeds from call and maturity of available-for-sale investments46,397  145,618 
Proceeds from sale of other investments3,482  3,243 
Purchase of investments in mortgage loans(8,137) (103)
Purchase of investments available-for-sale(232,216)(262,359)
Purchase of other investments(14,899) (5,447)
Net purchases and sales of property and equipment(8,037) (2,675)
Net cash provided by (used in) investing activities$(164,661)$(38,314)
Cash Flows From Financing Activities   
Issuance of common stock$(223)$846 
Payment of cash dividends(12,122)(11,826)
Net cash provided by (used in) financing activities$(12,345)$(10,980)
Net Change in Cash and Cash Equivalents$(27,500) $(79,087)
Cash and Cash Equivalents at Beginning of Period96,650 132,104 
Cash and Cash Equivalents at End of Period$69,150 $53,017 
Supplemental Disclosures of Cash Flow Information
Income taxes paid$1,336 $21,537 
Interest paid$2,391 $2,391 
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
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UNITED FIRE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share amounts or as otherwise noted)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance through a network of independent agencies. Our insurance company subsidiaries are licensed as property and casualty insurers in 50 states and the District of Columbia.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K/A for the year ended December 31, 2022, including certain financial statement footnote disclosures, is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; loss settlement expenses; and pension and postretirement benefit obligations.
Management 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/A for the year ended December 31, 2022.
Segment Information
Our property and casualty insurance business is reported as one business segment. The property and casualty insurance business profit or loss is consistent with consolidated reporting as disclosed on the Consolidated Statements of Income and Comprehensive Income. We analyze the property and casualty insurance business results based on profitability (i.e., loss ratios), expenses and return on equity. The Company's property and casualty insurance business was determined using a management approach to make decisions on operating matters, including allocating resources, assessing performance, determining which products to market and sell, determining distribution networks with insurance agents and monitoring the regulatory environment. The property and casualty insurance business products have similar economic characteristics and use a similar marketing and distribution strategy with our independent agents. We will continue to evaluate our operations on the basis of both statutory accounting principles prescribed or permitted by our states of domicile and GAAP.
Lloyd's Syndicates
On January 1, 2021, the Company became a member of Lloyd's of London ("Lloyd's") through McIntyre Cedar Corporate Member LLP. As a member of Lloyd's, the Company is required to maintain capital at Lloyd's, referred to
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as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699 and Syndicate 5623. At September 30, 2023, the Company's FAL investments were comprised of cash of $24,383 on deposit with Lloyd's in order to satisfy these FAL requirements.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, cash on deposit and held at Lloyd's and non-negotiable certificates of deposit with original maturities of three months or less.
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, 2023.
Total
Recorded asset at beginning of period$104,225 
Underwriting costs deferred202,768 
Amortization of deferred policy acquisition costs(181,700)
Recorded asset at September 30, 2023
$125,292 

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.
Other Intangible Assets
Our other intangible assets, which consist primarily of agency relationships, trade names, state insurance licenses, and software, are being amortized using the straight-line method over periods ranging from two years to 15 years, with the exception of state insurance licenses, which are indefinite-lived and not amortized.
Long Term Debt
The Company executed a private placement debt transaction on December 15, 2020 between United Fire & Casualty Company ("UF&C"), and Federated Mutual Insurance Company, a mutual insurance company domiciled in Minnesota ("Federated Mutual"), and Federated Life Insurance Company, an insurance company domiciled in Minnesota ("Federated Life" and, together with Federated Mutual, the "Note Purchasers").

UF&C sold an aggregate principal amount of $50,000 of notes due 2040 to the Note Purchasers. One note with a principal amount of $35,000 was issued to Federated Mutual and one note with a principal amount of $15,000 was issued to Federated Life subject to the terms of their respective notes. The notes are presented as a long term debt liability in the Consolidated Balance Sheets and as a financing activity in the Consolidated Statement of Cash Flows.

Interest payments under the long term debt are paid quarterly on March 15, June 15, September 15 and December 15 of each year (each such date, an "Interest Payment Date"). The interest rate will equal the rate that corresponds to the A.M. Best Co. (or its successor's) financial strength rating for members of the United Fire & Casualty Pooled Group as of the applicable Interest Payment Date. For the nine-month period ended September 30, 2023, interest totaled $2,391 and is included in accrued expenses and other liabilities in the Consolidated Balance Sheets and as interest expense in the Consolidated Statements of Income and Comprehensive Income. Payment of interest is subject to approval by the Iowa Insurance Division.
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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 consolidated federal income tax benefit of $14,544 for the nine-month period ended September 30, 2023 compared to an income tax benefit of $5,475 during the same period of 2022. Our effective tax rate for 2023 and 2022 is different than the federal statutory rate of 21 percent, due principally to the net effect of tax-exempt municipal bond interest 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 this 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, 2023 or December 31, 2022. 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.
Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred taxes will not be realized. After considering all positive and negative evidence of taxable income in the carryback and carryforward periods and our tax planning strategy of holding debt securities with unrealized losses to maturity or recovery, we believe it is more likely than not that all the deferred assets will be realized. As a result, we have no valuation allowance at September 30, 2023 or December 31, 2022.
For the nine-month periods ended September 30, 2023 and 2022, we made payments for income taxes totaling $1,336 and $21,537, respectively. We did not receive a federal tax refund for the nine-month period ended September 30, 2023. For the nine-month period ended September 30, 2022, we received a federal tax refund of $10,789.
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 2018.

Leases

The Company determines if a contract contains a lease at inception of the contract. The Company's inventory of leases consists of operating leases which are recorded as a lease obligation liability disclosed in the "Accrued expenses and other liabilities" line on the Consolidated Balance Sheets and as a lease right-of-use asset disclosed in the "Other assets" line on the Consolidated Balance Sheets. The Company's operating leases consist of office space, vehicles, computer equipment and office equipment. The lease right-of-use asset represents the Company's right to use each underlying asset for the lease term and the lease obligation liability represents the Company's obligation over the lease term. The Company's lease obligation is recorded at the present value of the lease payments based on the term of the applied lease. Short-term leases of 12 months or less are recorded on the Consolidated Balance Sheets and lease payments are recognized on the Consolidated Statements of Income and Comprehensive Income. For more information on leases refer to Note 10 "Leases."
Variable Interest Entities
The Company and certain related parties are equity investors in one investment 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.
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The Company and certain related parties are not the primary beneficiaries largely due to their inability to influence management or direct the activities that most significantly impact the VIE's economic performance. Based on these facts and circumstances, the Company has a variable interest in the VIE, but has not consolidated the VIE's financial results as it is not the primary beneficiary. The Company's investment is reported in other long-term investments in the Consolidated Balance Sheets and accounted for under the equity method of accounting. The fair value of the VIE at September 30, 2023 was $2,650 and there are no future funding commitments.
Credit Losses
The Company recognizes credit losses for our available-for-sale fixed-maturity portfolio, reinsurance receivables, mortgage loans and premium receivables by setting up allowances which are remeasured each reporting period and recorded in the Consolidated Statements of Income and Comprehensive Income.
For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value versus amortized cost, investment spreads widening or contracting, rating actions, payment and default history. For more information on credit losses and the allowance for credit losses for our available-for-sale fixed-maturity portfolio, see Note 2 "Summary of Investments."
An allowance for mortgage loan losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments which have similar risk characteristics. To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. On a quarterly basis, quantitative credit risk metrics, including, for example, cash-flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations. This allowance is presented as a separate line in the Consolidated Balance Sheets beneath the asset value as well as presented net and recorded through "Net investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income. For more information on credit losses and the allowance for credit losses for our investment in mortgage loans see Note 3 "Fair Value of Financial Instruments."
For reinsurance receivables, the Company's model estimates expected credit loss by multiplying the exposure at default by both the probability of default and loss given default ("LGD"). The LGD is estimated by the rating of the reinsurer, historical relationship with UFG, existence of letters of credit and known regulation for which the Company may be held accountable. The ultimate LGD percentage is estimated after considering Moody's experience with unsecured year one bond recovery rates from 1983-2017. The allowance calculated as of September 30, 2023 is recorded through the line "Reinsurance receivables and recoverables" in the Consolidated Balance Sheets and through the line "Other underwriting expenses" in the Consolidated Statements of Income and Other Comprehensive Income. As of September 30, 2023, the Company had a credit loss allowance for reinsurance receivables of $130.
Rollforward of credit loss allowance for reinsurance receivables:
As of
September 30, 2023
Beginning balance, January 1, 2023$82 
Current-period provision for expected credit losses48 
Ending balance of the allowance for reinsurance receivables, September 30, 2023
$130 

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

In the preparation of the accompanying financial statements, the Company has evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure in the Company's financial statements.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2022

Inflation Reduction Act

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act ("IRA") which, among other changes, created a new corporate alternative minimum tax ("CAMT") based on adjusted financial statement income and imposes a 1 percent excise tax on corporate stock repurchases. The effective date of these provisions was January 1, 2023. The Company does not expect to be subject to CAMT in 2023 and does not expect the IRA to have a material 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 to fair value of investments in our available-for-sale fixed maturity portfolio, presented on a consolidated basis, as of September 30, 2023 and December 31, 2022, is provided below:
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September 30, 2023
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair ValueAllowance for Credit LossesCarrying Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$68,133 $— $1,260 $66,873 $— $66,873 
U.S. government agency104,695 16 12,813 91,898 — 91,898 
States, municipalities and political subdivisions
General obligations:
Midwest58,724 — 1,843 56,881 — 56,881 
Northeast11,440 — 441 10,999 — 10,999 
South55,335 — 2,201 53,134 — 53,134 
West78,044 — 2,718 75,326 — 75,326 
Special revenue:
Midwest101,204 1 4,327 96,878 — 96,878 
Northeast52,836 — 2,284 50,552 — 50,552 
South168,395 — 8,895 159,500 — 159,500 
West105,521 — 5,005 100,516 — 100,516 
Foreign bonds21,251 — 2,915 18,336 — 18,336 
Public utilities143,162 14 15,759 127,417 — 127,417 
Corporate bonds
Energy45,368 — 3,768 41,600 — 41,600 
Industrials73,635 38 7,705 65,968 — 65,968 
Consumer goods and services100,300 — 11,794 88,506 — 88,506 
Health care37,903 — 6,366 31,537 — 31,537 
Technology, media and telecommunications90,285 — 10,037 80,248 — 80,248 
Financial services145,477 — 12,315 133,162 126 133,036 
Mortgage-backed securities24,470 — 3,463 21,007 — 21,007 
Collateralized mortgage obligations
Government national mortgage association163,893 — 17,223 146,670 — 146,670 
Federal home loan mortgage corporation88,565 — 16,716 71,849 — 71,849 
Federal national mortgage association52,114 — 6,227 45,887 — 45,887 
Asset-backed securities3,575 456 137 3,894 — 3,894 
Total Available-for-Sale Fixed Maturities$1,794,325 $525 $156,212 $1,638,638 $126 $1,638,512 


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December 31, 2022
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized DepreciationFair ValueAllowance for Credit LossesCarrying Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$15,684 $— $1,009 $14,675 $— $14,675 
U.S. government agency94,092 35 9,721 84,406 — 84,406 
States, municipalities and political subdivisions
General obligations:
Midwest61,191 185 263 61,113 — 61,113 
Northeast15,518 18 73 15,463 — 15,463 
South64,851 57 927 63,981 — 63,981 
West87,094 163 712 86,545 — 86,545 
Special revenue:
Midwest103,107 224 1,065 102,266 — 102,266 
Northeast55,292 76 1,148 54,220 — 54,220 
South184,108 278 3,529 180,857 — 180,857 
West113,594 275 1,657 112,212 — 112,212 
Foreign bonds36,129 — 4,480 31,649 — 31,649 
Public utilities138,752 65 13,406 125,411 — 125,411 
Corporate bonds
Energy36,507 — 3,298 33,209 — 33,209 
Industrials58,334 62 5,554 52,842 — 52,842 
Consumer goods and services100,539 — 10,598 89,941 — 89,941 
Health care32,987 24 5,419 27,592 — 27,592 
Technology, media and telecommunications67,193 — 7,253 59,940 — 59,940 
Financial services132,849 851 9,408 124,292 3 124,289 
Mortgage-backed securities20,450 — 2,750 17,700 — 17,700 
Collateralized mortgage obligations
Government national mortgage association97,839 — 13,291 84,548 — 84,548 
Federal home loan mortgage corporation92,366 — 13,528 78,838 — 78,838 
Federal national mortgage association50,272 5 4,891 45,386 — 45,386 
Asset-backed securities3,932 466 145 4,253 — 4,253 
Total Available-for-Sale Fixed Maturities$1,662,680 $2,784 $114,125 $1,551,339 $3 $1,551,336 



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Maturities
The amortized cost and fair value of available-for-sale fixed maturity securities at September 30, 2023, by contractual maturity, are shown in the following tables. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
Maturities
Available-For-Sale
September 30, 2023Amortized Cost Fair Value
Due in one year or less$84,646  $84,052 
Due after one year through five years518,815  496,253 
Due after five years through 10 years530,822  476,969 
Due after 10 years327,424  292,056 
Asset-backed securities3,575 3,894 
Mortgage-backed securities24,470  21,007 
Collateralized mortgage obligations304,573  264,407 
 $1,794,325  $1,638,638 
Net Investment Gains and Losses
Net gains (losses) on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net investment gains (losses) is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2023 202220232022
Net investment gains (losses):   
Fixed maturities:
Available-for-sale$(19)$(98)$(445)$(1,397)
Allowance for credit losses(125)(91)(123)(91)
Equity securities
Change in the fair value204 (13,078)(1,960)(32,403)
Sales(2,085)(93)150 (1,767)
Mortgage loans allowance for credit losses1 — (5)5 
Other long-term investments64  (187)(245)(229)
Real estate— (703)47 235 
Total net investment gains (losses)$(1,960) $(14,250)$(2,581)$(35,647)

The proceeds and gross realized gains (losses) on the sale of available-for-sale fixed maturity securities are as follows:
 Three Months Ended September 30,Nine Months Ended September 30,
2023 202220232022
Proceeds from sales$4,940  $18,399 $48,749 $83,409 
Gross realized gains—  12 121 459 
Gross realized losses19  110 566 1,857 

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Funding Commitment
Pursuant to agreements with our limited liability partnership investments, we are contractually committed through July 10, 2030 to make capital contributions upon the request of certain of the partnerships. Our remaining potential contractual obligation was $32,248 at September 30, 2023.

In addition, the Company invested $25,000 in December 2019 in a limited liability partnership investment fund which is subject to a three-year lockup with a 60-day minimum notice, with four possible repurchase dates per year after the three-year lockup period has concluded. The fair value of the investment at September 30, 2023 was $25,218 and there are no remaining capital contributions with this investment.
Unrealized Appreciation and Depreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
 Nine Months Ended September 30,
2023 2022
Change in net unrealized investment appreciation (depreciation)   
Available-for-sale fixed maturities$(44,087)$(197,594)
Income tax effect9,258 41,495 
Total change in net unrealized investment appreciation (depreciation), net of tax$(34,829) $(156,099)
Credit Risk
An allowance for credit losses is recorded based on a number of factors including current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value versus amortized cost, investment spreads widening or contracting, rating actions, payment and default history. The following table contains a rollforward of the allowance for credit losses for available-for-sale fixed maturity securities at September 30, 2023.
Rollforward of allowance for credit losses for available-for-sale fixed maturity securities:
As of
September 30, 2023
Beginning balance, January 1, 2023$3 
Additions to the allowance for credit losses for which credit losses were not previously recorded123 
Reductions for securities sold during the period (realized)— 
Write-offs charged against the allowance— 
Recoveries of amounts previously written off— 
Ending balance, September 30, 2023
$126 

Fixed Maturities Unrealized Depreciation
The following tables summarize our fixed maturity securities that were in an unrealized loss position reported on a consolidated basis at September 30, 2023 and December 31, 2022. The securities are presented by the length of time they have been continuously in an unrealized loss position. Non-credit related unrealized losses are recognized as a component of other comprehensive income and represent other market movements that are not credit related, for example interest rate changes. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.
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September 30, 2023Less than 12 months12 months or longerTotal
Type of InvestmentNumber
of Issues		Fair
Value		Gross Unrealized
Depreciation		Number
of Issues		Fair
Value		Gross Unrealized DepreciationFair
Value		Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury5 $54,358 $390 6 $12,515 $870 $66,873 $1,260 
U.S. government agency3 10,643 336 25 75,239 12,477 85,882 12,813 
States, municipalities and political subdivisions
General obligations
Midwest30 45,359 1,360 3 10,357 483 55,716 1,843 
Northeast4 7,716 214 1 3,283 227 10,999 441 
South23 37,383 989 9 15,751 1,212 53,134 2,201 
West26 54,944 1,498 8 20,382 1,220 75,326 2,718 
Special revenue
Midwest38 71,273 2,694 11 22,054 1,633 93,327 4,327 
Northeast11 27,061 956 8 23,491 1,328 50,552 2,284 
South42 95,076 3,480 33 64,424 5,415 159,500 8,895 
West39 59,134 2,017 19 41,380 2,988 100,514 5,005 
Foreign bonds— — — 9 18,336 2,915 18,336 2,915 
Public utilities7 17,689 621 49 109,217 15,138 126,906 15,759 
Corporate bonds
Energy4 8,604 294 15 32,996 3,474 41,600 3,768 
Industrials6 14,842 331 22 47,010 7,374 61,852 7,705 
Consumer goods and services7 22,863 976 28 65,643 10,818 88,506 11,794 
Health care3 6,604 223 11 24,933 6,143 31,537 6,366 
Technology, media and telecommunications5 17,505 865 28 61,492 9,172 78,997 10,037 
Financial services10 24,655 1,090 44 108,507 11,225 133,162 12,315 
Mortgage-backed securities4 5,656 195 48 15,352 3,268 21,008 3,463 
Collateralized mortgage obligations
Government National Mortgage Association18 75,767 1,169 40 70,903 16,054 146,670 17,223 
Federal Home Loan Mortgage Corporation3 7,655 2,523 32 64,194 14,193 71,849 16,716 
Federal National Mortgage Association6 14,078 421 20 31,810 5,806 45,888 6,227 
Asset-backed securities— — — 1 3,095 137 3,095 137 
Total Available-for-Sale Fixed Maturities294 $678,865 $22,642 470 $942,364 $133,570 $1,621,229 $156,212 


The unrealized losses on our investments in available-for-sale fixed maturities were the result of interest rate movements. We have no intent to sell, and it is more likely than not that we will not be required to sell these securities until the fair value recovers to at least equal our cost basis or the securities mature.
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December 31, 2022Less than 12 months12 months or longerTotal
Type of InvestmentNumber
of Issues		Fair
Value		Gross Unrealized DepreciationNumber
of Issues		Fair
Value		Gross Unrealized DepreciationFair
Value		Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury4 $6,656 $212 4 $8,019 $797 $14,675 $1,009 
U.S. government agency24 70,158 5,606 3 11,242 4,115 81,400 9,721 
States, municipalities and political subdivisions
General obligations
Midwest16 29,089 263 — — — 29,089 263 
Northeast4 8,576 73 — — — 8,576 73 
South24 48,235 927 — — — 48,235 927 
West27 62,652 711 — — — 62,652 711 
Special revenue
Midwest35 67,101 1,065 — — — 67,101 1,065 
Northeast14 37,484 1,148 — — — 37,484 1,148 
South58 126,388 3,124 1 866 405 127,254 3,529 
West39 83,622 1,658 — — — 83,622 1,658 
Foreign bonds9 21,377 1,861 5 10,272 2,619 31,649 4,480 
Public utilities45 101,867 8,737 9 19,979 4,669 121,846 13,406 
Corporate bonds
Energy15 28,612 1,930 1 4,597 1,368 33,209 3,298 
Industrials21 43,639 3,542 4 7,049 2,012 50,688 5,554 
Consumer goods and services28 69,320 4,440 7 20,620 6,157 89,940 10,597 
Health care5 9,829 487 6 15,928 4,933 25,757 5,420 
Technology, media and telecommunications23 49,970 3,279 5 9,970 3,974 59,940 7,253 
Financial services40 101,411 6,997 5 11,236 2,208 112,647 9,205 
Mortgage-backed securities38 7,909 1,056 12 9,791 1,693 17,700 2,749 
Collateralized mortgage obligations
Government National Mortgage Association29 48,898 4,500 12 35,650 8,791 84,548 13,291 
Federal Home Loan Mortgage Corporation21 35,456 5,629 19 43,383 7,900 78,839 13,529 
Federal National Mortgage Association14 24,146 1,281 7 16,674 3,611 40,820 4,892 
Asset-backed securities1 3,452 145 — — — 3,452 145 
Total Available-for-Sale Fixed Maturities534 $1,085,847 $58,671 100 $225,276 $55,252 $1,311,123 $113,923 
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NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
•Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.
•Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.
•Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years' experience and who have demonstrated knowledge of the subject security.
In order to determine the proper classification in the fair value hierarchy, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.
The mortgage loan portfolio consists entirely of commercial mortgage loans. The fair value of our mortgage loans is determined by modeling performed by our third-party fund manager based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value.
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Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Supplemental Executive Retirement and Deferral Plan (the "Executive Retirement Plan"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plan. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of September 30, 2023, the cash surrender value of the COLI policies was $11,000 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.

Our long-term debt is not carried in the Consolidated Balance Sheet at fair value. The fair value of our long-term debt is estimated using Level 2 inputs based on quoted prices for similar financial instruments. The fair value is estimated using a discounted cash flow analysis.

A summary of the carrying value and estimated fair value of our financial instruments at September 30, 2023 and December 31, 2022 is as follows:
 September 30, 2023December 31, 2022
Fair ValueCarrying ValueFair ValueCarrying Value
Assets    
Investments    
Fixed maturities:
Available-for-sale securities$1,638,638 $1,638,512 $1,551,339 $1,551,336 
Equity securities51,217 51,217 169,106 169,106 
Mortgage loans42,280 45,534 35,302 37,898 
Other long-term investments93,836 93,836 86,276 86,276 
Short-term investments— — 275 275 
Cash and cash equivalents69,150 69,150 96,650 96,650 
Corporate-owned life insurance11,000 11,000 10,588 10,588 
Liabilities
Long Term Debt34,456 50,000 36,168 50,000 















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The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table includes financial instruments at September 30, 2023 and December 31, 2022:

September 30, 2023Fair Value Measurements
DescriptionTotalLevel 1Level 2Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$66,873 $— $66,873 $— 
U.S. government agency91,898 — 91,898 — 
States, municipalities and political subdivisions
General obligations
Midwest56,881 — 56,881 — 
Northeast10,999 — 10,999 — 
South53,134 — 53,134 — 
West75,326 — 75,326 — 
Special revenue
Midwest96,878 — 96,878 — 
Northeast50,552 — 50,552 — 
South159,500 — 159,500 — 
West100,516 — 100,516 — 
Foreign bonds18,336 — 18,336 — 
Public utilities127,417 — 127,417 — 
Corporate bonds
Energy41,600 — 41,600 — 
Industrials65,968 — 65,968 — 
Consumer goods and services88,506 — 88,506 — 
Health care31,537 — 31,537 — 
Technology, media and telecommunications80,248 — 80,248 — 
Financial services133,162 — 128,462 4,700 
Mortgage-backed securities21,007 — 21,007 — 
Collateralized mortgage obligations
Government national mortgage association146,670 — 146,670 — 
Federal home loan mortgage corporation71,849 — 71,849 — 
Federal national mortgage association45,887 — 45,887 — 
Asset-backed securities3,894 — 3,095 799 
Total Available-for-Sale Fixed Maturities$1,638,638 $— $1,633,139 $5,499 
EQUITY SECURITIES
Common stocks
Public utilities$3,703 $3,703 $— $— 
Energy9,536 9,536 — — 
Industrials13,023 13,023 — — 
Consumer goods and services11,127 11,127 — — 
Health care1,959 1,959 — — 
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Technology, media and telecommunications5,612 5,612 — — 
Financial services6,257 6,257 — — 
Total Equity Securities$51,217 $51,217 $— $— 
Short-Term Investments$— $— $— $— 
Money Market Accounts$13,977 $13,977 $— $— 
Corporate-Owned Life Insurance$11,000 $— $11,000 $— 
Total Assets Measured at Fair Value$1,714,832 $65,194 $1,644,139 $5,499 



December 31, 2022Fair Value Measurements
DescriptionTotalLevel 1Level 2Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$14,675 $— $14,675 $— 
U.S. government agency84,406 — 84,406 — 
States, municipalities and political subdivisions
General obligations
Midwest61,113 — 61,113 — 
Northeast15,463 — 15,463 — 
South63,981 — 63,981 — 
West86,545 — 86,545 — 
Special revenue
Midwest102,266 — 102,266 — 
Northeast54,220 — 54,220 — 
South180,857 — 180,857 — 
West112,212 — 112,212 — 
Foreign bonds31,649 — 31,649 — 
Public utilities125,411 — 125,411 — 
Corporate bonds
Energy33,209 — 33,209 — 
Industrials52,842 — 52,842 — 
Consumer goods and services89,941 — 89,941 — 
Health care27,592 — 27,592 — 
Technology, media and telecommunications59,940 — 59,940 — 
Financial services124,292 — 118,617 5,675 
Mortgage-backed securities17,700 — 17,700 — 
Collateralized mortgage obligations
Government national mortgage association84,548 — 84,548 — 
Federal home loan mortgage corporation78,838 — 78,838 — 
Federal national mortgage association45,386 — 45,386 — 
Asset-backed securities4,253 — 3,452 801 
Total Available-for-Sale Fixed Maturities$1,551,339 $— $1,544,863 $6,476 
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EQUITY SECURITIES
Common stocks
Public utilities$14,846 $14,846 $— $— 
Energy19,743 19,743 — — 
Industrials27,163 27,163 — — 
Consumer goods and services43,139 43,139 — — 
Health care7,981 7,981 — — 
Technology, media and telecommunications28,213 28,213 — — 
Financial services28,021 28,021 — — 
Total Equity Securities$169,106 $169,106 $— $— 
Short-Term Investments$275 $275 $— $— 
Money Market Accounts$31,289 $31,289 $— $— 
Corporate-Owned Life Insurance$10,588 $— $10,588 $— 
Total Assets Measured at Fair Value$1,762,597 $200,670 $1,555,451 $6,476 
The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. In addition, on a quarterly basis, we also test all securities in the portfolio and independently corroborate the valuations obtained from our third-party valuation service providers. Quarterly, we also perform deep dive analyses of the pricing method used by our third-party valuation service provider by selecting a random sample of securities by asset class and reviewing methodologies. In our opinion, the pricing obtained at September 30, 2023 and December 31, 2022 was reasonable.
For the three- and nine-month periods ended September 30, 2023, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers'
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valuation processes. A change in significant unobservable inputs may result in a significantly higher or lower fair value measurement as of the reporting date.
The following table provides quantitative information about our Level 3 securities at September 30, 2023:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value atValuation Technique(s)Unobservable inputsRange of weighted average significant unobservable inputs
September 30, 2023
Fixed Maturities corporate$4,700 Third-party valuationOffered quotes
90.0% - 100.0%
Fixed Maturities asset-backed securities799 Discounted cash flowProbability of default
4% - 6%
The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended September 30, 2023:

Corporate bonds Asset-backed securitiesTotal
Beginning Balance - July 1, 2023$4,765 $837 $5,602 
Net unrealized gains (losses)(1)
(65)(38)(103)
Ending Balance - September 30, 2023$4,700  $799 $5,499 
(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.

The following table provides a summary of the changes in fair value of our Level 3 securities for the nine-month period ended September 30, 2023:

Corporate bondsAsset-backed securitiesTotal
Beginning Balance - January 1, 2023$5,675 $801 $6,476 
Net unrealized gains (losses)(1)
(975)(2)(977)
Ending Balance - September 30, 2023$4,700 $799 $5,499 
(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.


Commercial Mortgage Loans
The following tables present the carrying value of our commercial mortgage loans and additional information at September 30, 2023 and December 31, 2022:
Commercial Mortgage Loans
September 30, 2023December 31, 2022
Loan-to-valueCarrying ValueCarrying Value
Less than 65%$36,883 $29,231 
65%-75%8,706 8,716 
Total amortized cost$45,589 $37,947 
Allowance for mortgage loan losses(55)(49)
Mortgage loans, net$45,534 $37,898 

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Mortgage Loans by Region
September 30, 2023December 31, 2022
Carrying ValuePercent of TotalCarrying ValuePercent of Total
East North Central$3,245 7.1 %$3,245 8.6 %
Southern Atlantic17,265 37.8 9,397 24.7 
East South Central7,591 16.7 7,783 20.5 
New England6,588 14.5 6,588 17.4 
Middle Atlantic6,020 13.2 6,139 16.2 
Mountain1,992 4.4 1,992 5.2 
West North Central2,888 6.3 2,803 7.4 
Total mortgage loans at amortized cost$45,589 100.0 %$37,947 100.0 %
Mortgage Loans by Property Type
September 30, 2023December 31, 2022
Carrying ValuePercent of TotalCarrying ValuePercent of Total
Commercial   
Multifamily$8,536 18.7 %$8,493 22.4 %
Office11,030 24.3 11,267 29.7 
Industrial
10,003 21.9 10,056 26.5 
Retail
10,000 21.9 1,992 5.2 
Mixed use/Other
6,020 13.2 6,139 16.2 
Total mortgage loans at amortized cost$45,589 100.0 %$37,947 100.0 %
Amortized Cost Basis by Year of Origination and Credit Quality Indicator
20232022202020192018Total
Commercial mortgage loans:
Risk Rating:
1-2 internal grade$8,136 $100 5,292 $7,897 $17,576 $39,001 
3-4 internal grade— — — — 6,588 6,588 
5 internal grade— — — — — — 
6 internal grade— — — — — — 
7 internal grade— — — — — — 
Total commercial mortgage loans$8,136 $100 $5,292 $7,897 $24,164 $45,589 
Current-period write-offs— — — — — — 
Current-period recoveries— — — — — — 
Current-period net write-offs$— $— $— $— $— $— 

Commercial mortgage loans carrying value excludes accrued interest of $173. As of September 30, 2023, all loan receivables were current, with no delinquencies. The commercial mortgage loans originate with an initial loan-to-value ratio to provide sufficient collateral to absorb losses should a loan be required to foreclose. Mortgage loans are evaluated on a quarterly basis for impairment on an individual basis through a monitoring process and review of key credit indicators, such as economic trends, delinquency rates, property valuations, occupancy and rental rates and loan-to-value ratios. A loan is considered impaired when the Company believes it will not collect the contractual principal and interest set forth in the contractual terms of the loan. An internal grade is assigned to each mortgage loan, with a grade of 1 being the highest and least likely for an impairment and the lowest rating of 7 being the most
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likely for an impairment. An allowance for mortgage loan losses is established on each loan recognizing a loss for amounts which we believe will not be collected according to the contractual terms of the respective loan agreement. As of September 30, 2023, the Company had an allowance for mortgage loan losses of $55, summarized in the following rollforward:
Rollforward of allowance for mortgage loan losses:
As of
September 30, 2023
Beginning balance, January 1, 2023$49 
Current-period provision for expected credit losses6 
Ending balance of the allowance for mortgage loan losses, September 30, 2023
$55 

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

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

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

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

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

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The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves at September 30, 2023 and December 31, 2022 (net of reinsurance amounts):
  
September 30, 2023December 31, 2022
Gross liability for losses and loss settlement expenses
at beginning of year		$1,497,274 $1,514,265 
Ceded losses and loss settlement expenses(146,875)(112,900)
Net liability for losses and loss settlement expenses
at beginning of year		$1,350,399 $1,401,365 
Losses and loss settlement expenses incurred
for claims occurring during
   Current year$538,941 $624,411 
   Prior years59,184 12,890 
Total incurred$598,125 $637,301 
Losses and loss settlement expense payments
for claims occurring during
   Current year$131,408 $215,891 
   Prior years371,723 472,377 
Total paid$503,131 $688,268 
Net liability for losses and loss settlement expenses
at end of period		$1,445,394 $1,350,399 
Ceded losses and loss settlement expenses191,525 146,875 
Gross liability for losses and loss settlement expenses
at end of period		$1,636,918 $1,497,274 

There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific monetary impact of any individual factor on the development of reserves.
Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. We believe our approach produces recorded reserves that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year. However, conditions and trends that have affected the reserve development for a given year do change. Changes in external and internal environments must be considered carefully when relying on prior development patterns to project future reserve positions.
We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our underwriters are aware of these exposures and use riders or endorsements to limit exposure.

Reserve Development

During 2023, the Company made additional refinements to its reserve review processes and analyses, including increased segmentation on unique exposures, which resulted in deeper insights and understanding of loss experience
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and significant movements in reserve development across a range of commercial liability lines of business. The significant driver of the reserve strengthening was an increase in long-tailed other liability reserves primarily due to increased loss cost trends related to economic and social inflation. The commercial auto line of business also experienced reserve strengthening in reaction to continuing loss trends in post-2020 accident years. These increases were offset by favorable development in workers' compensation and fire and allied lines.
The significant drivers of the unfavorable reserve development in 2022 were commercial other liability and commercial fire and allied lines. This was offset partially by favorable development in commercial automobile, workers' compensation and fidelity and surety. The unfavorable development in commercial other liability was due to paid loss and loss adjustment expense ("LAE") which was greater than reductions in reserves for unpaid loss and LAE. Emerging claim experience and deeper data insights during 2022 pointed to an increase in loss exposure on these longer tailed businesses driven in part by social and economic inflation. Commercial fire and allied developed unfavorably due to paid loss and LAE driven by catastrophe losses and increased severity on non-catastrophe claims, which was greater than reductions in reserves for unpaid loss and LAE. The favorable development for commercial automobile was from both loss and LAE where reductions of reserves for unpaid liabilities were more than sufficient to offset actual paid loss. Paid LAE reductions in reserves for IBNR claims also contributed favorable development in addition to LAE where reductions in reserves were more than sufficient to offset payments.


NOTE 5. EMPLOYEE BENEFITS

Net Periodic Benefit Cost

The components of the net periodic benefit cost for our pension and postretirement benefit plans are as follows:
Pension PlanPostretirement Benefit Plan
Three Months Ended September 30,2023202220232022
Net periodic benefit cost
Service cost$954 $1,120 $— $— 
Interest cost2,526 1,933 — 1 
Expected return on plan assets(3,756)(4,723)— — 
Amortization of prior service credit(820)(820)— (3,771)
Amortization of net loss52 194 — 706 
Net periodic benefit cost$(1,044)$(2,296)$— $(3,064)
Pension PlanPostretirement Benefit Plan
Nine Months Ended September 30,2023202220232022
Net periodic benefit cost
Service cost$2,863 $3,361 $— $— 
Interest cost7,579 5,798 — 2 
Expected return on plan assets(11,269)(14,168)— — 
Amortization of prior service credit(2,460)(2,460)— (11,314)
Amortization of net loss155 583 — 2,118 
Net periodic benefit cost$(3,131)$(6,887)$— $(9,194)

A portion of the service cost component of net periodic pension and postretirement benefit costs is capitalized and amortized as part of deferred acquisition costs and is included in the line "Amortization of deferred policy acquisition costs" in the Consolidated Statements of Income and Comprehensive Income. The portion not related to the compensation and other components of net periodic pension and postretirement benefit costs is included in the income statement line titled "other underwriting expenses."
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In January 2021, the Company changed the postretirement benefit plan to a voluntary plan funded exclusively by participants, commencing at the start of 2023. A related, previously disclosed adjustment is being amortized through an additional one-time adjustment in the line "Amortization of prior service credit". The amortization of prior service credits continued through the end of 2022 related to these plan changes. As of December 31, 2022, the postretirement benefit obligation was $0.

Employer Contributions

We previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2022 that we are not required to make a contribution to the pension plan for 2023.

NOTE 6. STOCK-BASED COMPENSATION

Non-Qualified Employee Stock Award Plan
The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, restricted stock units, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of UFG common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of UFG common stock issuable pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc. Stock Plan. In May 2021, the Registrant's shareholders approved an additional 650,000 shares of UFG common stock issuable pursuant to the Stock Plan, and among other amendments, renamed such plan as the United Fire Group, Inc. 2021 Stock and Incentive Plan (as amended, the "Stock Plan"). At September 30, 2023, there were 1,108,419 authorized shares remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees, who are in positions of substantial responsibility with UFG. The Board of Directors, in its discretion, has also delegated authority to management to grant a limited number of restricted stock units in situations where the Company is seeking to recruit or retain individuals.
Options granted pursuant to the Stock Plan are granted to buy shares of UFG's common stock at the market value of the stock on the date of grant. Options granted prior to March 2017 vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. Options granted after March 2017 vest and are exercisable in installments of 33.3 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the Stock Plan are granted at the market value of UFG's common stock on the date of the grant. Restricted stock units fully vest after three years or five years from the date of grant, unless accelerated upon the approval of the Board of Directors, at which time UFG common stock will be issued to the awardee.
The activity in the Stock Plan is displayed in the following table:
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Authorized Shares Available for Future Award GrantsNine Months Ended September 30, 2023 
From Inception to September 30, 2023
Beginning balance1,342,119  1,900,000 
Additional shares authorized— 2,150,000 
Number of awards granted(305,241) (3,927,382)
Number of awards forfeited or expired71,541  985,801 
Ending balance1,108,419  1,108,419 
Number of option awards exercised4,000  1,537,336 
Number of unrestricted stock awards granted— 10,090 
Number of restricted stock awards vested28,100  295,945 

Non-Qualified Non-Employee Director Stock Plan
The United Fire Group, Inc. Non-Employee Director Stock Plan (formerly known as the 2005 Non-Qualified Non- Employee Director Stock Option and Restricted Stock Plan) (the "Director Stock Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of UFG's common stock to non-employee directors. On May 20, 2020, the Company's shareholders approved amendments to the Director Stock Plan, previously approved by the Company's Board of Directors, to (i) increase the number of shares available for future awards under the Director Stock Plan from 300,000 to 450,000, (ii) extend the expiration date of the Director Stock Plan from December 31, 2020 to December 31, 2029, (iii) allow for the grant of awards of restricted stock units, and (iv) rename the Director Stock Plan as the "United Fire Group, Inc. Non-Employee Director Stock Plan." At September 30, 2023, the Company had 103,600 authorized shares available for future issuance.
The Board of Directors has the authority to determine which non-employee directors receive awards, when restricted stock, restricted stock units and options shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options, restricted stock and restricted stock units (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option, restricted stock or restricted stock unit agreements (subject to limits set forth in the Director Stock Plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Stock Plan.
The activity in the Director Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award GrantsNine Months Ended September 30, 2023 
From Inception to September 30, 2023
Beginning balance123,397  300,000 
Additional authorization— 150,000 
Number of awards granted(31,380) (386,618)
Number of awards forfeited or expired11,583  40,218 
Ending balance103,600  103,600 
Number of option awards exercised1,755  152,336 
Number of restricted stock awards vested— 117,001 

Stock-Based Compensation Expense

For the three-month periods ended September 30, 2023 and 2022, we recognized stock-based compensation expense of $949 and $828, respectively. For the nine-month periods ended September 30, 2023 and 2022, we recognized stock-based compensation expense of $3,124 and $2,590, respectively.

As of September 30, 2023, we had $6,542 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized over the remainder of 2023 and
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subsequent years according to the table below, except with respect to awards that are accelerated by the Board of Directors, in which case we will recognize any remaining compensation expense in the period in which the awards are accelerated.
2023$1,034 
20243,364 
20251,878 
2026266 
2027— 
Total$6,542 
NOTE 7. EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options, restricted stock awards and restricted stock unit awards.
We determine the dilutive effect of our outstanding stock options using the "treasury stock" method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average market value of our common stock during the reporting period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.
The components of basic and diluted earnings per share were as follows for the three- and nine-month periods ended September 30, 2023 and 2022:
 Three Months Ended September 30,
(In Thousands, Except Share Data)20232022
BasicDilutedBasicDiluted
Net income (loss)$6,380 $6,380 $(22,981)$(22,981)
Weighted-average common shares outstanding25,263,523 25,263,523 25,188,958 25,188,958 
Add dilutive effect of restricted stock unit awards— 295,997 — — 
Add dilutive effect of stock options— 19,814 — — 
Weighted-average common shares outstanding25,263,523 25,579,334 25,188,958 25,188,958 
Earnings (loss) per common share$0.25 $0.25 $(0.91)$(0.91)
Awards excluded from diluted earnings per share calculation(1)
— 837,482 — 392,062 
(1)Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.

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 Nine Months Ended September 30,
(In Thousands, Except Share Data)20232022
BasicDilutedBasicDiluted
Net income (loss)$(49,308)$(49,308)$(5,089)$(5,089)
Weighted-average common shares outstanding25,244,502 25,244,502 25,146,318 25,146,318 
Add dilutive effect of restricted stock unit awards— — — — 
Add dilutive effect of stock options— — — — 
Weighted-average common shares outstanding25,244,502 25,244,502 25,146,318 25,146,318 
Earnings (loss) per common share$(1.95)$(1.95)$(0.20)$(0.20)
Awards excluded from diluted earnings per share calculation(1)
— 814,636 — 479,981 
(1)Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.








NOTE 8. DEBT

Long Term Debt

The Company executed a private placement debt transaction on December 15, 2020 between UF&C, and Federated Mutual and Federated Life.

UF&C sold an aggregate principal amount of $50,000 of notes due 2040 to the Note Purchasers. One note with a principal amount of $35,000 was issued to Federated Mutual and one note with a principal amount of $15,000 was issued to Federated Life subject to the terms of their respective notes.

Interest payments under the long term debt will be paid quarterly on March 15, June 15, September 15 and December 15 of each year (each such date, an "Interest Payment Date"). The interest rate will equal the rate that corresponds to the A.M. Best Co. (or its successor's) financial strength rating for members of the United Fire & Casualty Pooled Group as of the applicable Interest Payment Date, as set forth in the table below. For the nine-month period ended September 30, 2023, interest expense totaled $2,391. Payment of interest is subject to approval by the Iowa Insurance Division. On August 18, 2023, the Company received a downgrade from AM Best on the Financial Strength Rating (FSR) to A- (Excellent) from A (Excellent). As a result of this downgrade, the interest rate on the long term debt will increase to 6.875%, beginning with the December 15, 2023 payment, in accordance with the table below.

A.M. Best Co. Financial Strength RatingApplicable Interest Rate
A+5.875%
A6.375%
A-6.875%
B++ (or lower)7.375%

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

The Credit Agreement includes customary events of default, including default in payments of principals, default in payment of other indebtedness, change of control and voluntary and involuntary insolvency proceedings, the occurrence of which would allow the Lenders to accelerate payment of all amounts outstanding thereunder and terminate any further commitments to lend.
There was no outstanding balance on the Credit Agreement at September 30, 2023 and 2022, respectively and the Company has not utilized this facility since its inception. For the nine-month periods ended September 30, 2023 and 2022, we did not incur any interest expense related to the credit facility.
As of June 30, 2023, the Company was not in compliance with the minimum net worth covenant in the Credit Agreement. On August 7, 2023, Wells Fargo and the Company entered into an amended agreement and waiver which revised the minimum net worth covenant to reduce the requirements through the maturity of the agreement on March 31, 2024. As of September 30, 2023, the Company was in compliance with all covenants in the Credit Agreement.

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the three-month period ended September 30, 2023:
Liability for
Net unrealizedunderfunded
appreciationemployee
on investments
benefit costs(1)
Total
Balance as of June 30, 2023(89,094)(341)$(89,435)
Change in accumulated other comprehensive income (loss) before reclassifications(34,166)(646)(34,812)
Reclassification adjustments from accumulated other comprehensive income (loss)62 40 102 
Balance as of September 30, 2023
$(123,198)$(947)$(124,145)
(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the nine-month period ended September 30, 2023:

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Liability for
Net unrealizedunderfunded
appreciationemployee
on investments
benefit costs(1)
Total
Balance as of January 1, 2023(88,369)873 $(87,496)
Change in accumulated other comprehensive income before reclassifications(35,438)(1,942)(37,380)
Reclassification adjustments from accumulated other comprehensive income (loss)609 122 731 
Balance as of September 30, 2023
$(123,198)$(947)$(124,145)
(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.

NOTE 10. LEASES

The Company has operating leases consisting of office space, vehicle leases, computer equipment, and office equipment. Lease terms and options vary in the Company's operating leases dependent upon the underlying leased asset. We exclude options to extend or terminate a lease from our recognition as part of our right-of-use assets and lease liabilities until those options are known and/or executed, as we typically do not exercise options to purchase the underlying leased asset. As of September 30, 2023, we have leases with remaining terms of one year to five years, some of which may include no options for renewal and others with options to extend the lease terms from six months to five years.
The components of our operating leases were as follows for the three- and nine-month periods ended September 30, 2023 and 2022:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Components of lease expense:
Operating lease expense$2,255 $2,201 $6,653 $6,569 
Less sublease income305 53 732 160 
Net lease expense1,950 2,148 5,921 6,409 
Cash flows information related to leases:
Operating cash outflow from operating leases1,952 2,170 5,996 6,471 




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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Part I, Item 1 "Financial Statements."

CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our consolidated financial condition and results of operations on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are more fully described in our Management's Discussion and Analysis of Financial Condition and Results of Operations presented in Part II, Item 7 of our Annual Report on Form 10-K/A for the year ended December 31, 2022. There have been no changes in our critical accounting policies from December 31, 2022.

INTRODUCTION

The purpose of this Management's Discussion and Analysis is to provide an understanding of our results of operations and consolidated financial condition. Our Management's Discussion and Analysis should be read in conjunction with our Consolidated Financial Statements and related notes, including those in Part II, Item 8 of our Annual Report on Form 10-K/A for the year ended December 31, 2022. Our Consolidated Financial Statements are prepared in accordance with GAAP. We also prepare financial statements for each of our insurance company subsidiaries based on statutory accounting principles and file them with insurance regulatory authorities in the states where they do business.

When we provide information on a statutory or other basis, we label it as such, otherwise all other data is presented in accordance with GAAP.

BUSINESS OVERVIEW

Founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("UFG," the "Company," "we," "us," or "our") and its consolidated insurance subsidiaries provide insurance protection for individuals and businesses through several regional offices. Our property and casualty insurance company subsidiaries are licensed in 50 states and the District of Columbia and are represented by approximately 1,000 independent agencies.
Our primary sources of revenue are premiums and investment income. Major categories of expenses from our operations include losses and loss settlement expenses, underwriting and other operating expenses.
Reportable Segments

Our property and casualty insurance business operates and reports as one business segment. For more information, refer to Part I, Item 1, Note 1. "Nature of Operations and Basis of Presentation."
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Lloyd's Syndicates
As of January 1, 2021, the Company became a member of Lloyd's of London ("Lloyd's"). As a member of Lloyd's, the Company is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699 and Syndicate 5623. At September 30, 2023, the Company's FAL investments were comprised of cash of $24.4 million on deposit with Lloyd's in order to satisfy these FAL requirements.
Personal Lines Business

In May 2020, the Company entered into a renewal rights agreement for our personal lines business, providing our independent insurance agents with the opportunity to transfer their personal lines policies to Nationwide Mutual Insurance Company beginning in the third quarter of 2020. The majority of this transfer was completed by December 31, 2021. There is an immaterial amount of personal lines business remaining primarily in New Jersey as of September 30, 2023. The business remaining in New Jersey is scheduled to lapse by the end of 2025.

Pooling Arrangement

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

Geographic Concentration

For the nine-month period ended September 30, 2023, approximately 47.6 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri, and Louisiana.
Profit Factors
Our profitability is influenced by many factors, including price, competition, economic conditions, investment returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, prudent management of our investments, appropriate matching of assets and liabilities, effective use of ceded reinsurance and effective and efficient use of technology.

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FINANCIAL HIGHLIGHTS
 Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands, Except Ratios)2023 2022 %20232022%
Revenues     
Net premiums earned$259,456  $238,256  8.9 %$770,221 $703,746 9.4 %
Investment income, net of investment expenses16,459  11,606  41.8 40,508 32,062 26.3 
Net investment gains (losses)(1,960) (14,250) 86.2 (2,581)(35,647)92.8 
Other income (loss)—  (39) 100.0 — (38)100.0 
Total revenues$273,955  $235,573  16.3 %$808,148 $700,123 15.4 %
     
Benefits, Losses and Expenses    
Losses and loss settlement expenses$172,798  $182,411  (5.3)%$598,125 $464,295 28.8 %
Amortization of deferred policy acquisition costs62,709  53,107  18.1 181,700 156,116 16.4 
Other underwriting expenses29,275  30,487  (4.0)89,784 87,885 2.2 
Interest expense797 797 — 2,391 2,391 — 
Total benefits, losses and expenses$265,579  $266,802  (0.5)%$872,000 $710,687 22.7 %
Income (loss) before income taxes$8,376  $(31,229) 126.8 %$(63,852)$(10,564)(504.4)
Federal income tax expense (benefit)1,996  (8,248) 124.2 (14,544)(5,475)NM
Net income (loss)$6,380  $(22,981) 127.8 $(49,308)$(5,089)(868.9)%
GAAP Ratios:   
Net underlying loss ratio (1)
60.5 % 60.4 %0.2 %62.9 %58.9 %6.8 %
Catastrophes - effect on net loss ratio (1)
5.9  11.4 (48.2)7.8 8.7 (10.3)
Reserve development - effect on net loss ratio (1)
0.2 4.8 (95.8)7.0 (1.6)537.5 
Net loss ratio (2)
66.6 % 76.6 %(13.1)%77.7 %66.0 %17.7 %
Expense ratio (3)
35.5  35.1 1.1 35.3 34.6 2.0 
Combined ratio (4)
102.1 % 111.7 %(8.6)%113.0 %100.6 %12.3 %
(1) Net underlying loss ratio is defined as the net loss ratio less impacts of catastrophes and non-catastrophe prior year reserve development.
(2) Net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our Consolidated Financial Statements.
(3) Expense ratio is calculated by dividing non-deferred underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance business.
(4) Combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.
NM = Not meaningful

RESULTS OF OPERATIONS

For the three-month period ended September 30, 2023, net income was $6.4 million compared to a net loss of $23.0 million for the same period of 2022. The change was primarily due to an increase in earned premium, net investment gains and lower loss and LAE in the third quarter of 2023 compared to net investment losses for the same period in 2022.

For the nine-month period ended September 30, 2023, net loss was $49.3 million compared to a net loss of $5.1 million for the same period of 2022. The change was primarily due to higher loss and LAE offset by an increase in earned premium and net investment gains compared to net investment losses for the same period in 2022.
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Net premiums earned increased 8.9 percent and 9.4 percent during the three- and nine-month periods ended September 30, 2023, respectively, compared to the same periods of 2022. Profitable growth is our primary consideration when putting new business on the books and these results reflect growth in assumed reinsurance, other liability, and fire and allied lines. For the three-month period ended September 30, 2023, the overall average increase in renewal premiums was 11.0 percent, with 2.6 percent from exposure changes and 8.4 percent from rate increases. Excluding the workers' compensation line of business, the overall average increase in renewal premiums was 12.4 percent, with 2.7 percent from exposures changes and 9.7 percent from rate increases. Ceded premiums included reinstatement premiums for surety coverage due to large losses of $4.7 million and $10.5 million for the three- and nine-month periods ended September 30, 2023, respectively.

Net investment income was $16.5 million for the third quarter of 2023 as compared to $11.6 million for the same period in 2022. Income from our fixed income portfolio increased $1.7 million which was a result of higher investment yields due to higher interest rates. Income from cash and cash equivalents increased $1.7 million. Income on other long-term investments resulted in an additional $2.4 million of income as the valuation of the investments in limited liability partnerships varies from period to period due to the current market conditions. Dividends on equity securities decreased $0.7 million from the same period in 2022. Net investment income for the nine-month period ended September 30, 2023 was $8.4 million higher compared to the same period of 2022. The higher investment yields from our fixed income portfolio contributed $5.3 million, interest received on cash and cash equivalent balances increased $4.6 million and the change in value of our limited liability partnerships increased $0.5 million, offset by a decrease in dividends on equity securities of $0.9 million due to a strategic reallocation of equity securities to fixed income assets over the past two quarters and an increase in investment expenses of $1.1 million.

The Company recognized net investment losses of $2.0 million during the third quarter of 2023, compared to net investment losses of $14.3 million for the same period in 2022. Year-to-date, the Company recognized net investment losses of $2.6 million and $35.6 million during the nine-month periods ended September 30, 2023 and 2022, respectively. The change in the three- and nine-month periods ended September 30, 2023 as compared to the same period in 2022 was primarily due to the change in the fair value of our investments in equity securities.

Losses and loss settlement expenses decreased by 5.3 percent and increased 28.8 percent during the three- and nine-month periods ended September 30, 2023, compared to the same periods of 2022. The reduction during the three-month period was driven by a reduction in catastrophe losses and a reduction in unfavorable prior-year reserve development. The increase during the nine-month period was driven by an increase in prior year reserve development and underlying losses due primarily to the impact of emerging loss trends. Unfavorable reserve development was driven primarily by long-tail other liability lines of business as described previously in the Reserve Development section in Note 4. The increase in underlying losses during the nine-month period is due to a small number of large surety losses as well as increased ceded reinsurance costs and higher retentions across the broader portfolio. There is an additional underlying loss increase attributable to a shift in accident year loss ratio assumed reinsurance business as discussed in previous quarters. This business continues to perform in line with our expectations. These underlying loss increases are offset by improved profitability in other lines of business, namely in standard umbrella, where enhanced metrics have increased visibility into historic rate levels and profit outlook.

The GAAP combined ratio decreased by 9.6 percentage points to 102.1 percent for the third quarter of 2023, compared to 111.7 percent in the same period in 2022. The improvement was driven by a decrease in prior year reserve strengthening of 4.6 percentage points and a decrease in catastrophe loss contributing 5.5 percentage points, offset by an increase in underwriting expenses of 0.4 percentage points and an increase in the underlying loss ratio of 0.1 percentage points. The GAAP combined ratio increased by 12.4 percentage points to 113.0 percent for the nine-month period ended September 30, 2023, compared to 100.6 percent in the same period in 2022. The deterioration was driven by an increase in the underlying loss ratio of 4.0 percentage points, prior period reserve strengthening in the current year compared to favorable development in the prior period leading to an increase of 8.6 percentage points, an increase in underwriting expenses contributing 0.7 percentage points, offset by a decrease in catastrophe loss contributing 0.9 percentage points. Each of these are explained in more detail below.

The net loss ratio decreased 10.0 percentage points to 66.6 percent for the third quarter of 2023, compared to 76.6 percent in the same period in 2022. The decrease was driven by reduced prior period reserve strengthening and
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lower catastrophe losses. Catastrophe losses are discussed below. Prior period reserve strengthening was 0.2 percent this quarter compared to 4.8 percent in the third quarter of 2022, driven by less unfavorable development in the third quarter of 2023 on other liability long-tail lines. The underlying loss ratio increased 0.1 percentage points to 60.5 percent for the third quarter of 2023, compared to 60.4 percent in the same period in 2022. This increase was driven by a small number of large surety losses and increases in assumed reinsurance, offset by improved profitability in other lines. These impacts are discussed in more detail in the loss and loss adjustment expense commentary above.

The net loss ratio increased 11.7 percentage points to 77.7 percent during the nine-month period ended September 30, 2023, compared to 66.0 percent in the same period in 2022. The underlying loss ratio of 62.9 percent increased 4.0 percentage points during the nine-month period ended September 30, 2023, compared to 58.9 percent in the same period in 2022. This is primarily due to a small number of large surety losses and associated reinsurance reinstatement premium in the quarter in addition to the impact of increased ceded reinsurance costs on 1/1/2023 renewals. Assumed reinsurance is also experiencing a higher underlying loss ratio as compared to this time last year. Prior period reserve development was 7.0 percent unfavorable year-to-date through September 30, 2023, as compared to 1.6 percent favorable in the same period last year. The prior period reserve strengthening in 2023 is primarily driven by an increase in long-tailed other liability lines and commercial auto, offset by workers' compensation and fire and allied lines. The prior period reserve release in 2022 was primarily driven by commercial auto and workers' compensation, offset by other liability.

Pre-tax catastrophe losses in the third quarter of 2023 added 5.9 percentage points to the combined ratio compared to 11.4 percentage points added to the combined ratio in the third quarter of 2022, and added 7.8 percentage points to the year-to-date loss ratio this year as compared to 8.7 percentage points during the same time period in 2022. Catastrophe losses were below expectations during the third quarter of 2023 and were approximately 6.0 points below the five-year historic mean catastrophe loss ratio for the third quarter of 2023.

The underwriting expense ratio for the third quarter of 2023 was 35.5 percent compared to 35.1 percent for the third quarter of 2022, an increase of 0.4 percentage points. The impact of surety reinsurance reinstatement premiums offset ongoing actions to sustainably reduce expenses. In addition to reducing expenses through careful vacancy management, we took the additional step to implement a voluntary early retirement program that we anticipate will provide ongoing benefits to our expense ratio in 2024. The underwriting expense ratio for the nine-months ended September 30, 2023 was 35.1 percent compared to 34.6 percent for the same time period of 2022. The increase is a result of strategic investments in talent and technology, surety reinsurance reinstatement premiums, and changes to our post-retirement benefit plans that reduced expenses in 2022 but have since concluded.

For a detailed discussion of our investment results, refer to the "Investment Portfolio" section below.

Reserve Development

For many liability claims, significant periods of time, ranging up to several years, and for certain construction defect claims, more than a decade, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement or other disposition of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability. Reserves for these long-tail coverages represent a significant portion of our overall carried reserves.

When establishing reserves and monitoring reserve adequacy, we analyze historical data and consider the potential impact of various loss development factors and trends, including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation, and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves, and for long-tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific dollar impact of any
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individual factor on the development of reserves.

Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after information about a claim becomes available.

2023 Development

The property and casualty insurance business experienced $4.4 million and $59.2 million reserve strengthening in net reserves for prior accident years for the three- and nine-month periods ended September 30, 2023, respectively. During the first half of 2023, the Company made additional advancements to its reserve review processes and analyses, including increased segmentation on unique exposures, which resulted in deeper insights and understanding of loss experience and significant movements in reserve development across a range of commercial liability lines of business. The significant driver of the reserve strengthening in the nine-month period ended September 30, 2023 was an increase in long-tailed other liability reserves primarily due to increased loss cost trends related to economic and social inflation. The commercial auto line of business also experienced reserve strengthening in reaction to continuing loss trends in post-2020 accident years. These increases were offset by favorable development in workers' compensation and fire and allied lines.

2022 Development

The property and casualty insurance business experienced $14.1 million of unfavorable development and $1.2 million of favorable development in net reserves for prior accident years for the three- and nine-month periods ended September 30, 2022, respectively. For the three-month period ended September 30, 2022 the unfavorable development was primarily driven by $31.7 million other liability and $5.4 million commercial fire and allied lines of business offset by favorable development in commercial automobile and workers' compensation lines of business of $12.4 million and $11.6 million, respectively. For the nine-month period ended September 30, 2022 the overall favorable development was primarily driven by commercial automobile lines of business and the workers' compensation line of business, with $28.9 million and $9.2 million, respectively, in net ultimate loss & loss adjustment expense estimates. The favorable reserve development was partially offset by unfavorable reserve development for $22.2 million other liability and $14.1 million commercial fire and allied lines.

Reserve development amounts can vary significantly from quarter-to-quarter and year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business. At September 30, 2023, our total reserves were within a reasonable range of our actuarial estimates.
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The following tables display our net premiums earned, net losses and loss settlement expenses and net loss ratio by line of business:
Three Months Ended September 30,20232022
  Net Losses  Net Losses 
  and Loss  and Loss 
 NetSettlementNetNetSettlementNet
(In Thousands, Except Ratios)PremiumsExpensesLossPremiumsExpensesLoss
UnauditedEarnedIncurredRatioEarnedIncurredRatio
Commercial lines      
Other liability(1)
$78,090 $34,466 44.1 %$80,231 $85,738 106.9 %
Fire and allied lines(2)
64,531 53,602 83.1 60,263 47,857 79.4 
Automobile53,929 46,186 85.6 51,939 32,093 61.8 
Workers' compensation13,366 9,616 71.9 14,043 (1,888)(13.4)
Surety(3)
9,279 6,575 70.9 9,756 3,598 36.9 
Miscellaneous883 112 12.7 267 449 168.2 
Total commercial lines$220,078 $150,557 68.4 %$216,499 $167,847 77.5 %
   
Personal lines  
Fire and allied lines(4)
$1,616 $1,304 80.7 %$529 $1,195 225.9 
Automobile— 49 NM(1)(775)NM
Miscellaneous5 (83)NM10 (1,020)NM
Total personal lines$1,621 $1,270 78.3 %$538 $(600)(111.5)%
Assumed reinsurance$37,757 $20,971 55.5 %$21,219 $15,164 71.5 %
Total$259,456 $172,798 66.6 %$238,256 $182,411 76.6 %
(1) Commercial lines "Other liability" is business insurance covering bodily injury and property damage arising from general business operations, accidents on the insured's premises and products manufactured or sold.
(2) Commercial lines "Fire and allied lines" includes fire, allied lines, commercial multiple peril and inland marine.
(3) Commercial lines "Surety" previously referred to as "Fidelity and surety."
(4) Personal lines "Fire and allied lines" includes fire, allied lines, homeowners and inland marine.
NM = Not meaningful
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Nine Months Ended September 30,20232022
  Net Losses  Net Losses 
  and Loss  and Loss 
 NetSettlementNetNetSettlementNet
(In Thousands, Except Ratios)PremiumsExpensesLossPremiumsExpensesLoss
UnauditedEarnedIncurredRatioEarnedIncurredRatio
Commercial lines      
Other liability$237,523 $194,115 81.7 %$225,323 $159,859 70.9 %
Fire and allied lines182,805 151,539 82.9 172,361 144,397 83.8 
Automobile154,806 136,875 88.4 157,927 107,021 67.8 
Workers' compensation40,413 19,316 47.8 42,389 16,345 38.6 
Surety27,611 15,668 56.7 26,700 5,723 21.4 
Miscellaneous1,522 277 18.2 817 593 72.6 
Total commercial lines$644,680 $517,790 80.3 %$625,517 $433,938 69.4 %
   
Personal lines  
Fire and allied lines$4,568 $3,631 79.5 %$2,127 $2,144 100.8 %
Automobile— (326)NM— (1,919)NM
Miscellaneous18 (148)NM42 (1,110)NM
Total personal lines$4,586 $3,157 68.8 %$2,169 $(885)(40.8)%
Assumed reinsurance$120,955 $77,178 63.8 %$76,060 $31,242 41.1 %
Total$770,221 $598,125 77.7 %$703,746 $464,295 66.0 %


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

•Other liability lines - The net loss ratio improved 62.8 percentage points and deteriorated 10.8 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022. The improvement in the three-month period was driven by a reduction in prior year reserve strengthening as compared to the same period last year. In the third quarter of 2022, reserves were strengthened on other liability lines concentrated in supported umbrella and construction defect exposures, increasing the prospective view of loss costs in these long-tailed lines. This strengthening did not occur in the third quarter of 2023, resulting in an improved net loss ratio as compared to the third quarter of 2022. In addition, the underlying loss ratio also improved in the third quarter of 2023 from the same period last year due to a reduced outlook for supported umbrella driven by improved analytics that brought a greater understanding of historical umbrella rate levels. The deterioration in the nine-month period ended September 30, 2023 is related to an increase in the estimation of evolving loss trends primarily affecting construction defect and excess and surplus lines excess casualty. During the last half of 2022 and first half of 2023, a combination of deeper analytical insights and emerging claim experience has increased our view of potential exposure within this line. Our prospective view of loss costs in these long-tailed lines has increased since this time last year.

•Commercial fire and allied lines - The net loss ratio deteriorated 3.7 percentage points and improved 0.9 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022. The deterioration in the three-month period is due to increased underlying losses offset by lower catastrophe losses. The improvement in the nine-month period is due to favorable prior period development in 2023 versus unfavorable development in 2022, offset by higher catastrophe losses and underlying losses.

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•Commercial automobile - The net loss ratio deteriorated 23.8 percentage points and 20.6 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022. This was driven by a strengthening of prior year reserves in the current year in reaction to continuing loss trends, as compared to a release of reserves in prior periods.

•Workers' compensation - The net loss ratio deteriorated 85.3 percentage points and 9.2 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022 primarily related to significant favorable prior year reserve development in the prior periods.

•Surety - The net loss ratio deteriorated 34.0 percentage points and 35.3 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022 primarily due to a small number of large claims and associated reinsurance reinstatement premiums. This business has historically delivered strong profitability, but can experience occasional periods of volatility. In addition, we are seeing a broader increase in risk within this line that aligns with macro-economic conditions, including inflation.

•Assumed reinsurance - The net loss ratio improved 16.0 percentage points and deteriorated 22.7 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022. The improvement in the three-month period is a result of a reduction in catastrophe losses due to initial reserves for Hurricane Ian in 2022. The material change in the nine-month results was due to the continued enhanced analysis of this book of business. As discussed in our second quarter of 2023 results, this review resulted in adjustments in the allocation of loss reserves to better align with the exposures.


Financial Condition

Stockholders' equity decreased to $644.9 million at September 30, 2023, from $740.1 million at December 31, 2022. The Company's book value per share was $25.53, which is a decrease of $3.83 per share, or 13.0 percent, from December 31, 2022. The decrease is primarily attributable to net loss of $49.3 million, net unrealized depreciation after tax of $34.8 million on fixed maturity securities, and shareholder dividends of $12.1 million during the first nine months of 2023.

Investment Portfolio

Our invested assets totaled $1.8 billion at September 30, 2023, compared to $1.8 billion at December 31, 2022, a decrease of $15.8 million. At September 30, 2023, fixed maturity securities and equity securities made up 89.6 percent and 2.8 percent of the value of our investment portfolio, respectively. Because the primary purpose of our investment portfolio is to fund future claims payments, we use a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government 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 the ability to borrow funds available under our revolving credit facility.

Composition
We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation, regulatory requirements, interest rates and credit quality of assets. We administer our investment portfolio based on investment guidelines approved by management and the investment committee of our Board of Directors that comply with applicable statutory regulations.
The composition of our investment portfolio at September 30, 2023 is presented at carrying value in the following table:
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 Property & Casualty Insurance
   Percent
(In Thousands, Except Ratios)  of Total
Fixed maturities (1)
 
Available-for-sale$1,638,512 89.6 %
Equity securities51,217  2.8 
Mortgage loans45,534  2.5 
Other long-term investments93,836  5.1 
Short-term investments—  — 
Total$1,829,099  100.0 %
(1) Available-for-sale securities with fixed maturities are carried at fair value.

As of September 30, 2023 and December 31, 2022, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.


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Credit Quality

The table below shows the composition of fixed maturity securities held in our available-for-sale security portfolios by credit rating at September 30, 2023 and December 31, 2022. Information contained in the table is generally based upon the issued credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain credit ratings from Standard & Poor's.
(In Thousands, Except Ratios)September 30, 2023 December 31, 2022
RatingCarrying Value % of Total Carrying Value % of Total
AAA$634,694  38.7 % $540,485  34.8 %
AA444,910  27.2  482,369  31.1 
A234,433  14.3  232,668  15.0 
Baa/BBB304,011  18.6  278,247  17.9 
Other/Not Rated20,464  1.2  17,567  1.1 
 $1,638,512  100.0 % $1,551,336  100.0 %

Duration
Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement we use to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.
Investment Results
We invest the premiums received from our policyholders in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Our net investment income increased in the three- and nine-month periods ended September 30, 2023, compared with the same periods of 2022 primarily due to the higher yields in the fixed income portfolio, reinvestment in the fixed income portfolio, higher income on cash and cash equivalents, and an increase in the fair value of our investments in limited liability partnerships.
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Investment Results
(unaudited)Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)20232022Change %20232022Change %
Investment income:
Interest on fixed maturities$14,472 $12,792 13.1 %$41,192 $35,879 14.8 %
Dividends on equity securities639 1,325 (51.8)%3,067 3,934 (22.0)%
Income on other long-term investments1,093 (1,348)181.1 %(3,491)(3,959)11.8 %
Other2,574 891 188.9 %6,868 2,279 201.4 %
Total investment income$18,778 $13,660 37.5 %$47,636 $38,133 24.9 %
Less investment expenses2,319 2,054 12.9 %7,128 6,071 17.4 %
Net investment income$16,459 $11,606 41.8 %$40,508 $32,062 26.3 %
Average yields:
Fixed income securities:
Pre-tax (1)
3.35 %3.07 %0.28 %3.20 %2.88 %0.31 %
(1) Fixed income securities yield excluding net unrealized investment gains/losses and expenses
We hold certain investments in limited liability partnerships that are recorded on the equity method of accounting, with changes in value of these investments recorded in investment income. In the three- and nine-month periods ended September 30, 2023, the change in total value of our investments in limited liability partnerships resulted in investment income of $1.1 million and investment loss of $3.5 million, respectively, as compared to investment losses of $1.3 million and $4.0 million in the same periods of 2022.
We had net investment losses of $2.0 million and $2.6 million during the three- and nine-month periods ended September 30, 2023, respectively, as compared to net investment losses of $14.3 million and $35.6 million in the same periods of 2022. The change in the three- and nine-month periods ended September 30, 2023 as compared to the same periods in 2022 was primarily due to the increase in the fair value of our investments in equity securities driven by equity market losses in 2022.
We regularly monitor the difference between our cost basis and the estimated fair value of our investments. For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value versus amortized cost, investment spreads widening or contracting, rating actions, payment and default history.
Non-credit related changes in unrealized gains and losses on available-for-sale fixed maturity securities are recognized as a component of other comprehensive income, stockholders' equity and book value per share, but do not affect net income. We believe that any unrealized losses on our available-for-sale securities at September 30, 2023 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.
For mortgage loans, an allowance for losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments that have similar risk characteristics. This allowance is presented as a separate line in the Consolidated Balance Sheets with an offset to "Net investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income.
To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. An example of a market-linked adjustment is the change in commercial market price appreciation or change in gross domestic product, with every point of fall leading to an increase in loss reserve. Local market economics are also considered. On a quarterly basis, quantitative
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credit risk metrics, including for example, cash flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations.

LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations. Our cash inflows are primarily a result of the receipt of premiums, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of losses and loss settlement expenses, the purchase of investments, operating expenses, dividends, pension plan contributions, and in recent years, common stock repurchases.
We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed by regulatory agencies in the United States.
On August 18, 2023, the Company received a credit rating downgrade from AM Best. The Financial Strength Rating (FSR) was downgraded to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) was downgraded to "a-" (Excellent) from "a" (Excellent) of the property/casualty subsidiaries of United Fire Group, Inc. Concurrently, AM Best has downgraded the Long-Term ICR to "bbb-" (Good) from "bbb" (Good) of UFG. The outlook of these Credit Ratings (ratings) has been revised to stable from negative. The Company has not experienced material impacts to its business or financial results as a result of the downgrade, but is subject to heightened risks associated with any further potential downgrades. Please see Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q for more information.
Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes.
Historically, we have generated substantial cash inflows from operations. It is our policy to invest the cash generated from operations in securities with maturities that, in the aggregate, correlate to the anticipated timing of payments for losses and loss settlement expenses. The majority of our assets are invested in available-for-sale fixed maturity securities.
The following table displays a consolidated summary of cash sources and uses for the nine-month periods ended September 30, 2023 and 2022:
Cash Flow SummaryNine Months Ended September 30,
(In Thousands)2023 2022
Cash provided by (used in)   
Operating activities$149,506  $(29,793)
Investing activities(164,661) (38,314)
Financing activities(12,345) (10,980)
Net change in cash and cash equivalents$(27,500) $(79,087)
Our cash flows were sufficient to meet our liquidity needs for the nine-month periods ended September 30, 2023 and 2022 and we anticipate they will be sufficient to meet our future liquidity needs for at least the next 12 months. We also have the ability to draw on our credit facility if needed.
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Operating Activities

Net cash flows from operating activities had inflows of $149.5 million and outflows of $29.8 million for the nine-month periods ended September 30, 2023 and 2022, respectively. In the nine-month period ended September 30, 2023, the net operating cash inflows were driven by premium and investment inflows offsetting loss and expense outflows.
Investing Activities
Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturity securities provide regular interest payments and allow us to match the duration of our liabilities. Equity securities provide dividend income, potential dividend income growth and potential appreciation. For further discussion of our investments, including our philosophy and our strategy for our portfolio, see the "Investment Portfolio" section of this Item 2.
In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed maturity securities can also provide liquidity. During the next five years, $606.0 million, or 37.0 percent, of our fixed maturity portfolio will mature.
We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At September 30, 2023, our cash and cash equivalents included $14.0 million related to these money market accounts, compared to $31.3 million at December 31, 2022.
Net cash flows used by investing activities were $164.7 million for the nine-month period ended September 30, 2023, compared to net cash flows used by investing activities of $38.3 million for the nine-month period ended September 30, 2022. For the nine-month periods ended September 30, 2023 and 2022, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $98.6 million and $232.3 million, respectively. Our cash outflows for investment purchases were $255.3 million for the nine-month period ended September 30, 2023, compared to $267.9 million for the same period of 2022.
Financing Activities
Net cash flows used in financing activities were $12.3 million for the nine-month period ended September 30, 2023, an increase of $1.4 million compared to $11.0 million used in the nine-month period ended September 30, 2022.
Credit Facilities

On March 31, 2020, United Fire & Casualty Company, as borrower ("Borrower"), a wholly owned subsidiary of United Fire Group, Inc. entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, issuing lender, swing-line lender and lender, and the other lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), providing for a $50 million revolving credit facility, which includes a $20 million letter of credit sub-facility and a $5 million swing-line loan for working capital and other general corporate purposes. The Credit Agreement is provided on an unsecured basis, and the Borrower has the option to increase the Credit Agreement by $100 million if agreed to by the Lenders providing such incremental facility. As of September 30, 2023 and 2022, there were no balances outstanding under the Credit Agreement. For the nine-month period ended September 30, 2023 and 2022, we did not incur any interest expense related to the credit facility. As of September 30, 2023, the Company was in compliance with the minimum net worth covenant in the Credit Agreement. For further discussion of the Credit Agreement, refer to Part I, Item 1, Note 8 "Debt."
Dividends
Dividends paid to shareholders totaled $12.1 million and $11.8 million in the nine-month periods ended September 30, 2023 and 2022, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
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Payments of any future dividends and the amounts of such dividends will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds.
As a holding company with no independent operations of its own, we rely on dividends received from our insurance company subsidiaries in order to pay dividends to our common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws of the states in which they are domiciled, and if applicable, commercially domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at September 30, 2023, UFG's sole direct insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $59.8 million in dividend payments without prior regulatory approval. We do not believe that these restrictions have a material impact in meeting the cash obligations of UFG.
Stockholders' Equity
Stockholders' equity decreased to $644.9 million at September 30, 2023, from $740.1 million at December 31, 2022. The Company's book value per share was $25.53, which is a decrease of $3.83 per share, or 13.0 percent, from December 31, 2022. The decrease is primarily attributable to net loss of $49.3 million, net unrealized depreciation after tax of $34.8 million on fixed maturity securities, and shareholder dividends of $12.1 million during the first nine months of 2023.
Funding Commitments

Pursuant to an agreement with our limited liability partnership investments, we are contractually committed through July 10, 2030, to make capital contributions upon the request of certain of the partnerships. Our remaining potential contractual obligation was $32.2 million at September 30, 2023.

In addition, the Company invested $25.0 million in December 2019 in a limited liability partnership investment fund that is subject to a three-year lockup with a 60-day minimum notice, with four possible repurchase dates per year after the three-year lockup period has concluded. The fair value of the investment at September 30, 2023 was $25.2 million and there are no remaining capital contribution obligations with this investment.

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MEASUREMENT OF RESULTS
Management evaluates our operations by monitoring key measures of growth and profitability. The following section provides further explanation of catastrophe losses, a key measure management uses to evaluate our results.

Catastrophe losses is an operational measure which utilizes the designations of the Insurance Services Office ("ISO") and are reported with losses and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25.0 million or more in U.S. industry-wide direct insured losses to property and that affect a significant number of insureds and insurers ("ISO catastrophe"). In addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may include U.S. or international losses that we believe are, or will be, material to our operations, either in amount or in number of claims made. Management, at times, may determine for comparison purposes that it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation. The frequency and severity of catastrophe losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance business, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in our periodic earnings.
 Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023 202220232022
ISO catastrophes$10,749 $27,816 $56,354 $62,179 
Non-ISO catastrophes (1)
4,546 (607)3,705 (806)
Total catastrophes$15,295 $27,209 $60,059 $61,373 
(1) This number includes international assumed losses.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

It is our philosophy that we do not utilize financial hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but rather attempt to mitigate our exposure through active portfolio management. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer. At September 30, 2023, we did not have direct exposure to investments in sub-prime mortgages or other credit-enhancement exposures.

Our primary market risks are exposure to changes in interest rates and equity prices, and we have limited exposure to foreign currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

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

Changes in Internal Control Over Financial Reporting

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

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company is a party to a variety of legal proceedings. While the final outcome of these legal proceedings cannot be predicted with certainty, management believes all of the proceedings pending as of September 30, 2023 to be ordinary and routine and does not expect these legal proceedings to have a material adverse effect on the Company's financial condition or results of operations.
ITEM 1A. RISK FACTORS

Our business is subject to a number of risks, including those identified in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K/A for the year ended December 31, 2022 filed with the SEC on March 1, 2023 and additionally by the following additional and updated risk factors:

AM Best recently announced a downgrade of the credit ratings of UFG and its property/casualty subsidiaries. A further downgrade in our financial strength or issuer credit ratings could result in a loss of business and could have a material adverse effect on our financial condition, results of operations and liquidity.

Ratings are an important factor in establishing the competitive position of insurance companies. Third-party rating agencies assess and rate the claims-paying ability, balance sheet strength and creditworthiness of insurers and reinsurers based on criteria established by the agencies. A.M. Best rates our property and casualty insurance companies on a group basis. Since 2012, A.M. Best has also provided an issuer credit rating to our parent holding company.
Financial strength and issuer credit ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength, creditworthiness and quality of insurers and reinsurers. These ratings are not evaluations directed to potential purchasers of our common stock, and are not recommendations to buy, sell or hold our common stock. These ratings are subject to change at any time and could be revised upward or downward or revoked at the discretion of the rating agency.

On August 18, 2023, UFG and our property/casualty subsidiaries received a rating downgrade from A.M. Best. For our property/casualty subsidiaries, the Financial Strength Rating (FSR) was downgraded to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) was downgraded to "a-" (Excellent) from "a" (Excellent). Concurrently, for UFG, AM Best has downgraded the Long-Term ICR to "bbb-" (Good) from "bbb" (Good). The outlook of these ratings has been revised to stable from negative.

The recent downgrades and any further downgrades in our financial strength ratings could adversely affect our ability to transact our current business, access the capital markets, lead to increased borrowing costs, or elevate interest rates. For more information, see Note 8 "Debt" in the Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Perceptions of the Company by investors, producers, other businesses and consumers could also be significantly impaired.

The ratings assigned by A.M. Best are an important factor in marketing our products. Our ability to retain our existing business, and to attract new business in our insurance operations is affected by our ratings from A.M. Best. Failure to maintain our ratings, or any other further adverse changes with respect to our ratings, could motivate current and future independent agents and policyholders to choose to transact their business with more highly rated competitors. If A.M. Best further downgrades our ratings or publicly indicates that our ratings are under review, it is possible that we will not be able to compete as effectively, leading to a decrease in premium revenue and earnings. For example, many of our agencies and policyholders have guidelines that require us to have an A.M. Best financial strength rating of "A-" or higher. A reduction of our A.M. Best ratings below "A-" could prevent us from issuing policies to a portion of our current policyholders or other potential policyholders with ratings requirements.

The failure of our insurance company subsidiaries to maintain their current ratings could dissuade a lender or reinsurance company from conducting business with us. A further ratings downgrade could also cause some of our
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existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or creation of additional financial obligations.

Our stock price could become more volatile and your investment could lose value.

The market price of our common stock historically has been, and we expect will continue to be, subject to fluctuations. These fluctuations may be due to our operating results or factors specific to our operations (including those discussed in our risk factors), changes in securities analysts’ estimates of our future financial performance, ratings or recommendations, our results falling below our expectations and analysts’ and investors’ expectations, the failure of our capital return programs to meet analysts’ and investors’ expectations, significant catastrophe events, departure of key personnel, cyberattacks, or factors largely outside of our control, including those affecting the property and casualty insurance industry. The stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the actual operating performance of listed companies. These fluctuations could adversely affect the price of our common stock.

These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also have a material effect on our business, results of operations, financial condition and/or liquidity.

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

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

The Board of Directors reauthorized the share repurchase program in November 2022 through August 2024. There are 1,719,326 shares of common stock remaining under this authorization. There were no purchases of shares of common stock made by or on our behalf or by any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, during the three-month period ended September 30, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

Securities Trading Plans of Officers and Directors

UFG has an Insider Trading Policy applicable to all individuals, including officers and directors of UFG, who have access to nonpublic information about UFG which limits the periods during which officers and directors are allowed to trade in Company securities. UFG's Insider Trading Policy permits trading plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), referred to as "Rule 10b5-1 trading plans." Under UFG's Insider Trading Policy, enactment of a Rule 10b5-1 trading plan by an officer or director requires approval by UFG's Nominating & Governance Committee, the Chief Executive Officer, or the Chief Financial Officer. During the third quarter of 2023, none of UFG's directors or officers adopted or terminated Rule 10b5-1 trading plans and none of UFG's directors or officers adopted or terminated a non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408(c) of Regulation S-K).
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ITEM 6. EXHIBITS
Exhibit numberExhibit descriptionFurnished herewithFiled herewith
10.1X
31.1X
31.2X
32.1X
32.2X
101.1

X
104.1X

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SIGNATURES

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

UNITED FIRE GROUP, INC.  
(Registrant)
   
/s/ Kevin J. Leidwinger /s/ Eric J. Martin
Kevin J. LeidwingerEric J. Martin
President, Chief Executive Officer, Director and Principal Executive Officer
 Executive Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer
 
   
November 2, 2023 November 2, 2023
(Date)(Date)