UNITED FIRE GROUP, INC.
ANNUAL REPORT
2O23
About UFG Insurance
Founded in 1946, UFG Insurance is a successful publicly traded company with over 75 years of local market
expertise and a growing national footprint. We offer commercial insurance, excess and surplus lines and surety
bonds, partnering with approximately 1,000 independent agency partners across the country.
Our company is headquartered in Cedar Rapids, Iowa, with offices in Arizona, California, Colorado, New Jersey
and Texas. With more than 850 employees, we pride ourselves on delivering deep expertise, personal relationships
and responsive service to our agents and policyholders.
At UFG, we are committed to achieving superior financial and operational performance, using our nearly eight
decades of experience to successfully guide us through market cycles and industry challenges. We hold a financial
strength rating of “A-” (Excellent) from AM Best Company that was affirmed in August 2023, reflecting our long-term
balance sheet strength.
Annual meeting of shareholders
United Fire Group, Inc.’s (UFG) annual meeting of shareholders will be held at 10 a.m. CT on Wednesday, May 15, 2024.
The meeting is being held virtually online via live audio webcast from the company’s headquarters at 118 2nd Ave SE,
Cedar Rapids, IA 52401. You will be able to attend virtually, submit questions and vote online by logging on to
https://meetnow.global/MZUWQ5V.
Our Annual Report on Form 10-K/A for 2023 is filed with the Securities and Exchange Commission and is available
(without exhibits) to shareholders, free of charge, upon written or oral request to:
Investor Relations
United Fire Group, Inc.
118 Second Avenue SE
Cedar Rapids, Iowa 52401
Telephone: 319-399-5700
or
Registrar and Transfer Agent
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Board of directors
James W. Noyce, Chairman of the Board
John-Paul E. Besong
Scott L. Carlton
Brenda K. Clancy
Christopher R. Drahozal
Matthew R. Foran
Mark A. Green
Kevin J. Leidwinger
Lura E. McBride
George D. Milligan
Susan E. Voss
United Fire Group, Inc. 2023 Annual Report
Letter to shareholders
Dear fellow shareholders,
2023 was not without its share of challenges for our
company, but we persevered through each quarter and
made significant progress in positioning UFG to deliver
superior financial and operational performance over time.
In last year’s letter, I discussed the strategic actions taken
at UFG in the years prior to my appointment as CEO in
August 2022. From exiting the subscale personal lines
business to completing a re-underwriting exercise of the
core commercial business, these actions were effective
in laying the groundwork for our ongoing evolution.
In 2023, we continued to build a strong foundation for
growth and profitability, taking numerous actions aimed
at deepening our expertise, driving operational efficiency,
and evolving for the future, including:
■ Strengthening our engagement with distribution
partners to restore growth across the core
commercial portfolio while continuing to act on
underperforming accounts across our business
units for improved profitability.
■ Appointing UFG’s first chief actuary to introduce
greater actuarial rigor and strategic decision-making
into our processes. Over the past year, the actuarial
team added new leaders for pricing, reserving, and
reinsurance, allowing for deeper insights and more
informed portfolio management.
■ Establishing small business, middle market, and
construction business units to better serve the needs
of UFG’s agents and policyholders. Additionally, we
strengthened our field organization with the creation
of a new head of field operations role focused
on driving underwriting execution and fostering
productive distribution relationships.
■ Bolstering our home office underwriting organization
with the appointment of a new chief underwriting
officer, as well as industry segment and line of
business leaders, to deepen our technical skills,
enhance our industry segment knowledge, and
improve our products.
■ Creating a business enablement organization
focused on underwriting governance, quality
assurance, applied tools and technology, and
process improvement. In early 2024, we combined
our information technology and business enablement
teams under a new chief administrative officer to
further improve how we leverage technology across
our business, streamline processes and drive
efficiency across UFG.
■ Transitioning our claims structure from a regional
operating model segmented by geographic location
to a specialized operating model segmented by claim
type. This new structure has led to improvements
in key operational metrics. We also elevated the
customer experience by establishing a claims
advocate team dedicated to assisting our agent
partners and insureds with their claims needs.
■ Reducing and optimizing the company’s catastrophe
footprint by refining our underwriting guidelines and
risk limits for property exposed to Florida hurricanes
and California earthquakes, resulting in significant
reinsurance cost savings. We also succeeded in
growing our property business in geographies that
are less exposed to severe convective storms.
■ Evolving our capital management, premium planning,
and expense budget frameworks to manage the
business more effectively. In addition to disciplined
vacancy management, we completed a voluntary
early retirement program in the fourth quarter
that contributed to a 22% reduction in enterprise
workforce at the end of 2023, which we expect will
provide more impactful benefits to the expense ratio
in 2024.
■ Investing in technology and staffing for our enterprise
risk management framework, enabling the company
to more comprehensively manage our enterprise risk
profile in compliance with regulatory requirements.
■ Modernizing our technology with the introduction
of a new small business quoting platform and
accompanying business owners policy (BOP) to
agents in 12 additional states in 2023, with remaining
states planned for launch in 2024. By the end of 2024,
we also plan to implement a new policy administration
system at UFG, with all core commercial product lines
to be fully enabled by the end of 2025.
United Fire Group, Inc. 2023 Annual Report Collectively, these accomplishments demonstrate our
commitment to advancing UFG’s five strategic pillars
of long-term profitability, diversified growth, continuous
innovation, retaining and attracting talent, and expense
management in everything we do.
In addition, we understand that to achieve superior
financial and operational performance, we must skillfully
navigate the ever-changing economic and industry
landscapes, as well as embrace a continuous change
mindset. As these initiatives take hold at UFG, we
expect them to position us to operate as a more agile
and nimble company and deliver positive, sustainable
financial results.
2023 FINANCIAL PERFORMANCE
UFG achieved strong premium growth and investment
results throughout 2023, yet our full-year financial results
were below expectations with a reported net loss of $1.18
per diluted share, primarily due to reserve strengthening
and elevated surety losses. We were pleased to end
the year with improved results in the fourth quarter,
delivering the highest level of quarterly profit and lowest
underlying loss ratio of 2023, reflecting early signs of
profit improvement in our core commercial lines.
To recap our full year results compared to 2022,
net premiums written increased 8.4%, led by our
core commercial and assumed reinsurance business
units. The overall average change in renewal premiums
was 9.6%, with 7.1% from rate increases and 2.5%
from exposure changes as we remain focused on
price adequacy across all lines of business. Renewal
price increases were higher when excluding the
workers compensation line of business, with average
change in renewal premiums of 10.7%, with 8.3%
from rate changes and 2.4% from exposure changes.
On an annual basis, premium retention was 82.6%,
compared to 77.8% in 2022, which we believe
supports healthy growth while allowing our underwriters
to address accounts that no longer meet our pricing
needs or risk profile.
The combined ratio was 109.3% in 2023, compared to
101.5% in 2022, driven primarily by a 7.4-point increase
in the loss ratio from 67.0% to 74.4%. The loss ratio
was impacted by 6.0% due to reserve strengthening
associated with our excess and surplus lines excess
casualty business, as well as adverse pressure from the
continued impact of social inflation on the liability lines
of business. Catastrophe losses contributed 6.2% to
the loss ratio in 2023, an improvement from 7.7% in
2022. The underlying loss ratio increased by 3.0 points
to 62.2% in 2023 as improving profitability from our core
commercial lines was offset by elevated losses in our
surety business.
The underwriting expense ratio of 34.9% for 2023
was 0.4 points higher than last year, primarily due to
changes to our post-retirement benefit plans that
provided a non-recurring benefit post-2022 and
increased reinsurance premiums in 2023. These were
primarily offset by our ongoing actions to sustainably
reduce expenses and drive premium growth.
Full-year net investment income of $59.6 million rose
32.7% from 2022, driven largely by higher interest rates
increasing interest income on fixed maturities and
increased valuation on limited partnership investments.
While the year fell short of our expectations from
a profitability standpoint, we are pleased with the
incremental progress we made throughout 2023.
We firmly believe the actions we have taken are not
yet fully reflected in our financial results and remain
confident in the path ahead as we continue to execute
strategies for improved profitability.
BALANCE SHEET STRENGTH
As of December 31, 2023, our balance sheet remained
strong, with $3.1 billion in total assets, $734 million in
total stockholders’ equity and a $1.9 billion investment
portfolio, of which 89% is allocated to a high-quality
fixed income book. Book value per common share was
$29.04 as of December 31, 2023.
Although our financial strength rating was downgraded
from “A” (Excellent) to “A-” (Excellent) in August 2023,
AM Best recognized our “very strong” balance
sheet and revised our outlook to “stable” given the
initiatives underway to improve performance. We are
fully committed to achieving the level of performance
commensurate with an “A” rating and will work diligently
to regain our longstanding “A” (Excellent) financial
strength rating with AM Best in the years ahead.
United Fire Group, Inc. 2023 Annual Report As we work to continually strengthen the balance sheet,
I am pleased to share that we successfully renewed our
core excess of loss, property catastrophe, and surety
reinsurance programs for 2024. Overall, we reduced our
all-perils property catastrophe retention to $20.0 million
by fully placing the first treaty layer and further reduced
our California earthquake retention to $10.0 million,
improving other terms and conditions with a modest
increase in risk adjusted pricing that outperformed
our expectations.
We also started the new year with the announcement of
our partnership with New England Asset Management
(NEAM) to oversee our investment portfolio. Partnering
with NEAM enables us to uphold our conservative
investment practices and high-quality investment portfolio,
while benefiting from a cost-effective and scalable way
to manage assets and maximize returns going forward.
In 2023, we paid total quarterly dividends totaling $0.64
per share, returning $16.2 million to our shareholders
over the course of the year. UFG has a 56-year history
of paying dividends to our shareholders, with the first
quarter of 2024 marking our 224th consecutive quarter.
COMMUNITY SUPPORT
Ingrained in our culture is an important promise of
community support that we fulfill through the UFG
Foundation, a private foundation devoted to enhancing
communities. Since its establishment 24 years ago, the
UFG Foundation has awarded more than $16.0 million in
nonprofit grants and scholarship awards, showing that
insurance is not our only passion at UFG.
Each year, we are also pleased to celebrate the noble
volunteer work of our employees and agents with the
“Scotty McIntyre Jr. Go Beyond” award, named in honor
of our company’s founding family and their legacy of
giving. This award recognizes individuals for their
outstanding community service, with UFG donating
$5,000 to a charity of the winner’s choice.
Since 2016, UFG employees have volunteered more
than 11,000 hours at over 100 organizations across the
country, inspiring us with their commitment to making a
positive difference in their communities.
CARRYING POSITIVE MOMENTUM INTO 2024
As I reflect on my 18+ months at the helm of UFG,
I remain tremendously proud of our people for their
dedication and adaptability during our ongoing evolution.
Within our walls, we have blended new talent and
knowledge with existing leadership and insight, allowing
us to evolve for the future while preserving our company’s
deeply valued culture.
Looking ahead to 2024, we are committed to achieving
superior performance by delivering deep underwriting
expertise to our partners and policyholders with the
personal relationships and responsive service that truly
set us apart in the industry today.
We made significant progress on our strategic journey
in 2023 and aim to carry this positive momentum into
2024. Through continued robust execution of our strategic
initiatives and strong adherence to our core strategic
pillars, we believe we are exceptionally well positioned
to deliver improved performance in the year ahead.
Whether you are our employee, distribution partner,
policyholder, or shareholder, I thank you for choosing
UFG. We are grateful for your trust and confidence and
are excited to continue to move our company boldly
forward in the year ahead.
Sincerely,
Kevin J. Leidwinger
UFG President and CEO
United Fire Group, Inc. 2023 Annual Report INSURANCE
UNITED FIRE GROUP, INC.
United Fire & Casualty Company
Addison Insurance Company
Financial Pacific Insurance Company
Franklin Insurance Company
Lafayette Insurance Company
Mercer Insurance Company
Mercer Insurance Company of New Jersey, Inc.
UFG Specialty Insurance Company
United Fire & Indemnity Company
United Fire Lloyds
118 Second Ave. SE, Cedar Rapids IA 52401, 319-399-5700, ufginsurance.com
Disclosure of Forward-Looking Statements
This release 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 and the Securities
Exchange Act of 1934 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 the Company, 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.
These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements.
Information concerning factors that could cause actual outcomes and results to differ materially from those expressed in the
forward-looking statements is contained in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2023, filed with the Securities and Exchange Commission (“SEC”) on February 29, 2024. The risks identified in
our Annual Report on Form 10-K and in our other SEC filings are representative of the risks, uncertainties, and assumptions that
could cause actual outcomes and results to differ materially from what is expressed in the 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 release 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.
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2023
FORM 10-K
OR
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______
Commission File Number 001-34257
UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of incorporation or organization)
45-2302834
(I.R.S. Employer Identification No.)
Cedar Rapids
118 Second Avenue SE
Iowa
(Address of principal executive offices) (Zip Code)
52401
Registrant's telephone number, including area code: (319) 399-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Trading Symbol
UFCS
Name of each exchange on which registered
The NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act: None
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
Emerging growth company
☐
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-
Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial
statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant
recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2023 was approximately $0.5 billion. For purposes of this calculation, all directors and executive officers of the registrant
are considered affiliates. As of February 23, 2024, 25,277,324 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, for its annual shareholder meeting to be held on May 15, 2024.
FORM 10-K TABLE OF CONTENTS
Table of Contents
Forward-Looking Information
PART I:
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II:
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III:
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV:
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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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" of this report for more
information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:
• 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;
• Our core insurance business is dependent on strong and beneficial relationships with a large network of independent insurance agents and not maintaining these relationships could result in loss
of sufficient business opportunities within our expertise and stated risk appetite;
•
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;
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• 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.
These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal
securities laws and the rules and regulations of the Securities and Exchange Commission ("SEC"), we do not have any intention or obligation to update publicly any forward-looking statements,
whether as a result of new information, future events, or otherwise.
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PART I.
ITEM 1. BUSINESS
OVERVIEW
United Fire Group, Inc. ("UFG", "United Fire", 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 currently licensed as property and casualty insurers in 50 states, plus the District of
Columbia. United Fire & Casualty Company was incorporated in Iowa in January 1946. Our principal executive office is located at 118 Second Avenue SE, Cedar Rapids, Iowa 52401; telephone:
319-399-5700.
United Fire Group, Inc. owns 100 percent of one subsidiary, United Fire & Casualty Company. United Fire & Casualty Company owns 100 percent of eight subsidiaries: (1) Addison Insurance
Company; (2) Lafayette Insurance Company; (3) United Fire & Indemnity Company; (4) Mercer Insurance Company; (5) Financial Pacific Insurance Company; (6) UFG Specialty Insurance
Company; (7) United Real Estate Holdings LLC and (8) McIntyre Cedar UK Limited. Mercer Insurance Company owns 100 percent of two subsidiaries: (1) Franklin Insurance Company; and (2)
Mercer Insurance Company of New Jersey, Inc. United Fire Lloyds, which is organized as a Texas Lloyds plan, is an affiliate of United Fire & Indemnity Company. McIntyre Cedar UK Limited owns
100 percent of McIntyre Cedar Corporate Member LLP.
All of our property and casualty insurance subsidiaries and affiliates belong to an intercompany reinsurance pooling arrangement. Pooling arrangements permit 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. Under such arrangements, the
members share substantially all of the insurance business that is written and allocate the combined premiums, losses and expenses based on percentages defined in the arrangement.
PROPERTY AND CASUALTY INSURANCE BUSINESS
Products and Operations
Our business is comprised primarily of commercial lines property and casualty insurance, including surety bonds. In 2020, the Company announced its intent to withdraw as a direct writer of personal
lines insurance with the last exposures related to this business expected to lapse by 2025. As of December 31, 2023, minimal exposure from the direct personal lines of business remains.
Our core commercial products support a wide variety of customers including small business owners and middle market businesses operating in industries such as construction, services, retail trade,
financial and manufacturing, along with contract surety and commercial surety bonds offered through approximately 1,000 independent property and casualty agencies. We also provide specialty and
surplus lines coverage written exclusively through wholesale brokers on an admitted and non-admitted basis. Additionally, the Company offers reinsurance coverage for property and casualty
insurance through traditional treaty reinsurance channels. The Company assumes premium in Lloyd's of London syndicates through a Funds at Lloyd's subsidiary. The reinsurance operation supports
primarily commercial lines of business but also assumes risk in professional, financial and personal lines of insurance. We also partner with managing general agents ("MGAs") to offer delegated
underwriting programs providing niche products including marine specialty, professional liability and earthquake coverages. For a more detailed discussion of our products, refer to the "Business
Overview" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Our property and casualty insurance business is reported as one business segment. Underwriting, sales and distribution are supported across our key products by regional underwriters and marketing
representatives executing on overall strategy and underwriting governance. These areas are supported by a business enablement function as well as claims, actuarial and business analytics and risk
control enabling functions. Our business enablement function provides efficient, centralized underwriting operations, premium processing, underwriting governance and product management. In
addition to servicing policyholders with optimized claim processing and payment capabilities, the claims function's specialized approach supports underwriting, risk control and marketing in writing
and retaining quality business. Actuarial and business analytics provide transparency and insight to business decisions through actuarial pricing, actuarial reserving, predictive modeling, and other
business analytics. Other
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enabling functions that support our business include technology, finance, human capital, legal and governance functions.
Competition
The property and casualty insurance industry is highly competitive. We compete with numerous property and casualty insurance companies in the regional and national market, many of which are
substantially larger and have considerably greater financial and other resources. Except for regulatory considerations, there are limited barriers to entry into the insurance industry. Our competitors
may be domestic or foreign, as well as licensed or unlicensed. The exact number of competitors within the industry is not known. Insurers compete on the basis of reliability, financial strength and
stability, ratings, underwriting consistency, service, business ethics, price, performance, capacity, policy terms and coverage conditions.
In addition, because our products are marketed exclusively through independent insurance agencies, most of which represent more than one company, we face competition within each agency and
competition to retain qualified independent agents. Our competitors include companies that market their products through agents, as well as companies that sell insurance directly to their customers.
Because we rely solely on independent agencies, we offer a competitive commissions program and a rewarding profit-sharing plan as incentives for agents to place high-quality property and casualty
insurance business with us. We tier our agents to objectively recognize our top performers including additional compensation in our profit-sharing plan. We offer incentive trips and promotions to
build UFG loyalty. Property and casualty insurance agencies are expected to receive profit-sharing payments of $23.9 million in 2024, based on profitable business produced by the agencies in 2023.
Our competitive advantages include our commitments to:
•
Strong agency relationships —
◦ Highly-experienced personnel focused on strong service-oriented relationships.
◦ A team of regional managers is responsible for deepening the agency relationships needed to drive profitable growth and the field execution of underwriting strategies for the core
commercial business.
Exceptional service — Our agents and policyholders always have the option to speak with a real person.
Fair and prompt claims handling — We view claims handling experiences as an opportunity to demonstrate our exemplary customer service to our policyholders.
Specialized underwriting expertise — We empower our underwriters with the knowledge and tools needed to make good decisions for the Company.
Superior loss control services — Our loss control representatives make multiple visits to policyholder businesses and job sites each year to ensure safety and make loss prevention
recommendations.
Effective and efficient use of technology — We use technology to provide enhanced service to our agents and policyholders, not to replace our personal relationships, but to reinforce them.
•
•
•
•
•
REINSURANCE
Incorporated by reference from Note 4 "Reinsurance" contained in Part II, Item 8, "Financial Statements and Supplementary Data."
RESERVES
Incorporated by reference from the "Critical Accounting Policies" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 5
"Reserves for Losses and Loss Settlement Expenses" contained in Part II, Item 8, "Financial Statements and Supplementary Data."
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INVESTMENTS
Incorporated by reference from Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the headings "Investments," "Market Risk" and
"Critical Accounting Policies," Note 1 "Summary of Significant Accounting Policies" under the heading "Investments," Note 2 "Summary of Investments," and Note 3 "Fair Value of Financial
Instruments," contained in Part II, Item 8, "Financial Statements and Supplementary Data."
COMPLIANCE WITH GOVERNMENT REGULATION
The insurance industry is subject to comprehensive and detailed regulation and supervision. Each jurisdiction in which we operate has established supervisory agencies with broad administrative
powers. While we are not aware of any currently proposed or recently enacted state or federal regulation that would have a material impact on our operations, we cannot predict the effect that future
regulatory changes might have on us.
State Regulation
We are subject to extensive regulation, primarily at the state level. The method, extent and substance of such regulation varies by state, but generally has its source in National Association of
Insurance Commissioners ("NAIC") model laws and regulations that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to a state
regulatory agency. Moreover, the NAIC Accreditation Program requires state regulatory agencies to meet baseline standards of solvency regulation, particularly with respect to regulation of multi-
state insurers. In general, such regulation is intended for the protection of those who purchase or use our insurance products, and not our shareholders. These rules have a substantial effect on our
business and relate to a wide variety of matters including: insurance company licensing and examination; the licensing of insurance agents and adjusters; price setting or premium rates; trade
practices; approval of policy forms; claims practices; restrictions on transactions between our subsidiaries and their affiliates, including the payment of dividends; investments; underwriting
standards; advertising and marketing practices; capital adequacy; and the collection, remittance and reporting of certain taxes, licenses and fees.
The state laws and regulations that have the most significant effect on our insurance operations and financial reporting are discussed below.
Insurance Holding Company Regulation
We are regulated as an insurance holding company system in the states of domicile of our property and casualty insurance companies: Iowa (United Fire & Casualty Company, UFG Specialty
Insurance Company and Addison Insurance Company), California (Financial Pacific Insurance Company), Louisiana (Lafayette Insurance Company), New Jersey (Mercer Insurance Company of
New Jersey, Inc.), Pennsylvania (Mercer Insurance Company and Franklin Insurance Company) and Texas (United Fire & Indemnity Company and its affiliate, United Fire Lloyds, which is
organized as a Texas Lloyds plan). These regulations require that we annually furnish financial and other information about the operations of the individual companies within our holding company
system. Generally, the insurance laws of these states provide that notice to the state insurance commissioner is required before finalizing any transaction affecting the ownership or control of an
insurer and before finalizing certain material transactions between an insurer and any person or entity within its holding company system. In addition, some of those transactions cannot be finalized
without the commissioner's prior approval.
Most states have now adopted the version of the Model Insurance Holding Company System Regulation Act and Regulation as amended by the NAIC in December 2010 (the "Amended Model Act")
to introduce the concept of "enterprise risk" within an insurance company holding system. Enterprise risk is defined as any activity, circumstance, event or series of events involving one or more
affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance holding company system as a
whole. The Amended Model Act imposes more extensive informational requirements on us, including requiring us to prepare an annual enterprise risk report that identifies the material risks within
our insurance company holding system that could pose enterprise risk to our licensed insurers.
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Restrictions on Shareholder Dividends
As an insurance holding company with no independent operations or source of revenue, our capacity to pay dividends to our shareholders is based on the ability of our insurance company subsidiaries
to pay dividends to us. The ability of our subsidiaries to pay dividends to us is regulated by the laws of their state of domicile. Under these laws, insurance companies must provide advance
informational notice to the domicile state insurance regulatory authority prior to payment of any dividend or distribution to its shareholders. Prior approval from the state insurance regulatory
authority must be obtained before payment of an "extraordinary dividend" as defined under the state's insurance code. The amount of ordinary dividends that may be paid to us is subject to certain
limitations, the amounts of which change each year. In all cases, we may pay dividends only from our earned surplus. Refer to Part II, Item 5, "Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities" under the heading "Dividends" and Note 6 "Statutory Reporting, Capital Requirements and Dividends and Retained Earnings
Restrictions," contained in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information about the dividends we paid during 2023.
Price Regulation
Nearly all states have insurance laws requiring us to file rate schedules, policy or coverage forms, and other information with the state's regulatory authority. In certain states, rate schedules, policy
forms, or both, must be approved prior to use. While insurance laws vary from state to state, their objectives are generally the same: an insurance rate cannot be excessive, inadequate or unfairly
discriminatory. The speed with which we can change our rates in response to competition or in response to increasing costs depends, in part, on the willingness of state regulators to allow adequate
rates for the business we write.
Investment Regulation
We are subject to various state regulations requiring investment portfolio diversification and limiting the concentration of investments we may maintain in certain asset categories. Failure to comply
with these regulations leads to the treatment of nonconforming investments as non-admitted assets for purposes of measuring statutory surplus. Further, in some instances, state regulations require us
to sell certain nonconforming investments.
Exiting Geographic Markets; Canceling and Non-renewing Policies
Most states regulate our ability to exit a market. For example, states limit, to varying degrees, our ability to cancel and non-renew insurance policies. Some states prohibit us from withdrawing one or
more types of insurance business from the state, except upon prior regulatory approval. Regulations that limit policy cancellation and non-renewal may restrict our ability to exit unprofitable markets.
Insurance Guaranty Associations
Each state has insurance guaranty association laws. Membership in a state's insurance guaranty association is generally mandatory for insurers wishing to do business in that state. Under these laws,
associations may assess their members for certain obligations that insolvent insurance companies have incurred with regard to their policyholders and claimants.
Typically, states assess each solvent association member with an amount related to that member's proportionate share of business written by all association members within the state. Most state
guaranty associations allow solvent insurers to recoup the assessments they are charged through future rate increases, surcharges or premium tax credits. However, there is no assurance that we will
ultimately recover these assessments. We cannot predict the amount and timing of any future assessments or refunds under these laws.
Shared Market and Joint Underwriting Plans
State insurance regulations often require insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations. These are mechanisms that generally provide
applicants with various types of basic insurance coverage that may not otherwise be available to them through voluntary markets. Such mechanisms are most commonly instituted for automobile and
workers' compensation insurance, but many states also mandate participation in Fair Access to Insurance Requirements Plans or Windstorm Plans, which provide basic property coverage.
Participation is based upon the amount of a company's voluntary market share in a particular state for the
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classes of insurance involved. Policies written through these mechanisms may require different underwriting standards and may pose greater risk than those written through our voluntary application
process.
Statutory Accounting Principles
For public reporting, insurance companies prepare financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). However, state laws require us to calculate and
report certain data according to statutory accounting principles as defined in the NAIC Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance,
statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies.
Insurance Reserves
State insurance laws require that insurance companies analyze the adequacy of their reserves annually. Our appointed actuaries must submit an opinion that our statutory reserves are adequate to meet
policy claims-paying obligations and related expenses.
Financial Solvency Ratios
The NAIC annually calculates 13 financial ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. A "usual range" of results for each of these ratios is
used by insurance regulators as a benchmark. Departure from the usual range on four or more of the ratios could lead to inquiries from individual state insurance departments as to certain aspects of a
company's business. In addition to the financial ratios, states also require us to calculate a minimum capital requirement for each of our insurance companies based on individual company insurance
risk factors. These "risk-based capital" results are used by state insurance regulators to identify companies that require regulatory attention or the initiation of regulatory action. At December 31,
2023, all of our insurance companies had capital in excess of the required levels.
Federal Regulation
Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives and legislation often have an impact on our business. These
initiatives and legislation include tort reform proposals, proposals addressing natural catastrophe exposures, terrorism risk mechanisms, federal financial services reforms, various tax proposals
affecting insurance companies, and possible regulatory limitations, impositions and restrictions arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), and
the Patient Protection and Affordable Care Act.
Various legislative and regulatory efforts to reform the tort liability system have impacted and will continue to impact our industry. Although there has been some tort reform with positive impact to
the insurance industry, new causes of action and theories of damages continue to be proposed in state court actions or by federal or state legislatures that continue to expand liability for insurers and
their policyholders. For example, some state legislatures have from time-to-time considered legislation addressing direct actions against insurers related to bad faith claims. As a result of this
unpredictability in the law, insurance underwriting is expected to continue to be difficult in commercial lines, professional liability and other specialty coverages.
Dodd-Frank expanded the federal presence in insurance oversight and may increase regulatory requirements that are applicable to us. Dodd-Frank's requirements include streamlining the state-based
regulation of reinsurance and non-admitted insurance (property or casualty insurance placed with insurers that are eligible to accept insurance, but are not licensed to write insurance in a particular
state). Dodd-Frank also established the Federal Insurance Office within the U.S. Department of the Treasury that is authorized to, among other things, gather data and information to monitor aspects
of the insurance industry, identify issues in the regulation of insurers about insurance matters, and preempt state insurance measures under certain circumstances.
Dodd-Frank also contains a number of provisions related to corporate governance and disclosure matters. In response to Dodd-Frank, the SEC has adopted or proposed rules regarding director
independence, director and officer hedging activities, executive compensation clawback policies, compensation advisor independence, pay versus performance disclosures, internal pay equity
disclosures, and shareholder proxy access. We continue to monitor developments under Dodd-Frank and their impact on us, insurers of similar size and the insurance industry as a whole.
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FINANCIAL STRENGTH AND ISSUER CREDIT RATING
Our financial strength is regularly reviewed by an independent rating agency that assigns a rating based upon criteria such as results of operations, capital resources and minimum policyholders'
surplus requirements. An insurer's financial strength rating is one of the primary factors evaluated by those in the market to purchase insurance. A poor rating indicates that there is an increased
likelihood that the insurer could become insolvent and therefore not able to fulfill its obligations under the insurance policies it issues. This rating can also affect an insurer's level of premium
writings, the lines of business it can write and, for insurers like us that are also public registrants, the market value of its securities.
Our property and casualty subsidiaries (collectively known as "United Fire & Casualty Group") are rated by A.M. Best Company, Inc. ("A.M. Best") on a group basis. On August 18, 2023, the
Company received a credit rating downgrade from A.M. 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 United Fire & Casualty Group. Concurrently, A.M. 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. According to A.M. Best, companies rated "A-" have "an excellent ability to meet their
ongoing obligations to policyholders." 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 I, Item 1A. "Risk Factors" of this Annual Report on Form 10-K for more information.
HUMAN CAPITAL RESOURCES
Organization core values
Working together as one, we are always striving to deliver on our promises of employee success, policyholder protection, agent opportunity, shareholder value and community support. That is our
mission. Its unified ideology guides every aspect of the way we conduct business at UFG.
Strategy for success
Our "One UFG: Boldly Forward" strategic plan unites our people in purpose and drives our mission of superior operational and financial performance. It is centered on five strategic pillars of long-
term profitability, diversified growth, people development, continuous innovation and expense management. These pillars provide us with a strong foundation of success as we work together to
deliver on our promises to all UFG stakeholders.
Diversity Equity and Inclusion
We are committed to fostering, cultivating and preserving a culture of diversity, equity, and inclusion. Our purpose is to invest in people to build enduring relationships with those we serve. Diversity,
equity, and inclusion are core to this purpose and are an integral part of our values and culture.
We are committed to building a diverse, equitable, and inclusive culture that encourages, supports, and celebrates the distinct voices of our people. We invite our people to bring their authentic whole
self to work, be inspired to form lasting relationships and to do their best each day, because we are all different, yet equal, humans. Our commitment extends into every facet of who we are:
a. We recognize that our people are our most valuable asset. To excel, we must each feel that we belong to a welcoming environment that values both our differences and the collective sum of
our individuality, experiences, knowledge, creativity, innovation, self-expression, unique capabilities, talents, beliefs and points of view.
b. We look to positively impact the communities where we live and work and partner with clients, vendors, and suppliers who share in our beliefs and commit to equity through building
awareness, advocacy, and allyship.
c. Succeeding as a national enterprise means embracing differences in an informed, sensitive, and welcoming manner so that we continue providing our people, clients, vendors and suppliers
with the best of our company, because their success is our success.
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We embrace and encourage our employees' differences in age, color, disability, ethnicity, family or marital status, gender identity or expression, language, national origin, physical and mental ability,
political affiliation, race, religion, sexual orientation, socio-economic status, veteran status, and other ways that make our employees unique.
Our commitment is reinforced through initiatives centered on our people, partners, and philanthropy, creating an inclusive work environment built on the premise of a strong sense of belonging that
encourages:
a. Respectful communication and cooperation between all employees.
b. Teamwork and participation that empowers and advances all groups and perspectives.
c. Work-life balance to accommodate employees' varying needs.
d. Giving back to the communities we serve to advance change and promote greater understanding and respect for diversity.
At UFG, inclusive conduct is centered on:
a. Treating others with dignity and respect at all times, because how we act is as important as what we accomplish.
b. Meeting the evolving needs of our expansive risk profile though investment in our talent through training and recruiting.
c. Striving to do what is right - even when no one is looking.
d. Continuously listening to our people, agents, partners, vendors, and community to effectuate our goals.
e. Deepening our sensitivity and understanding towards others, so we can connect in a meaningful way.
f. Ensuring that employees exhibit conduct that reflects inclusion during work, at work functions on or off the work site, and at all other company-sponsored and company-participating events.
Inclusive conduct applies to all in-office, hybrid, remote and field employees, regardless of the location of their physical workplace.
It is through our shared awareness and commitment to these principles that we foster a culture of belonging, where everyone is welcome, respected and appreciated. Championing diversity, equity,
and inclusion is not just something we do, it is the core of who we are.
Headcount
Average tenure in years
Employee data
Workforce data
Percent of self-identified women in workforce
Human rights/Social
Ethics
Community
Percent of self-identified racial/ethnic minorities in workforce
Voluntary turnover rate*
Equal employment opportunity policy
Diversity, equity and inclusion policy
Human and labor rights policy
Anti-bribery & anti-corruption policy and training
Code of ethics and business conduct
Employee volunteer hours
* The 2023 voluntary turnover rate includes employees who accepted the Company's early retirement plan offering.
2023
852
9.0
55.0%
14.1%
26.8%
Y
Y
Y
Y
Y
1,676
2022
1,095
8.7
57.4%
13.8%
12.3%
Y
Y
Y
Y
Y
1,690
2021
1,075
10.0
54.8%
13.8%
11.7%
Y
Y
Y
Y
Y
720
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Fulfilling careers; health, safety and wellness; compensation and benefits; talent development
Employee success is part of UFG's mission, therefore, health, wellness and education are core cultural values. Our investment in employee health and well-being is built on our foundation of helping
people enhance their lives. UFG is dedicated to proactively promoting work-life balance for all employees that respects a variety of values and lifestyles. Employees are encouraged to meet with their
managers to develop a flexible work schedule that suits their needs outside of work.
Our commitment to advancing the mental and physical health of our people includes:
• U Fit Wellness Center located on-site: in our Cedar Rapids home office and our Houston and Denver regional offices. We are proud to have built our own state-of-the-art fitness center in
Cedar Rapids, and we have a full-time Manager of Corporate Wellness on staff. The manager provides one-on-one coaching, customized wellness plans and group fitness and wellness
classes for all skill levels. She also provides change management consulting to business units and/or individual employees.
Empowering employees to make healthy decisions:
•
◦
Fitness classes – We offer a variety of both in-person group classes as well as virtual classes to cater to our hybrid workforce. We partner with Wellbeats Virtual Fitness to offer
tailored virtual fitness to all employees and their families. To mesh our passion for community with wellness, we have also held multiple physical activity fundraisers.
◦ Weekly wellness webinars – These webinars are intended to educate employees on everything from nutrition best practices to mental and emotional well-being and mindfulness.
◦
Subject matter experts are oftentimes brought in to present on various topics.
Enterprise-wide resiliency program – Our Manager of Corporate Wellness offers a monthly resiliency course, year-round. This course focuses on building upon life skills to help
employees become more emotionally resilient in their professional and personal lives. In addition, we established a mental wellness employee resource group and held senior
leadership training on mental wellness and suicide prevention.
◦ A wellness reward system – Our employees have the option to enroll in our third-party wellness management program designed to cultivate good lifestyle habits. This program also
provides monetary incentives based on physical activity and premium credits on health insurance when employees reach certain thresholds.
◦ Access to a health advocate program where we are partnering with a service to help employees navigate the healthcare system and address personal and work-related issues at no
cost to them.
◦ A well-being and weight management program - Digital platform taught by renowned experts that will assist with a personalized approach for weight loss results together with
coaching.
Sustainability
As a property and casualty insurer, UFG is acutely aware of the growing risks to business, insureds and communities stemming from sustainability issues. Sustainability is top of mind for our
Management Team and Board of Directors, and as a result we have made important updates to our environmental, social and governance ("ESG") structure. Various Board committees maintain
oversight of relevant ESG initiatives:
a. The Nominating and Governance Committee oversees our ESG policies and practices, generally, and reviews our voluntary ESG disclosures, goals and related sustainability metrics.
Additionally, the Nominating and Governance Committee is responsible for oversight of business ethics.
b. The Audit Committee, in its oversight of financial risk exposures, internal controls and financial reporting, reviews policies, processes and internal controls for collecting ESG data to ensure
disclosures containing ESG data are accurate, reliable and consistent. Additionally, the Audit Committee has oversight of the whistleblower program.
c. The Compensation and Human Capital Committee oversees our human capital management and diversity, equity, and inclusion initiatives, as well as corporate culture matters. Additionally,
the Compensation and Human Capital Committee reviews and approves our Human and Labor Rights Policy.
d. The Investment Committee reviews risks related to our investment portfolio, including oversight of any responsible investment strategies and associated risks (in consultation with the Risk
Management
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Committee). Additionally, the Investment Committee reviews and approves our ESG Investment Policy (a component of the Company's Investment Policy Statement) and monitors
investment activity to ensure investments are made consistent with the ESG Investment Policy.
e. The Risk Management Committee reviews and evaluates the Company's identification, assessment and management of risks associated with ESG matters, including but not limited to
climate change, cybersecurity, and ESG-related emerging risks. It also coordinates with other committees of the Board of Directors on ESG risks specific to such committee's area of
oversight.
Together with Board oversight, UFG established our ESG Management Committee, a cross-functional team of leaders who are dedicated to actively leading UFG's sustainability, corporate social
responsibility, health and safety and human capital efforts, as well as cultivating an ESG-focused culture. The ESG Management Committee meets regularly and provides routine updates to the
Board's Nominating and Governance Committee. Our Chief Risk Officer, supported by our Chief Legal Officer and Assistant Vice President ("AVP") of Workplace Environment, is responsible for
developing and deepening UFG's understanding of climate change as an enterprise-level risk and informing the Board how the related risks are monitored and mitigated.
In 2023, UFG undertook a comprehensive effort to improve sustainability and improve transparency in our sustainability reporting. We established targets for greenhouse gas ("GHG") emissions
reduction, and reported our progress towards these targets, as well as our aggregated energy and wastewater discharge. Our full sustainability report can be found on our website at:
www.ufginsurance.com. We also developed a third party code of conduct that, among other things, details UFG's right to request metrics on suppliers' environmental efforts. We view climate change
as a transversal risk impacting and elevating other critical enterprise risks, and we have begun developing strategies to address and build resiliency to these risks. While this disclosure is a first step,
UFG will continue to enhance and act on our understanding of the risks and opportunities a changing climate presents to our business.
UFG was appointed the insurance provider for members of the Iowa Land Improvement Contractors Association ("LICA") insurance program. This organization, which is known for its mission of
professional conservation of soil and water, as well as best practices in the construction and protection of cities, farms, ranches and rural areas where we live and work, has worked with UFG to
develop a program that is customized to this targeted group of insureds. Our program, in partnership with Prins Insurance, is specifically designed for LICA contractors and includes professional risk
control services, safety group dividends based on the performance of the group, specialty pricing, and the broadened coverages needed when working to conserve our soil and water.
In addition to establishing a UFG Green Team dedicated to sustainability practices, the facilities team is active in reducing our environmental footprint. Here are a few of our practices intended to
lesson our impact on the environment:
•
•
•
Responsible Scaling of Corporate Real Estate
We continue to evaluate our space needs and in support of on-going flexible working arrangements. We were able to consolidate our Cedar Rapids home office space, subleasing a portion of
our Security building. Additionally, we decommissioned our Los Angeles office building site, and right-sized our Sacramento and Phoenix offices. From the beginning of 2022 through the
end of 2023, we successfully decreased our real estate footprint by over 28%.
Pursuit of WELL Building Certification
The WELL Building Standard, a leading global framework focuses exclusively on the ways that buildings and organizations can improve employee comfort, drive better choices, and
enhance health and well-being. Organizations are given three years to complete all performance testing and documentation. In 2023, we started the process and achieved a platinum WELL
V2 Building designation. We are one of only a handful of organizations in the US to reach this level of achievement, illustrating our dedication to our employees' well-being.
Commitment to Community Service
In 2023, our employees dedicated a total of 3,055 hours to their communities, an increase of 6% from 2022. We provided a benefit of 16 hours of paid time off to each employee to
participate in community service activities. In 2023, employees benefited from 1,676 hours of paid time off for community service.
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• Net Zero Waste Initiative
UFG continued to embrace the opportunity for environmental stewardship in 2023 with excellent results from the net zero waste program that was initiated in 2022. We successfully diverted
15 tons of waste from the landfill, composted nearly five tons of materials, and saved on janitorial costs by implementing UFGreen stations and encouraging our employees to separate their
own compost and recycling in 2023. In 2024, UFG is striving to receive the TRUE certification (Total Resource Use and Efficiency) in support of zero waste, reduction of carbon footprint,
and supporting public health.
• GHG Emission Targets and Sustainability Reporting
We recently set initial GHG emission targets. In 2024, we will be implementing a sustainability platform that will allow us to measure, manage, and report out on targeted sustainability
efforts. Sustainability reporting and GHG emission targets are disclosed to our employees, shareholders, and insureds on our public facing website www.ufginsurance.com.
COMPANY WEBSITE AND AVAILABILITY OF INFORMATION
We provide free and timely access to all our reports filed with the SEC in the Investor Relations section of our website at www.ufginsurance.com. Under the "Investors" tab, select "Financial
Documents" and then, select "SEC Filings" to view the list of our SEC filings, which includes annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements, beneficial ownership reports on Forms 3, 4 and 5 and amendments to reports filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the Exchange Act. Such reports are made
available as soon as reasonably practicable after they are filed with or furnished to the SEC. They are also available on the SEC's website at www.sec.gov.
Our Code of Ethics and Business Conduct is also available at www.ufginsurance.com in the Investor Relations section. To view it, under the "Investors" tab, select "Overview," then "Governance
Documents" and then "Code of Ethics and Business Conduct."
Free paper copies of any materials that we file with or furnish to the SEC can also be obtained by writing to Investor Relations, United Fire Group, Inc., 118 Second Avenue SE, Cedar Rapids, Iowa
52401.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following table sets forth information concerning the following executive officers:
Name
Kevin J. Leidwinger
Eric J. Martin
Julie A. Stephenson
Jeremy J. Bahl
Robert F. Cataldo
Sarah E. Madsen
Corey L. Ruehle
Micah G. Woolstenhulme
Kelly A. Walsh
Lindsay E. Lovvorn
Age
60
53
56
46
53
45
50
48
45
44
Position
President and Chief Executive Officer, Principal Executive Officer
Executive Vice President, Chief Financial Officer and Principal Financial Officer
Executive Vice President and Chief Operating Officer
Vice President, Field Operations
Vice President and Chief Investment and Strategy Officer
Vice President, Chief Legal Officer and Corporate Secretary
Vice President and Chief Claims Officer
Vice President and Chief Risk Officer
Vice President and Chief Underwriting Officer
Vice President and Chief Administrative Officer
A brief description of the business experience of these officers follows:
Kevin J. Leidwinger became our President and Chief Executive Officer in August 2022. Prior to joining UFG, Mr. Leidwinger served as President and Chief Operating Officer at CNA Commercial
from 2015 - 2022. Prior to joining CNA Commercial in 2015, he was global casualty manager for Chubb Commercial Insurance, and was responsible for the company's worldwide portfolio of
general liability, workers' compensation, excess umbrella, auto errors and omissions, and environmental business.
Eric J. Martin became Executive Vice President and Chief Financial Officer in February 2023, after joining UFG as our Senior Vice President and Chief Financial Officer in April 2022. Prior to
joining UFG, he served as Head of Enterprise Transformation at Transamerica Corporation (an insurance company), beginning in 2020. Mr. Martin also held numerous other positions at
Transamerica including: Chief Operating Officer, Individual Solutions and Retail Affiliates (2019-2020); Senior Vice President, Controller and Head of Finance (2016-2019) and various other roles
dating back to 2001.
Julie A. Stephenson joined UFG as our Executive Vice President and Chief Operating Officer effective as of the end of January 2023. Ms. Stephenson has over 25 years of experience in the insurance
industry, most recently serving as global head of casualty reinsurance at Swiss Re. Prior to joining Swiss Re in 2021, she held the positions of Chief Operating Officer-Middle Market (2019-2021)
and Commercial Chief Underwriting Officer (2015-2019) at CNA Insurance and Global Liability Manager for Chubb Insurance.
Jeremy J. Bahl became Vice President, Field Operations in December 2023. Mr. Bahl joined UFG as an accountant in 2000. He transferred to the underwriting department of the Great Lakes region in
2002 and served as an Underwriting Supervisor from 2010 to 2014. In 2014, he became Underwriting Supervisor of the Denver region. In 2016, he was named Vice President and Branch Manager of
our Denver region and assumed oversight of the Sacramento region in 2018. From 2020 through 2023, Mr. Bahl served as Vice President and Chief Underwriting Officer. Mr. Bahl has the Chartered
Property Casualty Underwriter (CPCU) professional designation.
Robert F. Cataldo became our Vice President and Chief Investment and Strategy Officer of UFG in 2020, serving the Company since 2011. Mr. Cataldo was Vice President and Strategy Officer for
UFG from 2018 to 2020. From 2015 to 2018, he served as AVP & Senior Portfolio Manager. Mr. Cataldo joined UFG as a Senior Portfolio Manager in 2011. On February 1, 2024, we filed a Form 8-
K with the SEC to disclose Mr. Cataldo's anticipated departure from UFG, effective no later than May 24, 2024, due to UFG's strategic decision to outsource its investment management function.
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Sarah E. Madsen became our Vice President, Chief Legal Officer, and Corporate Secretary in April 2022. Ms. Madsen previously served as Assistant General Counsel from 2018 - 2022. Prior to
joining UFG, she served as corporate counsel for a national insurance and financial strategies firm, counsel for a global non-profit and was a partner at a St. Paul, MN-based law firm, where she
practiced financial services, insurance, and commercial litigation. Ms. Madsen holds a CPCU designation.
Corey L. Ruehle became our Vice President and Chief Claims Officer in 2019. He joined UFG as a Commercial Underwriter in 2001. Between 2001 and 2019 he served in various capacities,
including as Underwriting Supervisor, Underwriting Manager and Branch Manager of the Midwest region. Mr. Ruehle has the Associate in Commercial Underwriting (AU) and Certified Insurance
Counselor (CIC) professional designations.
Micah G. Woolstenhulme serves as Vice President and Chief Risk Officer. Mr. Woolstenhulme joined UFG in 2020 to lead the enterprise risk management activities. Prior to joining UFG, he served
as Head of Risk and Economic Advisory at JLT Re (a reinsurance broker) from 2016-2020 and led the ERM Services group at Guy Carpenter (a global risk and reinsurance specialist company). He
also served Swiss Re, Samsung, and Safeco in various roles including financial modeling, product development and corporate strategy. Mr. Woolstenhulme is a Fellow of the Casualty Actuarial
Society.
Kelly A. Walsh joined UFG as our Vice President and Chief Underwriting Officer in December 2023. Ms. Walsh has over two decades of insurance industry experience. Prior to joining UFG, Ms.
Walsh held a variety of leadership positions at CNA Insurance, serving as Vice President for branch services (2016-2018), Senior Vice President for general liability & umbrella, middle market
(2018-2023) and Senior Vice President and global product leader for general liability in 2023 before joining UFG.
Lindsay E. Lovvorn became our Vice President and Chief Administrative Officer in February 2024. Ms. Lovvorn joined UFG as our Vice President of Business Enablement in February 2023. Prior to
joining UFG, she served as the Senior Director of Industry and Product Strategy at Oracle (2007-2012). Ms. Lovvorn also served at CNA Insurance as Assistant Vice President and business lead
(2012-2017) and Vice President of Product and Process Systems (2017-2022).
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ITEM 1A. RISK FACTORS
We provide readers with the following discussion of risks and uncertainties relevant to our business. These are factors that we believe could cause our actual results to differ materially from our
historic or anticipated results. We could also be adversely affected by other factors, in addition to those listed here. Additional information concerning factors that could cause actual results to differ
materially from those contained in the forward-looking statements is set forth in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Risks Relating to Our Operations: Underwriting Risks, Claims Risks, Investments Risks, Management Risks, Cyber Risks and Legal Risks
Our success depends primarily on our ability to underwrite risks effectively and adequately price the risks we insure.
The results of our operations and our financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of risks based on available information. Adequate
rates are necessary to generate premiums sufficient to pay losses, loss settlement expenses and underwriting expenses and to earn a profit. To price our products accurately, we must collect and
properly analyze a substantial amount of data, develop, and apply appropriate pricing techniques, closely monitor changes in trends and project both severity and frequency of losses with reasonable
accuracy. We could underprice risks which would adversely affect our profit margins. Conversely, we could overprice risks, leading to reduced sales volume and competitiveness. Our ability to
undertake these efforts successfully is subject to a number of risks and uncertainties, including but not limited to: (1) the availability of sufficient reliable data and our ability to properly analyze
available data; (2) market and competitive conditions; (3) changes in medical care expenses and restoration costs; (4) our selection and application of appropriate pricing techniques; and (5) changes
in the regulatory market, applicable legal liability standards and in the civil litigation system generally.
The risk presented by market conditions presents a unique set of challenges in the property and casualty insurance industry. The property and casualty insurance marketplace is cyclical in nature and
has historically been characterized by soft markets (periods of relatively high levels of price competition, less restrictive underwriting standards and generally low premium rates) followed by hard
markets (periods of capital shortages resulting in a lack of insurance availability, relatively low levels of price competition, more selective underwriting of risks and relatively high premium rates).
During soft markets, we may lose business to competitors offering competitive insurance at lower prices. We may reduce our premiums or limit premium increases leading to a reduction in our profit
margins and revenues.
The demand for property and casualty insurance can also vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases. Fluctuations in demand and
competition could produce underwriting results that would have a negative impact on the results of our operations and financial condition.
We continue to compete with many major U.S. and non-U.S. insurers and smaller regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies, and
diversified financial services companies, including banks, mutual funds, broker-dealers and asset-managers. Our competitors may always attempt to increase their market share by lowering rates.
Losing business to competitors offering similar products at lower prices or who have a competitive advantage may adversely affect the results of our operations.
We are subject to certain risks related to our investment portfolio that could negatively affect our profitability.
Investment income is an important component of our net income and overall profitability. We invest premiums received from policyholders and other available cash to generate investment income
and capital appreciation, while also maintaining sufficient liquidity to pay covered claims, operating expenses, and dividends. As discussed in detail below, general economic conditions, changes in
financial markets, global events, and many other factors beyond our control can adversely affect the value of our investments and the realization of investment income.
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We manage our investment portfolio internally under required statutory guidelines and investment guidelines approved by our Board of Directors and the boards of directors of our subsidiaries.
Although these guidelines stress diversification and capital preservation, our investments are subject to a variety of risks discussed as follows.
Credit Risk – The value of our investment in marketable securities is subject to credit losses as a result of deterioration in the creditworthiness of the issuer. Such impairments could reduce our net
investment income and result in realized investment losses. The vast majority of our investments (98.4 percent of core fixed income portfolio at December 31, 2023) are investment-grade securities.
Despite efforts to diversify our portfolio and emphasize credit quality, our investments are subject to losses as a result of a general downturn in the economy.
Interest Rate Risk – A significant portion of our investment portfolio (89.4 percent at December 31, 2023) consists of fixed income securities, primarily U.S. government agency, corporate and
municipal bonds (70.0 percent at December 31, 2023). These securities are sensitive to changes in interest rates. An increase in interest rates typically reduces the fair value of fixed income securities,
while a decline in interest rates reduces the investment income earned from future investments in fixed income securities. We generally hold our fixed income securities to maturity, so our interest
rate exposure does not usually result in realized losses. However, rising interest rates could result in a significant reduction of the book value of our fixed maturity investments. Low interest rates, and
low investable yields, could adversely impact our net earnings as reinvested funds produce lower investment income. Interest rates are highly sensitive to many factors beyond our control including
general macroeconomic conditions, changes in governmental regulations and monetary policy, and national and international political conditions.
Liquidity Risk – We seek to match the maturities of our investment portfolio with the estimated payment date of our loss and loss adjustment expense reserves to ensure strong liquidity and avoid
having to liquidate securities to fund claims. Risk such as inadequate loss and loss adjustment reserves, a large natural catastrophe, or unfavorable trends in litigation could potentially result in the
need to sell investments to fund these liabilities. This could result in significant realized losses depending on the conditions of the general market, interest rates and credit profile of individual
securities. Further, our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are
illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the portion of the investment portfolio that is carried at fair value in our financial statements is not
reflective of prices at which actual transactions could occur.
Market Risk – Our investments are subject to risks inherent in the global financial system and capital markets. The value and risks of our investments may be adversely affected if the functioning of
those markets is disrupted or otherwise affected by local, national or international events, such as: changes in regulation or tax policy; changes in legislation relating to bankruptcy or other
proceedings; infrastructure failures; wars or terrorist attacks; public health emergencies and pandemics; the overall health of global economies; a significant change in inflation expectations; a
significant devaluation of government or private sector credit and/or currency values; and other factors or events not specifically attributable to changes in interest rates, credit losses, and liquidity
needs.
We exercise prudence and significant judgment in analyzing and validating fair values, which are primarily provided by third parties, for securities in our investment portfolio, including those that are
not regularly traded in active markets. We also exercise prudence and significant judgment in determining whether the impairment of particular investments is temporary or other-than-temporary. Due
to the inherent uncertainties involved in these judgments, we may incur unrealized losses and subsequently conclude that other-than-temporary write downs of our investments are required.
Our geographic concentration ties our performance to the business, economic and regulatory conditions of certain states.
The following states provided 47.0 percent of the direct statutory premiums written for the property and casualty insurance businesses in 2023: Texas (17.4 percent), California (12.4 percent), Iowa
(7.1 percent), Missouri (5.8 percent) and Louisiana (4.3 percent).
Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, competitive, weather, and other conditions in the principal states in which we do business. With
respect to regulatory conditions,
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the NAIC and state legislators continually reexamine existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the
development of new laws and regulations. In a time of financial uncertainty or a prolonged economic downturn, regulators may choose to adopt more restrictive insurance laws and regulations.
Changes in regulatory or any other of these conditions could make it less attractive for us to do business in such states. In addition, our exposure to severe losses from localized natural perils, such as
tornadoes, wildfires or hailstorms, is increased in those areas where we have written a significant amount of property insurance policies.
We insure property that is exposed to various natural perils that can give rise to significant claims costs.
Our property and casualty insurance operations expose us to claims arising from catastrophic events affecting multiple policyholders. Such catastrophic events consist of various natural disasters,
which may increase in severity and frequency due to climate change, including, but not limited to, hurricanes, tornadoes, hailstorms, wildfires, earthquakes, severe winter weather, volcanic eruptions,
and man-made disasters such as terrorist acts (including biological, chemical or radiological events), explosions, infrastructure failures and results from political instability. We have exposure to
hurricanes along the Gulf Coast, Eastern and Southeastern coasts of the United States. We have exposure to tornadoes, severe convective storms, windstorms, and hailstorms throughout the United
States. We have exposure to earthquakes along the West Coast and the New Madrid Fault area. Our automobile and inland marine business also exposes us to losses arising from floods and other
perils.
Property damage resulting from catastrophes is perhaps the largest short-term underwriting loss we face in the ordinary course of our business. Catastrophes may reduce our net income, cause
substantial volatility in our financial results for any fiscal quarter or year or otherwise adversely affect our financial condition, liquidity or results of operations. Catastrophes may also negatively
affect our ability to write new business.
We have exposure to catastrophe losses under our commercial insurance policies as well as through our assumed reinsurance and managing general agency contracts. Losses from catastrophic events
are a function of our exposure profile and the level of reinsurance purchased to mitigate these losses. For example, the losses experienced from a tornado will vary on whether the location of the
tornado was in a highly populated or unpopulated area, the concentration of insureds in that area and the severity of the tornado. Increases in the value and geographic concentration of insured
property and the effects of inflation could increase the severity of claims from a catastrophic event.
In addition, as with catastrophe losses generally, it can require time for us to determine our ultimate losses associated with a particular catastrophic event. The inability to access portions of the
impacted area, the complexity of the losses, legal and regulatory uncertainty, and the nature of the information available for certain catastrophic events may affect our ability to estimate the claims and
claim adjustment expense reserves. Such complex factors include, but are not limited to: determining the cause of the damage, evaluating general liability exposures, estimating additional living
expenses, the impact of demand surge, infrastructure disruption, fraud, business interruption costs and reinsurance collectability.
The timing of a catastrophic occurrence at the end or near the end of a reporting period may also affect the information available to us when estimating claims and claim adjustment expense reserves
for the reporting period. As our claims experience for a particular catastrophe develops, we may be required to adjust our reserves to reflect our revised estimates of the total cost of claims. However,
because the occurrence and severity of catastrophes are inherently unpredictable and may vary significantly from year to year and region to region, historical results of operations may not be
indicative of future results of operations.
Following catastrophes there are also sometimes legislative, administrative, and judicial decisions that seek to expand insurance coverage for claims beyond the original intent of the policies or seek
to prevent the application of deductibles. Our ability to manage catastrophic exposure may be limited by public policy considerations, the political environment, changes in the general economic
climate and/or social responsibilities.
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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.
Long-term weather trends may be changing, a phenomenon that has been associated with extreme weather events linked to rising temperatures, including effects on global weather patterns, sea, land
and air temperature, sea levels, rain, snow, and drought. Such changes in climate conditions could cause our underlying modeling data to be less accurate, limiting our ability to evaluate and manage
our risk. Climate change also adds to the unpredictability of natural disasters and creates uncertainty as to future trends and exposures.
Climate change presents risks in four categories to UFG:
a. Physical Risk: The cost of natural perils may change. This is a concern for our property insurance underwriting strategy and, to a lesser extent, our real estate costs.
b. Regulatory Risk: Certain regulatory bodies may impose laws that require UFG to report GHG emissions from our own operations and our strategies to mitigate emissions, resulting in
compliance with such regulations requiring increased time and expense.
c. Transition Risk: Financial risks arising from a global transition to a lower-carbon economy could impact long-term return on certain invested assets.
d. Liability Risk: New areas of law enabling litigation alleging damage from climate change may present legal risk to UFG.
We maintain catastrophe exposure modeling and management in house and incorporate our view of natural peril risk into forward-looking projections that reflect our view on climate. Our property
catastrophe reinsurance program is designed to meet the needs of a changing risk profile. A key area of current focus is our exposure to severe convective storms. We endeavor to reduce GHG
emissions from operations via energy saving construction features/devices and leasing of fuel-efficient fleet vehicles. Our business continuity plan is tested annually, including failover of all systems
to our disaster recovery data center. Additional capabilities and plans are being developed that support continuance of operations after a regional weather event. UFG offers a green replacement
option for equipment breakdown coverage to encourage installation of more energy efficient heating and cooling systems. Underwriting requires wind and hail deductibles in coastal and severe
convective storm areas to minimize our exposure and encourage policyholders to adopt stronger building codes. UFG endeavors to comply with a growing number of federal and state regulations
pertaining to climate disclosures and questionnaires.
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, capital 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. The table below shows the current ratings assigned to our companies by A.M. Best.
Pooled Property and Casualty Companies
United Fire Group, Inc.
Financial Strength Rating
A-
N/A
Issuer Credit Rating
a-
bbb-
Rating Held Since
2023
2023
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 downward or revoked at the sole 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
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(Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) was downgraded to "a-" (Excellent) from "a" (Excellent). Concurrently, for UFG, A.M. 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, or lead to increased
borrowing costs (including through elevated interest rates). For more information, see Note [8] "Debt" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
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 ratings from A.M. Best affect our ability to retain our existing business, and to attract new business in our
insurance operations. 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
existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or creation of additional financial obligations.
We may be unable to attract, retain or effectively manage the succession of key personnel.
Our success depends on our ability to attract and retain key personnel, including members of our executive and senior management team. Any unplanned turnover or our failure to develop an
adequate succession plan for one or more of our executive officers or other key positions could compromise our institutional knowledge base and erode our competitive advantage. The loss or limited
availability of the services of one or more of our executive officers or other key personnel, or our inability to recruit and retain qualified executive officers or other key personnel in the future, could,
at least temporarily, have a material adverse effect on our operating results and financial condition.
We have experienced several transitions in key roles in recent years, including the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Chief Legal Officer positions. These
changes and any future significant leadership changes or senior management transitions involve inherent risk and can be disruptive to our operations. Any failure to find a timely and suitable
replacement for key personnel and ensure an effective transition, including the effective onboarding, could hinder our strategic planning, business execution and future performance.
We may be unable 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.
We refer to these phenomena collectively as "social inflation" and they present a significant challenge in accurately pricing risk and managing the liabilities that arise on insurance policies. As a
commercial casualty insurance company, we have always been sensitive to the effects of emerging claims and coverage issues, including class action lawsuits. But more recent trends such as
litigation financing have led to an unprecedented number of large liability losses for us as well as our competitors.
These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number and/or size of claims, resulting in further increases in our
reserves. The effects of these and other unforeseen emerging claim and coverage issues are difficult to predict. Further examples of these issues
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include: (1) judicial expansion of policy coverage and the impact of new theories of liability; (2) an increase in plaintiffs targeting property and casualty insurers, including us, in purported class
action litigation regarding claims handling and other practices; (3) medical developments that link health issues to particular causes, resulting in liability or workers' compensation (for example,
cumulative trauma); (4) claims relating to unanticipated consequences of current or new technologies; (5) an increase in the variety, number and size of claims relating to liability losses, which often
present complex coverage and damage valuation questions; (6) claims relating to potentially changing climate conditions, including higher frequency and severity of weather-related events; and (7)
adverse changes in loss cost trends, including inflationary pressure in medical cost and automobile repair costs.
Many of the policies we issue include exclusions and other conditions that define and limit coverage, which exclusions and conditions are designed to manage our exposure to certain types of risks
and expanding theories of legal liability. In addition, many of our policies limit the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter than
the statutory period under which these claims can be brought by our policyholders. While these exclusions and limitations help us assess and control our loss exposure, it is possible that a court or
regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted which modifies or bars the use of these exclusions and limitations. This could result in higher than
anticipated losses by extending coverage beyond the intent of our underwriting. In some instances, these changes may not become apparent until sometime after we have issued the insurance policies
that are affected by these changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.
We maintain an internal education plan on the risk of social inflation. We endeavor to find ways to keep claims out of litigation and manage downward the length of time that certain claims are open.
We also steer our portfolio away from business that is most exposed to these trends, and we target business in our assumed reinsurance operations and other alternative distribution channels that offer
more short tail risks.
Unauthorized data access, cyber-attacks and other security breaches could have an adverse impact on our business and reputation.
We rely on computer systems to conduct our business for our customer service, marketing and sales activities, customer relationship management and producing financial statements. Our business
and operations rely on secure and efficient processing, storage and transmission of customer and Company data, including personally identifiable information. Our ability to effectively operate our
business depends upon our ability, and the ability of certain third-party vendors and business partners, to access our computer systems to perform necessary business functions, such as providing
quotes and product pricing, billing and processing premiums, administering claims, and reporting our financial results.
We retain confidential information on our computer systems, including customer information and proprietary business information belonging to us and our policyholders. Our business and operations
depend upon our ability to safeguard this personally identifiable information. Our systems may be vulnerable to unauthorized access and hackers, computer viruses, and other scenarios in which our
data may be compromised.
Cyber-attacks involving these systems, or those of our third-party vendors, could be carried out remotely and from multiple sources and could interrupt, damage, or otherwise adversely affect the
operations of these critical systems. Cyber-attacks could result in the modification or theft of data, the distribution of false information, or the denial of service to users. Threats to data security can
emerge from a variety of sources and change rapidly, resulting in the ongoing need to expend resources to secure our data in accordance with customer expectations and statutory and regulatory
requirements.
Any compromise of the security of our data could expose us to liability and harm our reputation, which could affect our business and results of operations. We continually enhance our operating
procedures and internal controls to effectively support our business and comply with our regulatory and financial reporting requirements, but there can be no assurances that we will be able to
implement security measures adequate to prevent every security breach.
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Although, to date, we have not identified any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents that have, or are likely to, materially affect us, our business
strategy, results of operation or financial condition, the scope and effect of any cyber-attack may remain undetected for a period of time. We maintain cyber liability insurance coverage that provides
both third-party liability and first-party insurance coverages; however, our insurance may be insufficient to cover all losses and expenses related to a cyber-attack.
Federal and state policymakers have and will likely continue to propose increased regulation of the protection of personally identifiable information and appropriate protocols after a related
cybersecurity breach. The New York Department of Financial Services recently adopted a cyber protection and reporting regulation for financial services companies with which we are complying.
The NAIC has created the Data Security Model Law based upon the New York regulation. Compliance with these regulations and efforts to address continually developing cybersecurity risks may
result in a material adverse effect on our results of operations, liquidity, financial condition, and financial strength.
Our reserves for property and casualty insurance losses and loss settlement expenses are based on estimates and may be inadequate, adversely impacting our financial results.
We maintain insurance reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjustment process, for reported
and unreported claims and for future policy benefits. Our reserves may prove to be inadequate, which may result in future charges to earnings and/or a downgrade of our financial strength rating or
the financial strength ratings of our insurance company subsidiaries.
Insurance reserves represent our best estimate at a given point in time. They are not an exact calculation of liability but instead are complex estimates, which are a product of actuarial expertise and
projection techniques based on assumptions and expectations about future events, many of which are highly uncertain.
The process of estimating claims and claims adjustment expense reserves involves a high degree of judgment. These estimates are based on historical data and the impact of various factors such as:
(1) actuarial and statistical projections of the cost of settlement and administration of claims reflecting facts and circumstances then known; (2) historical claims information and loss emergence
patterns; (3) assessments of currently available data; (4) estimates of future trends in claims severity and frequency; (5) judicial theories of liability; (6) economic factors such as inflation; (7)
estimates and assumptions regarding social, judicial and legislative trends, and actions such as class action lawsuits and judicial interpretation of coverages or policy exclusions; and (8) the level of
insurance fraud.
Many of these factors are not quantifiable. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting
the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in a regular and
ongoing process as experience develops and further claims are reported and settled.
Actual loss and loss settlement expenses paid might exceed our reserves. If our loss reserves are insufficient, or if we believe our loss reserves are insufficient to cover our actual loss and loss
settlement expenses, we will have to increase our loss reserves and incur charges to our earnings, which could indicate that premium levels were insufficient. As such, deviations from one or more of
these assumptions could result in a material adverse impact on our Consolidated Financial Statements and our financial strength rating or the financial strength ratings of our insurance company
subsidiaries could be downgraded.
For a detailed discussion of our reserving process and the factors we consider in estimating reserves, refer to the "Critical Accounting Policies" section in Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Our core insurance business is dependent on strong and beneficial relationships with a large network of independent insurance agents and not maintaining these relationships could result in
loss of sufficient business opportunities within our expertise and stated risk appetite.
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Our direct insurance products are marketed exclusively through independent insurance agencies, all of which represent more than one company. We face competition within each agency and
competition to retain qualified independent agents. Our competitors include companies that market their products via independent agents, exclusive agents and companies that sell insurance directly
to their customers.
Our distribution model is subject to the risks of possible loss of independent agencies for various reasons and the discretion agencies have to reduce their business with us. Other potential
consequences of not maintaining strong and beneficial relationships include the loss of sufficient business opportunities within our specific risk appetite, impacting the quality of our underwriting and
loss ratio. If the quality of the independent agencies with which we do business were to decline, policyholders might consider purchasing their insurance through different agencies or channels.
We are subject to comprehensive laws and regulations, changes to which may have an adverse effect on our financial condition and results of operations.
Insurance is a highly regulated industry. We are subject to extensive supervision and regulation by the states in which we operate. As a public company, we are also subject to increased regulation at
the federal level. Our ability to comply with these laws and regulations and obtain necessary and timely regulatory action is, and will continue to be, critical to our success and ability to earn profits.
Examples of regulations that pose particular risks to our ability to earn profits are discussed as follows.
Required licensing. Our insurance company subsidiaries operate under licenses issued by various state insurance departments. If a regulatory authority were to revoke an existing license or deny or
delay granting a new license, our ability to continue to sell insurance or to enter or offer new insurance products in that market would be substantially impaired.
Regulation of insurance rates, fees and approval of policy forms. The insurance laws of most states in which we operate require insurance companies to file insurance premium rate schedules and
policy forms for review and approval. State regulatory authorities may resist or delay our efforts to raise premium rates at their discretion due to general market, economic, or political factors or
factors specific to UFG. If increases to premium rates we deem necessary are not approved, we may not be able to respond to market developments and increased costs in that state. State regulatory
authorities may even impose premium rate rollbacks or require us to pay premium refunds to policyholders, affecting our profitability. If insurance policy forms we seek to use are not approved by
state insurance departments, our ability to offer new products and grow our business in that state could be substantially impaired.
Restrictions on cancellation, nonrenewal or withdrawal. Many states have laws and regulations restricting an insurance company's ability to cease or significantly reduce its sales of certain types of
insurance in that state, except pursuant to a plan that is approved by the state insurance departments. These laws and regulations could limit our ability to exit or reduce our business in unprofitable
markets or discontinue unprofitable products. Additionally, our ability to adjust terms or increase pricing requires approval of regulatory authorities in certain states.
Risk-based capital and capital adequacy requirements. Our insurance company subsidiaries and affiliates are subject to risk-based capital requirements that require us to report our results of risk-
based capital calculations to state insurance departments and the NAIC. These standards apply specified risk factors to various asset, premium and reserve components of statutory capital and surplus
reported in our statutory basis of accounting financial statements. Any failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject us or our
subsidiaries and affiliates to further examination or corrective action by state regulators, including limitations on our writing of additional business, state supervision or liquidation.
Transactions between insurance companies and their affiliates. Transactions between us, our insurance company subsidiaries and our affiliates generally must be disclosed to, and in some cases
approved by, state insurance departments. State insurance departments may refuse to approve or delay their approval of a transaction, which may impact our ability to innovate or operate efficiently.
Required participation in guaranty funds and assigned risk pools. Certain states have enacted laws that require a property and casualty insurer conducting business in that state to participate in
assigned risk plans, reinsurance
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facilities, and joint underwriting associations where participating insurers are required to provide coverage for assigned risks. The number of risks assigned to us by these plans is based on our share
of total premiums written in the voluntary insurance market for that state. Pricing is controlled by the plan, often restricting our ability to charge the premium rate we might otherwise charge.
Wherever possible, we utilize a designated servicing carrier to fulfill our obligations under these plans. Designated servicing carriers charge us fees to issue policies, adjust and settle claims and
handle administrative reporting on our behalf. In these markets, we may be compelled to underwrite significant amounts of business at lower than desired premium rates, possibly leading to an
unacceptable return on equity. While these facilities are generally designed so that the ultimate cost is borne by policyholders, the exposure to assessments and our ability to recoup these assessments
through adequate premium rate increases may not offset each other in our financial statements. Moreover, even if they do offset each other, they may not offset each other in our financial statements
for the same fiscal period, due to the ultimate timing of the assessments and recoupments or premium rate increases. Additionally, certain states require insurers to participate in guaranty funds to bear
a portion of the unfunded obligations of impaired or insolvent insurance companies. These state funds periodically assess losses against all insurance companies doing business in the state. Our
operating results and financial condition could be adversely affected by any of these factors.
Restrictions on the amount, type, nature, quality and concentration of investments. The various states in which we are domiciled have certain restrictions on the amount, type, nature, quality and
concentration of our investments. Generally speaking, these regulations require us to be conservative in the nature and quality of our investments and restrict our ability to invest in riskier, but often
higher yield investments. These restrictions may make it more difficult for us to obtain our desired investment results.
We benefit from certain tax items, including but not limited to, tax-exempt bond interest, dividends-received deductions, tax credits (such as foreign tax credits) and insurance reserve deductions.
From time to time, the U.S. Congress, as well as foreign, state and local governments, considers legislation that could reduce or eliminate the benefits associated with these tax items.
Terrorism Risk Insurance. The Terrorism Risk Insurance Program Reauthorization Act of 2019 ("TRIPRA") was signed into law. TRIPRA, which extended the Terrorism Risk Insurance Program
until December 31, 2027, gradually increased the coverage trigger for shared terrorism losses between the federal government and the insurance industry to $200 million per year, and gradually
increased the industry-wide retention to $37.5 billion per year. For further information about TRIPRA and its effect on our operations, refer to the information in the "Results of Operations for the
Years Ended December 31, 2023, 2022 and 2021" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Accounting standards. We prepare our consolidated financial statements in conformity with GAAP, which is periodically revised and/or expanded by recognized authoritative bodies, including the
Financial Accounting Standards Board ("FASB"). These principles are subject to interpretation by the SEC and various other bodies formed to interpret and create appropriate accounting principles
and guidance. Changes in GAAP and financial reporting requirements, or the interpretation of GAAP or those requirements, may have an impact on the content and presentation of our financial
results and could have adverse consequences on our financial results, including lower reported results of operations and shareholders' equity and increased volatility and decreased comparability of
our reported results with our historic results and with the results of other insurers. In addition, the required adoption of new accounting standards may result in significant incremental costs associated
with initial implementation of and ongoing compliance with those standards. Additional information regarding recently proposed and adopted accounting standards and their potential impact on us is
set forth in Note 1 "Summary of Significant Accounting Policies" to Part II, Item 8, "Financial Statements and Supplementary Data."
Corporate Governance and Public Disclosure Regulation. Changing laws, regulations and standards relating to corporate governance and public disclosure, including Dodd-Frank, the Sarbanes-
Oxley Act of 2002 and related SEC regulations, as well as the listing standards of the Nasdaq stock market, have created and are continuing to create uncertainty for public companies. The Federal
Insurance Office, established within the U.S. Department of the Treasury by Dodd-Frank in 2010, has limited regulatory authority and is empowered to gather data and information regarding the
insurance industry and insurers, monitor aspects of the insurance industry, identify issues with regulation of insurers that could contribute to a systemic crisis in the insurance industry or the overall
financial system, coordinate federal policy on international insurance matters and preempt state insurance measures under
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certain circumstances. Dodd-Frank and other federal regulation adopted in the future may impose burdens on us, including impacting the ways we conduct our business, increasing compliance costs
and duplicating state regulation.
Information Privacy Regulation. We are required to safeguard the personal information of our customers and applicants and are subject to an increasing number of laws and regulations regarding
privacy and data security, as well as in our contractual commitments with service providers. We could be subject to governmental enforcement actions and fines, penalties, litigation, or public
statements against us by consumer advocacy groups if personal information is not appropriately controlled. Strategic service providers may refuse to continue to do business with us if we do not meet
particular standards.
Compliance with these laws and regulations requires us to incur administrative costs that decrease our profits. These laws and regulations may also prevent or limit our ability to underwrite and price
risks accurately, obtain timely premium rate increases necessary to cover increased costs, discontinue unprofitable relationships or exit unprofitable markets and otherwise continue to operate our
business profitably. In addition, our failure to comply with these laws and regulations could result in actions by state or federal regulators, including the imposition of fines and penalties or, in an
extreme case, revocation of our ability to do business in one or more states. Finally, we could face individual, group and class action lawsuits by our policyholders and others for alleged violations of
certain state laws and regulations. Each of these regulatory risks could have a negative effect on our profitability.
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 use various actuarial techniques and data analytics to understand our risk exposures such as frequency and severity of different types of insurance claims. The data we rely on for these analytics
includes experience data from our own business (policies written, characteristics, coverages, and details of associated losses) and data attained from third parties, including industry results. We use
outputs of predictive models and other analytics to assist in decision making related to underwriting, pricing, claims management (including reserving), and catastrophe risk exposure management.
Emerging technology, including artificial intelligence, offers opportunities to underwrite and price business more efficiently and accurately, thus lowering costs. If we are not able to use technology
and data analytics as effectively as our competitors, our competitiveness and ability to write and retain business within our risk appetite will be impacted. This may reduce the profitability of the
business we do write and retain and negatively affect our ability to meet our business objectives.
We may be unable to secure reinsurance capacity that provides necessary risk protection at a reasonable cost.
Our reinsurance strategy seeks to protect the Company from extremely adverse underwriting outcomes as well as unnecessary volatility in underwriting results. We purchase conservative levels of
reinsurance as measured by our property catastrophe models, our economic capital model, and benchmarking with our peers.
We retain multiple reinsurance intermediaries to plan, create, and facilitate our ceded reinsurance placements. These intermediaries work closely with our risk, corporate underwriting, and finance
departments to design reinsurance transactions that align with corporate strategy and risk appetite. Reinsurance transactions are supported by a large and diverse array of reinsurance providers to
ensure that the capacity is reliable in each underwriting year. However, in hard reinsurance market conditions, reinsurance capacity can become constrained as reinsurers are pressed with concerns
about capital or profitability. In these conditions, we may be unable to secure our desired reinsurance protection at a reasonable cost.
Lost reinsurance capacity could expose the Company to larger retained losses per loss occurrence, per risk, or per year in total. To mitigate this risk, we maintain a large panel of reinsurers and prefer
to trade with partners that participate in each of our ceded programs. We transact with multiple intermediary companies to ensure full access to the entire reinsurance market. We monitor the credit
quality of our reinsurance providers. We have a clear view of the criticality of various components of our reinsurance program. Finally, we maintain active dialogue with intermediaries and
underwriters throughout the year.
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Risks Relating to Our Common Stock
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, cyber-attacks, 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. In addition, our stock is followed by a small number of analysts and
the average daily trading volume tends to be low. These factors could adversely affect the price of our common stock.
Certain provisions of our organizational documents, as well as applicable insurance laws, could impede an attempt to replace or remove our management or members of our Board of Directors,
prevent the sale of the Company or prevent or frustrate any attempt by shareholders to change the direction of the Company, each of which could diminish the value of our common stock.
Our articles of incorporation and bylaws, as well as applicable laws governing corporations and insurance companies, contain provisions that could impede an attempt to replace or remove our
management or prevent the sale of the Company that, in either case, shareholders might not consider being in their best interests.
Our Board of Directors is divided into three classes. At any annual meeting of our shareholders, our shareholders have the right to appoint approximately one-third of the directors on our Board of
Directors. Consequently, it will take at least two annual shareholder meetings to effect a change in control of our Board of Directors.
Our articles of incorporation limit the rights of shareholders to call special shareholder meetings.
Our articles of incorporation set the minimum number of directors constituting the entire Board of Directors at nine and the maximum at 15, and they require approval of holders of 60.0 percent of all
outstanding shares to amend these provisions. Within the range, the Board of Directors may increase by one each year the number of directors serving on the Board of Directors.
Our articles of incorporation require the affirmative vote of 60.0 percent of all outstanding shares to approve any plan of merger, consolidation, or sale or exchange of all, or substantially all, of our
assets.
Our Board of Directors may fill vacancies on the Board of Directors.
Our Board of Directors has the authority, without further approval of our shareholders, to issue shares of preferred stock having such rights, preferences and privileges as the Board of Directors may
determine.
Section 490.1110 of the Iowa Business Corporation Act imposes restrictions on mergers and other business combinations between us and any holder of 10.0 percent or more of our common stock.
Section 490.624A of the Iowa Business Corporation Act authorizes the terms and conditions of stock rights or options issued by us to include restrictions or conditions that preclude or limit the
exercise, transfer, or receipt of such rights or options by a person, or group of persons, owning or offering to acquire a specified number or percentage of the outstanding common shares or other
securities of the corporation.
Further, the insurance laws of Iowa, and the states in which our insurance company subsidiaries are domiciled, prohibit any person from acquiring direct or indirect control of us or our insurance
company subsidiaries, generally defined as owning or having the power to vote 10.0 percent or more of our outstanding voting stock, without the prior written approval of state regulators.
These provisions of our articles of incorporation and bylaws, and these state laws governing corporations and insurance companies, may discourage potential acquisition proposals. These provisions
and state laws may also
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delay, deter or prevent a change of control of the Company, in particular through unsolicited transactions that some or all of our shareholders might consider to be desirable. As a result, efforts by our
shareholders to change the direction or the Company's management may be unsuccessful, and the existence of such provisions may adversely affect market prices for our common stock if they are
viewed as discouraging takeover attempts.
The ability of our subsidiaries to pay dividends may affect our liquidity and ability to meet our obligations.
As a holding company, we have no significant independent operations of our own. Our principal sources of funds are dividends and other payments received from our subsidiaries. We rely on those
dividends for our liquidity, and to meet our obligations to pay dividends to shareholders and make share repurchases. Dividends from those subsidiaries depend on their statutory surplus, earnings and
regulatory restrictions.
State insurance laws limit the ability of insurance subsidiaries to pay dividends and require our insurance subsidiaries to maintain specified minimum levels of statutory capital and surplus. The actual
ability to pay dividends may be further constrained by business and regulatory considerations, such as the impact of dividends on surplus, by our competitive position and by the amount of premiums
that we can write. Ordinary dividend payments, or dividends that do not require prior approval by the insurance subsidiaries' domiciliary state insurance regulator are generally limited to amounts
determined by a formula which varies by jurisdiction. Extraordinary dividends, on the other hand, require prior regulatory approval by the insurance subsidiaries' domiciliary state insurance regulator
before they can be made.
In addition, competitive pressures generally require insurance companies to maintain insurance financial strength ratings. These restrictions and other regulatory requirements affect the ability of our
insurance subsidiaries to make dividend payments to us. At times we may not be able to pay dividends on our common stock, or we may be required to seek prior approval from the applicable
regulatory authority before we can pay any such dividends. In addition, the payment of dividends by us is within the discretion of our Board of Directors and will depend on numerous factors,
including our financial condition, our capital requirements and other factors that our Board of Directors considers relevant.
General Risk Factor
Macroeconomic conditions could materially and adversely affect our business, results of operations, financial condition, and growth.
Macroeconomic conditions such as growth, inflation, market stability, and geopolitics can impact our operations, opportunities, and risk profile. Important sectors we follow include goods, services,
and housing. Markets exhibit stability when credit is available, there is liquidity in the system, and banks are stable. Geopolitical concerns can also disrupt the business environment. All of these
factors can contribute to adverse financial consequences for UFG.
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 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Overview
We recognize the importance of assessing, identifying, and managing risks associated with cybersecurity threats. Our cybersecurity risks are identified and addressed through a comprehensive, cross-
functional approach to develop strategies for preserving the confidentiality, integrity and availability of Company and customer information, identifying, preventing and mitigating cybersecurity
threats, and effectively responding to cybersecurity incidents.
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Oversight
Cybersecurity risk oversight is a focus area of our Risk Management Committee and the full Board of Directors. The Risk Management Committee's charter requires it to assist the Board of Directors
in identifying and evaluating risks inherent in our business and to oversee and review the significant policies, procedures, and practices employed to manage risks. The Risk Management Committee
receives a quarterly cybersecurity update from the Chief Administrative Officer, which is shared with the full Board of Directors. The Board of Directors discusses cybersecurity matters and risks on
a quarterly basis or more frequently, as needed, at the recommendation of the Risk Management Committee.
The Company's executive enterprise risk management committee (the "Executive ERM Committee") is tasked with, among other responsibilities, identifying and evaluating operational risks, which
includes risks associated with information technology and cybersecurity. The Executive ERM Committee includes senior leaders across business functions, including the Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, Chief Legal Officer, Chief Risk Officer and Chief Administrative Officer. The Executive ERM Committee, as part of its comprehensive risk
management duties, discusses Company strategies to prevent cyber-attacks and the Company's response and remediation of threats. The Chief Administrative Officer provides a quarterly report to the
Risk Management Committee that summarizes cybersecurity risks, relevant events and other items of note identified by management or the Executive ERM Committee. The Executive ERM
Committee meets independently of the Risk Management Committee, with a representative from the Risk Management Committee in attendance. Certain members of the Executive ERM Committee
are invited to attend and participate in meetings of the Risk Management Committee.
In addition, we maintain internal working groups called "corporate risk register groups" dedicated to assessing and managing the various ERM risks facing the Company. There are two corporate risk
register groups that relate to cybersecurity risk: Cyber Incident Prevention and Cyber Incident Recovery; the Chief Administrative Officer is the leader of both of these risk register groups. The Chief
Administrative Officer likewise serves on the Business Continuity Team as the business continuity technology lead, a role in which she comprehensively evaluates IT system readiness and
preparedness should a business continuity event involving cybersecurity or technology interruption occur.
The lead management team member responsible for cybersecurity matters is the Chief Administrative Officer, who has 20 years of experience in information technology and a B.A. in Management
Information Systems. She is assisted by the Information Security Manager and the Assistant Vice President and Senior Corporate Counsel for Privacy and Governance.
Cybersecurity Program
We have adopted a Written Information Security Program (WISP) designed to align with the guidelines recommended by the National Institute of Standards and Technology (NIST). We have made
ongoing continuous improvements to our information security program; specifically in the implementation of secure remote access solutions with multifactor authentication, next-generation endpoint
detection and remediation, cloud-based security controls, automated scanning and outside validation of security controls. Additionally, we require employees to complete cybersecurity training at
least annually. When a specific cyber threat is identified, we may create additional trainings with targeted content for our employees. As part of our efforts to manage our cybersecurity risks, we have
engaged an independent firm to assist with conducting penetration tests and provide advice on our information security program. We also carry insurance to mitigate losses from cyber events.
We have processes in place to oversee and identify risks from cybersecurity threats associated with our use of third-party service providers. All proposed third parties are subject to a preliminary
assessment to identify those that may handle or have access to company information and scope appropriate due diligence activities relating to the engagement. Third parties that may handle or have
access to company information are subject to enhanced due diligence procedures prior to onboarding and security risk assessments at the time of onboarding, contract renewal, and upon detection of
an increase in risk profile. We use a variety of inputs in such risk assessments, including information supplied by third parties and information obtained through other channels. In addition, we require
our
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providers to adhere to appropriate security requirements and controls, and we investigate security incidents that have impacted our third-party service providers, as appropriate.
We have established comprehensive incident response and recovery plans and continue to regularly test and evaluate the effectiveness of those plans. Our incident response and recovery plans address
– and guide our employees, management and the Board of Directors on – our response to a cybersecurity incident, including the requirements of notification, classification, analysis and
communication of cybersecurity incidents based on the identified severity level. The Executive ERM Committee regularly reviews and evaluates the corporate incident response plan and business
continuity plan.
Cybersecurity Threats
To date, we have not identified any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, that have, or are likely to, materially affect us, our business strategy,
results of operation or financial condition. Refer to "Item 1A. Risk Factors" in this Annual Report on Form 10-K, for additional discussion about cybersecurity-related risks.
ITEM 2. PROPERTIES
Our headquarters are located in Cedar Rapids, Iowa, where we own approximately 235,000 square feet of office and building space. In addition, we lease office and building space, including
underwriting and claims offices, throughout the U.S. We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business.
ITEM 3. 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 December 31, 2023 to be ordinary and routine and does not expect these legal proceedings to have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Shareholders
United Fire Group, Inc.'s common stock is traded on the Nasdaq stock market under the symbol "UFCS." On February 23, 2024, there were 645 holders of record of United Fire Group, Inc. common
stock. The number of record holders does not reflect shareholders who beneficially own common stock in nominee or street name but does include participants in our employee stock purchase plan.
Dividends
Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its
common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of
dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior
approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on
a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions.
Based on these restrictions, at December 31, 2023, our insurance company subsidiary, United Fire & Casualty, is able to make a maximum of $58.6 million in dividend payments without prior
regulatory approval.
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 and there can be no assurance that we will continue to pay such dividends or the amount of such dividends.
Additional information about these restrictions is incorporated by reference from Note 6 "Statutory Reporting, Capital Requirements and Dividends and Retained Earnings Restrictions" contained in
Part II, Item 8, "Financial Statements and Supplementary Data."
Issuer Purchases of Equity Securities
Under our share repurchase program, we may purchase our 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. There were no repurchases during the year ended December 31, 2023. Our share repurchase program was most recently renewed in
November 2022 through August 2024. As of December 31, 2023, we remained authorized to repurchase 1,719,326 shares of common stock.
United Fire Group, Inc. Common Stock Performance Graph
The following graph compares the performance of an investment in United Fire Group Inc.'s common stock from December 31, 2018 through December 31, 2023, with the Standard & Poor's 500
Index ("S&P 500 Index"), and the Standard & Poor's 600 Property and Casualty Index ("S&P 600 P&C Index"). The graph assumes $100 was invested on December 31, 2018 in our common stock
and in each of the below listed indices and that all dividends were reinvested on the date of payment without payment of any commissions. Dollar amounts in the graph are rounded to
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the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
The following table shows the data used in the total return performance graph above.
Index
United Fire Group, Inc.
S&P 500 Index
S&P 600 P&C Index
12/31/2018
12/31/2019
12/31/2020
12/31/21
12/31/22
12/31/23
$
$
100.00
100.00
100.00
$
81.12
131.49
109.99
$
48.48
155.68
110.97
$
45.79
200.38
129.93
$
55.17
164.05
118.03
41.77
207.13
124.69
Period Ended
The foregoing performance graph is being furnished as part of this Annual Report on Form 10-K solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish our shareholders with
such information, and therefore, shall not be deemed to be filed or incorporated by reference into any filings by the Company under the Securities Act or Exchange Act.
ITEM 6. [RESERVED]
Not applicable.
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ITEM 7. 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 Operation should be read in conjunction with Part II, Item 8, "Financial Statements and Supplementary
Data." Amounts (except per share amounts) are presented in thousands, unless otherwise noted.
FORWARD-LOOKING STATEMENTS
It is important to note that our actual results could differ materially from those projected in any forward-looking statements in this Annual Report on Form 10-K. Please refer to "Forward-Looking
Information" and Part I, Item 1A, "Risk Factors" of this report for information concerning factors that could cause actual results to differ materially from the forward-looking statements contained in
this Annual Report on Form 10-K.
BUSINESS OVERVIEW
Originally founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. and its consolidated insurance company subsidiaries provide insurance protection for individuals and
businesses through several regional companies. Our property and casualty insurance company subsidiaries are licensed in 50 states plus the District of Columbia and are represented by approximately
1,000 independent agencies.
Reportable Segments
Our property and casualty insurance business operates and reports as one business segment. For more information, refer to Part I, Item 1 "Property and Casualty Insurance Business" under "Products
and Operations".
Products and Lines of Business
Our core commercial products support a wide variety of customers including small business owners and middle market businesses operating in industries such as construction, services, retail trade,
financial and manufacturing, along with contract surety and commercial surety bonds offered through approximately 1,000 independent property and casualty agencies. We also provide specialty and
surplus lines coverage written exclusively through wholesale brokers on an admitted and non-admitted basis.Additionally, the Company offers reinsurance coverage for property and casualty
insurance through traditional treaty reinsurance channels. The Company assumes premium in Lloyd's of London syndicates through a Funds at Lloyd's subsidiary. The reinsurance operation supports
primarily commercial lines of business but also assumes risk in professional, financial and personal lines of insurance. We also partner with MGAs to offer delegated underwriting programs providing
niche products including marine specialty, professional liability and earthquake coverages.
We review and report our results using lines of business. The following table shows the principle types of property and casualty insurance policies we write and issue, and which lines of business they
are reported in:
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Commercial Lines
Other Liability
Fire and allied lines
Automobile
Workers' compensation
Fidelity and surety
Other
Personal Lines
Fire and allied lines
Automobile
Other
Reinsurance Assumed
Direct Writer
Treaty Reinsurance
(1)
Funds at Lloyd's
MGAs
x
x
x
x
x
x
*
*
*
P
P
P
P
P
P
NP
x
x
x
x
* Personal lines direct business was discontinued in 2020 with only a minimal number of exposures still in force due to certain regulatory non-renewal limitations. For more information, refer to Part I, Item 1 "Property and Casualty Insurance
Business" under "Products and Operations"
(1) Treaty Reinsurance is split between proportional reinsurance (P) and non-proportional reinsurance (NP)
Commercial other liability - primarily business insurance covering bodily injury and property damage including construction defect, excess and surplus lines excess casualty, and standard umbrella.
Proportional assumed reinsurance on these lines and professional liability coverage managed by an MGA partner.
Commercial fire and allied lines - primarily multi-peril non-liability property coverage, inland marine. Proportional assumed reinsurance on these lines and earthquake coverage managed by an MGA
partner.
Commercial automobile - physical damage to an insured's vehicle, as well as liabilities to third parties. Automobile physical damage insurance covers loss or damage to vehicles from collision,
vandalism, fire, theft, flood or other causes. Automobile liability insurance covers bodily injury, damage to property resulting from automobile accidents caused by the insured, uninsured or under-
insured motorists and the legal costs of defending the insured against lawsuits. Proportional reinsurance on these lines is also included.
Workers' compensation - business coverage for employees who are injured or become ill as a result of their job, including proportional assumed reinsurance for this coverage. Our workers'
compensation insurance covers primarily small- to mid-sized accounts.
Fidelity and surety - contract and commercial surety bond coverage which guarantees performance and payment by our bonded principals, protects owners from failure to perform on the part of our
principals, and protects material suppliers and subcontractors from nonpayment by our contractors.
Commercial other - commercial theft coverage, boiler and machinery and ocean marine business managed by an MGA partner.
Personal fire and allied lines - proportional assumed reinsurance for homeowners multi-peril coverage.
Reinsurance assumed - primarily non-proportional assumed reinsurance and Funds at Lloyd's property and casualty syndicates.
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 as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by
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Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699 and Syndicate 5623.
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 2023, 47.0 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri, and Louisiana.
In 2023, 2022 and 2021 the direct statutory premiums written by our property and casualty insurance operations were distributed as follows:
(In Thousands)
Texas
California
Iowa
Missouri
Louisiana
New Jersey
Illinois
Colorado
Minnesota
South Dakota
All Other States
Direct Statutory Premiums Written
MEASUREMENT OF RESULTS
2023
Years Ended December 31,
2022
2021
2023
% of Total
2022
2021
$
$
176,287 $
126,262
71,975
59,094
43,769
42,369
37,157
36,900
35,718
33,770
350,976
1,014,277 $
148,207 $
111,037
70,128
54,090
37,124
41,030
28,538
34,480
32,659
31,609
304,839
893,741 $
158,676
119,171
73,097
55,693
39,280
49,468
29,755
38,761
35,697
30,429
281,485
911,512
17.4 %
12.4
7.1
5.8
4.3
4.2
3.7
3.6
3.5
3.3
34.6
100.0 %
16.6 %
12.4
7.8
6.1
4.2
4.6
3.2
3.9
3.7
3.5
34.1
100.0 %
17.4 %
13.1
8.0
6.1
4.3
5.4
3.3
4.3
3.9
3.3
30.9
100.0 %
We evaluate profit or loss based upon operating and investment results. Profit or loss described in the following sections of this Management's Discussion and Analysis is reported on a pre-tax basis.
Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, underwriting and other operating expenses.
Management uses metrics to provide financial statement users with a better understanding of results of operations, including net premiums written and three components of the loss ratio: underlying
loss ratio, impacts of catastrophes and non-catastrophe prior period reserve development.
Net premiums written is frequently used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies. Net premiums written is the
amount charged for insurance policy contracts issued and recognized on an annualized basis at the effective date of the policy. Management believes net premiums written is a meaningful measure for
evaluating insurance company sales performance and geographical expansion efforts. Net premiums written for an insurance company consists of direct premiums written and premiums assumed,
less premiums ceded. Net premiums earned is calculated on a pro-rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written
applicable to the unexpired terms of the insurance policies in force. The difference between net premiums earned and net premiums written is the change in unearned premiums and the change in
prepaid reinsurance premiums.
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Underlying loss ratio represents the net loss ratio less the impacts of catastrophes and non-catastrophe prior period reserve development. The underlying combined ratio represents the combined ratio
less the impacts of catastrophes and non-catastrophe prior period reserve development. The Company believes that the underlying loss ratio and underlying combined ratio are meaningful measures to
understand the underlying trends in the core business in the current accident year, removing the volatility of prior period impacts and catastrophes. Management believes separate discussions on
catastrophe losses and prior period reserve development are important to understanding how the Company is managing catastrophe risk and in identifying developments in longer-tailed business.
Prior period reserve development is the increase (unfavorable) or decrease (favorable) in incurred loss and loss adjustment expense reserves at the valuation dates for losses which occurred in
previous calendar years. This measure excludes development on catastrophe losses.
Catastrophe losses is an operational measure that utilizes the designations of the Insurance Services Office ("ISO") and is reported with losses and loss adjustment expense amounts net of reinsurance
recoverables, unless specified otherwise. 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. Catastrophes are not predictable and are unique in terms of timing and financial impact. While
management estimates catastrophe losses as incurred, due to the inherently unique nature of catastrophe losses, the impact in a reporting period is inclusive of catastrophes that occurred in the
reporting period, as well as development on catastrophes that may have occurred in prior periods. The following table shows the breakdown of ISO and non-ISO catastrophes in 2023, 2022 and 2021:
(In Thousands)
ISO catastrophes
Non-ISO catastrophes
Total catastrophes
(1)
(1) Includes international assumed losses.
2023
Years Ended December 31,
2022
$
$
61,269
2,883
64,152
$
$
73,342
124
73,466
$
$
2021
83,386
15,230
98,616
We evaluate our property catastrophe exposure by considering planned portfolio growth, market conditions, business needs, portfolio aggregation, and results of third-party vendor model output. As a
result of the evaluation, we may limit our exposure in regions that are prone to naturally occurring catastrophic events through a combination of geographic diversification and restrictions on the
amount and location of new business production in such regions. We regularly assess our concentration of risk exposures in natural catastrophe exposed areas and consider the impacts of climate
change and the unpredictability of future trends in adjusting our geographic concentrations. We have strategies and underwriting standards to manage these exposures through individual risk
selection, subject to regulatory constraints. We use third-party vendor catastrophe modeling and a risk concentration management tool to monitor and control our accumulation of potential losses in
natural catastrophe exposed areas, such as the Gulf Coast and East Coast. We model several perils against our exposure profile to produce a view into portfolio aggregation and property catastrophe
exposure. Our staff regularly performs portfolio analysis, creating and utilizing custom model output which is used to further expand our insights into our exposure profile. We use all of these
evaluations when renewing our catastrophe reinsurance programs on an annual basis.
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.
We measure our cash flows and liquidity to ensure we meet our short- and long-term cash obligations. We monitor our capital adequacy to support our business.
Ceded Reinsurance
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Table of Contents
Our reinsurance allows us to manage our risk, increase our underwriting capacity and protect us from large events. A summary of our key 2024 reinsurance program is as follows. For details on our
2021 - 2023 plans please refer to Part II, Item 8, Note 4 "Reinsurance"
Property Catastrophe Excess of Loss
Our corporate property catastrophe reinsurance program, effective January 1, 2024, is an excess of loss ("XOL") treaty. The program consists of $110 million in coverage for losses in excess of
$20 million. The treaty protects from catastrophic events such as earthquakes, hail, windstorms, and fires. The treaty consists of three layers and is fully placed. It includes exclusions for
communicable diseases and cyber loss. In addition, it includes a terrorism exclusion. Each layer can be reinstated once to its full amount at the same premium. The business written through our
delegated underwriting arrangement for earthquake and flood business is no longer subject to the corporate treaty. That exposure is now completely, and separately, reinsured and detailed below.
Layer
First
Second
Third
Limit
$
$
$
Retention
Placement
10,000 $
30,000 $
70,000 $
20,000
30,000
60,000
100 %
100 %
100 %
Property & Casualty Core XOL Treaty
Our property and casualty working program, which we refer to as the core treaty, includes a multi-line layer which applies in excess of our retention and annual aggregate deductible, as well as
property-only and casualty-only towers above the multi-line exhaustion point. Our core treaty begins January 1, 2024 and each layer is fully placed. Each layer includes provisions for extra-
contractual and excess of policy limit losses. The multi-line treaty includes a provision that limits the per occurrence maximum limit to $24 million. Reinstatement is free and unlimited, upon erosion
of the deductible. This treaty provides coverage to the majority of the commercial property and casualty business that we write. The multi-line treaty combined with the property per risk provide for a
combined limit of $22 million coverage excess of the $3 million retention. If we have a property risk that requires limits in excess of our reinsured limit, facultative reinsurance is generally obtained.
Layer
Multi-Line
Property Per Risk
Casualty 2nd
Casualty 3rd
Casualty 4th
Surety Per Principal XOL Treaty
Limit
Retention
Placement
8,000
14,000
9,000
20,000
20,000
3,000
11,000
11,000
20,000
40,000
100 %
100 %
100 %
100 %
100 %
Our surety treaty begins on January 1, 2024 and is an excess of loss treaty. The program consists of $45 million in coverage for losses in excess of $5 million per principal. The first layer includes
three reinstatements, while the second and third include one. Losses are considered discovered to the treaty year in accordance with the contract terms and conditions.
Layer
First
Second
Third
Limit
Retention
Placement
5,000
10,000
25,000
100 %
100 %
100 %
5,000
15,000
25,000
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Table of Contents
Earthquake and Flood XOL Treaty
We delegate underwriting authority to write a specific portfolio of flood and earthquake difference in conditions ("DIC") business. This arrangement began in 2019. An excess of loss treaty, effective
January 1, 2024, is in place to specifically and exclusively reinsure business written through this arrangement. This program consists of $160 million for losses in excess of $10 million and is fully
placed. This treaty replaces the earthquake quota share that we had previously placed in treaty years 2022 and 2023, as well as the remaining coverage that had been provided by the corporate
property catastrophe XOL. Effecting the above change allowed us to reduce our retention to these events from $20 million to $10 million.
Layer
First
Second
Third
Fourth (Q1 only)
Assumed Reinsurance
Limit
Retention
Placement
20,000
30,000
60,000
50,000
10,000
30,000
60,000
120,000
100 %
100 %
100 %
100 %
The Company offers reinsurance coverage for property and casualty insurance through traditional treaty reinsurance channels and participates in the Funds at Lloyd's syndicates. We target
diversifying risks that complement our direct portfolio. The following provides more detail on the type of assumed reinsurance business we target.
•
•
Treaty reinsurance with regional property and casualty carriers, including casualty XOL, property per risk, and property catastrophe XOL.
Treaty reinsurance with professional reinsurers and Lloyd's syndicates.
• Mortgage reinsurance with Freddie Mac and Fannie Mae, private mortgage insurers and surety carriers.
•
•
Treaty reinsurance on risks underwritten by managing general agents.
Treaty reinsurance underwritten on our behalf through reinsurance intermediary management agreements (RIMA) that define underwriting boundaries by product, class and type.
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Table of Contents
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021
FINANCIAL HIGHLIGHTS
(In Thousands)
Revenues
Net premiums earned
Investment income, net of investment expenses
Net investment gains (losses)
Other income
Total revenues
Benefits, losses and expenses
Losses and loss settlement expenses
Amortization of deferred policy acquisition costs
Other underwriting expenses
Interest expense
Other non-underwriting expenses
Total benefits, losses and expenses
Income (loss) before income taxes
Federal income tax expense (benefit)
Net income (loss)
GAAP Ratios:
(1)
Net loss ratio
Expense ratio
Combined ratio
(2)
(3)
(1)
Additional Loss Ratios:
Net loss ratio
Catastrophes - effect on net loss ratio
Reserve development-effect on net loss ratio
(4)
Underlying loss ratio (Non-GAAP)
(4)
(4)
Years Ended December 31,
2023
2022
2021
% Change
2023
vs. 2022
2022
vs. 2021
$
$
$
$
$
$
1,034,587
59,606
1,274
—
1,095,467
769,414
244,991
115,800
3,260
1,723
1,135,188
(39,721)
(10,021)
(29,700)
$
$
$
$
$
$
74.4 %
34.9 %
109.3 %
74.4 %
6.2 %
6.0 %
62.2 %
$
$
$
$
$
$
951,541
44,932
(15,892)
(295)
980,286
637,301
213,075
115,169
3,188
(524)
968,209
12,077
(2,954)
15,031
67.0 %
34.5 %
101.5 %
67.0 %
7.7 %
0.1 %
59.2 %
962,823
55,778
47,383
207
1,066,191
652,155
203,432
110,103
3,187
471
969,348
96,843
16,249
80,594
67.7 %
32.6 %
100.3 %
67.7 %
10.2 %
(6.9)%
64.4 %
8.7 %
32.7
(108.0)
(100.0)
11.7 %
20.7 %
15.0
0.5
2.3
(428.8)
17.2 %
(428.9)
239.2
(297.6)
11.0 %
1.2 %
7.7 %
11.0 %
(19.5)%
NM
5.1 %
(1.2)%
(19.4)
(133.5)
(242.5)
(8.1)%
(2.3)%
4.7
4.6
—
(211.3)
(0.1)%
(87.5)%
(118.2)%
(81.3)%
(1.0)%
5.8 %
1.2 %
(1.0)%
(24.5)%
(101.4)%
(8.1)%
NM = not meaningful
(1) 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.
(2) 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.
(3) 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.
(4) Underlying loss ratio is defined as the net loss ratio less impacts of catastrophes and non-catastrophe prior year reserve development.
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Table of Contents
Net loss reported in 2023 as compared to net income in 2022 was primarily due to an increase in losses and loss settlement expenses and an increase in amortization of deferred acquisition costs.
These were partially offset with an increase in net premiums earned, higher investment income and net investment gains, as compared to net investment losses for the same period in 2022.
In 2022, the decrease in net income compared to 2021 was primarily due to lower premiums earned, lower net investment income from a decrease in value of other long-term assets, and net
investment losses from a decrease in the fair value of equity securities, as compared to net investment gains for the same period in 2021.
Premiums
The following table shows our premiums earned and written for 2023, 2022 and 2021:
(In Thousands)
Years ended December 31,
Direct premiums earned
Assumed premiums earned
Ceded premiums earned
Net premiums earned
(In Thousands)
Years ended December 31,
Direct premiums written
Assumed premiums written
Ceded premiums written
(1)
Net premiums written
2023
2022
2021
953,958
225,587
(144,958)
1,034,587
2023
987,977
232,716
(153,792)
1,066,901
$
$
$
889,301
163,980
(101,740)
951,541
2022
893,741
190,215
(99,732)
984,224
$
$
$
978,190
77,283
(92,650)
962,823
2021
911,514
130,375
(100,541)
941,348
$
$
$
% Change
2023
vs. 2022
2022
vs. 2021
7.3 %
37.6 %
42.5 %
8.7 %
10.5 %
22.3
54.2
8.4 %
2023
vs. 2022
(9.1)%
112.2 %
9.8 %
(1.2)%
2022
vs. 2021
(1.9)%
45.9
(0.8)
4.6 %
NM = not meaningful
(1) Net premiums written: Net premiums written is frequently used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies. Net premiums written are the amount charged for
insurance policy contracts issued and recognized on an annualized basis at the effective date of the policy. Management believes net premiums written are a meaningful measure for evaluating insurance company sales performance and geographical
expansion efforts. Net premiums written for an insurance company consists of direct premiums written and reinsurance assumed, less reinsurance ceded. Net premiums earned is calculated on a pro rata basis over the terms of the respective policies.
Net Premiums Written
Net premiums written comprise direct and assumed premiums written, less ceded premiums written. Direct premiums written are the total policy premiums, net of cancellations, associated with
policies issued and underwritten by our property and casualty insurance business. Assumed premiums written are the total premiums associated with the insurance risk transferred to us by other
insurance and reinsurance companies pursuant to reinsurance contracts. Ceded premiums written is the portion of direct premiums written that we cede to our reinsurers under our reinsurance
contracts. Net premiums earned are recognized ratably over the life of a policy and differ from net premiums written, which are recognized on the effective date of the policy.
Direct Premiums Written
Direct premiums written increased $94.2 million in 2023 as compared to 2022 primarily due to growth in our core commercial lines. Direct premiums written decreased $17.8 million in 2022 as
compared to 2021 due to our continued focus on improving profitability through non-renewal of under-performing accounts in our commercial automobile line of business.
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Table of Contents
Assumed Premiums Written
Assumed premiums written increased $42.5 million in 2023 as compared to 2022 due to growth of our Funds at Lloyd's participation along with increases in our assumed book by the addition of new
programs.
Assumed premiums written increased $59.8 million in 2022 as compared to 2021 due to growth of our assumed book by the addition of new programs and cedant premium growth.
Ceded Premiums Written
Direct premiums written are reduced by the ceded premiums that we pay to reinsurers. For 2023, the ratio of ceded premiums to direct written premiums increased as compared to 2022 as a result of
higher reinsurance costs, in addition to an increase in our direct written premiums. Ceded premiums also increased $12.8 million in 2023 as a result of increased surety reinstatement premium due to a
small number of large claims. All these contributed to ceding 54.2 percent more premiums to reinsurers in 2023 as compared to 2022. For 2022, the ratio of ceded premiums to direct written
premiums is nearly the same as it was in 2021, and thus ceded premiums written are only down as a reflection of decreased direct premiums written.
Losses and Loss Settlement Expenses
Climate Change and Catastrophe Exposures
Catastrophe losses are inherent risks of the property and casualty insurance business. Catastrophic events include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high
winds, winter storms and other natural disasters, along with man-made exposures to losses resulting from, without limitation, acts of war, acts of terrorism and political instability. Such events result
in insured losses that can be, and may continue to be, a material factor in our results of operations and financial position, as the extent of losses from a catastrophe is a function of both the total
amount of insured exposure in an area affected by the event and the severity of the event. Because the level of insured losses that may occur in any one year cannot be accurately predicted, these
losses contribute to fluctuations in our year-to-year results of operations and financial position. Some types of catastrophes are more likely to occur at certain times within the year than others, which
adds an element of seasonality to our property and casualty insurance claims. The frequency and severity of catastrophic events are difficult to accurately predict in any year. However, some
geographic locations are more susceptible to these events than others.
We control our direct insurance exposures in regions that are prone to naturally occurring catastrophic events through a combination of geographic diversification, restrictions on the amount and
location of new business production in such regions, and reinsurance. We regularly assess our concentration of risk exposures in natural catastrophe exposed areas and consider the impacts of climate
change and the unpredictability of future trends in adjusting our geographic concentrations in the United States. We have strategies and underwriting standards to manage these exposures through
individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance coverage. We use catastrophe modeling and a risk concentration management tool to
monitor and control our accumulations of potential losses in natural catastrophe exposed areas of the United States, such as the Gulf Coast and East Coast, as well as in areas of exposure in other
countries where we are exposed to a portion of an insurer’s underwriting risk under our assumed reinsurance contracts.
Overall, the models indicate increased risk estimates for our exposure to hurricanes in the U.S., but the impact of the models on our book of business varies significantly among the regions that we
model for hurricanes. Based on our analysis, we have implemented more targeted underwriting and rate initiatives in some regions. We intend to continue to take underwriting actions and/or purchase
additional reinsurance as necessary to reduce our exposure.
Catastrophe modeling generally relies on multiple inputs based on experience, science, engineering and history, and the selection of those inputs requires a significant amount of judgment. The
modeling results may also fail to account for risks that are outside the range of normal probability or are otherwise unforeseen. Because of this, actual results may differ materially from those derived
from our modeling assumptions.
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Table of Contents
Despite our efforts to manage our catastrophe exposure, the occurrence of one or more severe natural catastrophic events in heavily populated areas could have a material effect on our results of
operations, financial condition or liquidity.
The process of estimating and establishing reserves for losses incurred from catastrophic events is inherently uncertain and the actual ultimate cost of a claim, net of reinsurance recoveries, may vary
materially from the estimated amount reserved. Although we reinsure a portion of our exposure, reinsurance may prove to be inadequate if a major catastrophic event exceeds our reinsurance limits or
if we experience a number of small catastrophic events that individually fall below our reinsurance retention level.
Catastrophe Losses
In 2023, our pre-tax catastrophe losses were $64.2 million, a decrease of $9.3 million compared to $73.5 million in 2022 and a decrease of $25.2 million as compared to $98.6 million in 2021. In
2023, our catastrophe losses included 61 events. Catastrophe losses in 2023 added 6.2 percentage points to the combined ratio, which is below our historical 10-year average of 7.2 percentage points.
Catastrophe Reinsurance
In 2023, the Company continued the pillared loss occurrence program in addition to the XOL ceded reinsurance program with no substantive structural changes. The catastrophe reinsurance retention
level was increased from $15.0 million to $20.0 million, the pillar retention in the pillared loss occurrence program increased from $5.0 million to $6.0 million, and the first layer of the occurrence
tower was placed with a co-participation. We did not experience any property catastrophe events that produced a reported loss to either program in 2022 or 2023.
We use many reinsurers, both domestic and foreign, which helps us to avoid concentrations of credit risk associated with our reinsurance. Our criteria for selecting reinsurance markets is to require
capital and surplus of at least $500.0 million and an A.M. Best rating or an S&P rating of at least "A-." If a reinsurer is rated by both rating agencies, then both ratings must be at least an "A-." All of
our reinsurance capacity is placed with reinsurers holding a rating of A- or better. For the small amount of reinsurance capacity we utilize that doesn't meet our criteria, markets are required to
collateralize the risk.
The following table represents the primary reinsurers we utilize and their financial strength ratings as of December 31, 2023:
(1)
(1)(2)
(1)(2)
Name of Reinsurer
(2)
Swiss Re
Hannover Re
Everest Re
(1)(2)
Lloyd's
Arch Re
Berkely Re
Partner Re
R&V Re
MS Amlin
Renaissance Re
(1)(2)
SCOR
(1)(2)
(1)(2)
(1)(2)
(1)
(1)
(1) Primary reinsurers participating in the property and casualty excess of loss programs.
(2) Primary reinsurers participating in the surety excess of loss program.
Refer to Part II, Item 8, Note 4 "Reinsurance" for further discussion of our reinsurance programs.
40
A.M. Best
A+
A+
A+
A
A+
A+
A+
NR
A
A+
A
S&P Rating
AA-
AA-
AA-
AA-
A+
A+
A+
A+
A
A+
A+
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Terrorism Coverage
Our principal reinsurance protection is the coverage provided through the Terrorism Risk Insurance Program Reauthorization Act of 2019 ("TRIPRA"), effective through December 31, 2027.
TRIPRA coverage includes most direct commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an insurer, with
exclusions for commercial automobile insurance, burglary and theft insurance, surety, professional liability insurance and farm owners' multiple peril insurance. For calendar year 2024, the aggregate
losses exceeding a threshold of $200.0 million industry-wide would be covered under this protection. Our TRIPRA deductible was $124.8 million for 2023 and our TRIPRA deductible is expected to
be $132.6 million for 2024. Our catastrophe and non-catastrophe reinsurance programs provide limited coverage for terrorism exposure excluding nuclear, biological and chemical-related claims.
2023 Results
In 2023, our loss and loss settlement expenses were 20.7 percent higher than 2022 and our net loss ratio increased 7.4 points. The primary driver for the increase was an increase in loss and loss
settlement expenses of $80.4 million in commercial lines and $48.0 million in reinsurance assumed, which will be discussed in more detail in Net Loss Ratios by Line. In 2023, catastrophe losses
were $64.2 million in both our direct and assumed reinsurance business as compared to $73.5 million in 2022.
2022 Results
In 2022, our losses and loss settlement expenses were 2.3 percent lower than 2021 and our net loss ratio decreased 0.7 points. The primary driver for the decline is a reduction of loss and loss
settlement expenses of $27.0 million in personal lines related to our exit of that business. This was offset by an increase in reinsurance assumed related to our growth in that business from the prior
year, and a slight decrease in our commercial lines. In 2022, catastrophe losses were $73.5 million in both our direct business and assumed reinsurance business as compared to $98.6 million in 2021.
Reserve Development
For many liability lines of business, several years (more than a decade for construction defect) 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, the legal environment, and inflation (economic and social). Consequently, the estimation of loss reserves for long-tail coverages is more
complex and subject to a higher degree of variability. As a result of this complexity and inherent uncertainty, reserve estimates may change over time as new information becomes available. 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 and
changes and trends in general economic conditions, including the effects of inflation.
2023 Development
The property and casualty insurance business experienced $67.8 million of adverse development in our net reserves for prior accident years for the twelve-month period ended December 31,
2023, which is comprised of $64.2 million on non-catastrophe losses and $3.6 million on catastrophe losses. Commercial other liability lines experienced adverse development of $52.9 million
primarily in our excess and surplus lines excess casualty book along with some adverse development in standard umbrella and construction defect due to increasing severity pressures. The
pressure on these longer tailed lines, especially in accident years 2016-2019, related to
41
Table of Contents
social and economic inflation, continued in 2023 and prompted a re-evaluation of trend assumptions for more recent accident years. The commercial automobile line of business also experienced
adverse development of $9.0 million related to increasing severity largely in post-COVID-19 accident years. Commercial fire and allied lines experienced adverse development of $4.4 million
largely due to development on both catastrophe and non-catastrophe losses, primarily from accident year 2022. The assumed reinsurance line of business contributed an additional $3.5 million of
adverse development largely driven by catastrophe losses.
2022 Development
The property and casualty insurance business experienced $12.9 million of adverse development in our net reserves for prior accident years for the twelve-month period ended December 31, 2022.
Most of the adverse development was in commercial other liability with $47.8 million and commercial fire and allied with $24.8 million adverse development. This was offset partially by favorable
development on commercial automobile which contributed $56.7 million. The unfavorable development in commercial other liability and commercial fire and allied was due to paid loss and loss
adjustment expense ("LAE") 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 and paid LAE. Reductions in reserves for IBNR claims also contributed favorable development.
2021 Development
The property and casualty insurance business experienced $48.9 million of favorable development in our net reserves for prior accident years for the twelve-month period ended December 31, 2021.
Two lines contributed the majority of favorable development with the largest contribution coming from commercial automobile which had $43.3 million favorable development, followed by workers'
compensation which had $10.9 million favorable development. All other individual lines, with the exception of commercial other liability, experienced favorable development. Commercial other
liability experienced $20.7 million of unfavorable development. 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 and paid LAE. The favorable development for workers' compensation was from both loss and LAE and for loss the reductions in reserves
for reported claims were more than sufficient to offset paid loss; 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. Commercial other liability experienced unfavorable development due to paid loss which was greater than reductions in reserves for unpaid loss; LAE
developed favorably and partially offset the unfavorable loss development.
Reserve development amounts can vary significantly from year-to-year depending on a number of factors (both internal and external).
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Table of Contents
Net Loss Ratios by Line
The following table depicts our net loss ratios for 2023, 2022 and 2021:
Years ended December 31,
(In Thousands)
Commercial lines
Other liability
Fire and allied lines
Automobile
Workers' compensation
Fidelity and surety
Other
Total commercial lines
Personal lines
Fire and allied lines
Automobile
Other
Total personal lines
Reinsurance assumed
Total
2023
Net Losses and
Loss Settlement
Expenses
Incurred
Net Premiums
Earned
Net Loss Ratio
Net Premiums
Earned
2022
Net Losses and
Loss Settlement
Expenses Incurred
Net Loss Ratio
Net Premiums
Earned
2021
Net Losses and
Loss Settlement
Expenses Incurred
Net Loss Ratio
320,762 $
244,674
208,874
53,039
39,922
2,702
869,973 $
$
$
$
$
4,733 $
—
22
4,755 $
159,859 $
1,034,587 $
249,106
183,533
176,667
33,224
22,259
940
665,729
3,402
(837)
(82)
2,483
101,202
769,414
77.7 % $
75.0
84.6
62.6
55.8
34.8
76.5 % $
71.9 % $
NM
NM
52.2 % $
63.3 % $
74.4 % $
302,446 $
232,156
208,398
56,015
37,975
1,081
838,071 $
4,957 $
1
50
5,008 $
108,462 $
951,541 $
231,587
204,278
114,296
27,545
6,790
821
585,317
2,959
(3,123)
(1,009)
(1,173)
53,157
637,301
76.6 % $
88.0
54.8
49.2
17.9
75.9
69.8 % $
59.7 % $
NM
NM
(23.4)% $
49.0 % $
67.0 % $
299,961 $
238,881
248,135
61,690
30,989
1,313
880,969 $
14,604 $
7,144
361
22,109 $
59,745 $
962,823 $
184,794
177,136
181,119
43,790
2,913
251
590,003
20,215
5,784
(216)
25,783
36,369
652,155
61.6 %
74.2
73.0
71.0
9.4
19.1
67.0 %
138.4 %
81.0
(59.8)
116.6 %
60.9 %
67.7 %
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Commercial Lines
The net loss ratio in our commercial lines of business, excluding assumed reinsurance, was 76.5 percent in 2023 compared to 69.8 percent in 2022 and 67.0 percent in 2021. The net loss ratio in 2023
increased primarily due to prior accident year reserve strengthening discussed in the Reserve Development section. The net loss dollars for 2022 compared to 2021 are lower by 0.8 percent, but the net
loss ratio increased due to the contraction of premiums in 2022.
Other Liability
We write numerous types of risk that are exposed to liability losses in our direct and assumed books of business. This includes, but is not limited to, bodily injury, property damage, standard umbrella,
excess liability, and product liability (including construction defect) loss and loss adjustment expenses.
The net loss ratio deteriorated 1.1 percentage points in 2023 compared to 2022. Both 2022 and 2023 results were the result of deeper analytical insights and emerging claim experience increasing our
view of potential exposure in excess liability coverages as well as construction defect. Social and economic inflation pressures continue to increase severity in these lines, primarily in accident years
2016-2019. Additional detail on construction defect exposure is discussed in the Critical Accounting Policies section.
Commercial Fire and Allied Lines
The net loss ratio improved 13.0 percentage points in 2023 compared to 2022. The improvement in 2023 is related to lower catastrophe losses and improvement in severity in both current and prior
accident years.
Commercial Automobile
The net loss ratio deteriorated 29.8 percentage points in 2023 compared to 2022 as the 2022 results reflected significant reserve releases. The 2023 results saw an increase in prior accident year
reserves driven by severity trends in post-COVID-19 accident years offset by improved frequency and continued rate achievement in the current accident year.
Workers' Compensation
The net loss ratio deteriorated 13.4 percentage points in 2023 compared to 2022. This line deteriorated primarily due to less favorable prior accident year reserve releases in 2023 as compared to
2022. There was also a slight uptick in severity compared to a favorable result for accident year 2022.
Fidelity and Surety
When surety losses occur, our loss is determined by estimating the cost to complete the remaining work and to pay the contractor's unpaid bills, offset by contract funds due to the contractor,
reinsurance, and the value of any collateral to which we may have access.
The net loss ratio deteriorated 37.9 percentage points in 2023 compared to 2022 due to a few large losses in 2023 and associated reinstatement premiums. The surety market has experienced pressure
from construction industry factors, such as increased material costs and limited contractor availability. Due to the nature of this business, results can be volatile, and it is not uncommon to experience
occasional outlier results like 2023 over an otherwise very profitable longer time horizon.
Personal Lines
The 2022 results reflected prior accident year reserve releases in lines which we were exiting. The 2023 results reflect a more normal level of loss for this line going forward.
Assumed Reinsurance
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Our assumed reinsurance portfolio is comprised of contracts that provide reinsurance protection to insurance companies. We only reinsure companies with attractive expected profitability, relevant
materiality, and strong reputation. Our reinsurance business focuses on long-term relationships.
Net earned premium grew to $159.9 million in 2023 compared to $108.5 million in 2022. The net loss ratio deteriorated 14.3 percentage points in 2023 compared to 2022. This is due to an enhanced
analysis of our assumed book of business that lead to a realignment of loss reserves to better align with exposures. The realignment was between lines of business and accident years and had no
impact on the total loss ratio results.
Underwriting Expense Ratio
Our underwriting expense ratio, which is a percentage of amortization of deferred policy acquisition costs and other underwriting expenses over net premiums earned, was 34.9 percent, 34.5 percent
and 32.6 percent for 2023, 2022, and 2021, respectively. The increase in expense ratio in 2023 as compared to 2022 was primarily driven by prior year changes to our employee post-retirement
benefit plans. These changes provided benefits to the underwriting expense ratio in 2022 and 2021 that concluded at the end of 2022. Additionally, the 2023 underwriting expense ratio increased due
to reinsurance premiums which were offset by our ongoing actions to sustainably reduce expenses and direct premium growth. The increase in expense ratio in 2022 as compared to 2021 was
primarily driven by the change in design of our employee post-retirement benefit plans.
During the fourth quarter of 2023, the Company evaluated categories of expenses included in the underwriting expense ratio and identified two categories of expenses that have been reclassified as
non-underwriting expenses: foreign exchange gain/loss and charitable contributions. These expenses have been isolated in a new financial line "Other Non-Underwriting Expenses" on the income
statement. As a result, there were immaterial changes to the historical underwriting expense ratio and the combined ratio.
Federal Income Taxes
We reported a federal income tax benefit on a consolidated basis of $10.0 million or 25.2 percent of pre-tax losses in 2023. For 2023, the effective tax rate varied from the statutory federal income tax
expense rate at 21.0 percent, due primarily to our portfolio of tax-exempt securities and general business tax credits. In 2022, federal income tax benefit on a consolidated basis was $3.0 million or
(24.5) percent of pre-tax income and federal income tax expense on a consolidated basis was $16.2 million or 16.8 percent of pre-tax income in 2021.
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 December 31, 2023 and 2022.
As of December 31, 2023, we had no alternative minimum tax credit carryforwards.
INVESTMENTS
Investment Philosophy
The Company's assets are invested to preserve capital and maximize after-tax total return while maintaining an appropriate balance of risk. The risk-adjusted return on our portfolio is an important
component of overall financial results, but quality and safety of principal is the highest priority of our investment program. Our general investment philosophy is to purchase financial instruments
with the expectation that we will hold them to their maturity. However, active management of our portfolio is considered necessary to appropriately manage risk, achieve portfolio objectives and
maximize investment income as market conditions change.
Each of our insurance company subsidiaries develops an appropriate investment strategy that aligns with its business needs and supports United Fire's strategic plan and risk appetite. The portfolio is
structured to be compliant with
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state insurance laws that prescribe the quality, concentration and type of investments that may be made by insurance companies.
Investment Portfolio
Our invested assets at December 31, 2023 totaled $1,886.5 million, compared to $1,844.9 million at December 31, 2022, an increase of $41.6 million. At December 31, 2023, fixed maturity securities
and equity securities comprised 89.4 percent and 2.9 percent of our investment portfolio, respectively. Because the primary purpose of the investment portfolio is to fund future claims payments, we
utilize a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government and government agency bonds
and tax-exempt U.S. municipal bonds. Our overall investment strategy is to stay fully invested (i.e., minimize cash balances). If additional cash is needed, we have the ability to take advances through
the Federal Home Loan Bank of Des Moines ("FHLB Des Moines") 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 and regulatory requirements. 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 December 31, 2023 is presented at carrying value in the following table:
(In Thousands)
Fixed maturities:
Available-for-sale
Trading securities
Equity securities
Mortgage loans
Other long-term investments
Short-term investments
Total
$
$
1,686,502
55,019
45,366
99,507
100
1,886,494
Percent
of Total
89.4 %
—
2.9
2.4
5.3
—
100.0 %
At December 31, 2023 and December 31, 2022, our fixed maturities portfolio is classified as available-for-sale. Available-for-sale fixed maturity securities are carried at fair value, with changes in
fair value recognized as a component of accumulated other comprehensive income in stockholders' equity. We record convertible redeemable preferred debt securities and equity securities at fair
value, with any changes in fair value recognized in earnings.
As of December 31, 2023 and 2022, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.
Credit Quality
The following table shows the composition of fixed maturity securities held in our available-for-sale security portfolios by credit rating at December 31, 2023 and 2022. Information contained in the
table is generally based upon the issue credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain it from Standard & Poor's.
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(In Thousands)
Rating
AAA
AA
A
Baa/BBB
Other/Not Rated
Duration
December 31, 2023
December 31, 2022
$
$
Carrying Value
635,023
456,310
255,490
312,246
27,433
1,686,502
% of Total
Carrying Value
% of Total
37.7 %
27.1
15.1
18.5
1.6
100.0 %
$
$
540,485
482,369
232,668
278,247
17,567
1,551,336
34.8 %
31.1
15.0
17.9
1.1
100.0 %
Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement used to quantify
our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in
interest rates will have an equal and offsetting 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.
The weighted average effective duration of our portfolio of fixed maturity securities was 4.0 years at December 31, 2023 compared to 4.3 years at December 31, 2022.
The amortized cost and fair value of available-for-sale and trading fixed maturity securities at December 31, 2023, by contractual maturity, are shown in the following table. Actual maturities may
differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities
and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
(In Thousands)
December 31, 2023
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Asset-backed securities
Mortgage-backed securities
Collateralized mortgage obligations
Investment Results
Available-For-Sale
Amortized
Cost
Fair
Value
$
$
74,293
524,463
523,999
321,300
3,394
23,800
299,792
1,771,041
$
$
74,066
515,126
496,643
304,810
3,831
21,483
270,544
1,686,503
We invest the premiums received from our policyholders in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment
income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation,
changes in interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other
unpredictable national or world events. Net investment income increased 32.7 percent in 2023, compared with the same period of 2022. While interest on fixed maturities was up $7.5 million driven
by higher interest rates, this was offset by a decrease in dividends on equity securities of $1.6 million, due to a strategic reallocation of equity securities to fixed income assets during 2023. Income on
other long-term investments resulted in an additional $3.2 million of income as the valuation of the investments in limited liability partnerships varies
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from period to period in large part due to current equity market conditions. We expect to maintain our investment philosophy of purchasing quality investments rated investment grade or better.
An allowance for credit losses is recorded based on a number of factors including the 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 December 31, 2023:
Rollforward of allowance for credit losses for available-for-sale fixed maturity securities:
Beginning balance, January 1, 2023
Additions to the allowance for credit losses for which credit losses were not previously recorded
Reductions for securities sold during the period (realized)
Writeoffs charged against the allowance
Recoveries of amounts previously written off
Ending balance, December 31, 2023
As of
December 31, 2023
3
0
—
—
(2)
1
$
$
Changes in unrealized gains and losses on available-for-sale fixed maturity securities do not affect net income and earnings per share but do impact comprehensive income, stockholders' equity and
book value per share. We believe that any unrealized losses on our available-for-sale fixed maturity securities at December 31, 2023 are temporary based upon our current analysis of the issuers of the
securities that we hold and current market conditions. We invest in high quality assets to provide protection from future credit quality issues. Non-credit related unrealized gains and 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.
Net Investment Income
In 2023, our investment income, net of investment expenses, increased $14.7 million to $59.6 million as compared to 2022, due to interest on fixed maturities, income on other long-term investments
in limited liability partnerships, and other income. These increases were slightly offset by a decrease in dividends on equity securities.
In 2022, our investment income, net of investment expenses, decreased $10.8 million to $44.9 million as compared to 2021, primarily due to the change in the fair value of our investments in limited
liability partnerships.
The following table summarizes the components of net investment income:
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Table of Contents
(In Thousands)
Years Ended December 31,
Investment income from operations:
Interest on fixed maturities
Dividends on equity securities
Income on other long-term investments
Interest
Change in value
(1)
Interest on mortgage loans
Interest on short-term investments
Interest on cash and cash equivalents
Other
Total investment income from operations
Less investment expenses
Net investment income
2023
2022
2021
$
$
$
56,243
3,548
—
2,833
(2,864)
1,889
1,068
2,228
4,139
69,084
9,478
59,606
$
$
$
48,702
5,163
0
4,742
(7,930)
1,897
354
740
780
54,448
9,516
44,932
$
$
$
43,224
5,031
0
4,481
9,699
1,995
18
252
152
64,852
9,074
55,778
(1) Represents the change in value of our interests in limited liability partnerships that are recorded on the equity method of accounting.
In 2023, 81.4 percent of our gross investment income originated from interest on fixed maturities, compared to 89.4 percent and 66.7 percent in 2022 and 2021, respectively.
The following table details our annualized yield on average invested assets for 2023, 2022, and 2021, which is based on our invested assets (including money market accounts) at the beginning and
end of the year divided by net investment income:
(In Thousands)
Years ended December 31,
2023
2022
2021
Average
Invested Assets
Investment
Income, Net
Annualized Yield on
Average Invested Assets
$
$
1,891,504
1,992,108
2,141,022
59,606
44,932
55,778
3.2 %
2.3 %
2.6 %
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Net Investment Gains and Losses
The following table summarizes the components of our net investment gains or losses:
(In Thousands)
Years Ended December 31,
Net investment gains (losses):
Net gains (losses):
Fixed maturities:
Available-for-sale
Allowance for credit losses
Trading securities
Change in fair value
Sales
Equity securities:
Net gains (losses) recognized on equity securities sold during the period
Unrealized gains (losses) recognized during the period on equity securities still held at reporting date
Net gains (losses) recognized during the reporting period on equity securities
Mortgage loans
Other long-term investments
Short-term investments
Other-than-temporary-impairment charges:
Fixed maturities
Equity securities
Cash equivalents
Real Estate
Total net investment gains (losses)
Net Unrealized Investment Gains and Losses
2023
2022
2021
$
$
(442)
1
—
—
150
1,842
1,992
(5)
(319)
—
—
—
—
47
1,274
$
$
(1,397)
(3)
—
—
(1,767)
(12,802)
(14,569)
109
(267)
—
—
—
—
235
(15,892)
$
$
$
(277)
5
—
—
14,444
30,682
45,126
5
2,780
—
—
—
—
(256)
47,383
As of December 31, 2023, net unrealized investment losses, after tax, totaled $67.0 million compared to unrealized losses of $88.4 million and unrealized gains of $49.8 million as of December 31,
2022 and 2021, respectively. The unrealized investment loss position is a result of continued elevated interest rates during 2023, with a slight improvement from 2022 that resulted in a small change
in unrealized gains for 2023.
The net unrealized investment losses in 2022 was primarily the result of a change in the value of the fixed maturity portfolio due to higher interest rates during 2022. The decrease in net unrealized
investment gains in 2021 was primarily the result of a decrease in fixed maturity securities held and a change in the value of the fixed maturity portfolio due to higher interest rates during 2021.
The following table summarizes the change in our net unrealized investment gains (losses):
(In Thousands)
Years Ended December 31,
Changes in net unrealized investment gains (losses):
Available-for-sale fixed maturity securities
Income tax effect
Total change in net unrealized investment gains (losses), net of tax
2023
2022
2021
$
$
27,091
(5,689)
21,402
$
$
(174,858)
36,720
(138,138)
$
$
(42,159)
8,858
(33,301)
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MARKET RISK
Our Consolidated Balance Sheets include financial instruments whose fair values are subject to market risk. The active management of market risk is integral to our operations. Market risk is the
potential for loss due to a decrease in the fair value of securities resulting from uncontrollable fluctuations, such as: interest rate risk, equity price risk, foreign exchange risk, credit risk, inflation, or
geopolitical conditions. Our primary market risk exposures are: changes in interest rates, deterioration of credit quality in specific issuers, sectors or the economy as a whole, and an unforeseen
decrease in the liquidity of securities we hold.
Interest Rate Risk
Interest rate risk is the price sensitivity of a fixed income maturity security or portfolio of securities to changes in level of interest rates. Generally, there is an inverse relationship between changes in
interest rates and changes in the price of a fixed income/maturity security. Plainly stated, if interest rates go up (down), bond prices go down (up). A vast majority of our holdings are fixed income
maturity and other interest rate sensitive securities that will decrease (increase) in value as interest rates increase (decrease). While it is generally our intent to hold our investments in fixed maturity
securities to maturity or recovery, we have classified a majority of our fixed maturity portfolio as available-for-sale. Available-for-sale fixed income maturity securities are carried at fair value on the
Consolidated Balance Sheets with unrealized gains or losses reported net of tax in Accumulated Other Comprehensive Income. A change in the prevailing interest rates generally translates into a
change in the fair value of our fixed income/maturity securities, and by extension, our overall book value.
Duration
We analyze potential changes in the value of our investment portfolio due to the market risk factors noted above within the overall context of asset and liability management. A technique we use in
the management of our investment portfolio specifically related to interest rate risk is the calculation of duration. Our actuaries estimate the payout pattern of our reserve liabilities to determine their
duration, which is the present value of the weighted average payments expressed in years. We then establish a target duration for our investment portfolio so that at any given time the estimated cash
generated by the investment portfolio will closely match the estimated cash required for the payment of the related reserves. We structure the investment portfolio to meet the target duration to
achieve the required cash flow, based on liquidity and market risk factors.
Impact of Interest Rate Changes
The amounts set forth in the following table detail the impact of hypothetical interest rate changes on the fair value of fixed maturity securities held at December 31, 2023. The sensitivity analysis
measures the change in fair values arising from immediate changes in selected interest rate scenarios. We employed hypothetical parallel shifts in the yield curve of plus or minus 100 and 200 basis
points in the simulations. Additionally, based upon the yield curve shifts, we employ estimates of prepayment speeds for mortgage-related products and the likelihood of call or put options being
exercised within the simulations.
The selection of a 100-basis-point and 200-basis-point increase or decrease in interest rates should not be construed as a prediction by our management of future market events, but rather as an
illustration of the potential impact of an event.
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December 31, 2023
(In Thousands)
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political subdivisions
General obligations:
Midwest
Northeast
South
West
Special revenue:
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-For-Sale Fixed Maturities
-200 Basis
Points
-100 Basis
Points
Base
+100 Basis
Points
+ 200 Basis
Points
$
52,859
102,613
$
51,844
99,114
$
50,861
94,493
$
49,911
89,071
$
53,470
11,601
55,992
79,588
104,874
54,484
172,308
106,032
20,915
155,483
47,101
78,246
106,170
38,428
92,001
155,386
23,117
53,103
11,493
55,118
78,553
102,973
53,365
168,451
103,876
20,020
147,723
45,234
74,246
100,844
35,828
86,625
150,555
22,375
52,707
11,380
54,207
77,426
100,981
52,227
164,266
101,565
19,172
140,467
43,473
70,548
95,921
33,472
81,788
145,691
21,483
51,832
11,156
52,835
75,825
97,900
50,716
158,149
98,023
18,371
133,688
41,808
67,124
91,369
31,332
77,420
140,838
20,504
162,765
79,179
48,670
4,829
1,806,111
$
158,024
75,569
47,291
4,251
1,746,475
$
153,206
71,685
45,653
3,831
1,686,503
$
147,995
67,770
43,801
3,519
1,620,957
$
$
48,992
83,292
50,333
10,728
50,921
73,272
92,935
48,367
149,398
92,858
17,617
127,364
40,238
63,953
87,158
29,387
73,467
136,095
19,509
142,186
64,074
41,854
3,284
1,547,282
To the extent actual results differ from the assumptions utilized, our duration and interest rate measures could be significantly affected. As a result, these calculations may not fully capture the impact
of nonparallel changes in the relationship between short-term and long-term interest rates.
Equity Price Risk
Equity price risk is the potential loss arising from changes in the fair value (i.e., market price) of equity securities held in our portfolio. Changes in the price of an equity security may be due to a
change in the future earnings capacity or strategic outlook of the security issuer, and what investors are willing to pay for those future earnings and related strategy. The carrying values of our equity
securities are based on quoted market prices, from an independent source, as of the balance sheet date. Market prices of equity securities, in general, are subject to fluctuations that could cause the
amount to be realized upon the future sale of the securities to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic
characteristics of the security issuer, the relative price of alternative investments, general market conditions, and supply/demand factors related to a particular security.
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Impact of Price Change
The following table details the effect on the fair value of our investments in equity securities for a positive and negative 10 percent price change at December 31, 2023:
(In Thousands)
Estimated fair value of equity securities
Foreign Currency Exchange Rate Risk
-10%
Base
+10%
$
49,517
$
55,019
$
60,521
Foreign currency exchange rate risk arises from the possibility that changes in foreign exchange rates will impact our financial results. Foreign currency exchange rate risk can occur as a result of
investment holdings in foreign currency, settlement of amounts due to or from foreign reinsurers or our participation in FAL. We consider this risk to be immaterial to our operations.
Credit Risk
Credit risk is the willingness and ability of a borrower to repay on time and in full any principal and interest due to the lender. Losses related to credit risk are realized through the income statement
and have a direct impact on the earnings of UFG. We believe that we maintain the appropriate balance of risk in our portfolio, consistent with our Investment Policy Statement and ensure the portfolio
is compensated appropriately for the credit risk it holds. We do have within our municipal bond holdings a small number of securities whose ratings were enhanced by third-party insurance for the
payment of principal and interest in the event of an issuer default. Of the insured municipal securities in our investment portfolio, 98.2 percent and 98.7 percent were rated "A" or above, and 95.0
percent and 95.2 percent were rated "AA" or above at December 31, 2023 and 2022, respectively, without the benefit of insurance. Due to the underlying financial strength of the issuers of the
securities, we believe that the loss of insurance would not have a material impact on our operations, financial position, or liquidity.
We have no direct exposure in any of the guarantors of our investments. Our largest indirect exposure with a single guarantor totaled $7.6 million or 28.9 percent of our insured municipal securities at
December 31, 2023, as compared to $7.7 million or 29.1 percent at December 31, 2022. Our five largest indirect exposures to financial guarantors accounted for $28.6 million and $28.7 million of
our municipal securities at December 31, 2023 and 2022, respectively.
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.
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.
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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 summary of cash sources and uses in 2023, 2022 and 2021:
Cash Flow Summary
(In Thousands)
Cash provided by (used in)
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
2023
Years Ended December 31,
2022
2021
$
$
171,736
(149,886)
(16,454)
5,396
$
$
(1,251)
(19,171)
(15,032)
(35,454)
$
$
29,917
31,731
(17,492)
44,156
Our cash flows were sufficient to meet our current liquidity needs for the full-year periods ended December 31, 2023, 2022 and 2021 and we anticipate they will be sufficient to meet our future
liquidity needs. We also have the ability to take advances through the Federal Home Loan Bank facility. See Part II, Item 8, Note 13 "Debt" for more information.
Operating Activities
Net cash flows provided by operating activities totaled $171.7 million in 2023, used in operating activities totaled $(1.3) million in 2022 and provided by operating activities totaled $29.9 million in
2021, respectively. Our cash flows from operating activities were sufficient to meet our liquidity needs for 2023, 2022 and 2021.
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 portfolio, see the "Investment Portfolio" section contained in this Item.
In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed maturity securities also can provide liquidity. During the next five years, $0.6 billion, or
35.64 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 December 31, 2023, our cash and cash equivalents included
$20.3 million related to these money market accounts, compared to $31.3 million at December 31, 2022.
Net cash flows used in investing activities totaled $149.9 million in 2023 and net cash flows used in investing activities totaled $19.2 million in 2022. Net cash flows provided by investing activities
totaled $31.7 million in 2021. In 2023, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments that totaled $162.1 million
compared to $280.4 million and $451.1 million for the same period in 2022 and 2021, respectively.
Our cash outflows for investment purchases totaled $301.1 million in 2023, compared to $297.5 million and $405.4 million for the same period in 2022 and 2021, respectively.
Financing Activities
Net cash flows used in financing activities totaled $16.5 million in 2023 and $15.0 million in 2022. Net cash flow used in financing activities totaled $17.5 million in 2021. The net cash flows used in
financing activities are
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primarily the payment of cash dividends of $16.2 million, $15.9 million and $15.1 million in 2023, 2022 and 2021, respectively, along with share repurchases of $2.0 million in 2021.
Contractual Obligations and Commitments
The following table shows our contractual obligations and commitments, including our estimated payments due by period at December 31, 2023. Time periods of less than one year are considered
short-term cash obligations and time periods greater than one year are considered long-term cash obligations.
(In Thousands)
Contractual Obligations
Loss and loss settlement expense reserves
Long term debt
Operating leases
Profit-sharing commissions
Total
Loss and Loss Settlement Expense Reserves
Total
Less Than
One Year
Payments Due By Period
One to
Three Years
Three to
Five Years
More Than
Five Years
$
$
1,638,755
105,250
32,262
23,904
1,800,171
$
$
567,672
3,250
9,361
23,904
604,187
$
$
563,091
6,500
16,777
—
586,368
$
$
220,939
6,500
5,313
—
232,752
$
$
287,053
89,000
811
—
376,864
The amounts presented are estimates of the dollar amounts and time periods in which we expect to pay out our gross loss and loss settlement expense reserves. Because the timing of future payments
may vary from the stated contractual obligation, these amounts are estimates based upon historical payment patterns and may not represent actual future payments. Refer to "Critical Accounting
Policies — Losses and Loss Settlement Expenses" in this section for further discussion.
Long term debt
The Company executed a private placement debt transaction on December 15, 2020 between United Fire & Casualty Company, 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").
UFG sold an aggregate $50.0 million of notes due 2040 to the Note Purchasers. One note with a principal amount of $35.0 million was issued to Federated Mutual and one note with a principal
amount of $15.0 million was issued to Federated Life.
Interest payments 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. Interest expense
totaled $3.3 million for the year ended December 31, 2023. Payment of interest is subject to approval by the Iowa Insurance Division.
Operating Leases
Our operating lease obligations are for the rental of office space, vehicles, computer equipment and office equipment. For further discussion of our operating leases, refer to Part II, Item 8, Note 12
"Lease Commitments."
Profit-Sharing Commissions
We offer our agents a profit-sharing plan as an incentive for them to place high-quality property and casualty insurance business with us. Based on business produced by the agencies in 2023,
property and casualty agencies expect to receive profit-sharing payments of $23.9 million in 2024.
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Guaranty Fund Assessments
The Company is subject to guaranty fund and other assessments by the states in which it writes business. At December 31, 2023 the accrued liability for guaranty fund assessments was $0 and the
premium tax benefit asset was $1.6 million. Guaranty fund assets are typically realized over the next five to 10 years.
Commitments for Capital Expenditures
Dividends
Dividends paid to shareholders totaled $16.2 million, $15.9 million and $15.1 million in 2023, 2022 and 2021, respectively. Our practice has been to pay quarterly cash dividends, which we have paid
every quarter since March 1968.
Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements, and general business
conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds.
As a holding company with no independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its
common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of
dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior
approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on
a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions.
Based on these restrictions, at December 31, 2023, our insurance company subsidiary, United Fire & Casualty, is able to make a maximum of $58.6 million in dividend payments without prior
regulatory approval. These restrictions are not expected to have a material impact in meeting our cash obligations.
Share Repurchases
Under our share repurchase program, first announced in August 2007, we may purchase our 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, economic and general market conditions, and corporate and
regulatory requirements. Our share repurchase program may be modified or discontinued at any time.
During 2023, 2022 and 2021, pursuant to authorization by our Board of Directors, we repurchased 0, 0, and 67,651 shares of our common stock, respectively, which used cash totaling $0.0 million in
2023 and 2022 and $2.0 million in 2021. The Board of Directors reauthorized the share repurchase program in November 2022 through August 2024. At December 31, 2023, we were authorized to
purchase an additional 1,719,326 shares of our common stock.
Credit Facilities
Information specific to our credit facilities is incorporated by reference from Note 13 "Debt" contained in Part II, Item 8. On December 29, 2023, the Company terminated its existing credit
agreement, dated as of March 31, 2020, with Wells Fargo Bank, National Association, as administrative agent, issuing lender, swing-line lender and lender, and the other lenders from time to time
party thereto.
In December 2023, the Company became a member of the Federal Home Loan Bank of Des Moines ("FHLB Des Moines"). Membership allows access to loans or advances. As of December 31,
2023, there were no advances outstanding under the FHLB Des Moines agreement. For further information regarding the agreement with FHLB Des Moines, see Note 13 "Debt" contained in Part II,
Item 8.
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Stockholders' Equity
Stockholders' equity decreased 0.9 percent to $733.7 million at December 31, 2023, from $740.1 million at December 31, 2022. The decrease is primarily attributed to a net loss of $29.7 million, and
stockholder dividends of $16.2 million, offset by an increase in net unrealized value from our fixed maturity securities, net of tax, of $21.4 million and a $15.1 million increase due to a change in
liability for employee benefit plans. As of December 31, 2023, the book value per share of our common stock was $29.04, compared to $29.36 at December 31, 2022.
Risk-Based Capital
The NAIC adopted risk-based capital requirements, which requires us to calculate a minimum capital requirement for each of our insurance companies based on individual company insurance risk
factors. These "risk-based capital" results are used by state insurance regulators to identify companies that require regulatory attention or the initiation of regulatory action. At December 31, 2023, all
of our insurance companies had capital well in excess of required levels.
Funding Commitments
We hold investments in limited liability partnerships as part of our investment strategy. Pursuant to agreements with our limited liability partnership investments, we are contractually committed
through July 10, 2030 to make capital contributions upon request of the partnerships. Our remaining potential contractual obligation was $28.6 million at December 31, 2023. These partnerships are
included in our other long term investments on the Consolidated Balance Sheets with a current fair value of $98.3 million, or 5.2 percent of our total invested assets, at December 31, 2023.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that may potentially result in materially different results under different
assumptions and conditions. We base our discussion and analysis of our results of operations and financial condition on the amounts reported in our Consolidated Financial Statements, which we have
prepared in accordance with 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 we believe to be reasonable under the circumstances. Actual results could differ from those estimates. We
believe our most critical accounting policies are as follows.
Investment Valuation
Upon acquisition, we classify investments in marketable securities as held-to-maturity, available-for-sale, or trading. We record investments in available-for-sale and trading fixed maturity securities
and equity securities at fair value. Other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. We record
mortgage loans at their amortized cost less any valuation allowance.
In general, investment securities are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility risk. Therefore, it is reasonably possible that changes in the fair value
of our investment securities that are reported at fair value will occur in the near term and such changes could materially affect the amounts reported in the Consolidated Financial Statements. Also, it
is reasonably possible that changes in the value of our investments in trading securities and limited liability partnerships could occur in the future and such changes could materially affect our results
of operations as reported in our Consolidated Financial Statements.
Fair Value Measurement
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Information specific to the fair value measurement of our financial instruments and disclosures is incorporated by reference from Note 3 "Fair Value of Financial Instruments" contained in Part II,
Item 8.
Deferred Policy Acquisition Costs ("DAC")
We record an asset for certain costs of underwriting new business, primarily commissions, premium taxes and variable underwriting and policy issue expenses that have been deferred. The amount of
underwriting compensation expense eligible for deferral is based on time studies and a ratio of success in policy placement. At December 31, 2023 and 2022, our DAC asset was $126.5 million and
$104.2 million, respectively.
The DAC asset is amortized over the life of the policies written, generally one year. We assess the recoverability of DAC on a quarterly basis by line of business. This assessment is performed by
comparing recorded unearned premium to the sum of unamortized DAC and estimates of expected losses and loss settlement expenses. If the sum of these costs exceeds the amount of recorded
unearned premium (i.e., the line of business is expected to generate an operating loss), the excess is recognized in current period other underwriting expenses as an offset against the established DAC
asset. We refer to this offset as a premium deficiency charge.
To calculate the premium deficiency charge by line of business, we estimate an expected loss and loss settlement expense ratio which is based on our best estimate of future losses for each line of
business. This calculation is performed on a quarterly basis and developed in conjunction with our quarterly reserving process. The expected loss and loss settlement expense ratios are the only
assumptions we utilize in our premium deficiency calculation. Changes in these assumptions can have a significant impact on the amount of premium deficiency charge recognized for a line of
business. The premium deficiency calculation is aggregated by line of business in a manner consistent with how the policies are currently being marketed and managed. The Company does not
consider anticipated investment income in determining if a premium deficiency exists.
The following table illustrates the hypothetical impact on the premium deficiency charge recorded for the quarter ended December 31, 2023, of reasonably likely changes in the assumed loss and loss
settlement expense ratios utilized for purposes of this calculation. The entire impact of these changes would be recognized through income as other underwriting expenses. The following table
illustrates the impact of potential changes in the expected loss and loss settlement expense ratios for all lines of business on the premium deficiency charge. The base amount indicated below is the
actual premium deficiency charge recorded as an offset against the DAC asset established as of the quarter ended December 31, 2023:
Sensitivity Analysis — Impact of Changes in Projected Loss and Loss Settlement Expense Ratios
(In Thousands)
Premium deficiency charge estimated
-10%
$
66
-5%
Base
+5%
+10%
$
76
$
86
$
10,630
$
22,276
Actual future results could differ materially from our assumptions used to calculate the recorded DAC asset. Changes in our assumed loss and loss settlement expense ratios in the future would
impact the amount of deferred costs in the period such changes in assumptions are made. The premium deficiency charge calculated for the quarter ended December 31, 2023 was $0.1 million
compared to the premium deficiency charge of $0.9 million calculated for the same period of 2022.
Losses and Loss Settlement Expenses
Reserves for losses and loss settlement expenses are reported using our best estimate of ultimate liability for claims that occurred prior to the end of any given reporting period but have not yet been
paid. Before credit for reinsurance recoverables, these reserves were $1.6 billion and $1.5 billion at December 31, 2023 and 2022, respectively. We purchase reinsurance to mitigate the impact of
large losses and catastrophic events. Loss and loss settlement expense reserves ceded to reinsurers were $191.6 million for 2023 and $146.9 million for 2022. Our reserves, before credit for
reinsurance recoverables, by line of business as of December 31, 2023, were as follows:
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(In Thousands)
Commercial lines
Fire and allied lines
Other liability
Automobile
Workers' compensation
Fidelity and surety
Miscellaneous
Total commercial lines
Personal lines
Automobile
Fire and allied lines
Miscellaneous
Total personal lines
Reinsurance assumed
Total
Case-Basis Reserves
Case Basis
IBNR
Loss
Settlement
Expense
Total Reserves
$
$
$
$
$
77,167
341,276
180,334
96,405
35,527
1,781
732,490
2,081
2,885
85
5,051
88,175
825,716
$
$
$
$
$
69,092
319,604
86,184
8,765
7,705
1,054
492,404
158
2,020
339
2,517
89,971
584,892
$
$
$
$
$
22,705
158,326
27,409
15,829
1,819
182
226,270
292
327
58
677
1,200
228,147
$
$
$
$
$
168,964
819,206
293,927
120,999
45,051
3,017
1,451,164
2,531
5,232
482
8,245
179,346
1,638,755
For each of our lines of business, with respect to reported claims, we establish reserves on a case-by-case basis. Our experienced claims personnel estimate these case-basis reserves using adjusting
guidelines established by management. Our goal is to set the case-basis reserves at the ultimate expected loss amount as soon as possible after information about the claim becomes available.
Establishing the case reserve for an individual claim is subjective and complex, requiring us to estimate future payments and values that will be sufficient to settle an individual claim. Setting a
reserve for an individual claim is an inherently uncertain process. When we establish and adjust individual claim reserves, we do so based on our knowledge of the circumstances and facts of the
claim. Upon notice of a claim, we establish a preliminary (average claim cost) reserve based on the limited claim information initially reported. Subsequently, we conduct an investigation of each
reported claim, which allows us to more fully understand the factors contributing to the loss and our potential exposure. This investigation may extend over a long period of time. As our claim
investigation progresses, and as our claims personnel identify trends in claims activity, we may refine and adjust our estimates of case reserves. To evaluate and refine our overall reserving process,
we track and monitor all claims until they are settled and paid in full, with all salvage, subrogation claims, and liability deductible recoveries being resolved.
Most of our insurance policies are written on an occurrence basis that provides coverage if a loss occurs during the policy period, even if the insured reports the loss many years later. For example,
some liability claims may be reported 10 years or more after the policy period, and the workers' compensation coverage provided by our policies pays unlimited medical benefits for the duration of
the claimant's injury up to the lifetime of the claimant. In addition, final settlement of certain claims can be delayed for years due to litigation or other reasons. Reserves for these claims require us to
estimate future costs, including the effect of judicial actions, litigation trends and medical cost inflation, among others. Reserve development can occur over time as conditions and circumstances
change many years after the policy was issued and/or the loss occurred.
Our loss reserves include amounts related to both short-tail and long-tail lines of business. A short-tail insurance product is one where claim settlement values are known comparatively quickly. Final
settlement values for long-tail insurance products are sometimes not known for many years. The longer the time span between the incidence of a loss and the settlement of the claim, the more the
final settlement can vary from the reserves initially established. Accordingly, long-tail insurance products can have significant implications on the reserving process.
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Our short-tail lines of business include fire and allied lines, commercial property, automobile physical damage and inland marine. The amounts of the case-based reserves that we establish for claims
in these lines depend upon various factors, such as individual claim facts (including type of coverage and severity of loss), our historical loss experience and trends in general economic conditions
(including changes in replacement costs, medical costs and inflation).
Our long-tail lines of business include workers' compensation and other liability. In addition, certain product lines such as commercial automobile, commercial multi-peril and surety include both
long-tail coverages and short-tail coverages. For many long-tail liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the loss, the reporting of
the loss to us and the settlement 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 than for short-tail coverages.
The amounts of the case-basis loss reserves that we establish for claims in long-tail lines of business depends upon various factors, including individual claim facts (including type of coverage,
severity of loss and underlying policy limits), company historical loss experience, changes in underwriting practice, legislative enactments, judicial decisions, legal developments in the awarding of
damages, changes in political attitudes and trends in general economic conditions, including inflation. As with our short-tail lines of business, we review and make changes to long-tail case-based
reserves based on our review of continually evolving facts as they become available to us during the claims settlement process. Our adjustments to case-based reserves are reported in the financial
statements in the period that new information arises about the claim. Examples of facts that become known that could cause us to change our case-based reserves include, but are not limited to:
evidence that loss severity is different than previously assessed; new claimants who have presented claims; and the assessment that no coverage exists.
Incurred But Not Reported Reserves
On a quarterly basis, the Company's actuarial reserving department performs a detailed analysis of IBNR reserves. This analysis uses various projection methods to provide several estimates of
ultimate loss (or LAE) for each individual accident year and line of business. The projection methods include, but are not limited to, paid development; reported development; expected loss ratio
methods; and Bornhuetter Ferguson methods on both a paid and reported basis. These methods may need to be adjusted for anomalies or outliers in the data, unusual internal or external trends, or
other factors impacting the reliability/credibility of the historical company experience. Results of the projection methods are compared, and a point estimate of ultimate loss (or LAE) is established
for each individual accident year and line of business. The specific projection methods used to establish point estimates vary depending on what is deemed most appropriate for a particular line of
business and accident year. IBNR estimates are derived by subtracting reported loss from the final point estimates.
Senior management meets with our actuarial team and controller quarterly to review the adequacy of carried IBNR reserves based on results from this actuarial analysis and makes adjustments for
changes in business and other factors not completely captured by the data within the actuarial analysis. This method of establishing our IBNR reserves has consistently resulted in aggregate reserve
levels that management believes are reasonable in comparison to the reserve estimates indicated by the actuarial analysis.
For our short-tail lines of business, IBNR reserves constitute a small portion of the overall reserves. These claims are generally reported and settled shortly after the loss occurs. In our long-tail lines
of business, IBNR reserves constitute a relatively higher proportion of total reserves, because, for many liability claims, significant periods of time may elapse between the initial occurrence of the
losses, the reporting of the losses to us, and the ultimate settlement of the losses.
Loss Settlement Expense Reserves
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Loss settlement expense reserves include amounts ultimately allocable to individual claims, as well as amounts required for the general overhead of the claims handling operation that are not
specifically allocable to individual claims. We do not establish case reserves for these expenses. Instead, on a quarterly basis, our internal reserving department performs a detailed statistical analysis
(using historical data) to estimate the required reserve for unpaid loss settlement expenses.
LAE is composed of two distinct kinds of expenses which are defense and cost containment ("DCC") and adjusting and other ("A&O"). These two expense types have different purposes and
characteristics which necessitates different estimation methods in order to provide a valid quarterly estimate of the required reserve for unpaid expense which is generally referred to as an LAE IBNR
reserve.
Reserves for unpaid DCC are estimated quarterly by line of business for each individual accident year using three methods: (1) Paid development, (2) Expected emergence of DCC, and (3)
Bornhuetter Ferguson. Each of the three methods produces an estimate of the ultimate DCC cost for an individual accident year and the final estimate is generally a weighted average of the various
methods. Inception to date paid DCC is subtracted from the final ultimate DCC estimate to provide the estimated DCC unpaid reserve for each individual accident year.
Reserves for unpaid A&O are estimated quarterly by line of business for each individual accident year using a single method. This method consists of applying a percentage factor to unpaid loss
reserves. The percentage factor used differs by line of business and is evaluated and established on an annual basis using year-end data. The percentage factor is evaluated and selected after reviewing
the ratio of paid A&O to paid loss using calendar year data for the most recent five years.
Reinsurance Reserves
The estimation of assumed and ceded reinsurance loss and loss settlement expense reserves is subject to the same factors as the estimation of loss and loss settlement expense reserves. In addition to
those factors, which give rise to inherent uncertainties in establishing loss and loss settlement expense reserves, there exists a delay in our receipt of reported claims for assumed business due to the
procedure of having claims first reported through one or more intermediary insurers or reinsurers.
Reserves for assumed reinsurance are established using methods and techniques identical to those used for direct lines of business. The additional delay inherent in assumed reinsurance reporting is
considered in our reserving process and payment is not problematic. Assumed reinsurance, like every independent line of business, has unique reporting and payment patterns that are reviewed as part
of the reserve estimation process.
There are three distinct types of reserves for expected recoveries: (1) reported claim reserves, (2) loss IBNR, and (3) allocated LAE IBNR. Ceded reserves for reported claims are calculated by
subtracting the primary retention from the claim value established by our claim adjuster. Ceded IBNR comes from multiple treaties and is reviewed quarterly by our reserving actuaries in conjunction
with the direct reviews. Multiple methods are utilized in the ceded reviews which vary by line of business. These include estimates based on the relationship of ceded premium to direct premium,
Bornhuetter Ferguson methods, and methods based on industry excess of loss factors. Some of our business is 100.0 percent ceded or based on a set quota share percentage. In those cases, ceded loss
IBNR is typically formulaic based on direct loss IBNR. We will cede some allocated LAE expenses when we cede loss. Our ceded allocated LAE IBNR is estimated based on our ceded unpaid loss
reserves and the general relation, by line of business, between LAE and loss. Our primary retention for the core multi-line reinsurance treaty was $2.0 million for 2012 through 2015, increased to $2.5
million from 2016 through 2021, and increased again to $3.0 million beginning in 2022.
Key Assumptions
Our actuarial reserving department uses a number of key assumptions in establishing an estimate of loss and loss settlement expense reserves, including the following assumptions: future loss
settlement expenses can be estimated based on the Company's historical ratios of loss settlement expenses paid to losses; the Company's case-basis reserves reflect the most up-to-date information
available about the unique circumstances of each individual claim;
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no new judicial decisions or regulatory actions will increase our case-basis obligations; historical aggregate claim reporting and payment patterns will continue into the future consistent with the
observable past; significant unique and unusual claim events have been identified and appropriate adjustments have been made; and, to the best of our knowledge, there are no new latent trends that
would impact our case-basis reserves.
Our key assumptions are subject to change as actual claims occur and as we gain additional information about the variables that underlie our assumptions. Accordingly, management reviews and
updates these assumptions periodically to ensure that the assumptions continue to be valid. If necessary, management makes changes not only in the estimates derived from the use of these
assumptions, but also in the assumptions themselves. Due to the inherent uncertainty in the loss reserving process, management believes that there is a reasonable chance that modification to key
assumptions could individually, or in aggregate, result in reserve levels that are either significantly above or below the actual amount for which the related claims will eventually settle.
As an example, if our loss and loss settlement expense reserves of $1.6 billion as of December 31, 2023, is 10.0 percent inadequate, we would experience a reduction in future pre-tax earnings of up
to $163.9 million. This reduction could be recorded in one year or multiple years, depending on when we identify the deficiency. The deficiency would also affect our financial position in that our
equity would be reduced by an amount equivalent to the reduction in net income. Any deficiency that would be recognized in our loss and loss settlement expense reserves usually does not have a
material effect on our liquidity because the claims have not been paid. Conversely, if our estimates of ultimate unpaid loss and loss settlement expense reserves prove to be redundant, our future
earnings and financial position would be improved. We believe our approach produces recorded reserves that are reasonable as to their relative position within a range of reasonable reserves from
year-to-year.
We are unable to reasonably quantify the impact of changes in our key assumptions utilized to establish individual case-basis reserves on our total reported reserves because the impact of these
changes would be unique to each specific case-basis reserve established. However, based on historical experience, we believe that aggregate case-basis reserve volatility levels of 5.0 percent and 10.0
percent can be attributed to the ultimate development of our net case-basis reserves. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards and an increase if
the reserves were to be adjusted downwards. The table below details the impact of this development volatility on our reported net case-basis reserves at December 31, 2023:
(In Thousands)
Change in level of net case-basis reserve development
Impact on reported net case-basis reserves
5%
10%
$
36,019
$
72,038
Due to the formula-based nature of our IBNR and loss settlement expense reserve calculations, changes in the key assumptions utilized to generate these reserves can impact our estimate of projected
loss and potentially impact reported results. It is not possible to isolate and measure the potential impact of just one of these factors, and future loss trends could be partially impacted by all factors
concurrently. Nevertheless, it is meaningful to view the sensitivity of the reserves to potential changes in these variables such as claim frequency and severity. To demonstrate the sensitivity of
reserves to changes in significant assumptions, the following example is presented. The amounts reflect the pre-tax impact on earnings from a hypothetical percentage change in the calculation of
IBNR and loss settlement expense reserves at December 31, 2023. The impact to pre-tax earnings would be a decrease if the reserves were to be adjusted upwards and an increase if the reserves were
to be adjusted downwards. We believe that the changes presented are reasonably likely based upon an analysis of our historical IBNR and loss settlement expense reserve experience.
(In Thousands)
Change in claim frequency and claim severity assumptions
Impact due to change in IBNR reserving assumptions
5%
10%
$
25,339
$
50,678
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(In Thousands)
Change in LAE paid to losses paid ratio
Impact due to change in LAE reserving assumptions
1%
2%
$
2,200
$
4,399
In 2023, we did not change the key method through which we develop our assumptions on which we based our reserving calculations. In estimating our 2023 loss and loss settlement expense
reserves, we did not anticipate future events or conditions that were inconsistent with past development patterns.
Certain of our lines of business are subject to the potential for greater loss and loss settlement expense development than others, which are discussed below:
Other Liability Reserves
Other liability is considered a long-tail line of business, as it can take a relatively long period of time to settle claims from prior accident years. This is partly due to the lag time between the date a
loss or event occurs that triggers coverage and the date when the claim is actually reported. Defense costs are also a part of the insured expenses covered by liability policies and can be significant,
sometimes greater than the cost of the actual paid claims. For the majority of our products, defense costs are outside of the policy limit, meaning that the amounts paid for defense costs are not
subtracted from the available policy limit.
Factors that can cause reserve uncertainty in estimating reserves in this line include: reporting time lags; the number of parties involved in the underlying tort action; whether the "event" triggering
coverage is confined to only one time period or is spread over multiple time periods; the potential dollars involved in the individual claim actions; whether such claims were reasonably foreseeable
and intended to be covered at the time the contracts were written (i.e., coverage disputes); and the potential for mass claim actions.
Claims with longer reporting time lags may result in greater inherent risk. This is especially true for alleged claims with a latency feature, particularly where courts have ruled that coverage is spread
over multiple policy years, hence involving multiple defendants (and their insurers and reinsurers) and multiple policies (thereby increasing the potential dollars involved and the underlying
settlement complexity). Claims with long latencies also increase the potential time lag between writing a policy in a certain market and the recognition that such policy has potential mass tort and/or
latent claim exposure.
Our reserve for other liability claims at December 31, 2023 was $819.2 million and consisted of 4,351 claims, compared with $757.5 million, consisting of 4,860 claims at December 31, 2022. Of the
$819.2 million total reserve for other liability claims, $103.7 million is identified as defense costs and $54.6 million is identified as general overhead required in the settlement of claims.
Included in the other liability line of business are gross reserves for construction defect losses and loss settlement expenses. Construction defect exposure is unique because of its very long tail as
claims can often take over six years to be reported to us and another four years to settle. This exposure relates to a deficiency in the design or construction of a building or structure resulting from a
failure to design or construct in a reasonably workmanlike manner, and/or in accordance with a buyer's reasonable expectation. In the cases involving latent defects, the determination of when a loss
occurred is often unclear and governed by various theories that vary by state. Further, each state has a unique Statute of Repose that determines the length of time an insured has to report a claim
generally from the date of substantial completion of a project.
In addition to these issues, other variables also contribute to a high degree of uncertainty in establishing reserves for construction defect claims. These variables include: whether coverage exists;
when losses occur; the size of each loss; expectations for future interpretive rulings concerning contract provisions; and the extent to which the assertion of these claims will expand geographically. In
recent years, we have implemented various underwriting measures that we anticipate will mitigate the amount of construction defect losses experienced. These initiatives include increased care
regarding additional insured endorsements; stricter underwriting guidelines on the writing of residential contractors; and an increased utilization of loss control.
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Asbestos and Environmental Reserves
Included in the other liability and assumed reinsurance lines of business are reserves for asbestos and other environmental losses and loss settlement expenses. At December 31, 2023 and 2022, we
had $0.8 million and $1.9 million, respectively, in direct and assumed asbestos and environmental loss reserves. The estimation of loss reserves for environmental claims and claims related to long-
term exposure to asbestos and other substances is one of the most difficult aspects of establishing reserves, especially given the inherent uncertainties surrounding such claims. Although we record
our best estimate of loss and loss settlement expense reserves, the ultimate amounts paid upon settlement of such claims may be more or less than the amount of the reserves, because of the
significant uncertainties involved and the likelihood that these uncertainties will not be resolved for many years.
Commercial Automobile Reserves
Commercial automobile claim reserves are established at exposure based on information either known and provided or obtained through the investigation. Incorporated are the perspective and
experience the claims staff has acquired, which may include assumptions as to how the claim will develop over time. Exposures are identified and reserves established within 30 to 60 days depending
on the complexity of the case.
Workers' Compensation Reserves
Like the other liability line of business, workers' compensation losses and loss settlement expense reserves are based upon variables that create uncertainty in estimating the ultimate reserve.
Estimates for workers' compensation are particularly sensitive to assumptions about medical cost inflation, which has been relatively stable over the past few years. Other variables that we consider
and that contribute to the uncertainty in establishing reserves for workers' compensation claims include: state legislative and regulatory environments; trends in jury awards; and mortality rates.
Because of these variables, the process of reserving for the ultimate loss and loss settlement expense to be incurred requires the use of informed judgment and is inherently uncertain. Consequently,
actual loss and loss settlement expense reserves may deviate from our estimates. Such deviations may be significant. Our reserve for workers' compensation claims at December 31, 2023 was
$121.0 million and consisted of 1,077 claims, compared with $138.9 million, consisting of 1,414 claims, at December 31, 2022.
Reserve Development
The following reserve development section should be read in conjunction with the "Results of Operations for the Years Ended December 31, 2023, 2022 and 2021" section of this Item 7.
In 2023, we recognized an adverse development in our net reserves for prior accident years totaling $67.8 million and adverse development of $12.9 million and favorable $48.9 million in 2022 and
2021, respectively.
The adverse development in 2023 was driven by the commercial other liability and commercial automobile lines of business. The adverse development in commercial other liability was primarily in
our excess and surplus lines excess casualty book along with some adverse development in standard umbrella and construction defect due to increasing severity pressures. The pressure on these
longer tailed lines, especially in accident years 2016-2019, related to social and economic inflation continued in 2023. Commercial automobile also experienced adverse development related to
increasing severity largely in post-COVID-19 accident years. The remaining lines experienced very small amounts of reserve development.
Adverse development in 2022 was driven by leveraging deeper data insights and emerging claim experience on longer tailed lines where the most uncertainty in the reserving process exists. Our
actions were focused on other liability lines, including excess umbrella business and construction defect, where increased loss exposure in these longer tailed businesses are also subject to social and
economic inflation. This was offset by continued favorable development in commercial automobile which has seen consistent releases over the past two years.
Other factors contributing to our development include: establishing reserves at their ultimate expected loss amount as soon as practicable after information becomes available; using claims
negotiation to control the size of
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settlements; assuming that we have liability for all claims, even though the issue of liability may, in some cases, be resolved in our favor; promoting claims management services to encourage return-
to-work programs; case management by nurses for serious injuries and management of medical provider services and billings; and using programs and services to help prevent fraud and to assist in
favorably resolving cases.
Based upon our comparison of carried reserves to actual claims experience over the last several years, we believe that using our Company's historical premium and claims data to establish reserves
for losses and loss settlement expenses results in adequate and reasonable reserves. Reserve development is discussed in more detail under the heading "Reserve Development" in the "Results of
Operations for the Years Ended December 31, 2023, 2022 and 2021" section in this Item 7.
The following table details the pre-tax impact on our property and casualty insurance business' financial results and financial condition of reasonably likely reserve development. Our lines of business
that have historically been most susceptible to significant volatility in reserve development have been shown separately and utilize hypothetical levels of volatility of 5.0 percent and 10.0 percent. Our
other, less volatile, lines of business have been aggregated and utilize hypothetical levels of volatility of 3.0 percent and 5.0 percent.
(In Thousands)
Hypothetical Reserve Development Volatility Levels
Impact on loss and loss settlement expenses
Other liability
Workers' compensation
Automobile
Hypothetical Reserve Development Volatility Levels
Impact on loss and loss settlement expenses
All other lines
Independent Actuary
-10%
-5%
+5%
+10%
$
(81,920)
(12,100)
(29,646)
$
(40,960)
(6,050)
(14,823)
$
40,960
6,050
14,823
81,920
12,100
29,646
-5%
-3%
+3%
+5%
(20,105)
$
(12,063)
$
12,063
$
20,105
$
$
We engage an independent actuarial firm to render an opinion as to the reasonableness of the statutory reserves that are established by management. During 2023 and 2022, we engaged the services of
Regnier Consulting Group, Inc. ("Regnier") as our independent actuarial firm for the property and casualty insurance business.
It is management's policy to utilize staff adjusters to develop our estimate of case-basis loss reserves. IBNR and loss settlement expense reserves are established through various formulae that utilize
pertinent, recent Company historical data. The calculations are supplemented with knowledge of current trends and events that could result in adjustments to the level of IBNR and loss settlement
expense reserves. On a quarterly basis, we compare our estimate of total reserves to the estimates prepared by Regnier by line of business to ensure that our estimates are within the actuary's
acceptable range. Regnier performs a review of loss and loss settlement expense reserves at each year end using generally accepted actuarial guidelines to ensure that the recorded reserves appear
reasonable. Our reserves for losses and loss settlement expenses, net of reinsurance recoverables, as of December 31, 2023 and 2022 were $1,447.1 million and $1,350.4 million, respectively. In 2023
and 2022, after considering the independent actuary's range of reasonable estimates, management believes that carried reserves were reasonable and therefore did not adjust the recorded amount.
Regnier uses four projection methods in its actuarial analysis of our loss reserves and uses two projection methods in its actuarial analysis of our loss settlement expense reserves. Based on the results
of the projection methods, the actuaries select an actuarial point estimate of the reserves, which is compared to our carried reserves to evaluate the reasonableness of the carried reserves. The four
methods utilized by Regnier to project losses are: paid loss development; reported loss development; expected loss emergence based on paid losses; and expected loss emergence based on reported
losses. The two methods utilized by Regnier to project loss expenses are: paid expenses-to-paid loss and paid expense-to-ultimate loss.
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Pension Benefit Obligation
The process of estimating our pension benefit obligation and related benefit expense is inherently uncertain, and the actual cost of benefits may vary materially from the estimates recorded. These
liabilities are particularly volatile due to their long-term nature and are based on several assumptions. The main assumptions used in the valuation of our benefit obligation are: estimated mortality of
the employees and retirees eligible for benefits; estimated expected long-term rates of return on investments; estimated compensation increases; estimated employee turnover; and estimated rate used
to discount the ultimate estimated liability to a present value. We engage a consulting actuary from Principal Financial Group, an independent firm, to assist in evaluating and establishing
assumptions used in the valuation of our benefit obligations.
A change in any one or more of these assumptions is likely to result in an ultimate liability different from the original actuarial estimate. Such changes in estimates may be material. For example, a
100 basis point decrease in our estimated discount rate would increase the benefit obligation at December 31, 2023 by $28.0 million while a 100 basis point increase in the rate would decrease the
benefit obligation by $22.9 million, for the same period.
A 100 basis point decrease in our estimated long-term rate of return on pension plan assets would increase the benefit expense for the year ended December 31, 2023 by $2.6 million, while a 100
basis point increase in the rate would decrease benefit expense by $2.6 million, for the same period.
Recently Issued Accounting Standards
Information specific to accounting standards that we adopted in 2023 or pending accounting standards that we expect to adopt in the future is incorporated by reference from Note 1 "Summary of
Significant Accounting Policies" contained in Part II, Item 8, "Financial Statements and Supplementary Data."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item 7A is incorporated by reference from Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings
"Investments" and "Market Risk."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
United Fire Group, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
Assets
Investments
Fixed maturities
Available-for-sale, at fair value (amortized cost $1,771,041 in 2023 and $1,662,680 in 2022; allowance for credit losses $1 in 2023 and $3 in 2022)
Equity securities, at fair value (cost $29,238 in 2023 and $75,292 in 2022)
Mortgage loans
Less: allowance for mortgage loan losses
Mortgage loans, net
Other long-term investments
Short-term investments
Cash and cash equivalents
Accrued investment income
Premiums receivable (net of allowance for doubtful accounts of $1,794 in 2023 and $1,575 in 2022)
Deferred policy acquisition costs
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $68,242 in 2023 and $59,566 in 2022)
Reinsurance receivables and recoverables (net of allowance for credit losses of $97 in 2023 and $82 in 2022)
Prepaid reinsurance premiums
Goodwill and net intangible assets
Deferred tax asset, net
Income taxes receivable
Other assets
Total assets
Liabilities and stockholders' equity
Liabilities
Losses and loss settlement expenses
Unearned premiums
Accrued expenses and other liabilities
Long term debt
Total liabilities
Stockholders' equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,269,842 and 25,210,541 shares issued and outstanding in 2023 and 2022, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Total stockholders' equity
Total liabilities and stockholders' equity
The Notes to Consolidated Financial Statements are an integral part of these statements.
December 31,
2023
2022
$
$
$
$
$
$
$
1,686,502
55,019
45,421
55
45,366
99,507
100
1,886,494
102,046
15,934
464,791
126,532
134,247
223,269
27,682
4,615
13,621
21,463
123,496
3,144,190
1,638,755
549,384
172,306
50,000
2,410,445
25
209,986
574,691
(50,957)
733,745
3,144,190
$
$
$
$
$
$
$
1,551,336
169,106
37,947
49
37,898
86,276
275
1,844,891
96,650
14,480
365,729
104,225
133,113
170,953
11,300
5,324
15,531
31,418
88,672
2,882,286
1,497,274
474,388
120,510
50,000
2,142,172
25
207,030
620,555
(87,496)
740,114
2,882,286
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Table of Contents
United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income
(In Thousands, Except Share Data)
Revenues
Net premiums earned
Investment income, net of investment expenses
Net investment gains (losses) (includes reclassifications for net unrealized gains (losses) on available-for-sale securities of
$(718) in 2023; $(1,323) in 2022; and $2,256 in 2021 previously included in accumulated other comprehensive income)
Other income (loss)
Total revenues
Benefits, losses and expenses
Losses and loss settlement expenses
Amortization of deferred policy acquisition costs
Other underwriting expenses (includes reclassifications for employee benefit costs of $(207) in 2023; $(3,601) in 2022; and
$(6,603) in 2021 previously included in accumulated other comprehensive income)
Interest Expense
Other nonunderwriting expenses
Total benefits, losses and expenses
Income (loss) before income taxes
Federal income tax expense (benefit) (includes reclassifications of $194 in 2023; $1,034 in 2022 and $913 in 2021 previously
included in accumulated other comprehensive income)
Net income (loss)
Other comprehensive income (loss)
Change in net unrealized appreciation on investments
Change in liability for underfunded employee benefit plans
Other comprehensive income (loss), before tax and reclassification adjustments
Income tax effect
Other comprehensive income (loss), after tax, before reclassification adjustments
Reclassification adjustment for net (gains) losses included in income
Reclassification adjustment for employee benefit costs included in expense
Total reclassification adjustments, before tax
Income tax effect
Total reclassification adjustments, after tax
Comprehensive income (loss)
Earnings (loss) per common share:
Basic
Diluted
The Notes to Consolidated Financial Statements are an integral part of these statements.
68
2023
For the Years Ended December 31,
2022
2021
$
$
$
$
$
$
$
$
$
1,034,587
59,606
1,274
—
1,095,467
769,414
244,991
115,800
3,260
1,723
1,135,188
(39,721)
(10,021)
(29,700)
26,373
18,953
45,326
(9,518)
35,808
718
207
925
(194)
731
6,839
(1.18)
(1.18)
$
$
$
$
$
$
$
$
$
951,541
44,932
(15,892)
(295)
980,286
637,301
213,075
115,169
3,188
(524)
968,209
12,077
(2,954)
15,031
(176,181)
(8,278)
(184,459)
38,736
(145,723)
1,323
3,601
4,924
(1,034)
3,890
(126,802)
0.60
0.59
$
$
$
$
$
$
$
$
$
962,823
55,778
47,383
207
1,066,191
652,155
203,432
110,103
3,187
471
969,348
96,843
16,249
80,594
(39,901)
19,633
(20,268)
4,260
(16,008)
(2,256)
6,603
4,347
(913)
3,434
68,020
3.21
3.16
Table of Contents
(In Thousands, Except Share Data)
Shares outstanding
Common stock
Additional paid-in capital
Retaining earnings
Accumulated other
comprehensive income (loss)
Total
United Fire Group, Inc.
Consolidated Statement of Stockholders' Equity
Common Stock
Balance, January 1, 2021
Net income (loss)
Shares repurchased
Stock based compensation
Dividends on common stock ($0.60 per share)
Change in net unrealized investment appreciation
Change in liability for underfunded employee benefit plans
(1)
(2)
Balance, January 1, 2022
Net income (loss)
Stock based compensation
Dividends on common stock ($0.63 per share)
Change in net unrealized investment appreciation
Change in liability for underfunded employee benefit plans
(1)
(2)
Balance, January 1, 2023
Net income (loss)
Stock based compensation
Dividends on common stock ($0.64 per share)
Change in net unrealized investment appreciation
Change in liability for underfunded employee benefit plans
(1)
(2)
Balance, December 31, 2023
25,055,479 $
—
(67,651)
94,276
—
—
—
25,082,104 $
— $
128,437
—
—
—
25,210,541 $
— $
59,301
—
—
—
25,269,842 $
(1) The change in net unrealized appreciation is net of reclassification adjustments and income taxes.
(2) The change in liability for underfunded employee benefit plans is net of income taxes.
The Notes to Consolidated Financial Statements are an integral part of these statements.
202,359 $
—
(2,007)
3,023
—
—
—
203,375 $
— $
3,655
0
—
—
207,030 $
— $
2,956
—
—
—
209,986 $
555,854 $
80,594
—
—
(15,064)
—
—
621,384 $
15,031 $
—
(15,860)
—
—
620,555 $
(29,700) $
—
(16,164)
—
—
574,691 $
66,911 $
—
—
—
—
(33,301)
20,727
54,337 $
— $
—
—
(138,138)
(3,695)
(87,496) $
— $
—
—
21,402
15,137
(50,957) $
825,149
80,594
(2,007)
3,023
(15,064)
(33,301)
20,727
879,121
15,031
3,655
(15,860)
(138,138)
(3,695)
740,114
(29,700)
2,956
(16,164)
21,402
15,137
733,745
25 $
—
—
—
—
—
—
25 $
— $
—
—
—
—
25 $
— $
—
—
—
—
25 $
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Table of Contents
United Fire Group, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Cash Flows From Operating Activities
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities
For the Years Ended December 31,
2023
2022
2021
$
(29,700)
$
15,031
$
Net accretion of bond premium
Depreciation and amortization
Stock-based compensation expense
Net investment (gains) losses
Net cash flows from trading investments
Deferred income tax benefit
Changes in:
Accrued investment income
Premiums receivable
Deferred policy acquisition costs
Reinsurance receivables
Prepaid reinsurance premiums
Income taxes receivable
Other assets
Losses, claims and loss settlement expenses
Unearned premiums
Accrued expenses and other liabilities
Deferred income taxes
Other, net
Cash from operating activities
Net cash provided by (used in) operating activities
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments
Proceeds from call and maturity of available-for-sale investments
Proceeds from short-term and other investments
Purchase of available-for-sale investments
Purchase of mortgage loans
Purchase of short-term and other investments
Net purchases and sales of property and equipment
Net cash provided by (used in) investing activities
Cash Flows From Financing Activities
Borrowings of long-term debt
Payment of cash dividends
Repurchase of common stock
Issuance of common stock
Net cash provided by (used in) financing activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Disclosures of Cash Flow Information
Income taxes paid
Interest paid
The Notes to Consolidated Financial Statements are an integral part of these statements.
70
7,092
10,508
3,246
(1,547)
116,080
(8,308)
(1,454)
(99,062)
(22,307)
(52,316)
(16,382)
9,955
(34,403)
141,481
74,996
70,956
—
2,901
201,436
171,736
77,388
80,081
4,615
(273,081)
(8,137)
(19,866)
(10,886)
(149,886)
—
(16,164)
—
(290)
(16,454)
5,396
96,650
102,046
1,348
3,260
$
$
$
$
$
$
$
$
$
9,000
7,670
2,826
15,622
29,725
(3,930)
(1,084)
(48,958)
(12,779)
(43,138)
(1,972)
960
(8,136)
(16,991)
34,655
12,972
(652)
7,928
(16,282)
(1,251)
83,559
184,210
12,648
(284,054)
(103)
(13,294)
(2,137)
(19,171)
—
(15,860)
—
828
(15,032)
(35,454)
132,104
96,650
21,548
3,188
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
80,594
13,597
6,570
3,444
(47,383)
38,411
5,632
1,219
521
(4,352)
32,725
3,637
33,816
(43,865)
(63,866)
(25,112)
2,430
(464)
(7,637)
(50,677)
29,917
180,514
264,237
6,387
(395,787)
—
(9,644)
(13,976)
31,731
—
(15,064)
(2,007)
(421)
(17,492)
44,156
87,948
132,104
5,360
3,187
Table of Contents
Index of Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. Summary of Investments
Note 3. Fair Value of Financial Instruments
Note 4. Reinsurance
Note 5. Reserves for Losses and Loss Settlement Expenses
Note 6. Statutory Reporting, Capital Requirements and Dividends and Retained Earnings Restrictions
Note 7. Federal Income Tax
Note 8. Employee Benefits
Note 9. Stock-Based Compensation
Note 10. Segment Information
Note 11. Earnings Per Common Share
Note 12. Lease Commitments
Note 13. Debt
Note 14. Intangible Assets
Note 15. Accumulated Other Comprehensive Income
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
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72
79
86
96
98
113
114
115
123
127
128
129
131
132
134
135
Table of Contents
UNITED FIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data unless otherwise noted)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United Fire Group, Inc. ("UFG", "United Fire", 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, plus the District of Columbia.
Principles of Consolidation
The accompanying Consolidated Financial Statements include United Fire and its wholly owned subsidiaries: United Fire & Casualty Company, United Real Estate Holdings, LLC, Addison
Insurance Company, Lafayette Insurance Company, United Fire & Indemnity Company, United Fire Lloyds, UFG Specialty Insurance Company, Financial Pacific Insurance Company, Franklin
Insurance Company, Mercer Insurance Company, Mercer Insurance Company of New Jersey, Inc, McIntyre Cedar UK Limited, Mercer Insurance Company and McIntyre Cedar Corporate Member
LLP.
United Fire Lloyds, an affiliate of United Fire & Indemnity Company, is organized as a Texas Lloyds plan, which is an aggregation of underwriters who, under a common name, engage in the
business of insurance through a corporate attorney-in-fact. United Fire Lloyds is financially and operationally controlled by United Fire & Indemnity Company, its corporate attorney-in-fact, pursuant
to three types of agreements: trust agreements between United Fire & Indemnity Company and certain individuals who agree to serve as trustees; articles of agreement among the trustees who agree
to act as underwriters to establish how the Lloyds plan will be operated; and powers of attorney from each of the underwriters appointing a corporate attorney-in-fact, who is authorized to operate the
Lloyds plan. Because United Fire & Indemnity Company can name the trustees, the Lloyds plan is perpetual, subject only to United Fire & Indemnity Company's desire to terminate it.
United Fire & Indemnity Company provides all of the statutory capital necessary for the formation of the Lloyds plan by contributing capital to each of the trustees. The trust agreements require the
trustees to become underwriters of the Lloyds plan, to contribute the capital to the Lloyds plan, to sign the articles of agreement and to appoint the attorney-in-fact. The trust agreements also require
the trustees to pay to United Fire & Indemnity Company all of the profits and benefits received by the trustees as underwriters of the Lloyds plan, which means that United Fire & Indemnity
Company has the right to receive 100 percent of the gains and profits from the Lloyds plan. The trustees serve at the pleasure of United Fire & Indemnity Company, which may remove a trustee and
replace that trustee at any time. Termination of a trustee must be accompanied by the resignation of the trustee as an underwriter, so that the trustee can obtain the capital contribution from the Lloyds
plan to reimburse United Fire & Indemnity Company. By retaining the ability to terminate trustees, United Fire & Indemnity Company possesses the ability to name and remove the underwriters.
United Real Estate Holdings, LLC, formed in 2013, is a wholly owned subsidiary of United Fire & Casualty Company and is organized as an Iowa limited liability corporation, an unincorporated
association formed for the purpose of holding United Fire & Casualty Company's ownership in commercial real estate.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared on the basis of U.S. generally accepted accounting principles ("GAAP"), which differ in some respects from those followed
in preparing our statutory reports to insurance regulatory authorities. Our stand-alone and consolidated subsidiary financial statements submitted to insurance regulatory authorities are presented on
the basis of accounting practices prescribed or permitted by the insurance departments of the states in which we are domiciled ("statutory accounting principles").
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Use of Estimates
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; goodwill impairment; losses and loss settlement expenses; and pension benefit obligations.
Property and Casualty Insurance Business
Premiums written are deferred and recorded as earned premium on a daily pro rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of
premiums written applicable to the unexpired term of insurance policies in force. Premiums receivable are presented net of an estimated allowance for doubtful accounts, which is based on a periodic
evaluation of the aging and collectability of amounts due from agents and policyholders.
To establish loss and loss settlement expense reserves, we make estimates and assumptions about the future development of claims. Actual results could differ materially from those estimates, which
are subjective, complex and inherently uncertain. When we establish and adjust reserves, we do so given our knowledge at the time of the circumstances and facts of known claims. To the extent that
we have overestimated or underestimated our loss and loss settlement expense reserves, we adjust the reserves in the period in which such adjustment is determined.
We record our best estimate of reserves for claim litigation that arises in the ordinary course of business. We consider all of our pending litigation as of December 31, 2023 to be ordinary, routine and
incidental to our business.
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 continually evaluate our operations on the basis of both
statutory accounting principles prescribed or permitted by our states of domicile and GAAP.
Reinsurance
Net premiums earned and losses and loss settlement expenses are reported net of reinsurance ceded. Ceded insurance business is accounted for on a basis consistent with the original policies issued
and the terms of the reinsurance contracts. Refer to Note 4 "Reinsurance" for a discussion of our reinsurance activities.
Investments
Investments in fixed maturities includes bonds. Our investments in available-for-sale fixed maturities and trading securities are recorded at fair value. Changes in unrealized appreciation and
depreciation, with respect to available-for-sale fixed maturities are reported as a component of accumulated other comprehensive income, net of applicable
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deferred income taxes, in stockholders' equity. Changes in unrealized appreciation and depreciation, with respect to trading securities, are reported as a component of income.
Investments in equity securities, which includes common stocks, are recorded at fair value with changes in value recorded as a component of income.
Other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting.
Included in investments at December 31, 2023 and 2022, are securities on deposit with, or available to, various regulatory authorities as required by law, with fair values of $106,297 and $92,932
respectively.
We review all of our investment holdings for appropriate valuation on an ongoing basis. Refer to Note 2 "Summary of Investments" for a discussion of our accounting policy for impairment
recognition.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts and non-negotiable certificates of deposit with original maturities of three months or less.
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 that are reported in the accompanying Consolidated Financial Statements.
Property and Casualty Insurance
Recorded asset at beginning of year
Underwriting costs deferred
Amortization of deferred policy acquisition costs
Recorded asset at end of year
$
$
2023
2022
2021
104,225
267,298
(244,991)
126,532
$
$
91,446
225,854
(213,075)
104,225
$
$
87,094
207,784
(203,432)
91,446
Our property and casualty insurance DAC is 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. This calculation is performed by line of business in a manner consistent with how the policies are currently being marketed and managed.
Property, Equipment and Depreciation
Property and equipment is presented at cost less accumulated depreciation. The following table is a summary of the components of the property and equipment that are reported in the accompanying
Consolidated Financial Statements.
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Real estate:
Land
Buildings
Furniture and fixtures
Internally developed software
Other computer equipment and software
Total property and equipment
2023
2022
$
$
78,683 $
1,203
4,451
48,787
1,123
134,247 $
80,346
1,202
4,818
44,303
2,444
133,113
Expenditures for maintenance and repairs on property and equipment are generally expensed as incurred. We periodically review these assets for impairment whenever events or changes in business
circumstances indicate that the carrying value of the underlying asset may not be recoverable. A loss would be recognized if the estimated fair value of the asset were less than its carrying value.
Depreciation is computed primarily by the straight-line method over the following estimated useful lives:
Computer equipment and software
Furniture and fixtures
Internally developed software
Leasehold improvements
Real estate
Depreciation expense totaled $9,799, $6,961 and $5,861 for 2023, 2022 and 2021, respectively.
Goodwill and Other Intangible Assets
Useful Life
Three years
Seven years
Ten years
Shorter of the lease term or useful life of the asset
Seven years to thirty-nine years
Goodwill assets arise as a result of business combinations and consist of the excess of the fair value of consideration paid over the tangible and intangible assets acquired and liabilities assumed. The
goodwill has been impaired to $0 for 2023, 2022 and 2021.
Our other intangible assets, which consist primarily of agency relationships, trade names, state insurance licenses, and software, are being amortized by the straight-line method over periods ranging
from two years to 15 years, with the exception of state insurance licenses, which are indefinite-lived and not amortized. In 2023, 2022 and 2021 we performed a qualitative impairment assessment of
our indefinite lived intangible assets. As a result of these assessments, we did not recognize an impairment charge on our intangible assets in 2023, 2022 and 2021. Amortization expense totaled $709,
$709 and $709 in 2023, 2022 and 2021, respectively.
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").
UFG sold an aggregate $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.
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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
equals 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 of December 31, 2023, interest totaled $3,260 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.
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.
The Company performs a quarterly review of its tax positions and makes a determination 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 position will be sustained, the Company will calculate any unrecognized tax benefits and calculate any interest and penalties. At December 31,
2023, 2022, and 2021 the Company did not recognize any liability for unrecognized tax benefits. 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 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 December 31, 2023 and 2022.
In 2023, 2022, and 2021, we made cash payments for income taxes of $1,348, $21,548 and $5,360, respectively. In 2023, 2022 and 2021 we received federal tax refunds of $14,017, $20,789 and
$28,083, respectively, which resulted from the utilization of our net operating losses and net capital loss carryforwards and carrybacks. We have $185 of tax credit carryforwards expiring in 2039
through 2042. We made no interest payments in 2023, 2022 and 2021.
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 12 "Lease Commitments."
Variable Interest Entities
The Company and certain related parties are equity investors in one investment in which the Company determined is a variable interest entity ("VIE") as a result of participation in the risks and
rewards of the VIE based on the objectives and strategies of the VIE. The VIE is a limited liability company that primarily invests in commercial real
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estate. 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
December 31, 2023 was $2.9 million and there are no future funding commitments.
Stock-Based Compensation
We currently have two equity compensation plans. One plan allows us to grant restricted and unrestricted stock, stock appreciation rights, incentive stock options, and non-qualified stock options to
employees. The other plan allows us to grant restricted and non-qualified stock options to non-employee directors.
We utilize the Black-Scholes option pricing method to establish the fair value of non-qualified stock options granted under our equity compensation plans. Our determination of the fair value of stock
options on the date of grant using this option-pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables, which include the expected
volatility in our stock price, the expected term of the award, the expected dividends to be paid over the term of the award and the expected risk-free interest rate. Any changes in these assumptions
may materially affect the estimated fair value of the award. For our restricted and unrestricted stock awards, we utilize the fair value of our common stock on the date of grant to establish the fair
value of the award. Refer to Note 9 "Stock-Based Compensation" for further discussion.
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 recognized 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 the 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 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 1 bond recovery rates from 1983-2017. The allowance calculated as of December 31, 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 December 31, 2023, the Company had a credit loss allowance for reinsurance receivables of $97.
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Rollforward of Credit Loss Allowance for Reinsurance Receivable
Beginning balance, January 1, 2023
Current-period provision for expected credit losses
Ending balance of the allowance for reinsurance receivable, December 31, 2023
As of
December 31, 2023
$
$
82
15
97
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. Outstanding audit premiums that are overdue after six months with no
payments are written off and turned over to our collection agency.
Comprehensive Income
Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by and dividends to stockholders.
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.
On February 1, 2024, the Company filed a Form 8-K with the SEC to disclose that we entered into an investment management agreement (the "Investment Management Agreement") with New
England Asset Management ("NEAM"), effective as of February 1, 2024, pursuant to which NEAM will provide investment management services subject to the terms and conditions set forth in the
Investment Management Agreement. The Investment Management Agreement can be terminated at any time upon 30 days' written notice by either party and will remain in effect until terminated.
On January 31, 2024, the Company and Robert Cataldo mutually agreed to the separation of Mr. Cataldo's employment as Vice President and Chief Investment and Strategy Officer of the Company,
effective no later than May 24, 2024. The complete terms of Mr. Cataldo's separation package are under negotiation and are expected to be set forth in a definitive separation agreement.
Recently Issued Accounting Standards
Accounting Standards Adopted in 2021
Defined Benefit Plans - Disclosures
In August 2018, the FASB issued new guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension and postretirement plans. The new guidance removes
the requirement for disclosing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs in the next year and the sensitivity of
postretirement health plans to one-percentage-point changes in medical trend rates. The new guidance is effective for annual periods beginning after December 15, 2020. The Company adopted the
new guidance as of January 1, 2021. The new guidance modified disclosures but did not have an impact on the Company's financial position and results of operations.
Income Taxes
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In December 2019 the FASB issued new guidance which simplifies the accounting for income taxes by removing certain exceptions to income tax accounting. The amendments also improve
consistent application of and simplify GAAP for other areas of income tax accounting. The new guidance clarifies and amends existing guidance, including removing certain requirements that an
entity evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be
considered a separate transaction, and requiring an entity to reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes
the enactment date. The new guidance is effective for annual periods beginning after December 15, 2020. The Company adopted the new guidance as of January 1, 2021. The new guidance did not
have an impact on the Company's financial position and results of operations.
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% excise tax on corporate stock repurchases. The effective date of these provisions is January 1, 2023. The Company was not subject to CAMT in 2023,
does not expect to be subject to CAMT in 2024 and does not expect the IRA to have an impact on the Company's financial position and results of operations.
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NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
The table that follows is a reconciliation of the amortized cost to fair value of investments in available-for-sale fixed maturity securities, presented on a consolidated basis as of December 31, 2023
and 2022.
Cost or Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Fair Value
Allowance for Credit
Losses
Carrying Value
December 31, 2023
Type of Investment
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political subdivisions
General obligations:
Midwest
Northeast
South
West
Special revenue:
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-for-Sale Fixed Maturities
$
$
51,211 $
102,540
325 $
255
675 $
8,302
50,861 $
94,493
— $
—
52,712
11,422
54,560
77,874
101,037
52,708
166,119
102,254
21,255
149,734
45,351
74,760
103,315
37,872
87,002
152,329
23,800
164,666
84,842
50,284
3,394
1,771,041 $
132
1
47
23
302
79
302
147
—
787
249
727
271
99
451
743
11
1,282
20
33
524
6,810 $
80
137
43
400
471
358
560
2,155
836
2,083
10,054
2,127
4,939
7,665
4,499
5,665
7,381
2,328
52,707
11,380
54,207
77,426
100,981
52,227
164,266
101,565
19,172
140,467
43,473
70,548
95,921
33,472
81,788
145,691
21,483
12,742
13,177
4,664
87
91,348 $
153,206
71,685
45,653
3,831
1,686,503 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
1 $
50,861
94,493
52,707
11,380
54,207
77,426
100,981
52,227
164,266
101,565
19,172
140,467
43,473
70,548
95,921
33,472
81,788
145,690
21,483
153,206
71,685
45,653
3,831
1,686,502
Table of Contents
December 31, 2022
Type of Investment
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political
subdivisions
General obligations:
Midwest
Northeast
South
West
Special revenue:
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and
telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-for-Sale Fixed Maturities
$
Maturities
Cost or Amortized Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Fair Value
Allowance for Credit
Losses
Carrying Value
$
15,684
94,092
$
$
—
35
1,009
9,721
$
14,675 $
84,406
— $
—
61,191
15,518
64,851
87,094
103,107
55,292
184,108
113,594
36,129
138,752
36,507
58,334
100,539
32,987
67,193
132,849
20,450
185
18
57
163
224
76
278
275
—
65
—
62
—
24
—
851
—
97,839
92,366
50,272
3,932
1,662,680
$
—
—
5
466
2,784
$
263
73
927
712
1,065
1,148
3,529
1,657
4,480
13,406
3,298
5,554
10,598
5,419
7,253
9,408
2,750
13,291
13,528
4,891
145
114,125
61,113
15,463
63,981
86,545
102,266
54,220
180,857
112,212
31,649
125,411
33,209
52,842
89,941
27,592
59,940
124,292
17,700
84,548
78,838
45,386
4,253
1,551,339 $
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
3 $
14,675
84,406
61,113
15,463
63,981
86,545
102,266
54,220
180,857
112,212
31,649
125,411
33,209
52,842
89,941
27,592
59,940
124,289
17,700
84,548
78,838
45,386
4,253
1,551,336
The amortized cost and fair value of available-for-sale fixed maturity securities at December 31, 2023, by contractual maturity, are shown in the following table. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and
collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
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Maturities
December 31, 2023
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Asset-backed securities
Mortgage-backed securities
Collateralized mortgage obligations
Net Investment Gains and Losses
Available-For-Sale
Amortized Cost
Fair Value
$
$
74,293
524,463
523,999
321,300
3,394
23,800
299,792
1,771,041
$
$
74,066
515,126
496,643
304,810
3,831
21,483
270,544
1,686,503
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 net investment gains (losses)
for 2023, 2022 and 2021, is as follows:
2023
2022
2021
Net investment gains (losses)
Fixed maturities:
Available-for-sale
Allowance for Credit Losses
Equity securities:
Net gains (losses) recognized on equity securities sold during the period
Unrealized gains (losses) recognized during the period on equity securities still held at reporting date
Net gains (losses) recognized during the reporting period on equity securities
Mortgage loans
Other long-term assets
Real Estate
Total net investment gains (losses)
$
$
$
(442)
1
150
1,842
1,992
(5)
(319)
47
1,274
$
The proceeds and gross realized gains (losses) on the sale of available-for-sale fixed maturity securities for 2023, 2022 and 2021, are as follows:
Proceeds from sales
Gross realized gains
Gross realized losses
2023
2022
$
77,388 $
265
707
(1,397)
(3)
$
(1,767)
(12,802)
(14,569)
109
(267)
235
(15,892)
83,559
459
1,857
$
$
(277)
5
14,444
30,682
45,126
5
2,780
(256)
47,383
2021
180,514
843
1,120
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Net investment income for the years ended December 31, 2023, 2022 and 2021, is comprised of the following:
Years Ended December 31,
Investment income:
Interest on fixed maturities
Dividends on equity securities
Income on other long-term investments
Investment income
(1)
Change in value
Interest on mortgage loans
Interest on short-term investments
Interest on cash and cash equivalents
Other
Total investment income
Less investment expenses
Net investment income
2023
2022
2021
$
$
$
56,243
3,548
2,833
(2,864)
1,889
1,068
2,228
4,139
69,084
9,478
59,606
$
$
$
48,702
5,163
4,742
(7,930)
1,897
354
740
780
54,448
9,516
44,932
$
$
$
43,224
5,031
4,481
9,699
1,995
18
252
152
64,852
9,074
55,778
(1) Represents the change in value of our interests in limited liability partnerships that are recorded on the equity method of accounting.
Funding Commitment
Pursuant to agreements with our limited liability partnership investments, we are contractually committed through July 10, 2030 to make capital contributions upon request of the partnerships. Our
remaining potential contractual obligation was $28,630 at December 31, 2023.
Credit Risk
An allowance for credit losses is recorded based on a number of factors including the 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 December 31, 2023:
Rollforward of allowance for credit losses for available-for-sale fixed maturity securities:
Beginning balance, January 1, 2023
Additions to the allowance for credit losses for which credit losses were not previously recorded
Reductions for securities sold during the period (realized)
Writeoffs charged against the allowance
Recoveries of amounts previously written off
Ending balance, December 31, 2023
As of
December 31, 2023
3
—
—
—
(2)
1
$
$
$
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Unrealized Appreciation and Depreciation
A summary of changes in net unrealized investment appreciation for 2023, 2022 and 2021, is as follows:
Change in net unrealized investment appreciation (depreciation)
Available-for-sale fixed maturities
Income tax effect
Total change in net unrealized investment appreciation (depreciation), net of tax
2023
2022
2021
$
$
$
27,091
(5,689)
21,402 $
(174,858)
36,720
(138,138)
$
$
(42,159)
8,858
(33,301)
The following tables summarize our fixed maturity securities that were in an unrealized loss position reported on a consolidated basis at December 31, 2023 and 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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December 31, 2023
Type of Investment
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political subdivisions
General obligations:
Midwest
Northeast
South
West
Special revenue:
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Asset-backed securities
Total Available-for-Sale Fixed Maturities
Less than 12 months
12 months or longer
Total
Number
of Issues
Fair
Value
Gross Unrealized
Depreciation
Number
of Issues
Fair
Value
Gross Unrealized
Depreciation
Fair
Value
Gross Unrealized
Depreciation
$
2
3
4,138
10,986
$
11
3
12
17
17
6
21
20
—
4
—
1
4
1
1
5
3
19,534
5,371
21,753
38,204
29,535
15,131
45,639
32,789
—
7,151
—
1,210
14,724
3,000
3,969
14,327
2,783
2
2
2
—
137
$
7,055
2,589
5,454
—
285,342
$
3
1
9
7
11
8
46
14
61
8
91
140
113
67
232
248
—
74
—
19
98
2
35
223
33
27
22
55
—
1,608
$
6
23
12,717
71,375
$
$
629
8,288
16,855
82,361
$
10,737
3,469
16,610
20,064
23,375
24,271
38,495
32
16
9
48
15
21
28
11
27
44
48
40
31
20
1
459
$
76
35
309
331
245
493
588
$
66,925
19,172
111,793
34,331
47,462
68,837
26,544
62,988
112,517
15,758
72,565
66,361
31,460
2,962
960,788
30,271
8,840
38,363
58,268
52,910
39,402
112,564
71,284
19,172
118,944
34,331
48,672
83,561
29,544
66,957
126,844
18,541
1,923
2,083
9,980
2,127
4,920
7,567
4,497
5,630
7,158
2,295
12,715
13,155
4,609
87
89,740
$
79,620
68,950
36,914
2,962
1,246,130
$
675
8,302
137
43
400
471
358
560
2,155
836
2,083
10,054
2,127
4,939
7,665
4,499
5,665
7,381
2,328
12,742
13,177
4,664
87
91,348
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, 2022
Type of Investment
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political subdivisions
South
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total Available-for-Sale Fixed Maturities
Less than 12 months
12 months or longer
Total
Number
of Issues
Fair
Value
Gross Unrealized
Depreciation
Number
of Issues
Fair
Value
Gross Unrealized
Depreciation
Fair
Value
Gross Unrealized
Depreciation
4
24
58
9
45
15
21
28
5
23
40
38
$
6,656
70,158
$
126,388
21,377
101,867
28,612
43,639
69,320
9,829
49,970
101,411
7,909
29
21
14
534
$
48,898
35,456
24,146
1,085,847
$
212
5,606
3,124
1,861
8,737
1,930
3,542
4,440
487
3,279
6,997
1,056
4,500
5,629
1,281
58,671
4
3
1
5
9
1
4
7
6
5
5
12
$
$
8,019
11,242
$
797
4,115
14,675
81,400
$
866
10,272
19,979
4,597
7,049
20,620
15,928
9,970
11,236
9,791
405
2,619
4,669
1,368
2,012
6,157
4,933
3,974
2,208
1,693
127,254
31,649
121,846
33,209
50,688
89,940
25,757
59,940
112,647
17,700
12
19
7
100
$
35,650
43,383
16,674
225,276
$
8,791
7,900
3,611
55,252
$
84,548
78,839
40,820
1,311,123
$
1,009
9,721
3,529
4,480
13,406
3,298
5,554
10,597
5,420
7,253
9,205
2,749
13,291
13,529
4,892
113,923
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.
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Table of Contents
•
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 of experience and
who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.
In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors' pricing
procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for
identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds,
credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on
fair value measurements.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist,
we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair
value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our
valuation techniques are discussed in more detail throughout this section.
The mortgage loan portfolio consists entirely of commercial mortgage loans. The fair value of our mortgage loans is determined by modeling performed by 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.
Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained
from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value.
We have not adjusted the net asset value provided by the fund managers.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.
The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Non-qualified Deferred Compensation Plan and United Fire Group Supplemental Executive
Retirement and Deferral Plan (collectively the "Executive Retirement Plans"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source
of funding for the Company's Executive Retirement Plans. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of December 31, 2023, the cash surrender
value of the COLI policies was $11,913, 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.
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Table of Contents
A summary of the carrying value and estimated fair value of our financial instruments at December 31, 2023 and 2022 is as follows:
December 31, 2023
December 31, 2022
Fair Value
Carrying Value
Fair Value
Carrying Value
Assets
Investments
Fixed maturities:
Available-for-sale securities
Equity securities
Mortgage loans
Other long-term investments
Short-term investments
Cash and cash equivalents
Corporate-owned life insurance
Liabilities
Long term debt
$
$
1,686,503
55,019
42,632
99,507
100
102,046
11,913
38,413
$
1,686,502
55,019
45,366
99,507
100
102,046
11,913
50,000
$
1,551,339
169,106
35,302
86,276
275
96,650
10,588
36,168
1,551,336
169,106
37,898
86,276
275
96,650
10,588
50,000
88
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The following tables present the categorization for our financial instruments measured at fair value on a recurring basis and financial instruments not recorded at fair value on a recurring basis. The
tables include financial instruments at December 31, 2023 and 2022:
Description
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political subdivisions
General obligations
Midwest
Northeast
South
West
Special revenue
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-for-Sale Fixed Maturities
EQUITY SECURITIES
Public utilities
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
$
$
December 31, 2023
Level 1
Fair Value Measurements
Level 2
Level 3
50,861
94,493
$
$
—
—
50,861
94,493
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
3,993
9,477
14,164
11,385
2,060
6,405
52,707
11,380
54,207
77,426
100,981
52,227
164,266
101,565
19,172
140,467
43,473
70,548
95,921
33,472
81,788
140,799
21,483
153,206
66,862
45,653
2,962
1,675,919
$
—
—
—
—
—
—
52,707
11,380
54,207
77,426
100,981
52,227
164,266
101,565
19,172
140,467
43,473
70,548
95,921
33,472
81,788
145,691
21,483
153,206
71,685
45,653
3,831
1,686,503
$
3,993
9,477
14,164
11,385
2,060
6,405
89
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,892
—
—
4,823
—
869
10,584
—
—
—
—
—
—
Table of Contents
Financial services
Total Equity Securities
Short-Term Investments
Money Market Accounts
COLI
Total Assets Measured at Fair Value
$
$
$
$
$
7,535
55,019
100
20,333
11,913
1,773,868
$
$
$
$
$
7,535
55,019
100
20,333
—
75,452
$
$
$
$
$
—
—
—
—
11,913
1,687,832
$
$
$
$
$
—
—
—
—
—
10,584
The fair value of financial financial instruments that are not carried at fair value on a recurring basis in the financial statements at December 31, 2023 are summarized below:
Description
Financial assets:
$
Cash and cash equivalents
$
Other Long Term Investments
Mortgage Loans
$
Total Financial assets not accounted for at fair value $
Long Term Debt
Total Financial liabilities not accounted for at fair
value
$
$
Fair Value Total
Level 1
Level 2
Level 3
Net Asset Value
— $
1,249 $
— $
1,249 $
38,413 $
38,413 $
— $
— $
42,632 $
42,632 $
— $
— $
—
98,258
—
98,258
—
—
81,713 $
99,507 $
42,632 $
223,852 $
38,413 $
38,413 $
81,713 $
— $
— $
81,713 $
— $
— $
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Table of Contents
Description
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury
U.S. government agency
States, municipalities and political subdivisions
General obligations
Midwest
Northeast
South
West
Special revenue
Midwest
Northeast
South
West
Foreign bonds
Public utilities
Corporate bonds
Energy
Industrials
Consumer goods and services
Health care
Technology, media and telecommunications
Financial services
Mortgage-backed securities
Collateralized mortgage obligations
Government national mortgage association
Federal home loan mortgage corporation
Federal national mortgage association
Asset-backed securities
Total Available-for-Sale Fixed Maturities
Equity securities
Public utilities
Energy
Industrials
Consumer goods and services
Health care
Financial Services
Technology, media and telecommunications
Total Equity Securities
Short-Term Investments
$
$
$
$
$
December 31, 2022
Level 1
Fair Value Measurements
Level 2
Level 3
14,675
84,406
$
$
—
—
14,675
84,406
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,846
19,743
27,163
43,139
7,981
28,213
28,021
169,106
275
$
$
$
$
61,113
15,463
63,981
86,545
102,266
54,220
180,857
112,212
31,649
125,411
33,209
52,842
89,941
27,592
59,940
118,617
17,700
84,548
78,838
45,386
3,452
1,544,863
—
—
—
—
—
—
—
—
—
$
$
$
$
61,113
15,463
63,981
86,545
102,266
54,220
180,857
112,212
31,649
125,411
33,209
52,842
89,941
27,592
59,940
124,292
17,700
84,548
78,838
45,386
4,253
1,551,339
14,846
19,743
27,163
43,139
7,981
28,213
28,021
169,106
275
$
$
$
$
91
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,675
—
—
—
—
801
6,476
—
—
—
—
—
—
—
—
—
Table of Contents
Money Market Accounts
Corporate-Owned Life Insurance
Total Assets Measured at Fair Value
$
$
$
31,289
10,588
1,762,597
$
$
$
31,289
—
200,670
$
$
$
—
10,588
1,555,451
$
$
$
—
—
6,476
The fair value of financial financial instruments that are not carried at fair value on a recurring basis in the financial statements at December 31, 2022 are summarized below:
Description
Financial assets:
Cash and cash equivalents
Other Long Term Investments
Mortgage Loans
Total Financial assets not accounted for at fair value
$
$
$
$
Long Term Debt
$
Total Financial liabilities not accounted for at fair value $
Fair Value Total
Level 1
Level 2
Level 3
Net Asset Value
65,361 $
86,276 $
35,302 $
186,939 $
36,168 $
36,168 $
65,361 $
— $
— $
65,361 $
— $
— $
— $
— $
— $
— $
36,168 $
36,168 $
— $
— $
35,302 $
35,302 $
— $
— $
—
86,276
—
86,276
—
—
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 analysis 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 December 31, 2023 and 2022 was reasonable.
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
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with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the
unobservable nature of the brokers' valuation processes. Level 3 fair value measurements are inherently uncertain in nature due to management's reliance on significant unobservable inputs which
reasonably could have been different at the reporting date. The following table provides a quantitative information about our Level 3 securities at December 31, 2023.
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
December 31, 2023
Valuation Technique(s)
Unobservable inputs
Range of weighted average significant
unobservable inputs
Fixed Maturities corporate
$
4,892
Third Party Valuation
Offered Quotes
$90 - $100
Fixed Maturities asset-backed securities
869 Discounted cash flow
Probability of default
Fixed Maturities Federal Home Loan Mortgage Corporation
4,823
Third Party Valuation
Offered Quotes
During the twelve month period ended December 31, 2023 and 2022, there were two securities transferred in or out of Level 3.
4% - 6%
$45 - $55
The following table provides a summary of the changes in fair value of our Level 3 securities for 2023:
Corporate bonds
Asset-backed securities
Equities
Total
(1)
(1)
Beginning Balance - January 1, 2023
Realized gains (loss)
Unrealized gains (losses)
Purchases
Disposals
Amortization
Transfers in
Transfers out
Ending Balance - December 31, 2023
(1) Unrealized gains (losses) are recorded as a component of comprehensive income.
$
$
5,675
—
(783)
—
—
—
—
—
4,892
$
$
801
—
68
—
—
—
4,823
—
5,692
The following table provides a summary of the changes in fair value of our Level 3 securities for 2022:
(1)
Beginning Balance - 01/01/2022
Realized gains (losses)
Unrealized gains (losses)
Purchases
Disposals
Transfers in
Transfers out
(1)
Ending Balance - 12/31/2022
(1) Unrealized gains (losses) are recorded as a component of comprehensive income.
Corporate bonds
Asset-backed securities
$
$
150
—
—
—
(150)
5,675
—
5,675
$
$
925
—
(124)
—
—
—
—
801
The fixed maturities reported as disposals relate to the receipt of principal on calls or sinking fund bonds, in accordance with the indentures.
93
$
$
$
$
—
—
—
—
—
—
—
—
—
595
(595)
—
—
—
—
—
—
$
$
$
$
6,476
—
(715)
—
—
—
4,823
—
10,584
1,670
(595)
(124)
—
(150)
5,675
—
6,476
Total
Equities
Table of Contents
Commercial Mortgage Loans
The following tables present the carrying value of our commercial mortgage loans and additional information at December 31, 2023 and 2022:
Commercial Mortgage Loans
Loan-to-value
Less than 65%
65%-75%
Total amortized cost
Valuation allowance
Total mortgage loans
East North Central
Southern Atlantic
East South Central
New England
Middle Atlantic
Mountain
West North Central
Total mortgage loans at amortized cost
Commercial
Multifamily
Office
Industrial
Retail
Mixed use/Other
Total mortgage loans at amortized cost
December 31, 2023
December 31, 2022
$
$
$
36,762
8,659
45,421
(55)
45,366
$
$
29,231
8,716
37,947
(49)
37,898
Mortgage Loans by Region
December 31, 2023
December 31, 2022
Carrying Value
Percent of Total
Carrying Value
Percent of Total
$
$
3,245
17,217
7,526
6,588
5,979
1,992
2,874
45,421
7.1 % $
37.9
16.6
14.5
13.2
4.4
6.3
100.0 % $
3,245
9,397
7,783
6,588
6,139
1,992
2,803
37,947
8.6 %
24.7
20.5
17.4
16.2
5.2
7.4
100.0 %
Mortgage Loans by Property Type
December 31, 2023
December 31, 2022
Carrying Value
Percent of Total
Carrying Value
Percent of Total
$
$
8,507
10,950
9,985
10,000
5,979
45,421
18.7 % $
24.1
22.0
22.0
13.2
100.0 % $
8,493
11,267
10,056
1,992
6,139
37,947
22.4 %
29.7
26.5
5.2
16.2
100.0 %
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Commercial mortgage loans:
Risk Rating:
1-2 internal grade
3-4 internal grade
5 internal grade
6 internal grade
7 internal grade
Total commercial mortgage loans
Current-period write-offs
Current-period recoveries
Current-period net write-offs
Amortized Cost Basis by Year of Origination and Credit Quality Indicator
2023
2022
2020
2019
2018
Total
$
$
$
8,135 $
—
—
—
—
8,135 $
—
—
— $
100 $
—
—
—
—
100 $
—
—
— $
5,263
—
—
—
—
5,263
—
—
—
$
$
$
7,866
—
—
—
—
7,866
—
—
—
$
$
$
17,469
6,588
—
—
—
24,057
—
—
—
$
$
$
38,833
6,588
—
—
—
45,421
—
—
—
Commercial mortgage loans carrying value excludes accrued interest of $174. As of December 31, 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 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 December 31, 2023, the
Company had an allowance for mortgage loan losses of $55, summarized in the following rollforward:
Rollforward of allowance for mortgage loan losses:
Beginning balance, January 1, 2023
Current-period provision for expected credit losses
Ending balance of the allowance for mortgage loan losses, December 31, 2023
As of
December 31, 2023
49
6
55
$
$
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NOTE 4. REINSURANCE
Ceded and Assumed Reinsurance
Reinsurance is a contract by which one insurer, called the reinsurer, agrees to cover, under certain defined circumstances, a portion of the losses incurred by a primary insurer if a claim is made under
a policy issued by the primary insurer. Our property and casualty insurance companies follow the industry practice of reinsuring a portion of their exposure by ceding to reinsurers a portion of the
premium received and a portion of the risk under the policies written. We purchase reinsurance to reduce the net liability on individual risks to predetermined limits and to protect us against
catastrophic losses, such as a hurricane or tornado. We do not engage in any reinsurance transactions classified as finite risk reinsurance. As we are able to obtain information required to estimate
ultimate premiums and periods of recognition, we account for assumed foreign reinsurance utilizing the Periodic Method, which provides for current recognition of profits and losses.
We account for premiums, written and earned, and losses and loss settlement expenses incurred net of reinsurance ceded. The ceding of insurance does not legally discharge us from primary liability
under our policies, and we must pay the loss if the reinsurer fails to meet its obligation. We periodically monitor the financial condition of our reinsurers to confirm that they are financially stable. We
believe that all of our reinsurers are in an acceptable financial condition and there were no reinsurance balances at December 31, 2023 for which collection is at risk that would result in a material
impact on our Consolidated Financial Statements. The amount of reinsurance recoverable on paid losses totaled $31,725 and $24,160 at December 31, 2023 and 2022, respectively.
We also assume both property and casualty insurance from other insurance or reinsurance companies.
Premiums and losses and loss settlement expenses related to our ceded and assumed business are as follows:
Years Ended December 31
Ceded Business
Ceded premiums written
Ceded premiums earned
Loss and loss settlement expenses ceded
Assumed Business
Assumed premiums written
Assumed premiums earned
Loss and loss settlement expenses assumed
2023
2022
2021
$
$
153,792
144,958
96,603
232,716
225,587
133,423
$
$
99,732
101,740
89,102
190,215
163,980
104,096
$
$
100,541
92,650
51,878
130,375
77,283
45,543
In 2023 we continued to grow our assumed programs by renewing the programs added in 2022 and continuing to diversify our risks. We reduced exposure in property catastrophe retrocessional treaty
and managing general agent treaty, while significantly growing our standard property and casualty treaty and Funds at Lloyd's businesses. This increased our assumed written premiums by 22.3
percent and earned premiums by 37.6 percent over the prior year.
In 2022, we continued to grow our assumed programs by renewing the programs added in 2021 and continuing to diversify our risks in retrocessional treaty, managing general agent, reinsurance
intermediary, and financial lines. This increased our assumed written premiums by 45.9 percent and earned premiums by 112.2 percent over the prior year. Losses and loss settlement expenses ceded
increased in 2022 due to two lines of business, other liability and fire and allied lines. Other liability is seeing more recoveries due to inflationary pressures and fire and allied lines has seen an
increase in severity, with both of these issues driving increasing ceded recovery.
In 2021, we renewed our participation in all of our 2020 assumed programs. We also grew our assumed book significantly by signing on to new programs in various channels; including retrocessional
treaty, managing general agent, reinsurance intermediary, and financial lines.
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Table of Contents
Refer to Note 5 "Reserves for Losses and Loss Settlement Expenses" for an analysis of changes in our overall property and casualty insurance reserves.
Ceded Reinsurance Programs and Retentions
We elect to cede parts of our business into various treaties, which allows us to increase our underwriting capacity, manage our risk profile, and protect us from a single large event, series of events, or
a catastrophic event. The majority of our treaties are excess of loss, meaning we retain a portion of the loss prior to ceding to reinsurers. We place some treaties on a proportional basis, meaning we
cede a portion of losses beginning with the first dollar of loss. Through each of our treaties, we cede a portion of each risk in exchange for a portion of the premium on those policies. Our treaties
cover us from individual risk losses as well as a loss to more than one risk.
We generally work with reinsurance brokers to facilitate our reinsurance treaty procurement.
We have several programs that provide reinsurance coverage. The following tables provide a summary of our primary reinsurance programs. Retention amounts reflect the accumulated retentions and
co-participation of all layers within a program. Reinsurance coverage limits the risk of loss that we retain by reinsuring direct risks in excess of our retention limits. New reinsurance programs
beginning in 2023 include our marine liability quota share and our specialty variable quota share. For 2022 we decided not to renew the all lines aggregate excess loss program. In its place we added
the pillared occurrence program. Another new program for 2022 was the addition of the earthquake quota share program. For 2021, there was an all lines annual aggregate excess of loss program with
variable retention of 7.02 percent of gross net earned premium with a minimum retention of $58.5 million and a maximum of $71.5 million. Our all lines aggregate recovery is also limited to $30.0
million and 65.0 percent of the program was placed.
Type of Reinsurance
Casualty excess of loss
Property excess of loss
Surety excess of loss
Marine liability quota share
Specialty casualty variable quota share
Property catastrophe, excess
Boiler and machinery
Pillared Occurrence Program
Earthquake Quota Share Program
Type of Reinsurance
Casualty excess of loss
Property excess of loss
Surety excess of loss
Property catastrophe, excess
Boiler and machinery
Pillared Occurrence Program
Earthquake Quota Share Program
Stated Retention
2023 Reinsurance Programs
Exhaustion Point
Placement and Limit
$
$
60,000
25,000
50,000
5,000
5,000
110,000
100,000
16,000
170,000
2022 Reinsurance Programs
Limits
60,000
25,000
45,000
180,000
50,000
15,000
180,000
100 %
100 %
100 %
70 %
70 %
100 %
100 %
90 %
100 %
100 %
100 %
100 %
100 %
100 %
100 %
100 %
of $
of $
of $
of $
of $
of $
of $
of $
of $
Coverage
of $
of $
of $
of $
of $
of $
of $
57,000
22,000
48,000
5,000
5,000
107,150
100,000
10,000
56,525
57,000
22,000
43,500
165,000
50,000
10,000
180,000
$
$
Stated Retention
3,000
3,000
2,000
N/A
N/A
20,000
N/A
6,000
N/A
3,000
3,000
1,500
15,000
N/A
5,000
N/A
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Type of Reinsurance
Casualty excess of loss
Property excess of loss
Surety excess of loss
Property catastrophe, excess
Boiler and machinery
Stated Retention
$
$
2,500
2,500
1,500
20,000
N/A
2021 Reinsurance Programs
Limits
60,000
25,000
45,000
250,000
50,000
Coverage
of $
of $
of $
of $
of $
100 %
100 %
100 %
100 %
100 %
57,500
22,500
43,500
230,000
50,000
If we incur property catastrophe losses and loss settlement expenses that exceed the retention, our property catastrophe program provides one guaranteed reinstatement. In such an instance, we are
required to pay the reinsurers a reinstatement premium equal to the full amount of the original premium, which will reinstate the full amount of reinsurance available under the property catastrophe
program.
NOTE 5. 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 is primarily
concerned with losses caused by injuries to persons and legal liability imposed on the insured for such injury or for damage to property of others. 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. ("Regnier"), to render an opinion as to the reasonableness of our statutory reserves annually. The
actuarial opinion is filed in those states where we are licensed.
On a quarterly basis, our actuarial reserving department 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 regular and quarterly basis, the adequacy of carried reserves based on results
from this actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique
circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific IBNR reserves because an analysis of existing historical data would not provide an
appropriate estimate.
Our IBNR methodologies and assumptions are reviewed periodically, but changes are infrequent. In response to an increase in severity of losses, we revised our commercial automobile assumptions,
resulting in an increase to our
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Table of Contents
carried loss IBNR. We also reviewed our methodology and assumptions in our product liability line, associated with our construction defects business and have revised our assumptions related to
expected severity resulting in an increase to our IBNR reserves. Additionally, similar reviews were completed for standard umbrella and excess liability exposures which led to a change in
assumptions related to severity, resulting in an increase in IBNR reserves for other liability. Besides the changes to our assumptions used for our commercial automobile, product liability and other
liability lines, we continually review and revise items affecting our projections of required reserves for unpaid loss and LAE. Items reviewed and revised include development factors for paid and
reported loss, paid development factors for allocated LAE, and ratios of paid unallocated LAE to paid loss.
We do not discount loss reserves based on the time value of money.
The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves for 2023, 2022 and 2021 (net of reinsurance amounts):
Years Ended December 31,
Gross liability for losses and loss settlement expenses
at beginning of year
Ceded losses and loss settlement expenses
Net liability for losses and loss settlement expenses
at beginning of year
Losses and loss settlement expenses incurred
for claims occurring during
Current year
Prior years
Total incurred
Losses and loss settlement expense payments
for claims occurring during
Current year
Prior years
Total paid
Net liability for losses and loss settlement expenses
at end of year
Ceded losses and loss settlement expenses
Gross liability for losses and loss settlement expenses
at end of year
2023
2022
2021
$
$
$
$
$
$
$
$
1,497,274
(146,875)
1,350,399
701,664
67,750
769,414
191,899
480,800
672,699
1,447,115
191,640
1,638,755
$
$
$
$
$
$
$
$
1,514,265
(112,900)
1,401,365
624,411
12,890
637,301
215,891
472,377
688,268
1,350,399
146,875
1,497,274
$
$
$
$
$
$
$
$
1,578,131
(131,843)
1,446,288
701,064
(48,909)
652,155
277,115
419,963
697,078
1,401,365
112,900
1,514,265
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. Therefore, such development cannot be used to project future reserve redundancies or deficiencies.
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Table of Contents
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
The significant drivers of the adverse reserve development in 2023 were the commercial other liability and commercial automobile lines of business. The adverse development in commercial other
liability was primarily in our excess and surplus lines excess casualty book along with some adverse development in standard umbrella and construction defect due to increasing severity pressures.
The pressure on these longer tailed lines, especially in accident years 2016-2019, related to social and economic inflation continued in 2023. The commercial automobile line of business also
experienced adverse development related to increasing severity largely in post-COVID-19 accident years. The remaining lines experienced small amounts of reserve development.
The significant drivers of the adverse 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. Commercial other liability experienced adverse development as 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 adversely driven by catastrophe
losses and increased severity on non-catastrophe claims. 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 and 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.
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Table of Contents
The following tables provide information about incurred and paid losses and loss settlement expense development as of December 31, 2023, net of reinsurance, as well as cumulative development,
cumulative claim frequency and IBNR liabilities. Claim data for Mercer Insurance Group, Inc., which was acquired on March 28, 2011, is presented retrospectively.
The cumulative number of reported claims, for calendar years 2023, 2022 and 2021, are counted for all lines of business on a per claimant per coverage basis and a single event may result in multiple
claims due to the involvement of multiple individual claimants and/or multiple independent coverages. Claim counts for calendar years 2016 and prior are counted on a per claim and per coverage
basis. Claim counts include open claims, claims that have been paid and closed, and reported claims that have been closed without the need for any payment.
Line of business: Commercial other liability
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2023
Accident
Year
2014
2015
2016
2017
2018
(Unaudited)
2019
2020
2021
2022
2023
For the years ended December 31,
Total of incurred
but not reported
liabilities plus
expected
development on
reported claims
Cumulative
development
Cumulative
number of
reported
claims
$
118,928 $
117,958 $
137,385
106,486 $
125,307
139,144
97,809 $
120,005
130,041
139,602
102,487 $
127,091
136,275
139,032
163,059
105,507 $
129,945
142,397
152,547
172,894
149,173
107,417 $
131,325
140,784
156,369
176,496
169,344
171,013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
111,517 $
132,694
148,324
159,653
187,841
183,918
158,022
145,822
111,558 $
136,161
153,490
173,091
197,696
179,667
162,471
162,359
161,826
Total
$
112,733 $
137,040
159,284
174,013
207,501
186,205
179,080
162,879
175,579
172,398
1,666,711
2,806
5,348
8,576
16,109
21,311
25,861
37,085
52,056
64,525
118,157
(6,195)
(345)
20,140
34,411
44,442
37,032
8,067
17,057
13,753
6,838
8,005
9,627
9,308
9,184
8,573
6,392
3,457
2,878
1,944
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Line of business: Commercial other liability
Accident Year
2014
2015
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2019
2018
2017
2020
2016
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
$
10,207 $
29,679 $
11,185
50,211 $
27,182
13,782
70,363 $
53,901
38,184
17,716
(Unaudited)
83,109 $
74,292
63,526
43,172
16,200
93,060 $
96,339
88,885
70,500
44,772
18,221
96,509 $
104,472
102,757
91,984
79,168
46,986
17,011
102,042 $
109,540
115,107
111,085
105,515
72,179
43,596
12,434
103,075 $
117,734
126,561
128,430
130,943
102,510
60,114
33,642
10,468
All outstanding liabilities for unpaid losses and loss settlement expenses before 2014, net of reinsurance
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
Total
$
102
105,035
126,364
136,400
138,127
158,851
127,650
98,592
59,278
42,168
9,335
1,001,801
13,905
678,815
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Line of business: Commercial fire and allied
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2023
Accident
Year
2014
2015
2016
2017
2018
(Unaudited)
2019
2020
2021
2022
2023
For the years ended December 31,
Total of
incurred but
not reported
liabilities plus
expected
development on
reported claims
Cumulative
development
Cumulative
number of
reported claims
$
126,216 $
131,198 $
103,177
128,762 $
108,293
147,473
128,185 $
110,633
144,208
155,139
128,503 $
108,235
143,721
160,240
143,280
126,811 $
105,218
143,724
160,945
146,950
164,030
127,068 $
104,646
143,108
161,693
146,378
155,482
207,207
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
128,180 $
105,043
144,109
161,232
146,010
158,475
201,391
156,794
128,491 $
104,978
145,351
161,456
147,356
157,667
202,929
169,669
161,776
Total
$
$
129,178
105,385
142,644
161,611
147,058
155,850
207,256
157,905
170,594
164,526
1,542,008
361
400
499
573
1,095
2,191
4,095
(7,859)
18,916
59,002
2,962
2,208
(4,829)
6,472
3,778
(8,180)
49
1,111
8,818
7,964
7,598
9,879
13,519
10,791
11,208
14,629
5,342
4,225
3,223
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Line of business: Commercial fire and allied
Accident Year
2014
2015
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2019
2017
2018
2020
2016
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
$
84,456 $
113,663 $
67,217
116,750 $
90,454
92,895
122,370 $
95,515
125,962
99,484
(Unaudited)
123,697 $
101,367
132,429
137,058
92,770
125,745 $
104,115
137,907
145,900
123,559
100,980
126,307 $
103,975
139,353
152,219
133,703
136,084
128,704
127,883 $
104,127
141,104
157,512
137,794
142,342
173,055
97,451
128,033 $
104,339
142,248
159,286
141,841
150,196
192,902
140,406
96,160
All outstanding liabilities for unpaid losses and loss settlement expenses before 2014, net of reinsurance
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
Total
$
128,403
104,638
141,008
159,456
145,021
151,739
197,602
154,242
138,479
75,304
1,395,891
1,453
147,570
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Line of business: Commercial automobile
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2023
Accident
Year
2014
2015
2016
2017
2018
(Unaudited)
2019
2020
2021
2022
2023
For the years ended December 31,
Total of
incurred but
not reported
liabilities plus
expected
development on
reported claims
$
107,723 $
106,076 $
125,506
113,720 $
129,816
174,018
118,869 $
132,206
175,357
227,919
120,385 $
138,987
174,337
224,553
236,629
121,077 $
137,395
175,655
235,110
245,173
279,229
120,599 $
137,335
173,823
233,159
253,045
291,139
243,360
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
119,214 $
136,826
174,588
233,007
255,017
289,929
216,951
179,880
121,311 $
137,240
175,016
233,535
255,409
282,155
196,412
172,599
157,165
Total
$
$
121,230
137,934
175,387
234,229
255,198
282,680
194,162
173,708
161,672
153,502
1,889,702
154
552
1,407
2,823
3,309
8,017
6,893
10,210
21,313
48,545
Cumulative
development
Cumulative
number of
reported claims
13,507
12,428
1,369
6,310
18,569
3,451
(49,198)
(6,172)
4,507
17,327
20,090
27,309
32,902
34,487
34,757
24,181
12,332
10,136
8,586
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Line of business: Commercial automobile
Accident Year
2014
2015
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2019
2018
2020
2017
2016
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
$
45,704 $
68,033 $
50,782
87,590 $
78,225
66,013
99,922 $
99,201
103,528
81,311
(Unaudited)
109,682 $
118,395
128,156
126,644
81,572
113,751 $
129,317
148,224
166,170
138,092
91,919
116,843 $
134,100
164,341
197,893
187,405
153,244
67,660
117,770 $
135,462
168,950
212,947
211,123
205,614
109,686
64,381
118,985 $
137,075
171,380
223,076
235,519
246,800
138,158
99,116
62,477
All outstanding liabilities for unpaid losses and loss settlement expenses before 2014, net of reinsurance
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
Total
$
106
119,087
137,085
172,928
228,749
244,284
264,151
161,798
128,283
95,785
56,175
1,608,325
345
281,722
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Line of business: Workers' compensation
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2023
Accident
Year
2014
2015
2016
2017
2018
(Unaudited)
2019
2020
2021
2022
2023
For the years ended December 31,
Total of
incurred but
not reported
liabilities plus
expected
development on
reported claims
Cumulative
development
Cumulative
number of
reported claims
$
64,051 $
60,729 $
53,788
58,284 $
55,578
70,419
56,630 $
51,003
66,575
76,184
54,636 $
46,682
61,648
69,528
71,972
53,023 $
46,019
55,168
55,982
67,883
52,136
52,889 $
44,706
53,964
51,874
59,192
49,189
45,365
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
52,388 $
43,751
52,870
49,362
56,109
49,336
46,612
45,177
51,861 $
43,209
53,090
47,801
53,812
48,945
43,724
42,283
29,597
Total
$
$
51,773
43,654
53,617
48,074
54,783
49,084
46,624
39,649
26,721
29,262
443,240
391
851
1,131
1,590
1,102
(1,087)
735
(1,731)
1,623
6,455
(12,278)
(10,134)
(16,802)
(28,110)
(17,189)
(3,052)
1,259
(5,528)
(2,876)
4,821
5,683
7,982
8,216
8,059
7,415
4,581
1,875
1,307
1,025
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Line of business: Workers' compensation
Accident Year
2014
2015
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2019
2018
2020
2017
2016
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
$
13,965 $
30,289 $
12,063
38,441 $
27,304
14,413
42,964 $
35,229
32,345
14,647
(Unaudited)
45,193 $
38,424
40,680
31,309
16,949
45,825 $
39,305
45,743
38,083
35,369
13,582
46,299 $
40,034
47,082
41,672
43,189
29,668
17,603
46,664 $
41,006
48,277
43,833
47,173
38,382
29,605
17,949
47,192 $
41,211
50,127
45,508
48,807
43,044
35,542
29,453
9,434
All outstanding liabilities for unpaid losses and loss settlement expenses before 2014, net of reinsurance
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
Total
$
108
47,548
41,865
51,023
45,742
49,964
46,101
39,479
34,074
17,851
10,227
383,875
13,649
73,014
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Line of business: Personal
Incurred losses and allocated loss settlement expenses, net of reinsurance
As of December 31, 2023
Accident
Year
2014
2015
2016
2017
2018
(Unaudited)
2019
2020
2021
2022
2023
For the years ended December 31,
Total of
incurred but
not reported
liabilities plus
expected
development on
reported claims
Cumulative
development
Cumulative
number of
reported claims
$
53,910 $
52,661 $
42,847
52,944 $
41,088
48,072
52,782 $
40,336
45,840
60,330
52,615 $
40,368
45,379
59,342
51,639
52,702 $
40,220
45,961
58,695
51,721
59,548
52,810 $
40,194
45,113
58,544
52,715
58,378
81,206
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
52,854 $
40,189
45,297
59,023
52,062
58,745
73,761
28,537
52,910 $
40,190
45,199
58,790
51,457
57,929
73,204
26,489
1,493
Total
$
$
52,975
40,191
45,179
58,863
51,115
57,630
72,531
26,372
2,287
2,391
409,534
9
13
22
32
113
175
588
291
(556)
2,019
(935)
(2,656)
(2,893)
(1,467)
(524)
(1,918)
(8,675)
(2,165)
794
10,969
9,553
11,905
14,717
13,688
13,609
17,095
2,588
64
10
109
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Line of business: Personal
Accident Year
2014
2015
Cumulative paid losses and allocated loss settlement expenses, net of reinsurance
For the years ended December 31,
2019
2020
2018
2017
2016
2021
2022
2023
$
37,055 $
47,912 $
29,551
49,710 $
37,431
32,999
51,837 $
39,027
40,910
42,135
(Unaudited)
52,018 $
39,428
42,660
53,111
37,410
52,543 $
39,865
44,046
55,982
47,433
40,544
52,519 $
40,029
44,618
57,169
49,464
52,390
54,181
52,526 $
40,053
44,737
57,824
50,185
54,935
68,124
20,298
52,565 $
40,053
44,828
58,206
50,661
56,658
70,543
23,829
551
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
All outstanding liabilities for unpaid losses and loss settlement expenses before 2014, net of reinsurance
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $
Total
$
52,615
40,053
44,827
58,377
50,852
56,852
71,416
24,889
2,128
297
402,305
340
7,568
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The reconciliation of the net incurred and loss development tables to the liability for unpaid losses and loss settlement expenses in the consolidated statement of financial position is as follows:
Net outstanding liabilities for unpaid losses and allocated loss settlement expenses:
December 31, 2023
Commercial other liability
Commercial fire and allied
Commercial automobile
Commercial workers' compensation
Personal
All other lines
Net outstanding liabilities for unpaid losses and allocated loss settlement expenses
Net outstanding liabilities for unpaid unallocated loss settlement expenses
Fair value adjustment (purchase accounting adjustment for Mercer acquisition)
Liabilities for unpaid losses and loss settlement expenses, net of reinsurance
Reinsurance recoverable on unpaid losses and allocated loss settlement expenses:
Commercial other liability
Commercial fire and allied
Commercial automobile
Commercial workers' compensation
Personal
All other lines
Reinsurance recoverable on unpaid losses and allocated loss settlement expenses
Reinsurance fair value amortization (purchase accounting adjustment for Mercer acquisition)
Total reinsurance recoverable on unpaid losses and loss settlement expenses
Total gross liability for unpaid losses and loss settlement expenses
111
$
$
678,815
147,570
281,722
73,014
7,568
170,119
1,358,808
87,949
560
1,447,317
85,753
9,750
2,624
38,231
294
55,322
191,974
(536)
191,438
1,638,755
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The following is supplementary information about average historical claims duration as of December 31, 2023.
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Average annual percentage payout of incurred claims by age, net of reinsurance
Commercial other liability
Commercial fire and allied
Commercial automobile
Commercial workers' compensation
Personal
8.2 %
61.0 %
35.9 %
32.4 %
62.0 %
14.9 %
23.1 %
20.6 %
31.9 %
24.2 %
15.5 %
5.8 %
16.4 %
15.0 %
4.0 %
15.9 %
4.0 %
12.2 %
8.3 %
2.2 %
112
(Unaudited)
12.1 %
1.9 %
7.9 %
3.8 %
0.8 %
9.2 %
1.2 %
3.4 %
2.1 %
0.5 %
4.9 %
0.4 %
1.8 %
1.8 %
0.1 %
5.7 %
0.2 %
0.9 %
0.9 %
— %
3.6 %
0.2 %
0.5 %
1.3 %
— %
1.7 %
0.3 %
0.1 %
0.7 %
0.1 %
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NOTE 6. STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDENDS AND RETAINED EARNINGS RESTRICTIONS
Statutory capital and surplus in regards to policyholders at December 31, 2023, 2022 and 2021 and statutory net income (loss) for the years then ended are as follows:
2023
Property and casualty business
2022
Property and casualty business
2021
Property and casualty business
Statutory Capital and Surplus
Statutory Net Income (Loss)
$
$
$
635,474
717,709
754,411
$
$
$
(13,251)
43,111
110,827
State insurance holding company laws and regulations generally require approval from the insurer's domicile state insurance commissioner for any material transaction or extraordinary dividend. For
property and casualty insurers, a material transaction is defined as any sale, loan, exchange, transfer or guarantee with an affiliate where the aggregate value of the transaction exceeds 25 percent of
the insurer's policyholders' surplus or three percent of its admitted assets (measured at December 31 of the preceding year), whichever is less.
The Company executed a $50,000 surplus note private placement transaction on December 15, 2020 among UF&C and Federated Mutual and Federated Life. See additional details in Note 13 "Debt."
State laws and regulations generally limit the amount of funds that an insurance company may distribute to a parent as a dividend without commissioner approval. As a holding company with no
independent operations of its own, United Fire Group, Inc. relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends
payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus
arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance
Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater
than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at
December 31, 2023, our insurance company subsidiary, United Fire & Casualty, is able to make a maximum of $58.6 million in dividend payments without prior regulatory approval. At
December 31, 2023, we were in compliance with applicable state laws and regulations.
We paid dividends to our common shareholders of $16,164, $15,860 and $15,064 in 2023, 2022 and 2021, respectively. Payments of any future dividends and the amounts of such dividends,
however, will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors,
out of funds legally available, and subject to any other restrictions that may be applicable to us.
In 2023, 2022 and 2021, United Fire & Casualty Company received dividends from its wholly owned subsidiaries of $0, $0, and $0, respectively. In 2023, 2022 and 2021, United Fire & Casualty
Company paid dividends to United Fire Group, Inc. totaling $13,200, $12,000 and $10,000, respectively. These intercompany dividend payments are eliminated for reporting in our Consolidated
Financial Statements.
Our property and casualty subsidiaries are required to prepare and file statutory-basis financial statements in conformity with the National Association of Insurance Commissioners ("NAIC")
Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. The accounting principles used to prepare
these statutory-basis financial statements follow prescribed or
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permitted accounting practices that differ from GAAP. Prescribed statutory accounting principles include state laws, regulations and general administrative rules issued by the state of domicile, as
well as a variety of publications and manuals of the NAIC. Permitted accounting practices encompass all accounting practices not prescribed, but allowed by the state of domicile. No material
permitted accounting practices were used to prepare our statutory-basis financial statements during 2023, 2022 and 2021. Statutory accounting principles primarily differ from GAAP in that policy
acquisition and certain sales inducement costs are charged to expense as incurred, goodwill is amortized, life insurance reserves are established based on different actuarial assumptions and the values
reported for investments, pension obligations and deferred taxes are established on a different basis.
We are directed by the state insurance departments' solvency regulations to calculate a required minimum level of statutory capital and surplus based on insurance risk factors. The risk-based capital
results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. United Fire & Casualty Company and its
property and casualty insurance subsidiaries and affiliates had statutory capital and surplus in regards to policyholders well in excess of their required levels at December 31, 2023.
NOTE 7. FEDERAL INCOME TAX
Federal income tax expense (benefit) is composed of the following:
Years Ended December 31,
Current
Deferred
Total
2023
2022
2021
$
$
(2,217)
(7,803)
(10,021)
$
$
1,627
(4,581)
(2,954)
$
$
A reconciliation of income tax expense (benefit) computed at the applicable federal tax rate of 21.0 percent in 2023, 2022 and 2021 to the amount recorded in the accompanying Consolidated
Statements of Income and Comprehensive Income is as follows:
Years Ended December 31,
Computed expected income tax expense (benefit)
Tax-exempt municipal bond interest income
Nontaxable dividend income
Compensation
Research & development credit
Other, net
Consolidated federal income tax expense (benefit)
Reconciliation of consolidated federal income tax expense (benefit) from:
Consolidated federal income tax expense (benefit)
2023
2022
2021
$
$
$
(8,339)
(2,763)
(269)
596
540
215
(10,021)
(10,021)
$
$
$
2,536
(3,115)
(378)
582
(1,591)
(988)
(2,954)
(2,954)
$
$
$
11,081
5,168
16,249
20,337
(3,412)
(361)
770
(1,545)
460
16,249
16,249
We measure certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is 21.0 percent. The significant components of our net deferred tax
liability at December 31, 2023 and 2022 are as follows:
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Table of Contents
December 31,
Deferred tax liabilities
Net unrealized appreciation on investment securities:
Equity securities
Deferred policy acquisition costs
Investments in partnerships
Over funded pension benefit
Prepaid pension cost
Net bond discount accretion
Depreciation
Revaluation of investment basis (1)
Identifiable intangible assets (1)
Capitalized Software
Other
Gross deferred tax liability
Deferred tax assets
Financial statement reserves in excess of income tax reserves
Unearned premium adjustment
Employee profit sharing
Other-than-temporary impairment of investments
Compensation expense related to stock options
Nonqualified deferred compensation
Net Unrealized Appreciation - all other securities
Revaluation of investment basis (1)
Other
Gross deferred tax asset
Valuation allowance
Deferred tax asset
Net deferred tax liability (asset)
(1) Related to our acquisition of Mercer Insurance Group, Inc.
2023
2022
$
$
$
$
$
5,414
26,572
1,713
4,256
7,090
213
3,637
—
944
2,310
2,432
54,581
20,414
20,618
1,623
451
1,760
2,493
17,753
23
3,067
68,202
—
68,202
(13,621)
$
$
$
$
$
$
19,701
21,887
1,303
232
5,653
238
3,996
119
1,093
3,607
1,550
59,379
22,522
18,513
1,624
1,109
1,822
2,399
23,382
—
3,539
74,910
—
74,910
(15,531)
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 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 December 31, 2023 and 2022.
NOTE 8. EMPLOYEE BENEFITS
We offer various benefits to our employees including a non-contributory cash balance pension plan and an employee health and dental benefit plan.
In September 2023, we offered an Early Retirement Package ("ERP") as a voluntary program for a select group of eligible employees to consider retiring earlier than planned. Employees that
accepted the offering received a one-time separation package. At the same time, we announced to employees that we would be changing our paid time off ("PTO") policy to a discretionary time off
policy as of the end of 2023. As a result, the company will no longer maintain an accrued liability on the balance sheet for PTO. The expense of the severance benefits offered with the ERP largely
offset the benefit of the liability released with the change in time off policy in the financial statements. A partial plan curtailment was triggered during the period due to the reduction in active lives
resulting from the ERP reduction in force, providing the benefit shown in the table for the Net Periodic Benefit Cost below.
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Pension and Post-Retirement Benefit Plans
We offer a non-contributory cash balance pension plan in which all of our employees are eligible to participate after they have completed one year of service, attained 21 years of age and have met the
hourly service requirements. Retirement benefits under our cash balance pension plan are based on the number of years of service and level of compensation. Our policy to fund the pension plan on a
current basis to not less than the minimum amounts required by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended, is designed
to ensure that plan assets will be adequate to provide retirement benefits. We are not required to make a contribution to the pension plan in 2024.
In December 2020, the Company made the decision to amend the non-contributory defined benefit pension plan and put in place a non-contributory cash balance pension plan effective July 1, 2021.
All benefits under the former non-contributory defined benefit pension plan stopped accruing on June 30, 2021.
We also offer health and dental benefit plans to all of our eligible employees that are self-funded. We previously offered a fully-funded (post-65) retiree health and dental plan (the "post-retirement
benefit plan"). In January 2021, the Company changed the post-retirement benefit plan to a voluntary plan funded exclusively by participants, commencing at the start of 2023. The impact of this
decision is reflected in the tables in this note, with a one-time adjustment presented in the line "Special event plan closure" and an additional 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, 2023, the post-retirement benefit obligation was $0.
Investment Policies and Strategies
Our investment policy and objective for the pension plan is to generate long-term capital growth and income by way of a diversified investment portfolio along with appropriate employer
contributions, which is intended to allow us to provide for the pension plan's benefit obligation. We have an internal investment/retirement committee, which includes our Chief Executive Officer,
Chief Financial Officer, Chief Investment Officer, Chief Operating Officer, and Chief Claims Officer, all of whom periodically receive information on the value of the pension plan assets and their
performance. Quarterly, the committee meets to review and discuss the performance of the pension plan assets as well as the allocation of investments within the pension plan.
In September 2023, the investment/retirement committee made a shift in investment strategy to a liability driven investment ("LDI") approach to better match the timing of cash flows between
payouts from the plan with cash flows from the asset portfolio, as well as hedge interest rate risk between assets and liabilities. Changing to this approach now, while the plan is overfunded, should
also reduce the likelihood of having to make a contribution to the plan in the future.
The investments held by the pension plan at December 31, 2023 include the following asset categories:
•
•
•
Fixed income securities, which may include bonds, and convertible securities;
Equity securities, which may include various types of stock, such as large-cap, mid-cap, small-cap, and international stocks;
Pooled separate accounts, which includes two separate funds, a real estate separate account and a liquid assets separate account;
• A group annuity contract that is administered by United Life, a former subsidiary of United Fire; and
•
Cash and cash equivalents, which include money market funds.
As a result of the shift in investment strategy in the second half of 2023, we have reduced the number of external investment managers by which the assets are managed, with most of the portfolio
now part of the hedge portfolio.
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The following is a summary of the pension plan's actual and target asset allocations at December 31, 2023 and 2022 by asset category:
Pension Plan Assets
Hedge portfolio:
Fixed maturity securities - corporate bonds
Redeemable preferred stock
Pooled separate accounts
Liquid assets separate account fund
Core plus bond separate account fund
Cash and cash equivalents
Return seeking portfolio:
Equity Securities
Pooled separate account
U.S. property separate account fund
United Life annuity
Arbitrage fund
Total plan assets
2023
% of Total
2022
% of Total
166,063
—
4,475
—
785
53,981
25,407
13,195
—
263,906
$
62.9
—
1.7
—
0.3
20.5
9.6
5.0
—
100.0 %
$
18,102
2,946
—
16,768
5,356
134,663
28,468
12,567
10,831
229,701
7.9
1.3
—
7.3
2.3
58.6
12.4
5.5
4.7
100.0 %
Target
Allocation
80 %
20 %
100.0 %
The LDI investment strategy has shifted the allocation of pension plan assets from prior periods. The portfolio includes a hedge portfolio, targeting 80.0 percent of the pension plan asset balance,
largely comprised of highly rated fixed income securities and designed to match the assets and liabilities and maintain a fully funded position while hedging interest rate, yield curve and credit spread
risks. The remaining 20.0 percent target of the asset balance is return seeking with the objective to account for liability growth and to maintain a healthy surplus position. The largest fund in the return
seeking is the external fund managed by Capital Investment Services. There will be additional portfolio shifts as assets liquidate to achieve these targets.
The availability of assets held in cash and cash equivalents enables the pension plan to mitigate market risk that is associated with other types of investments and allows the pension plan to maintain
liquidity both for the purpose of making future benefit payments to participants and their beneficiaries and for future investment opportunities.
Valuation of Investments
Fixed Maturity and Equity Securities
Investments in equity securities are stated at fair value based upon quoted market prices reported on recognized securities exchanges on the last business day of the year. Purchases and sales of
securities are recorded as of the trade date.
The fair value of fixed maturity securities categorized as Level 2 is determined by management based on fair value
information reported in the custodial statements received from Plan's investment managers, which is derived from
recent trading activity of the underlying security in the financial markets. These securities represent various taxable bonds held by the pension plan. These securities categorized as Level 2 are valued
in the same manner as described in Note 3 "Fair Value of Financial Instruments" and have the same controls in place.
Pooled Separate Accounts
The pension plan invests in two pooled separate account funds, a U.S. property separate account fund and a liquid assets separate account fund. The fair value of the investments in the U.S. property
separate account fund is provided by the administrator of the fund based on the net asset value of the fund. The net asset value is based on the fair value of the underlying properties included in the
fund as this pooled separate account invests mainly in
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commercial real estate and includes mortgage loans which are backed by the associated properties. The fair value of the underlying real estate is estimated using discounted cash flow valuation
models that utilize public real estate market data inputs such as transaction prices, market rents, vacancy levels, leasing absorption, market cap rates and discount rates. In addition, each property is
appraised annually by an independent appraiser. The net asset value is the basis for current transactions and the pooled separate account can be redeemed at net asset value as of the measurement date.
The fair value measurement is classified within Level 2 of the fair value hierarchy given the inputs reflect observable market data but are not based on quoted prices in an active market. Investments
in the liquid assets separate account fund are stated at fair value as provided by the administrator of the fund based on the fair value of the underlying assets owned by the fund. This pooled separate
account invests mainly in short term securities such as commercial paper. The majority of the underlying securities have observable Level 1 or 2 pricing inputs, including quoted prices for similar
assets in active or non-active markets. The fair value measurement is classified within Level 2 of the fair value hierarchy as the inputs reflect observable market data and quoted prices for similar
assets, but in some instances, quoted prices are in markets that are not active. We have adjusted the net asset value provided by the custodian to Level 2 from Level 1 based on inputs and ASC 820
guidance.
United Life Annuity
The United Life group annuity contract, which is a deposit administration contract, is stated at contract value as determined by United Life. Under the group annuity contract, the plan's investment
account is credited with compound interest on the average account balance for the year. The interest rate is equivalent to the ratio of net investment income to mean assets of United Life, net of
investment expenses.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of insured cash and money market funds held with various financial institutions. Interest is earned on a daily basis. The fair value of these funds
approximates their cost basis due to their short-term nature.
Fair Value Measurement
The following tables present the categorization of the pension plan's assets measured at fair value on a recurring basis at December 31, 2023 and 2022:
Description
Fixed maturity securities - corporate bonds
Equity securities
Pooled separate accounts
Liquid assets separate account fund
U.S. property separate account fund
Money market funds
Total assets measured at fair value
December 31, 2023
Level 1
Fair Value Measurements
Level 2
Level 3
$
$
166,063
53,981
$
4,475
25,407
772
250,698
$
—
53,981
$
—
—
772
54,753
$
166,063
—
$
4,475
25,407
—
195,945
$
—
—
—
—
—
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Description
Fixed maturity securities - corporate bonds
Redeemable preferred stock
Equity securities
Pooled separate accounts
Core plus bond separate account fund
U.S. property separate account fund
Arbitrage fund
Money market funds
Total assets measured at fair value
December 31, 2022
Level 1
Fair Value Measurements
Level 2
Level 3
18,102
2,946
134,663
16,768
28,468
10,831
5,348
217,126
$
$
—
2,946
134,663
—
—
—
5,348
142,957
$
$
18,102
—
—
16,768
—
10,831
—
45,701
$
$
—
—
—
—
28,468
—
—
28,468
$
$
The fair value of investments categorized as Level 1 is based on quoted market prices that are readily and regularly available.
The fair value of fixed maturity securities categorized as Level 2 is determined by management based on fair value information reported in the custodial statements, which is derived from recent
trading activity of the underlying security in the financial markets. These securities represent various taxable bonds held by the pension plan. These securities categorized as Level 2 are valued in the
same manner as described in Part II, Item 8, Note 3 "Fair Value of Financial Instruments" and have the same controls in place.
The fair value of the arbitrage fund and bond and mortgage pooled separate account fund are categorized as Level 2 since there are no restrictions as to the pension plan's ability to redeem its
investment at the net asset value of the fund as of the reporting date.
The following tables provide a summary of the changes in fair value of the pension plan's Level 3 securities:
Balance at January 1, 2023
Unrealized gains
Balance at December 31, 2023
Balance at January 1, 2022
Unrealized gains
Balance at December 31, 2022
U.S. property separate account fund
28,468
(3,061)
25,407
U.S. property separate account fund
27,328
1,140
28,468
$
$
$
$
Estimates and Assumptions
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. The discount rate assumption uses the Principal© Pension Discount Rate Curve ("Principal Curve") and reflects the expected future benefit discounted cash flows to determine the present value
of the plan benefit obligations as of December 31. The Principal Curve uses pricing and yield information for high quality corporate bonds. We have reviewed the updated curve and materials
provided by our external actuaries with regard to the assumptions used in the curve. We will continue to monitor this curve and intend to make changes as appropriate.
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The Society of Actuaries ("SOA") is an actuarial organization that periodically reviews mortality data and publishes mortality tables and improvement scales. In October 2019, the SOA released the
Pri-2012 mortality tables for private sector retirement plans in the United States. The mortality assumptions are based on the Pri-2012 white collar base rate mortality projected generationally using
the Principal Mortality Improvement Scale ("Principal 2022 MI"). The Principal 2022 MI scale is based on latest mortality improvement release, the MIM-2021-v3 application tool issued by SOA in
October 2022 with a few user-selected assumptions: 2028 as the ultimate year for age/cohort transition and long-term rate assumptions using sex-distinct and age based rated developed from the latest
Social Security Trustee Reports. We have reviewed these updated tables and have updated the mortality assumptions based on this information and also based on research provided by our external
actuaries. We will continue to monitor mortality assumptions and intend to make changes as appropriate to reflect additional research and our resulting best estimate of future mortality rates.
Assumptions Used to Determine Benefit Obligations
The following actuarial assumptions were used to determine the reported plan benefit obligations at December 31:
Weighted-average assumptions as of
December 31,
Discount rate
Interest crediting rate
Rate of compensation increase
Pension Benefits
2023
2022
Post-retirement Benefits
2023
2022
4.93 %
4.00
4.00
5.15 %
3.50
3.00
N/A
N/A
N/A
N/A
N/A
N/A
Rising interest rates resulted in an increase in the discount rates we use to value our respective plan's benefit obligations at December 31, 2022 compared to December 31, 2021.
Assumptions Used to Determine Net Periodic Benefit Cost
The following actuarial assumptions were used at January 1 to determine our reported net periodic benefit costs for the year ended December 31:
Weighted-average assumptions as of
January 1,
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
Assumed Health Care Cost Trend Rates
2023
5.15 %
6.70
3.00
Pension Benefits
2022
2.84 %
6.70
3.00
2021
2023
Post-retirement Benefits
2022
2021
2.58 %
6.70
2.75
N/A
N/A
N/A
0.48 %
N/A
N/A
2.58 %
N/A
N/A
Years Ended December 31,
Health care cost trend rates assumed for next year
Rate to which the health care trend rate is assumed to decline (ultimate trend rate)
Year that the rate reaches the ultimate trend rate
Health Care Benefits
Dental Claims
2023
2022
2023
2022
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Benefit Obligation and Funded Status
The following table provides a reconciliation of benefit obligations, plan assets and funded status of our plans:
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Years Ended December 31,
Reconciliation of benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Adjustment for plan amendment
Special event plan closure
Benefit payments
Benefit obligation at end of year
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefit payments
Fair value of plan assets at end of year
Funded status at end of year
(1)
Pension Benefits
Post-retirement Benefits
2023
2022
2023
2022
$
$
$
$
$
201,676
3,817
10,106
3,112
—
(8,831)
209,880
229,701
43,036
—
(8,831)
263,906
54,026
$
$
$
$
$
276,587
4,481
7,730
(79,303)
—
—
(7,819)
201,676
283,940
(50,420)
4,000
(7,819)
229,701
28,025
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
960
—
2
(122)
—
—
(840)
—
—
840
(840)
—
—
(1) For the pension plan, the benefit obligation is the projected benefit obligation. For the post-retirement benefit plan, the benefit obligation is the accumulated post-retirement benefit obligation.
Our accumulated pension benefit obligation was $209,867 and $201,669 at December 31, 2023 and 2022, respectively.
The following table displays the effect that the unrecognized prior service cost and unrecognized actuarial loss of our plans had on accumulated other comprehensive income ("AOCI"), as reported in
the accompanying Consolidated Balance Sheets:
Years Ended December 31
Amounts recognized in AOCI
Unrecognized prior service cost
Unrecognized actuarial (gain) loss
Total amounts recognized in AOCI
Pension Benefits
Post-retirement Benefits
2023
2022
2023
2022
$
$
(20,119)
(146)
(20,265)
$
$
(26,066)
24,961
(1,105)
$
$
—
—
—
$
$
—
—
—
We anticipate amortization of the net actuarial losses for our pension plan in 2024 to be $0.
Net Periodic Benefit Cost
The components of the net periodic benefit cost for our pension and post-retirement benefit plans are as follows:
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Years Ended December 31,
2023
Pension Plan
2022
2021
2023
Post-retirement Benefit Plan
2022
2021
Net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Effect of partial curtailment
Amortization of net loss
Net periodic benefit cost
$
$
3,817
10,106
(15,025)
(3,280)
(2,666)
207
(6,841)
$
$
4,481
7,730
(18,891)
(3,280)
777
(9,183)
$
$
12,082
6,911
(16,807)
(3,237)
3,995
2,944
$
$
—
—
—
—
—
—
—
$
$
—
2
—
(15,085)
(26)
2,824
(12,285)
$
$
148
72
—
(14,490)
(20,177)
2,607
(31,840)
The expected return on plan assets is determined using a calculated value. The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset
allocation of the plan and the Long-Term Capital Market Assumptions ("CMA") November 2023. The capital market assumptions were developed with a primary focus on forward-looking valuation
models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. In addition to forward-looking models,
historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.
The Corridor Approach is used to amortize actuarial gains and losses. An allowable 10% corridor is utilized under this approach. The period of amortization of such gains and losses is the average
future service of members expected to receive benefits. A portion of the service cost component of net periodic pension and postretirement benefit costs are capitalized and amortized as part of
deferred acquisition costs and is included in the income statement line titled "amortization of deferred policy acquisition costs." The portion not related to the compensation and the other components
of net periodic pension and postretirement benefit costs are included in the income statement line titled "other underwriting expenses."
Projected Benefit Payments
The following table summarizes the expected benefits to be paid from our plans over the next 10 years:
Pension benefits
$
17,570
$
13,950
$
14,310
$
14,880
$
15,100 $
80,050
2024
2025
2026
2027
2028
2029-3033
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NOTE 9. 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, stock appreciation rights, incentive stock options, and non-
qualified stock options for up to 1,900,000 shares of United Fire common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of UFG common
stock issuable at any time and from time to time pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc. Stock Plan. In May 2021, the
Registrant's shareholders approved an additional 650,000 shares of UFG common stock issuable at any time and from time to time 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 December 31, 2023, there were 1,150,834 authorized shares remaining available for future
issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the
awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole
discretion, grant awards to our employees who are in positions of substantial responsibility with United Fire.
Options granted pursuant to the Stock Plan are granted to buy shares of United Fire'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 our common stock
on the date of the grant. Restricted stock awards fully vest after three years or five years from the date of issuance, unless accelerated upon the approval of the Board of Directors, at which time
United Fire common stock will be issued to the awardee. All awards are generally granted free of charge to the eligible employees of United Fire as designated by the Board of Directors. Forfeitures
of awards under the plan are recognized as they occur.
The activity in the Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Beginning balance
Additional shares authorized
Number of awards granted
Number of awards forfeited or expired
Ending balance
Number of option awards exercised
Number of unrestricted stock awards granted
Number of restricted stock awards vested
Year Ended
December 31, 2023
From Inception to
December 31, 2023
1,334,790
—
(351,716)
167,760
1,150,834
4,000
—
32,591
1,900,000
2,150,000
(3,973,857)
1,074,691
1,150,834
1,537,336
10,090
300,436
Non-Qualified Non-Employee Director Stock Option and Restricted 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
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(iv) rename the Director Stock Plan as the "United Fire Group, Inc. Non-Employee Director Stock Plan." At December 31, 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 options and restricted stock shall be granted, the option price, the option expiration date,
the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set
forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement (subject to limits set forth in the plan). The Board of Directors
may also take any action it deems necessary and appropriate for the administration of the Director Stock Plan. Forfeitures of awards under the plan are recognized as they occur.
The activity in the Director Stock Plan is displayed in the following table:
Authorized Shares Available for Future Award Grants
Beginning balance
Additional authorization
Number of awards granted
Number of awards forfeited or expired
Ending balance
Number of option awards exercised
Number of restricted stock awards vested
Stock-Based Compensation Expense
Year Ended
December 31, 2023
From Inception to
December 31, 2023
123,397
—
(31,380)
11,583
103,600
1,755
20,955
300,000
150,000
(386,618)
40,218
103,600
152,336
137,956
In 2023, 2022 and 2021, we recognized stock-based compensation expense of $3,246, $2,827 and $3,441, respectively. Stock-based compensation expense is recognized over the vesting period of the
stock options.
As of December 31, 2023, we had $5,655 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized in
subsequent years according to the following table, 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.
2024
2025
2026
2027
Total
$
3,394
1,865
367
29
5,655
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Analysis of Award Activity
The analysis below details the option award activity for 2023 and the awards outstanding at December 31, 2023, for both of our plans and ad hoc options, which were granted prior to the adoption of
the other plans:
Options
Outstanding at January 1, 2023
Granted
Exercised
Cancelled/Forfeited
Expired
Outstanding at December 31, 2023
Exercisable at December 31, 2023
Shares
Weighted-Average Exercise
Price
Weighted-Average Remaining
Life (in years)
Aggregate Intrinsic Value
776,338
117,026
(5,755)
(74,350)
(17,583)
795,676
645,476
$
$
$
36.47
28.08
27.35
35.95
27.23
35.55
37.21
3.01
1.64
$
$
—
—
Intrinsic value is the difference between our share price on the last day of trading (i.e., December 31, 2023) and the price of the options when granted and represents the value that would have been
received by option holders had they exercised their options on that date. These values change based on the fair market value of our shares. The intrinsic value of options exercised totaled $18, $261
and $133 in 2023, 2022 and 2021, respectively.
The analysis below details the award activity for the restricted stock and restricted stock unit awards outstanding at December 31, 2023:
Restricted stock awards
Non-vested at January 1, 2023
Adjustment to prior year PSU performance prediction
Granted
Vested
Forfeited
PSU projected performance adjustment
Non-vested at December 31, 2023
Shares
Weighted-Average Grant Date Fair Value
157,387
7,329
266,070
(67,488)
(31,117)
(40,742)
291,439
$
$
30.56
30.56
26.42
32.99
31.89
28.42
27.42
In 2023, 2022 and 2021 we recognized $2,637, $2,048 and $2,610, respectively, in compensation expense related to the restricted stock and restricted stock unit awards. At December 31, 2023, we
had $4,632 in compensation expense that has yet to be recognized through our results of operations related to the restricted stock and restricted stock unit awards. The intrinsic value of the non-vested
restricted stock and restricted stock unit awards outstanding totaled $5,864 and $4,306 at December 31, 2023 and 2022, respectively.
Assumptions
The weighted-average grant-date fair value of the options granted under our plans has been estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
December 31,
Risk-free interest rate
Expected volatility (historical)
Expected option life (in years)
Expected dividends (in dollars)
Weighted-average grant-date fair value of options granted during the year (in
dollars)
$
$
2023
2022
2021
4.09 %
41.85 %
7
0.64
10.95
$
$
2.18 %
40.56 %
7
0.61
10.49
$
$
0.98 %
56.49 %
7
0.60
13.48
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The following table summarizes information regarding the stock options outstanding and exercisable at December 31, 2023:
$
$
Range of Exercise Prices
20.24
28.77
29.45
34.77
43.55
20.24
28.76
29.44
34.76
43.54
54.26
54.26
Number Outstanding (in shares)
136,617
171,963
128,246
189,022
169,828
795,676
Options Outstanding
Weighted-Average Remaining
Contractual Life (in years)
Weighted-Average Exercise
Price
Number Exercisable (in shares)
Weighted-Average Exercise
Price
Options Exercisable
27.36
29.20
29.56
40.79
47.27
35.55
26,954 $
165,469
94,203
189,022
169,828
645,476 $
24.50
29.19
29.59
40.79
47.27
37.21
7.74 $
1.58
3.36
1.24
2.34
3.01 $
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NOTE 10. 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 continually evaluate our operations on the basis of both
statutory accounting principles prescribed or permitted by our states of domicile and GAAP.
Our property and casualty insurance business is comprised of commercial lines insurance, including surety bonds, and assumed reinsurance. The company announced its intent to withdraw from
personal lines insurance in 2020 and all remaining exposure is immaterial. All of our property and casualty insurance subsidiaries and our affiliate belong to an intercompany reinsurance pooling
arrangement. Pooling arrangements permit 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. Under such arrangements, the members share substantially all of the insurance business that is written and allocate the combined premiums,
losses and expenses based on percentages defined in the arrangement.
The accounting policies of our businesses are the same as those described in Note 1 "Summary of Significant Accounting Policies" to our Consolidated Financial Statements.
Commercial Lines Business
Our primary commercial policies are tailored business packages that include the following coverages: fire and allied lines, other liability, automobile, workers' compensation and surety.
Personal Lines Business
Our personal lines consist primarily of automobile and fire and allied lines coverage, including homeowners.
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 the state of New Jersey as of December 31, 2023. The business remaining in New Jersey is scheduled to lapse by the end of 2025.
Pricing
Pricing levels for our property and casualty insurance products are influenced by many factors, including an estimation of expected losses, the expenses of producing, issuing and servicing business
and managing claims, the time value of money associated with such loss and expense cash flows, and a reasonable allowance for profit. We have a disciplined approach to underwriting and risk
management that emphasizes profitable growth rather than premium volume or market share. Our insurance company subsidiaries are subject to state laws and regulations regarding rate and policy
form approvals. The applicable state laws and regulations establish standards in certain lines of business to ensure that rates are not excessive, inadequate, unfairly discriminatory, or used to engage in
unfair price competition. Our ability to increase rates and the relative timing of the process are dependent upon each respective state's requirements, as well as the competitive market environment.
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Seasonality
Our property and casualty insurance business experiences some seasonality with regard to premiums written, which are generally highest in January and July and lowest during the fourth quarter.
Although we experience some seasonality in our premiums written, premiums are earned ratably over the period of coverage. Losses and loss settlement expenses incurred tend to remain consistent
throughout the year, with the exception of catastrophe losses which generally are highest in the second and third quarters. Catastrophes inherently are unpredictable and can occur at any time during
the year from man-made or natural disaster events that include, but are not limited to, hail, tornadoes, hurricanes and windstorms.
Premiums Earned
The following table sets forth our net premiums earned:
Years Ended December 31,
Property and casualty insurance business
Net premiums earned
Other liability
Fire and allied lines
Automobile
Workers' compensation
Fidelity and surety
Reinsurance assumed
Other
Total net premiums earned
2023
2022
2021
$
$
320,762
249,407
208,874
53,039
39,922
159,859
2,724
1,034,587
$
$
302,446
237,113
208,399
56,015
37,975
108,462
1,131
951,541
$
$
299,961
253,485
255,279
61,690
30,989
59,745
1,674
962,823
Total revenue includes sales to external customers and intercompany sales that are eliminated to arrive at the total revenues as reported in the accompanying Consolidated Statements of Income and
Comprehensive Income. We account for intercompany sales on the same basis as sales to external customers.
NOTE 11. 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 and restricted
stock 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.
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The components of basic and diluted earnings per share were as follows:
(In Thousands Except Share and Per Share Data)
Net income (loss)
Weighted-average common shares outstanding
Add dilutive effect of restricted stock awards
Add dilutive effect of stock options
Weighted-average common shares
Earnings (loss) per common share
Awards excluded from diluted calculation
(1)
2023
Years Ended December 31,
2022
2021
Basic
Diluted
Basic
Diluted
Basic
Diluted
$
$
(29,700)
25,249,269
—
—
25,249,269
(1.18)
—
$
$
(29,700)
25,249,269
—
—
25,249,269
(1.18)
791,735
$
$
15,031
25,160,809
—
—
25,160,809
0.60
—
$
$
15,031
25,160,809
157,387
—
25,318,196
0.59
585,853
$
$
80,594
25,092,297
—
—
25,092,297
3.21
—
$
$
80,594
25,092,297
202,809
224,620
25,519,726
3.16
800,903
(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 12. LEASE COMMITMENTS
The Company determines if a contract contains a lease at inception of the contract through a review by vendor management of the facts and circumstances of the contract to determine if a lease is
present. A questionnaire is then forwarded to the corporate finance department to come to agreement on the determination. There are no significant assumptions made in the identification of lease
components and there has been no history of contracts containing both lease and non-lease components. The Company has operating leases relating to office space, vehicles, computer equipment, and
office equipment, 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 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. As an accounting policy election, we have elected the practical expedient on not separating lease components from non-
lease components to each major asset class.
The Company's lease obligation is recorded at the present value of the lease payments based on the term of the applied lease. The Company has elected to categorize its leases into four categories
based on length of lease terms and applies an incremental borrowing rate of interest as of the effective date of adoption or the lease effective date equivalent to a collateralized rate with similar terms.
The four categories are as follows: less than three years, three to five years, five to 10 years and greater than 10 years. The collateralized discount rate used to calculate the present value of future
minimum lease payments is based, where appropriate, on current industry borrowing rates for financial companies with similar ratings. The Company does not have any restrictions or covenants
associated with its lease arrangements.
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 December 31, 2023, we
have leases with remaining terms of one year to eight 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 Company has six lease agreements with the Company serving as the lessor. The properties are office spaces and parking. The terms of the leases vary depending on the property and range from
two years to nine years, which may include options for renewal or to extend lease terms or no options for renewal. The Company has elected to categorize these leases into four categories based on
length of lease terms and applies an incremental borrowing rate
129
Table of Contents
of interest as of the effective date of adoption or the lease effective date equivalent to a collateralized rate with similar terms. The four categories are as follows: less than three years, three to five
years, five to 10 years and greater than 10 years. The collateralized discount rate used to calculate the present value of future minimum lease payments is based, where appropriate, on current industry
borrowing rates for similar rated financial companies.
The components of our operating leases were as follows:
Components of lease expense:
Operating lease expense
Less lessor income
Less sublease income
Net lease expense
Cash flows information related to leases:
Operating cash outflow from operating leases
Balance sheet information for operating leases:
Operating lease right-of-use assets (Other assets on Consolidated Balance Sheets)
Operating lease liabilities (Accrued expenses and other liabilities on Consolidated Balance Sheets)
Right-of-use assets obtained in exchange for new operating lease liabilities
$
Weighted average remaining lease term
Weighted average discount rate
Maturities of lease liabilities:
2023
2024
2025
2026
2027
2028
Thereafter
Total lease payments
Less imputed interest
Lease liability
As of December 31, 2023
As of December 31, 2022
9,187
507
532
8,148
8,219
As of December 31, 2023
As of December 31, 2022
$
29,184
29,668
9,336
3.77 years
4.17 %
As of December 31, 2023
As of December 31, 2022
— $
9,361
9,029
7,748
3,617
1,696
811
32,262
(2,594)
29,668 $
8,763
77
250
8,436
8,396
26,472
26,924
2,807
3.81 years
2.91 %
8,452
7,007
6,438
5,141
1,315
—
—
28,353
(1,429)
26,924
$
$
$
130
Table of Contents
Maturities of lease receivables:
2023
2024
2025
2026
2027
2028
Thereafter
Total lease payments receivable
NOTE 13. DEBT
Long Term Debt
$
As of December 31, 2023
As of December 31, 2022
— $
1,051
1,066
1,124
1,092
584
2,691
7,608
618
487
498
554
519
10
38
2,724
The Company executed a private placement debt transaction on December 15, 2020 between UF&C, and Federated Mutual and Federated Life.
UFG sold an aggregate $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. As of December 31, 2023, interest expense totaled $3,260. Payment of interest is subject to approval by the Iowa Insurance Division.
A.M. Best Co. Financial Strength Rating
Applicable Interest Rate
A+
A
A-
B++ (or lower)
5.875%
6.375%
6.875%
7.375%
Credit Facilities
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 included 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 was
provided by the Lenders on an unsecured basis, and the UF&C had the option to increase the Credit Agreement by $100,000 if agreed to by the Lenders providing such incremental facility.
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The Credit Agreement included 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 December 31, 2022. As of December 31, 2022, we were in compliance with all covenants under the Credit Agreement. We did not incur
any interest expense related to the Credit Agreement in 2023, 2022 or 2021.
On December 29, 2023, the Company terminated its existing Credit Agreement. The Company did not have any borrowings outstanding under the Credit Agreement and the Company did not incur
any early termination penalties in connection with the termination of the Credit Agreement.
In December 2023, the Company became a member of the Federal Home Loan Bank of Des Moines ("FHLB Des Moines"). As part of the FHLB Des Moines application process and in connection
with its membership in FHLB Des Moines, the Company entered into FHLB Des Moines' standard Advances, Pledge and Security Agreement (the "Advances Agreement"). The Advances Agreement
governs the terms and conditions under which the Company may borrow and FHLB Des Moines may make loans or advances from time to time. The Advances Agreement requires the Company to
pledge certain collateral, including the capital stock in FHLB Des Moines owned by the Company and such other assets (including mortgage-related securities, loans, and stock in the Company) as
agreed by the Company and FHLB Des Moines in connection with any such loans or advances.
Membership in FHLB Des Moines provides the Company with access to FHLB Des Moines' product line of financial services, including funding agreements, general asset/liability management, and
collateralized advances that can be used for liquidity management. As a member, the Company has an aggregate borrowing capacity of up to 20.0 percent of total assets. As of December 31, 2023, the
Company has FHLB Des Moines borrowing capacity up to $392,194 if an immediate liquidity need would arise. The Company had no outstanding balance as of December 31, 2023 and 2022 related
to these lines of credit.
NOTE 14. INTANGIBLE ASSETS
Our major classes of intangible assets are presented in the following table:
Agency relationships
Accumulated amortization - agency relationships
Trade names
Accumulated amortization - trade names
State insurance licenses
(1)
Net intangible assets
(1) The intangible asset for licenses has an indefinite life and therefore is not amortized.
The estimated useful lives assigned to our major classes of amortizable intangible assets are as follows:
Agency relationships
Trade names
Useful Life
Fifteen years
Fifteen years
132
Year Ended December 31,
2023
2022
$
$
$
$
$
$
10,338
(9,040)
1,298
1,978
(1,681)
297
3,020
4,615
$
$
$
$
$
$
10,338
(8,462)
1,876
1,978
(1,550)
428
3,020
5,324
Table of Contents
Our estimated aggregate amortization expense for each of the next five years is as follows:
2024
2025
2026
2027
2028
$
709
709
177
–
–
133
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NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2023, 2022 and 2021:
Balance as of January 1, 2021
Change in accumulated other comprehensive income before reclassifications
Reclassification adjustments from accumulated other comprehensive income
Balance as of December 31, 2021
Change in accumulated other comprehensive income before reclassifications
Reclassification adjustments from accumulated other comprehensive income
Balance as of December 31, 2022
Change in accumulated other comprehensive income before reclassifications
Reclassification adjustments from accumulated other comprehensive income
Balance as of December 31, 2023
Net unrealized
appreciation
on investments
Liability for
underfunded
employee
benefit costs
$
$
$
$
83,070
(31,519)
(1,782)
49,769
(139,183)
1,045
(88,369)
20,835
567
(66,967)
$
$
$
$
(16,159)
15,511
5,216
4,568
(6,540)
2,845
873
14,973
164
16,010
$
$
$
$
Total
66,911
(16,008)
3,434
54,337
(145,723)
3,890
(87,496)
35,808
731
(50,957)
Income tax effects are released from accumulated other comprehensive income (loss) for unrealized gains or losses when the gains or losses are realized.
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Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of United Fire Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of United Fire Group, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income and
comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedules listed in the
Index at Item 15(a)2 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of
December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework),
and our report dated February 29, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit
committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
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Description of the Matter
Valuation of reserves for property and casualty loss and loss settlement expenses
At December 31, 2023, the Company's reserves for losses and loss settlement expenses was $1.6 billion, of which $584.9 million related to Incurred But Not
Reported (IBNR) reserves. As described in Note 5 to the consolidated financial statements, liability for losses and loss settlement expenses reflect management's
best estimates at a given point in time of what is expected to be paid for claims that have been reported and those that have been incurred but not reported, based on
known facts, circumstances, and historical trends. There is significant uncertainty and subjectivity inherent in determining management's best estimates of the
ultimate cost of losses, which is used to determine IBNR reserves.
Auditing management's estimate of IBNR reserves was complex due to the highly judgmental nature of management's selection of methods and assumptions used
to develop those estimates. In particular, the estimates are sensitive to assumptions and the weighting of methodologies that are used to project the ultimate cost of
losses.
How We Addressed the Matter
in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the reserving process, including, among others, the
review and approval processes that management has in place for the methods and assumptions used in estimating the reserves.
To test the estimated IBNR reserves we, including our actuarial specialists, performed audit procedures that included, among others, evaluating management's
selection and weighting of actuarial methods and assumptions by comparing to those used in prior periods and those used in the industry. We compared
management's best estimate of reserves to our independently calculated range of reasonable reserve estimates and assessed the development of prior year reserves.
We also evaluated the results of the reserve analysis prepared by management's independent third-party actuary for comparison to management's best estimate.
We have served as the Company's auditor since 2002.
Des Moines, Iowa
February 29, 2024
/s/ Ernst & Young LLP
Ernst & Young LLP
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 are 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.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of United Fire Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. United Fire Group, Inc.'s internal control over financial
reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of its Consolidated Financial Statements for external purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2023, United Fire Group, Inc.'s management assessed the effectiveness of United Fire Group Inc.'s internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in "Internal Control — Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework). Based on the assessment, United Fire Group, Inc.'s management determined that effective internal control over financial reporting was maintained as of December 31, 2023, based on
those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the Consolidated Financial Statements of United Fire Group, Inc. included in this Annual Report on Form 10-K,
has audited the effectiveness of internal control over financial reporting as of December 31, 2023. Their attestation report, which expresses an unqualified opinion on the effectiveness of United Fire
Group, Inc.'s internal control over financial reporting as of December 31, 2023, is included in this Item under the heading "Report of Independent Registered Public Accounting Firm."
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
United Fire Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited United Fire Group, Inc.'s (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of United Fire Group, Inc. as
of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended
December 31, 2023 of the Company and our report dated February 29, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Annual Report. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Des Moines, Iowa
February 29, 2024
/s/ Ernst & Young LLP
Ernst & Young LLP
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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 year to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We believe our operational processes,
internal controls over financial reporting and disclosures, and financial reporting systems are operating effectively in the present environment. Since 2020, our business teams have moved to a hybrid
working environment and continue to support our customers, agents and claimants regardless of working location.
Based on our evaluation, there have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15 and 15d-15) that occurred during the fiscal quarter
ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 regarding the Company's executive officers is included in "Information About Our Executive Officers" under Part I, Item 1 "Business" of this report.
The information required by this Item regarding our directors and corporate governance matters is included under the captions "Board of Directors," subheading "Corporate Governance" and
"Proposal One-Election of Directors," in our definitive proxy statement for our annual meeting of shareholders to be held on May 15, 2024 (the "2024 Proxy Statement") and is incorporated herein by
reference.
The information regarding our Code of Ethics is included under the caption "Board of Directors," subheading "Corporate Governance," subpart "Code of Ethics" in our 2024 Proxy Statement and is
incorporated herein by reference.
The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is included under the caption "Delinquent Section 16(a) Reports" in our 2024 Proxy Statement
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item regarding our executive compensation and our Compensation Committee Report is included under the caption "Executive Compensation" in our 2024 Proxy
Statement and is incorporated herein by reference. The information required by this Item regarding Compensation Committee interlocks and insider participation is included under the caption "Board
of Directors," subheading "Committees of the Board," subheading "Compensation Committee," subpart "Compensation Committee Interlocks and Insider Participation" in our 2024 Proxy Statement
and is incorporated herein by reference.
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Table of Contents
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this Item is included under the captions "Security Ownership of Certain Beneficial Owners," "Security Ownership of Management" and "Equity Compensation Plan
Information" in our 2024 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this Item is included under the captions "Board of Directors" and "Transactions with Related Persons" in our 2024 Proxy Statement and is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this Item is included under the caption "Proposal Two - Ratification of the Audit Committee's Appointment of Independent Registered Public Accounting Firm,"
subheading "Information About Our Independent Registered Public Accounting Firm" in our 2024 Proxy Statement and is incorporated herein by reference.
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Table of Contents
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
(a) 1. Financial Statements
Consolidated Balance Sheets at December 31, 2023 and 2022
Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 2023
Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2023
Consolidated Statements of Cash Flows for the three years ended December 31, 2023
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules required to be filed by Item 8 of this Form:
Schedule I. Summary of Investments — Other than Investments in Related Parties
Schedule II. Condensed Financial Statements of Parent Company
Schedule III: Supplementary Insurance Information
Schedule IV: Reinsurance
Schedule V: Valuation and Qualifying Accounts
Schedule VI: Supplemental Information Concerning Property and Casualty Insurance Operations
All other schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Consolidated Financial Statements.
142
Page
67
68
69
70
72
146
147
150
151
152
153
Table of Contents
(a) 3. Exhibit Index:
Exhibit number Exhibit description
Filed herewith
2.1†
3.1
3.2
3.3
4.1
Stock Purchase Agreement, dated as of September 18, 2017, between United Fire &
Casualty Company and Kuvare US Holdings, Inc.
Articles of Incorporation of United Fire Group, Inc.
Articles of Amendment to Articles of Incorporation of United Fire Group, Inc.
Bylaws of United Fire Group, Inc.
Description of the Registrant's Securities Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934
10.1
* United Fire & Casualty Company Employee Stock Purchase Plan, Amended and
Restated as of November 16, 2007
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
* United Fire & Casualty Company Non-Employee Director Stock Plan
* United Fire Group, Inc. Amended and Restated Annual Incentive Plan
* United Fire & Casualty Company Non-qualified Deferred Compensation Plan
* United Fire Group, Inc. 2021 Stock and Incentive Plan (the "Stock Plan")
*
Form of Non-qualified Stock Option Agreement pursuant to the United Fire &
Casualty Company, Inc. Nonqualified Employee Stock Option Plan
Form of Stock Option Issued Pursuant to the 2005 Non-Qualified Non-Employee
Director Stock Option and Restricted Stock Plan
Form of Stock Award Agreement Under the Stock Plan
Form of Non-Qualified Stock Option Agreement for the Purchase of Stock under the
Stock Plan
Form of Incentive Stock Option Agreement for the Purchase of Stock under the Stock
Plan
* Amendment to Non-qualified Stock Option Agreements for John A. Rife pursuant to
the Stock Plan
Form of United Fire Group, Inc. Restricted Stock Agreement Under the 2005 Non-
Qualified Non-Employee Director Stock Option Plan
Form of United Fire Group, Inc. Restricted Stock Agreement Under the 2005 Non-
Qualified Non-Employee Director Stock Option Plan
*
*
*
*
*
*
10.14
* United Fire Group, Inc. Plan for Allocation of Equity Compensation to Management
Team
10.15
*
Deferred Compensation Plan for United Fire Group, Inc. Non-Employee Directors
143
Form
8-K
S-4
8-K/A
S-4
10-K
10-K
8-K
10-K
10-Q
8-K
10-K
10-K
8-K
8-K
8-K
8-K/A
10-K
10-Q
10-K
8-K
Incorporated by reference
Period ended
Exhibit
Filing date
2.1
Annex II
3.1
Annex III
4.1
10.2
10.1
10.4
10.3
10.1
10.7
10.8
99.2
99.3
99.4
99.1
10.14
10.1
10.15
10.1
9/19/2017
5/25/2011
5/26/2015
5/25/2011
2/28/2020
2/27/2008
5/22/2020
3/15/2012
10/25/2007
5/21/2021
2/27/2008
2/27/2008
5/22/2008
5/22/2008
5/22/2008
2/24/2009
3/15/2012
8/3/2016
3/15/2012
11/19/2012
12/31/2019
12/31/2007
12/31/2011
9/30/2007
12/31/2007
12/31/2007
12/31/2011
6/30/2016
12/31/2011
Form
8-K
8-K
8-K
8-K
8-K
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
8-K
10-Q
Incorporated by reference
Exhibit
Period ended
Filing date
10.1
10.2
10.3
10.4
10.5
10.7
10.8
10.1
10.2
10.1
10.2
10.3
10.1
10.1
5/22/2014
5/22/2014
5/22/2014
5/22/2014
5/22/2014
8/5/2014
8/5/2014
5/3/2017
8/5/2020
11/4/2021
11/4/2021
11/4/2021
1/5/2023
5/9/2023
6/30/14
6/30/14
3/31/17
6/30/2020
9/30/2021
9/30/2021
9/30/2021
3/31/2023
Table of Contents
(a) 3. Exhibit Index (continued):
Exhibit number Exhibit description
Filed herewith
10.16
10.17
*
*
Executive Nonqualified Excess Plan
Executive Nonqualified "Excess Plan" Adoption Agreement
10.18
* United Fire & Casualty Company Rabbi Directed Trust Agreement
10.19
*
Form of United Fire Group, Inc. Change in Control Severance Agreement
10.20
* Amendment Number One to United Fire & Casualty Company Nonqualified Deferred
Compensation Plan
10.21
10.22
10.23
10.24
*
*
*
*
Form of Non-Qualified Employee Stock Option Agreement for Purchase of Stock
Under the United Fire Group, Inc. 2008 Stock Plan
Form of Stock Award Agreement under the United Fire Group, Inc. Stock Plan
Form of Stock Award Agreement (Restricted Stock Units-Performance Units) Under
the Stock Plan
Form of Stock Award Agreement (Restricted Stock Units) under the United Fire,
Group, Inc. Non-Employee Director Stock Plan
10.25
* United Fire Group, Inc. 2021 Stock and Incentive Plan Performance-Based Restricted
Stock Unit Award Notice
10.26
10.27
* United Fire Group, Inc. 2021 Stock and Incentive Plan Option Award Notice
* United Fire Group, Inc. 2021 Stock and Incentive Plan Restricted Stock Unit Award
10.28
*
Notice
Executive Employment Offer Letter, dated January 5, 2023, between United Fire
Group, Inc and Julie Stephenson (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on January 5, 2023 8-K)
10.29
* Amended Executive Employment Offer Letter, dated March 1, 2023, between United
Fire Group, Inc. and Julie Stephenson
144
Table of Contents
(a) 3. Exhibit Index (continued):
Exhibit number Exhibit description
21.0
23.1
23.2
31.1
31.2
32.1
32.2
97.0
101.1
104.1
Subsidiaries of the Registrant
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consent of Regnier Consulting Group, Inc., Independent Actuary
Certification of Kevin Leidwinger Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Certification of Eric J. Martin Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Kevin Leidwinger Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Eric J. Martin Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
United Fire Group, Inc. Clawback Policy
The following financial information from United Fire Group, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2023 formatted in Inline eXtensible
Business Reporting Language (Inline XBRL): (i) Consolidated Balance Sheets at
December 31, 2023 and 2022; (ii) Consolidated Statements of Income and
Comprehensive Income for the years ended December 31, 2023, 2022 and 2021; (iii)
Consolidated Statement of Stockholders' Equity for the years ended December 31,
2023, 2022 and 2021; (iv) Consolidated Statements of Cash Flows for the years ended
December 31, 2023, 2022 and 2021; and (v) Notes to Consolidated Financial
Statements.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit
101.1)
Filed herewith
X
X
X
X
X
X
X
X
X
Incorporated by reference
Form
Period ended
Exhibit
Filing date
*Indicates a management contract or compensatory plan or arrangement.
† The schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The registrant agrees to furnish a copy of all omitted schedules to the SEC upon its request.
Certain instruments defining the rights of holders of long-term debt securities of the Company are omitted pursuant to Item 601(b)(4)(iii) of
Regulation S-K. The Company hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
145
Table of Contents
Schedule I. Summary of Investments — Other than Investments in Related Parties
December 31, 2023
Type of Investment
Fixed maturities
Bonds
United States Government and government agencies and authorities
States, municipalities and political subdivisions
Foreign governments
Public utilities
All other bonds
Redeemable preferred stock
Total fixed maturities
Equity securities
Common stocks - key from Note 2-3 Cost Fair Value
Public utilities
Banks, trusts and insurance companies
Industrial, miscellaneous and all other
Redeemable preferred stocks
Nonredeemable preferred stocks
Total equity securities
Mortgage loans on real estate
Policy loans
Other long-term investments
Short-term investments
Total investments
Cost or Amortized Cost
Fair Value
Amounts at Which Shown in
Balance Sheet
(In thousands)
153,751
618,686
21,255
149,734
827,615
—
1,771,041
656
2,359
26,223
—
—
29,238
45,421
—
99,507
100
1,945,307
$
$
$
$
$
$
145,354
614,759
19,172
140,467
766,751
—
1,686,503
3,993
7,535
43,491
—
—
55,019
42,632
—
99,507
100
1,883,761
$
$
$
$
$
$
145,354
614,759
19,172
140,467
766,750
—
1,686,502
3,993
7,535
43,491
—
—
55,019
45,366
—
99,507
100
1,886,494
$
$
$
$
$
$
146
Table of Contents
Schedule II. Condensed Financial Statements of Parent Company
United Fire Group, Inc. (parent company only)
Condensed Balance Sheets
(In thousands, except share data)
Assets
Fixed maturities
Available-for-sale, at fair value (amortized cost $0 in 2023 and $0 in 2022)
Investment in subsidiary
Cash and cash equivalents
Other assets
Total assets
Liabilities and stockholders' equity
Liabilities
Stockholders' equity
Common stock, $0.001 par value, authorized 75,000,000 shares 25,269,842 and 25,210,541 issued and outstanding in 2023 and
2022, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2023
2022
$
$
$
$
$
$
— $
733,152
553
199
733,904 $
159 $
25 $
209,986
574,691
(50,957)
733,745 $
733,904 $
—
738,098
2,038
134
740,270
156
25
207,029
620,556
(87,496)
740,114
740,270
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K.
147
Table of Contents
Schedule II. Condensed Financial Statements of Parent Company (continued)
United Fire Group, Inc. (parent company only)
Condensed Statements of Income and Comprehensive Income
(In thousands)
Revenues
Investment income
Total revenues
Expenses
Other operating expenses
Total expenses
Income before income taxes and equity in net income of subsidiary
Federal income tax expense (benefit)
Net income before equity in net income (loss) of subsidiary
Equity in net income (loss) of subsidiary
Net income (loss)
Other comprehensive income (loss)
Change in unrealized appreciation on investments held by subsidiary
Change in liability for underfunded employee benefit plans of subsidiary
Other comprehensive income (loss), before tax and reclassification adjustments
Income tax effect
Other comprehensive income (loss), after tax, before reclassification adjustments
Reclassification adjustment for net realized gains of the subsidiary included in income
Reclassification adjustment for employee benefit costs of the subsidiary included in expense
Total reclassification adjustments, before tax
Income tax effect
Total reclassification adjustments, after tax
Comprehensive income (loss)
2023
For the Years Ended December 31,
2022
2021
99 $
99
—
—
99
21
78 $
(29,778)
(29,700) $
26,373 $
18,953
45,326 $
(9,518)
35,808 $
718
207
925 $
(194)
731 $
6,839 $
85 $
85
—
—
85
18
67 $
14,964
15,031 $
(176,183) $
(8,277)
(184,460) $
38,736
(145,724) $
1,323
3,601
4,924 $
(1,034)
3,890 $
(126,803) $
23
23
3
3
20
5
15
80,579
80,594
(39,901)
19,633
(20,268)
4,260
(16,008)
(2,256)
6,603
4,347
(913)
3,434
68,020
$
$
$
$
$
$
$
$
$
United Fire Group, Inc. and its subsidiaries file a consolidated federal income tax return. The federal income tax provision represents an allocation under its tax allocation agreements.
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K.
148
Table of Contents
Schedule II. Condensed Financial Statements of Parent Company (continued)
United Fire Group, Inc. (parent company only)
Condensed Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities
Equity in net income of subsidiary
Dividends received from subsidiary
Other, net
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities
Net cash used in investing activities
Cash flows from financing activities
Payment of cash dividends
Repurchase of common stock
Issuance of common stock
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of year
2023
For the Years Ended December 31,
2022
2021
(29,700) $
29,778
13,200
1,691
44,669 $
14,969 $
15,031 $
(14,964)
12,000
2,845
(119) $
14,912 $
80,594
(80,579)
10,000
3,131
(67,448)
13,146
— $
— $
—
(16,164) $
—
(290)
(16,454) $
(1,485) $
2,038
553 $
(15,860) $
—
828
(15,032) $
(120) $
2,158
2,038 $
(15,064)
(2,007)
(421)
(17,492)
(4,346)
6,504
2,158
$
$
$
$
$
$
$
$
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K.
149
Table of Contents
Schedule III. Supplementary Insurance Information
(In thousands)
Year Ended December 31, 2023
Property and Casualty
Year Ended December 31, 2022
Property and Casualty
Year Ended December 31, 2021
Property and Casualty
Deferred Policy
Acquisition
Costs
Future Policy
Benefits,
Losses, Claims
and Loss
Expenses
Unearned
Premiums
Earned
Premium
Revenue
Investment
Income, Net
Benefits,
Claims,
Losses and
Settlement
Expenses
Amortization of
Deferred Policy
Acquisition
Costs
Other
Underwriting
Expenses
Premiums
Written
$
$
$
126,532 $
1,638,755 $
549,384 $
1,034,587 $
59,606 $
769,414 $
244,991 $
115,800 $
1,066,901
104,225 $
1,497,274 $
474,388 $
951,541 $
44,932 $
637,301 $
213,075 $
114,645 $
984,223
91,446 $
1,514,265 $
439,733 $
962,823 $
55,778 $
652,155 $
203,432 $
110,574 $
941,348
150
Table of Contents
Schedule IV. Reinsurance
(In thousands)
Year Ended December 31, 2023
Premiums earned
Property and casualty insurance
Year Ended December 31, 2022
Premiums earned
Property and casualty insurance
Year Ended December 31, 2021
Premiums earned
Property and casualty insurance
Gross Amount
Ceded to Other
Companies
Assumed From
Other Companies
Net Amount
Percentage of Amount
Assumed to Net Earned
$
$
$
953,958
889,301
978,190
$
$
$
144,958
101,740
92,650
$
$
$
225,587
163,980
77,283
$
$
$
1,034,587
21.80 %
951,541
17.23 %
962,823
8.03 %
151
Table of Contents
Schedule V. Valuation And Qualifying Accounts
(In thousands)
Description
Allowance for bad debts
Year Ended December 31, 2023
Year Ended December 31, 2022
Year Ended December 31, 2021
Deferred tax asset valuation allowance
Year Ended December 31, 2023
Year Ended December 31, 2022
Year Ended December 31, 2021
Balance at beginning of period
Charged to costs and
expenses
Deductions
Balance at end of period
$
$
$
$
1,575
781
687
—
—
—
219
794
94
—
—
—
$
$
—
—
—
—
1,794
1,575
781
—
—
—
152
Table of Contents
Schedule VI. Supplemental Information Concerning Property and Casualty Insurance Operations
(In thousands)
Affiliation with Registrant:
United Fire & Casualty
Company and consolidated
property and casualty
subsidiaries
2023
2022
2021
Deferred
Policy
Acquisition
Costs
Reserves for
Unpaid
Claims and
Claim
Adjustment
Expenses
Unearned
Premiums
Earned
Premiums
Net Realized
Investment
Gains
(Losses)
Net
Investment
Income
Claims and Claim Adjustment
Expenses Incurred Related to:
Current Year
Prior Years
Amortization of
Deferred Policy
Acquisition
Costs
Paid Claims
and Claim
Adjustment
Expenses
$
$
$
126,532 $
104,225 $
91,446 $
1,638,755 $
1,497,274 $
1,514,265 $
549,384 $
474,388 $
439,733 $
1,034,587 $
951,541 $
962,823 $
1,274 $
(15,892) $
47,383 $
59,606 $
44,932 $
55,778 $
701,664 $
624,411 $
691,933 $
67,750 $
12,890 $
(39,778) $
244,991 $
213,075 $
203,432 $
672,699 $
688,268 $
697,078 $
Premiums
Written
1,066,901
984,223
941,348
153
Table of Contents
ITEM 16. FORM 10-K SUMMARY
None.
154
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
By:
/s/ Kevin Leidwinger
Kevin Leidwinger, President, Chief Executive Officer, Director and Principal Executive Officer
UNITED FIRE GROUP, INC.
Date:
2/29/2024
By:
/s/ Eric J. Martin
Eric J. Martin, Executive Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting
Officer
Date:
2/29/2024
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
By
Date
By
Date
By
Date
By
Date
By
Date
By
Date
/s/ Kevin Leidwinger
Kevin Leidwinger, President, Chief Executive Officer, Director and Principal
Executive Officer
2/29/2024
/s/ James W. Noyce
James W. Noyce, Chairman and Director
2/29/2024
/s/ Scott L. Carlton
Scott L. Carlton, Director
2/29/2024
/s/ Christopher R. Drahozal
Christopher R. Drahozal, Director
2/29/2024
/s/ Mark A. Green
Mark A. Green, Director
2/29/2024
/s/ George D. Milligan
George D. Milligan, Director
2/29/2024
By
Date
By
Date
By
Date
By:
Date
By:
Date
By
Date
155
/s/ Eric J. Martin
Eric J. Martin, Executive Vice President, Chief Financial Officer, Principal Financial
Officer and Principal Accounting Officer
2/29/2024
/s/ John Paul E. Besong
John Paul E. Besong, Director
2/29/2024
/s/ Brenda K. Clancy
Brenda K. Clancy, Director
2/29/2024
/s/ Matthew R. Foran
Matthew R. Foran, Director
2/29/2024
/s/ Lura McBride
Lura McBride, Director
2/29/2024
/s/ Susan E. Voss
Susan E. Voss, Director
2/29/2024
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
Subsidiary
United Fire & Casualty Company
Addison Insurance Company
UFG Specialty Insurance Company
Lafayette Insurance Company
Financial Pacific Insurance Company
Mercer Insurance Company
Franklin Insurance Company
Mercer Insurance Company of New Jersey, Inc.
United Fire & Indemnity Company
United Fire Lloyds
United Real Estate Holdings, LLC
McIntyre Cedar UK Limited
McIntyre Cedar Corporate Member LLP
Jurisdiction of
Organization
Iowa
Iowa
Iowa
Louisiana
California
Pennsylvania
Pennsylvania
New Jersey
Texas
Texas
Iowa
United Kingdom
United Kingdom
% of Ownership by United Fire Group, Inc. or one of its Subsidiaries
100% owned by United Fire Group, Inc.
100% owned by United Fire & Casualty Company
100% owned by United Fire & Casualty Company
100% owned by United Fire & Casualty Company
100% owned by United Fire & Casualty Company
100% owned by United Fire & Casualty Company
100% owned by Mercer Insurance Company
100% owned by Mercer Insurance Company
100% owned by United Fire & Casualty Company
Operationally and financially controlled by United Fire & Indemnity Company, its Corporate Attorney-in-
Fact
Single-member LLC 100% owned by United Fire & Casualty Company
100% owned by United Fire & Casualty Company
100% owned by McIntyre Cedar UK Limited
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements of United Fire Group, Inc. described in the following table of our reports dated February 29, 2024, with respect to the
consolidated financial statements and schedules of United Fire Group, Inc. and the effectiveness of internal control over financial reporting of United Fire Group, Inc. included in this Annual Report
(Form 10-K) for the year ended December 31, 2023, filed with the Securities Exchange Commission.
Registration Statement
Form
Number
Purpose
S-8
S-8
S-8
S-8
S-8
S-8
S-8
333-42895
333-63103
333-107041
333-129923/ 333-178095
333-151074/ 333-196251
333-257499
333-238899
Pertaining to United Fire's employee stock purchase plan
Pertaining to United Fire's non-qualified employee stock option plan
Pertaining to the United Fire Group 401(k) plan
Pertaining to United Fire's 2005 non-qualified non-employee director stock option and restricted stock plan
Pertaining to United Fire's Stock Plan
Pertaining to United Fire's employee plan stock & incentive
Pertaining to United Fire's non-employee director stock plan
Des Moines, Iowa
February 29, 2024
/s/ Ernst & Young LLP
Ernst & Young LLP
EXHIBIT 23.2
Consent of Independent Actuary
We consent to the use of and reference to our name in the Annual Report on Form 10-K of United Fire Group, Inc. (“United Fire”) for the year ended December 31, 2023 in Item 7. “Management's
Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Critical Accounting Policies” under the subheading “Independent Actuary” under “Loss and Loss
Settlement Expenses” and in Item 8. “Financial Statements and Supplemental Data” under Note 5. “Reserves for Losses and Loss Settlement Expenses.” We also consent to the incorporation by
reference of such use and reference into the Registration Statements of United Fire described in the following table:
Registration Statement
Form
Number
Purpose
S-8
S-8
S-8
S-8
S-8
S-8
S-8
333-42895
333-63103
333-107041
333-129923/ 333-178095
333-151074/ 333-196251
333-257499
333-238899
Pertaining to United Fire's employee stock purchase plan
Pertaining to United Fire's non-qualified employee stock option plan
Pertaining to the United Fire Group 401(k) plan
Pertaining to United Fire's 2005 non-qualified non-employee director stock option and restricted stock plan
Pertaining to United Fire's Stock Plan
Pertaining to United Fire's employee plan stock & incentive
Pertaining to United Fire's non-employee director stock plan
February 29, 2024
/s/ Steven J. Regnier
Regnier Consulting Group, Inc.
Steven J. Regnier, President
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin J. Leidwinger, certify that:
1.
I have reviewed this annual report on Form 10-K of United Fire Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the Consolidated Financial Statements and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 29, 2024
/s/ Kevin J. Leidwinger
Kevin J. Leidwinger
Chief Executive Officer
Exhibit 31.2
I, Eric J. Martin, certify that:
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1.
I have reviewed this annual report on Form 10-K of United Fire Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the Consolidated Financial Statements and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:
February 29, 2024
/s/ Eric J. Martin
Eric J. Martin
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of United Fire Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023, as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), I, Kevin Leidwinger, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 29, 2024
/s/ Kevin J. Leidwinger
Kevin J. Leidwinger
Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to United Fire Group, Inc. and will be retained by United Fire Group, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of United Fire Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023, as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), I, Eric J. Martin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 29, 2024
/s/ Eric J. Martin
Eric J. Martin
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to United Fire Group, Inc. and will be retained by United Fire Group, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
1 RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY In accordance with the applicable rules of The Nasdaq Stock Market (the “Nasdaq Rules”) and Section 10D (“Section 10D”) and Rule 10D-1 (“Rule 10D-1”) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Board of Directors (the “Board”) of United Fire Group, Inc. (the “Company”) has adopted this Policy (the “Policy”) to provide for the recovery of erroneously awarded Incentive-based Compensation from Executive Officers. All capitalized terms used and not otherwise defined herein shall have the meanings set forth in Section G, below. A. Recovery of Erroneously Awarded Compensation (1) In the event of an Accounting Restatement, the Company will reasonably promptly recover the Erroneously Awarded Compensation Received in accordance with the Nasdaq Rules and Rule 10D-1 as follows: (i) After an Accounting Restatement, the Compensation and Human Capital Committee of the Board (the “Committee”) shall determine the amount of any Erroneously Awarded Compensation Received by each Executive Officer and shall promptly notify each Executive Officer with a written notice containing the amount of any Erroneously Awarded Compensation and a demand for repayment or return of such compensation, as applicable. (a) For Incentive-based Compensation based on (or derived from) the Company’s stock price or total shareholder return, where the amount of Erroneously Awarded Compensation is not subject to mathematical recalculation directly from the information in the applicable Accounting Restatement: i. The amount to be repaid or returned shall be determined by the Committee based on a reasonable estimate of the effect of the Accounting Restatement on the Company’s stock price or total shareholder return upon which the Incentive- based Compensation was Received; and ii. The Company shall maintain
documentation of the determination of such reasonable estimate and provide the relevant documentation as required to Nasdaq. (ii) The Committee shall have discretion to determine the appropriate means of recovering Erroneously Awarded Compensation based on the particular facts and circumstances. Notwithstanding the foregoing, except as set forth in Section A(2) below, in no event may the Company accept an amount that is less than the amount of Erroneously Awarded Compensation in satisfaction of an Executive Officer’s obligations hereunder. (iii) To the extent that the Executive Officer has already reimbursed the Company for any Erroneously Awarded Compensation Received under any duplicative recovery obligations established by the Company or applicable law, it shall be appropriate for any such reimbursed amount to be credited to the amount of Erroneously Awarded Compensation that is subject to recovery under this Policy. (iv) To the extent that an Executive Officer fails to repay all Erroneously Awarded
2 RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY Compensation to the Company when due, the Company shall take all actions reasonable and appropriate to recover such Erroneously Awarded Compensation from the applicable Executive Officer. (v) Recoupment under this Policy shall be required regardless of whether the Executive Officer or any other person was at fault or responsible for accounting errors that contributed to the need for the Accounting Restatement or engaged in any misconduct. (2) Notwithstanding anything herein to the contrary, the Company shall not be required to take the actions contemplated by Section A(1) above if the Committee (which, as specified above, is composed entirely of independent directors or in the absence of such a committee, a majority of the independent directors serving on the Board) determines that recovery would be impracticable because: (i) the direct expenses paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered. Before making this determination, the Company must make a reasonable attempt to recover the Erroneously Awarded Compensation, documented such attempt(s) and provided such documentation to Nasdaq; or (ii) recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of Section 401(a)(13) or Section 411(a) of the Internal Revenue Code of 1986, as amended, and regulations thereunder. B. Disclosure Requirements The Company shall file all disclosures with respect to this Policy required by applicable U.S. Securities and Exchange Commission (“SEC”) filings and rules. C. Prohibition of Indemnification The Company shall not be permitted to insure or indemnify any Executive Officer against (i) the loss of any Erroneously Awarded Compensation that is repaid, returned or recovered pursuant to the terms
of this Policy, or (ii) any claims relating to the Company’s enforcement of its rights under this Policy. Further, the Company shall not enter into any agreement that exempts any Incentive-based Compensation that is granted, paid or awarded to an Executive Officer from the application of this Policy or that waives the Company’s right to recovery of any Erroneously Awarded Compensation, and this Policy shall supersede any such agreement (whether entered into before, on or after the effective date of this Policy). D. Administration and Interpretation This Policy shall be administered by the Committee, and any determinations made by the Committee shall be final and binding on all affected individuals. The Committee is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of this Policy and for the Company’s compliance with Nasdaq Rules, Section 10D, Rule 10D-1 and any other applicable law, regulation, rule or interpretation of the SEC or
3 RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY Nasdaq promulgated or issued in connection therewith. This Policy shall be interpreted to comply with the requirements of the Nasdaq Rules implementing Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and, to the extent this Policy is in any manner deemed inconsistent with such rules, this Policy shall be treated as retroactively amended to be compliant with such rules. E. Amendment; Termination The Committee may amend this Policy from time to time in its discretion and shall amend this Policy as it deems necessary. Notwithstanding anything in this Section E to the contrary, no amendment or termination of this Policy shall be effective if such amendment or termination would (after taking into account any actions taken by the Company contemporaneously with such amendment or termination) cause the Company to violate any federal securities laws, SEC rule or Nasdaq Rule. F. Other Recovery Rights This Policy shall be binding and enforceable against all Executive Officers and, to the extent required by applicable law or guidance from the SEC or Nasdaq, their beneficiaries, heirs, executors, administrators or other legal representatives. The Committee intends that this Policy will be applied to the fullest extent required by applicable law. Any employment agreement, equity award agreement, compensatory plan or any other agreement or arrangement with an Executive Officer shall be deemed to include, as a condition to the grant of any benefit thereunder, an agreement by the Executive Officer to abide by the terms of this Policy. Any right of recovery under this Policy is in addition to, and not in lieu of, any other remedies or rights of recovery that may be available to the Company under applicable law, regulation or rule or pursuant to the terms of any policy of the Company or any provision in any employment agreement,
equity award agreement, compensatory plan, agreement or other arrangement. G. Definitions For purposes of this Policy, the following capitalized terms shall have the meanings set forth below: (1) “Accounting Restatement” means an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements (a “Big R” restatement), or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (a “little r” restatement). (2) “Clawback Eligible Incentive Compensation” means all Incentive-based Compensation Received by an Executive Officer (i) on or after the effective date of the applicable Nasdaq rules (i.e., October 2, 2023), (ii) after beginning service as an Executive Officer, (iii) who served as an Executive Officer at any time during the performance period applicable to the Incentive-based Compensation in question (whether or not such Executive Officer is serving at the time the Erroneously Awarded Compensation is required to be repaid to the Company), (iv) while the Company has a class of securities listed on a national securities exchange or a national securities association, and (v) during the applicable Clawback Period (as defined below).
4 RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY (3) “Clawback Period” means, with respect to any Accounting Restatement, the three completed fiscal years of the Company immediately preceding the Restatement Date, and if the Company changes its fiscal year, any transition period of less than nine months within or immediately following those three completed fiscal years (as set forth in Section 5608(b)(i)(D) of the Nasdaq Rules). (4) “Erroneously Awarded Compensation” means, with respect to each Executive Officer in connection with an Accounting Restatement, the amount of Clawback Eligible Incentive Compensation that exceeds the amount of Incentive-based Compensation that otherwise would have been Received had it been determined based on the restated amounts, computed without regard to any taxes paid. (5) “Executive Officer” means each individual who is currently or was previously designated as an “officer” of the Company or a subsidiary, within the meaning of Rule 10D-1. For the avoidance of doubt, the identification of an executive officer for purposes of this Policy shall include each executive officer who is or was identified pursuant to Item 401(b) of Regulation S-K, as well as the principal financial officer and principal accounting officer (or, if there is no principal accounting officer, the controller). (6) “Financial Reporting Measures” means measures that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and all other measures that are derived wholly or in part from such measures. Stock price and total shareholder return (and any measures that are derived wholly or in part from stock price or total shareholder return) shall, for purposes of this Policy, be considered Financial Reporting Measures. For the avoidance of doubt, a Financial Reporting Measure need not be presented in the Company’s financial statements or
included in a filing with the SEC. (7) “Incentive-based Compensation” means any compensation that is granted, earned or vested based wholly or in part upon the attainment of a Financial Reporting Measure. (8) “Nasdaq” means The Nasdaq Stock Market. (9) “Received” means, with respect to any Incentive-based Compensation, actual or deemed receipt, and Incentive-based Compensation shall be deemed received in the Company’s fiscal period during which the Financial Reporting Measure to which the Incentive-based Compensation relates is attained or purportedly attained, even if the payment or grant of the Incentive-based Compensation to the Executive Officer occurs after the end of that period. (10) “Restatement Date” means the earlier to occur of (i) the date the Board, a committee of the Board or the officer or officers of the Company authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement, or (ii) the date a court, regulator or other legally authorized body directs the Company to prepare an Accounting Restatement. Adopted by the Board of Directors August 18, 2023
5 RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY Exhibit A ATTESTATION AND ACKNOWLEDGEMENT OF RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY By my signature below, I acknowledge and agree that: • I have received and read the attached Policy for the Recovery of Erroneously Awarded Compensation (this “Policy”). • I hereby agree to abide by all of the terms of this Policy both during and after my employment with the Company, including, without limitation, by promptly repaying or returning any Erroneously Awarded Compensation to the Company as determined in accordance with this Policy. Signature: ____________________________________ Printed Name: _________________________________ Date: ________________________________________