UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20222023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34257
________________________
UNITED FIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Iowa | | 45-2302834 |
| (State of incorporation) | | (I.R.S. Employer Identification No.) |
| | | | | | | | |
| 118 Second Avenue SE |
| Cedar Rapids | Iowa
| 52401
|
| (Address of principal executive offices) (Zip Code) |
Registrant's telephone number, including area code: (319) 399-5700
Securities Registered Pursuant to Section 12(b) of the Exchange Act of 1934:
| | | | | | | | |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, $0.001 par value | UFCS | The NASDAQ Global Select Market |
Indicate by check mark whether the registrant: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:Act.
| | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
As ofof November 1, 2022, 25,197,357 2023, 25,265,351 shares of common stock were outstanding.
United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
September 30, 20222023
FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "remain(s) optimistic," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K10-K/A for the year ended December 31, 20212022 and in our other filings with the Securities and Exchange Commission ("SEC") for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:
◦Our ability to effectively underwrite and adequately price insured risks;
◦Risks related to our investment portfolio that could negatively affect our profitability;
◦General macroeconomic conditions, interest rate risk, the impact of inflation and changes in governmental regulations and monetary policy;
◦Geographic concentration risk in our property and casualty insurance business;
◦The properties we insure are exposed to various natural perils that can give rise to significant claims costs;
◦Changing weather patterns and climate change add to the unpredictability, frequency and severity of catastrophe losses and may adversely affect our results of operations, liquidity and financial condition;
◦Lowering of one or moreFurther 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 impact of the COVID-19 pandemic, and the emergence of variant strains, on our business, financial conditions, results of operations, and liquidity;
◦The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses;
◦Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network; and
◦Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) 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.compliance;
These◦We will be at a competitive disadvantage if, over time, our competitors are representativemore effective than us in their utilization of the risks, uncertainties,technology and assumptionsevolving data analytics;
◦We may be unable to secure reinsurance capacity that provides necessary risk protection at a reasonable cost; and
◦Our stock price could cause actual outcomesbecome more volatile and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undueyour 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 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.
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| | | | | | | | | | | | | | |
United Fire Group, Inc.
Consolidated Balance Sheets |
| | (In Thousands, Except Share Data) | (In Thousands, Except Share Data) | September 30,
2022 | | December 31,
2021 | (In Thousands, Except Share Data) | September 30,
2023 | | December 31,
2022 |
| | | (unaudited) | | | (unaudited) | |
| ASSETS | ASSETS | | ASSETS | |
| Investments: | Investments: | | Investments: | |
| Fixed maturities | Fixed maturities | | Fixed maturities | |
| Available-for-sale, at fair value (amortized cost $1,681,752 in 2022 and $1,656,797 in 2021) | $ | 1,547,061 | | | $ | 1,719,790 | | |
| Available-for-sale, at fair value (amortized cost $1,794,325 in 2023 and $1,662,680 in 2022) | | Available-for-sale, at fair value (amortized cost $1,794,325 in 2023 and $1,662,680 in 2022) | $ | 1,638,512 | | | $ | 1,551,336 | |
| | Equity securities at fair value (cost $75,292 in 2022 and $84,605 in 2021) | 149,505 | | | 213,401 | | |
| Equity securities at fair value (cost $29,238 in 2023 and $75,292 in 2022) | | Equity securities at fair value (cost $29,238 in 2023 and $75,292 in 2022) | 51,217 | | | 169,106 | |
| Mortgage loans | Mortgage loans | 46,757 | | | 47,201 | | Mortgage loans | 45,589 | | | 37,947 | |
| Less: allowance for mortgage loan losses | Less: allowance for mortgage loan losses | 65 | | | 71 | | Less: allowance for mortgage loan losses | 55 | | | 49 | |
| Mortgage loans, net | Mortgage loans, net | 46,692 | | | 47,130 | | Mortgage loans, net | 45,534 | | | 37,898 | |
| Other long-term investments | Other long-term investments | 79,917 | | | 84,090 | | Other long-term investments | 93,836 | | | 86,276 | |
| Short-term investments | Short-term investments | 275 | | | 275 | | Short-term investments | — | | | 275 | |
| Total investments | Total investments | 1,823,450 | | | 2,064,686 | | Total investments | 1,829,099 | | | 1,844,891 | |
| Cash and cash equivalents | Cash and cash equivalents | 53,017 | | | 132,104 | | Cash and cash equivalents | 69,150 | | | 96,650 | |
| Accrued investment income | Accrued investment income | 15,169 | | | 13,396 | | Accrued investment income | 17,269 | | | 14,480 | |
| Premiums receivable (net of allowance for doubtful accounts of $1,082 in 2022 and $781 in 2021) | 374,341 | | | 316,771 | | |
| Premiums receivable (net of allowance for doubtful accounts of $1,768 in 2023 and $1,575 in 2022) | | Premiums receivable (net of allowance for doubtful accounts of $1,768 in 2023 and $1,575 in 2022) | 475,632 | | | 365,729 | |
| Deferred policy acquisition costs | Deferred policy acquisition costs | 106,376 | | | 91,446 | | Deferred policy acquisition costs | 125,292 | | | 104,225 | |
| Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $61,790 in 2022 and $60,142 in 2021) | 133,064 | | | 137,702 | | |
| Reinsurance receivables and recoverables (net of allowance for credit losses of $76 in 2022 and $102 in 2021) | 155,960 | | | 127,815 | | |
| Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $66,257 in 2023 and $59,566 in 2022) | | Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $66,257 in 2023 and $59,566 in 2022) | 133,887 | | | 133,113 | |
| Reinsurance receivables and recoverables (net of allowance for credit losses of $130 in 2023 and $82 in 2022) | | Reinsurance receivables and recoverables (net of allowance for credit losses of $130 in 2023 and $82 in 2022) | 211,645 | | | 170,953 | |
| Prepaid reinsurance premiums | Prepaid reinsurance premiums | 12,142 | | | 9,328 | | Prepaid reinsurance premiums | 21,425 | | | 11,300 | |
| Intangible assets | Intangible assets | 5,502 | | | 6,034 | | Intangible assets | 4,793 | | | 5,324 | |
| Deferred tax asset | Deferred tax asset | 25,983 | | | — | | Deferred tax asset | 36,591 | | | 15,531 | |
| Income taxes receivable | Income taxes receivable | 39,593 | | | 32,378 | | Income taxes receivable | 36,469 | | | 31,418 | |
| Other assets | Other assets | 74,303 | | | 81,061 | | Other assets | 90,527 | | | 88,672 | |
| TOTAL ASSETS | TOTAL ASSETS | $ | 2,818,900 | | | $ | 3,012,721 | | TOTAL ASSETS | $ | 3,051,779 | | | $ | 2,882,286 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| Liabilities | Liabilities | | Liabilities | |
| | Losses and loss settlement expenses | Losses and loss settlement expenses | $ | 1,464,508 | | | $ | 1,514,265 | | Losses and loss settlement expenses | $ | 1,636,918 | | | $ | 1,497,274 | |
| Unearned premiums | Unearned premiums | 488,293 | | | 439,733 | | Unearned premiums | 560,663 | | | 474,388 | |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | 115,304 | | | 102,849 | | Accrued expenses and other liabilities | 159,261 | | | 120,510 | |
| | Long term debt | Long term debt | 50,000 | | | 50,000 | | Long term debt | 50,000 | | | 50,000 | |
| Deferred tax liability | — | | | 26,753 | | |
| | TOTAL LIABILITIES | TOTAL LIABILITIES | $ | 2,118,105 | | | $ | 2,133,600 | | TOTAL LIABILITIES | $ | 2,406,842 | | | $ | 2,142,172 | |
| Stockholders’ Equity | Stockholders’ Equity | | Stockholders’ Equity | |
| Common stock, $0.001 par value; authorized 75,000,000 shares; 25,191,414 and 25,082,104 shares issued and outstanding in 2022 and 2021, respectively | $ | 25 | | | $ | 25 | | |
| Common stock, $0.001 par value; authorized 75,000,000 shares; 25,263,742 and 25,210,541 shares issued and outstanding in 2023 and 2022, respectively | | Common stock, $0.001 par value; authorized 75,000,000 shares; 25,263,742 and 25,210,541 shares issued and outstanding in 2023 and 2022, respectively | $ | 25 | | | $ | 25 | |
| Additional paid-in capital | Additional paid-in capital | 206,811 | | | 203,375 | | Additional paid-in capital | 209,931 | | | 207,030 | |
| Retained earnings | Retained earnings | 604,469 | | | 621,384 | | Retained earnings | 559,126 | | | 620,555 | |
| Accumulated other comprehensive income, net of tax | Accumulated other comprehensive income, net of tax | (110,510) | | | 54,337 | | Accumulated other comprehensive income, net of tax | (124,145) | | | (87,496) | |
| TOTAL STOCKHOLDERS’ EQUITY | TOTAL STOCKHOLDERS’ EQUITY | $ | 700,795 | | | $ | 879,121 | | TOTAL STOCKHOLDERS’ EQUITY | $ | 644,937 | | | $ | 740,114 | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,818,900 | | | $ | 3,012,721 | | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 3,051,779 | | | $ | 2,882,286 | |
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
United Fire Group, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In Thousands, Except Share Data) | 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | | | | | | | |
| Net premiums earned | $ | 238,256 | | | $ | 238,909 | | | $ | 703,746 | | | $ | 722,837 | |
| Investment income, net of investment expenses | 11,606 | | | 11,571 | | | 32,062 | | | 42,447 | |
| Net investment gains (losses) (includes reclassifications for net unrealized investment gains (losses) on available-for-sale securities of $(1,079) and $(1,478) in 2022 and $214 and $(453) in 2021; previously included in accumulated other comprehensive income (loss)) | (14,250) | | | (2,269) | | | (35,647) | | | 28,243 | |
| Other income (loss) | (39) | | | 332 | | | (38) | | | 163 | |
| Total revenues | $ | 235,573 | | | $ | 248,543 | | | $ | 700,123 | | | $ | 793,690 | |
| Benefits, Losses and Expenses | | | | | | | |
| Losses and loss settlement expenses | $ | 182,411 | | | $ | 175,444 | | | $ | 464,295 | | | $ | 533,981 | |
| Amortization of deferred policy acquisition costs | 53,107 | | | 51,261 | | | 156,116 | | | 150,533 | |
| Other underwriting expenses (includes reclassifications for employee benefit costs of $900 and $2,700 in 2022 and $1,586 and $4,899 in 2021; previously included in accumulated other comprehensive income (loss)) | 30,487 | | | 35,468 | | | 87,885 | | | 82,236 | |
| | | | | | | |
| Interest expense | 797 | | | 797 | | | 2,391 | | | 2,391 | |
| Total benefits, losses and expenses | $ | 266,802 | | | $ | 262,970 | | | $ | 710,687 | | | $ | 769,141 | |
| Income (loss) before income taxes | $ | (31,229) | | | $ | (14,427) | | | $ | (10,564) | | | $ | 24,549 | |
| Federal income tax expense (benefit) (includes reclassifications of $416 and $877 in 2022 and $285 and $1,122 in 2021; previously included in accumulated other comprehensive income (loss)) | (8,248) | | | (4,834) | | | (5,475) | | | 1,690 | |
| Net Income (loss) | $ | (22,981) | | | $ | (9,593) | | | $ | (5,089) | | | $ | 22,859 | |
| Other comprehensive income (loss) | | | | | | | |
| Change in net unrealized appreciation on investments | $ | (65,415) | | | $ | (12,230) | | | $ | (199,071) | | | $ | (33,231) | |
| Change in liability for underfunded employee benefit plans | (4,591) | | | (3,765) | | | (13,774) | | | (1,025) | |
| Other comprehensive income (loss), before tax and reclassification adjustments | $ | (70,006) | | | $ | (15,995) | | | $ | (212,845) | | | $ | (34,256) | |
| Income tax effect | 14,701 | | | 3,359 | | | 44,697 | | | 7,194 | |
| Other comprehensive income (loss), after tax, before reclassification adjustments | $ | (55,305) | | | $ | (12,636) | | | $ | (168,148) | | | $ | (27,062) | |
| Reclassification adjustment for net investment losses included in income | $ | 1,079 | | | $ | (214) | | | $ | 1,478 | | | $ | 453 | |
| Reclassification adjustment for employee benefit costs included in expense | 900 | | | 1,586 | | | 2,700 | | | 4,899 | |
| Total reclassification adjustments, before tax | $ | 1,979 | | | $ | 1,372 | | | $ | 4,178 | | | $ | 5,352 | |
| Income tax effect | (416) | | | (285) | | | (877) | | | (1,122) | |
| Total reclassification adjustments, after tax | $ | 1,563 | | | $ | 1,087 | | | $ | 3,301 | | | $ | 4,230 | |
| Comprehensive income (loss) | $ | (76,723) | | | $ | (21,142) | | | $ | (169,936) | | | $ | 27 | |
| Diluted weighted average common shares outstanding | 25,188,958 | | | 25,092,167 | | | 25,146,318 | | | 25,427,318 | |
| Earnings per common share: | | | | | | | |
| Basic | $ | (0.91) | | | $ | (0.38) | | | $ | (0.20) | | | $ | 0.91 | |
| Diluted | (0.91) | | | (0.38) | | | (0.20) | | | 0.90 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In Thousands, Except Share Data) | 2023 | | 2022 | | 2023 | | 2022 |
| Revenues | | | | | | | |
| Net premiums earned | $ | 259,456 | | | $ | 238,256 | | | $ | 770,221 | | | $ | 703,746 | |
| Investment income, net of investment expenses | 16,459 | | | 11,606 | | | 40,508 | | | 32,062 | |
| Net investment gains (losses) (includes reclassifications for net unrealized investment gains (losses) on available-for-sale securities of $(79) and $(771) in 2023 and $(1,079) and $(1,478) in 2022; previously included in accumulated other comprehensive income (loss)) | (1,960) | | | (14,250) | | | (2,581) | | | (35,647) | |
| Other income (loss) | — | | | (39) | | | — | | | (38) | |
| Total revenues | $ | 273,955 | | | $ | 235,573 | | | $ | 808,148 | | | $ | 700,123 | |
| Benefits, Losses and Expenses | | | | | | | |
| Losses and loss settlement expenses | $ | 172,798 | | | $ | 182,411 | | | $ | 598,125 | | | $ | 464,295 | |
| Amortization of deferred policy acquisition costs | 62,709 | | | 53,107 | | | 181,700 | | | 156,116 | |
| Other underwriting expenses (includes reclassifications for employee benefit costs of $51 and $155 in 2023 and $900 and $2,700 in 2022; previously included in accumulated other comprehensive income (loss)) | 29,275 | | | 30,487 | | | 89,784 | | | 87,885 | |
| | | | | | | |
| Interest expense | 797 | | | 797 | | | 2,391 | | | 2,391 | |
| Total benefits, losses and expenses | $ | 265,579 | | | $ | 266,802 | | | $ | 872,000 | | | $ | 710,687 | |
| Income (loss) before income taxes | $ | 8,376 | | | $ | (31,229) | | | $ | (63,852) | | | $ | (10,564) | |
| Federal income tax expense (benefit) (includes reclassifications of $28 and $195 in 2023 and $416 and $877 in 2022; previously included in accumulated other comprehensive income (loss)) | 1,996 | | | (8,248) | | | (14,544) | | | (5,475) | |
| Net Income (loss) | $ | 6,380 | | | $ | (22,981) | | | $ | (49,308) | | | $ | (5,089) | |
| Other comprehensive income (loss) | | | | | | | |
| Change in net unrealized appreciation on investments | $ | (43,245) | | | $ | (65,415) | | | $ | (44,857) | | | $ | (199,071) | |
| Change in liability for underfunded employee benefit plans | (820) | | | (4,591) | | | (2,460) | | | (13,774) | |
| Other comprehensive income (loss), before tax and reclassification adjustments | $ | (44,065) | | | $ | (70,006) | | | $ | (47,317) | | | $ | (212,845) | |
| Income tax effect | 9,253 | | | 14,701 | | | 9,937 | | | 44,697 | |
| Other comprehensive income (loss), after tax, before reclassification adjustments | $ | (34,812) | | | $ | (55,305) | | | $ | (37,380) | | | $ | (168,148) | |
| Reclassification adjustment for net investment losses included in income | $ | 79 | | | $ | 1,079 | | | $ | 771 | | | $ | 1,478 | |
| Reclassification adjustment for employee benefit costs included in expense | 51 | | | 900 | | | 155 | | | 2,700 | |
| Total reclassification adjustments, before tax | $ | 130 | | | $ | 1,979 | | | $ | 926 | | | $ | 4,178 | |
| Income tax effect | (28) | | | (416) | | | (195) | | | (877) | |
| Total reclassification adjustments, after tax | $ | 102 | | | $ | 1,563 | | | $ | 731 | | | $ | 3,301 | |
| Comprehensive income (loss) | $ | (28,330) | | | $ | (76,723) | | | $ | (85,957) | | | $ | (169,936) | |
| Diluted weighted average common shares outstanding | 25,579,334 | | | 25,188,958 | | | 25,244,502 | | | 25,146,318 | |
| Earnings per common share: | | | | | | | |
| Basic | $ | 0.25 | | | $ | (0.91) | | | $ | (1.95) | | | $ | (0.20) | |
| Diluted | 0.25 | | | (0.91) | | | (1.95) | | | (0.20) | |
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The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
United Fire Group, Inc.
Consolidated Statement of Stockholders’ Equity (Unaudited)
| | | Common Stock | | | Common Stock | |
| (In Thousands, Except Share Data) | (In Thousands, Except Share Data) | Shares outstanding | Common stock | Additional paid-in capital | Retaining Earnings | Accumulated other comprehensive income | Total | (In Thousands, Except Share Data) | Shares outstanding | Common stock | Additional paid-in capital | Retaining Earnings | Accumulated other comprehensive income | Total |
| | | | |
| Balance, January 1, 2022 | 25,082,104 | | $ | 25 | | $ | 203,375 | | $ | 621,384 | | $ | 54,337 | | $ | 879,121 | | |
| Balance, January 1, 2023 | | Balance, January 1, 2023 | 25,210,541 | | $ | 25 | | $ | 207,030 | | $ | 620,555 | | $ | (87,496) | | $ | 740,114 | |
| Net income | Net income | — | | — | | — | | 28,349 | | — | | 28,349 | | Net income | — | | — | | — | | 694 | | — | | 694 | |
| | Stock based compensation | Stock based compensation | 37,140 | | — | | 631 | | — | | — | | 631 | | Stock based compensation | 21,012 | | — | | 980 | | — | | — | | 980 | |
| Dividends on common stock ($0.15 per share) | — | | — | | — | | (3,767) | | — | | (3,767) | | |
| Dividends on common stock ($0.16 per share) | | Dividends on common stock ($0.16 per share) | — | | — | | — | | (4,037) | | — | | (4,037) | |
Change in net unrealized investment appreciation (depreciation)(1) | Change in net unrealized investment appreciation (depreciation)(1) | — | | — | | — | | — | | (65,793) | | (65,793) | | Change in net unrealized investment appreciation (depreciation)(1) | — | | — | | — | | — | | 14,650 | | 14,650 | |
Change in liability for underfunded employee benefit plans(2) | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (2,916) | | (2,916) | | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (607) | | (607) | |
| | Balance, March 31, 2022 | 25,119,244 | | $ | 25 | | $ | 204,006 | | $ | 645,966 | | $ | (14,372) | | $ | 835,625 | | |
| Balance, March 31, 2023 | | Balance, March 31, 2023 | 25,231,553 | | $ | 25 | | $ | 208,010 | | $ | 617,213 | | $ | (73,453) | | $ | 751,795 | |
| | Net income (loss) | Net income (loss) | — | | $ | — | | $ | — | | $ | (10,457) | | $ | — | | $ | (10,457) | | Net income (loss) | — | | $ | — | | $ | — | | $ | (56,382) | | $ | — | | $ | (56,382) | |
| | Stock based compensation | Stock based compensation | 67,404 | | — | | 2,159 | | — | | — | | 2,159 | | Stock based compensation | 31,396 | | — | | 977 | | — | | — | | 977 | |
| Dividends on common stock ($0.16 per share) | Dividends on common stock ($0.16 per share) | — | | — | | — | | (4,028) | | — | | (4,028) | | Dividends on common stock ($0.16 per share) | — | | — | | — | | (4,042) | | — | | (4,042) | |
Change in net unrealized investment appreciation (depreciation)(1) | Change in net unrealized investment appreciation (depreciation)(1) | — | | — | | — | | — | | (39,480) | | (39,480) | | Change in net unrealized investment appreciation (depreciation)(1) | — | | — | | — | | — | | (15,376) | | (15,376) | |
Change in liability for underfunded employee benefit plans(2) | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (2,916) | | (2,916) | | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (606) | | (606) | |
| | Balance, June 30, 2022 | 25,186,648 | | $ | 25 | | $ | 206,165 | | $ | 631,481 | | $ | (56,768) | | $ | 780,903 | | |
| Balance, June 30, 2023 | | Balance, June 30, 2023 | 25,262.949 | | $ | 25 | | $ | 208,987 | | $ | 556,788 | | $ | (89,435) | | $ | 676,365 | |
| | Net income (loss) | Net income (loss) | — | | $ | — | | $ | — | | $ | (22,981) | | $ | — | | $ | (22,981) | | Net income (loss) | — | | $ | — | | $ | — | | $ | 6,380 | | $ | — | | $ | 6,380 | |
| | Shares repurchased | | Shares repurchased | — | | — | | — | | — | | — | | — | |
| Stock based compensation | Stock based compensation | 4,766 | | — | | 646 | | — | | — | | 646 | | Stock based compensation | 793 | | — | | 944 | | — | | — | | 944 | |
| Dividends on common stock ($0.16 per share) | Dividends on common stock ($0.16 per share) | — | | — | | — | | (4,031) | | — | | (4,031) | | Dividends on common stock ($0.16 per share) | — | | — | | — | | (4,042) | | — | | (4,042) | |
Change in net unrealized investment appreciation(1) | — | | — | | — | | — | | (50,826) | | (50,826) | | |
Change in net unrealized investment appreciation (depreciation)(1) | | Change in net unrealized investment appreciation (depreciation)(1) | — | | — | | — | | — | | (34,103) | | (34,103) | |
Change in liability for underfunded employee benefit plans(2) | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (2,916) | | (2,916) | | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (607) | | (607) | |
| | Balance, September 30, 2022 | 25,191,414 | | $ | 25 | | $ | 206,811 | | $ | 604,469 | | $ | (110,510) | | $ | 700,795 | | |
| | Balance, September 30, 2023 | | Balance, September 30, 2023 | 25,263,742 | | $ | 25 | | $ | 209,931 | | $ | 559,126 | | $ | (124,145) | | $ | 644,937 | |
(1)The change in net unrealized appreciation (depreciation) is net of reclassification adjustments and income taxes.
(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.
| | | Common Stock | | | Common Stock | |
| (In Thousands, Except Share Data) | (In Thousands, Except Share Data) | Shares outstanding | Common stock | Additional paid-in capital | Retaining Earnings | Accumulated other comprehensive income | Total | (In Thousands, Except Share Data) | Shares outstanding | Common stock | Additional paid-in capital | Retaining Earnings | Accumulated other comprehensive income | Total |
| | | | |
| Balance, January 1, 2021 | 25,055,479 | | $ | 25 | | $ | 202,359 | | $ | 555,854 | | $ | 66,911 | | $ | 825,149 | | |
| Balance, January 1, 2022 | | Balance, January 1, 2022 | 25,082,104 | | $ | 25 | | $ | 203,375 | | $ | 621,384 | | $ | 54,337 | | $ | 879,121 | |
| Net income | Net income | — | | — | | — | | 18,702 | | — | | 18,702 | | Net income | — | | — | | — | | 28,349 | | — | | 28,349 | |
| Shares repurchased | (207) | | — | | (7) | | — | | — | | (7) | | |
| | Stock based compensation | Stock based compensation | 64,583 | | — | | 522 | | — | | — | | 522 | | Stock based compensation | 37,140 | | — | | 631 | | — | | — | | 631 | |
| Dividends on common stock $0.15 per share) | — | | — | | — | | (3,767) | | — | | (3,767) | | |
| Dividends on common stock ($0.15 per share) | | Dividends on common stock ($0.15 per share) | — | | — | | — | | (3,767) | | — | | (3,767) | |
Change in net unrealized investment appreciation (depreciation)(1) | Change in net unrealized investment appreciation (depreciation)(1) | — | | — | | — | | — | | (23,456) | | (23,456) | | Change in net unrealized investment appreciation (depreciation)(1) | — | | — | | — | | — | | (65,793) | | (65,793) | |
Change in liability for underfunded employee benefit plans(2) | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | 6,456 | | 6,456 | | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (2,916) | | (2,916) | |
| | Balance, March 31, 2021 | 25,119,855 | | $ | 25 | | $ | 202,874 | | $ | 570,789 | | $ | 49,911 | | $ | 823,599 | | |
| Balance, March 31, 2022 | | Balance, March 31, 2022 | 25,119,244 | | $ | 25 | | $ | 204,006 | | $ | 645,966 | | $ | (14,372) | | $ | 835,625 | |
| | Net income | Net income | — | | $ | — | | $ | — | | $ | 13,750 | | $ | — | | $ | 13,750 | | Net income | — | | $ | — | | $ | — | | $ | (10,457) | | $ | — | | $ | (10,457) | |
| Shares repurchased | (31,027) | | — | | (1,000) | | — | | — | | (1,000) | | |
| | Stock based compensation | Stock based compensation | 28,512 | | — | | 1,180 | | — | | — | | 1,180 | | Stock based compensation | 67,404 | | — | | 2,159 | | — | | — | | 2,159 | |
| Dividends on common stock $0.15 per share) | — | | — | | — | | (3,772) | | — | | (3,772) | | |
| Dividends on common stock ($0.15 per share) | | Dividends on common stock ($0.15 per share) | — | | — | | — | | (4,028) | | — | | (4,028) | |
Change in net unrealized investment appreciation(1) | Change in net unrealized investment appreciation(1) | — | | — | | — | | — | | 7,391 | | 7,391 | | Change in net unrealized investment appreciation(1) | — | | — | | — | | — | | (39,480) | | (39,480) | |
Change in liability for underfunded employee benefit plans(2) | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (1,674) | | (1,674) | | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (2,916) | | (2,916) | |
| | Balance, June 30, 2021 | 25,117,340 | | $ | 25 | | $ | 203,054 | | $ | 580,767 | | $ | 55,628 | | $ | 839,474 | | |
| Balance, June 30, 2022 | | Balance, June 30, 2022 | 25,186,648 | | $ | 25 | | $ | 206,165 | | $ | 631,481 | | $ | (56,768) | | $ | 780,903 | |
| | Net income (loss) | Net income (loss) | $ | — | | $ | — | | $ | — | | $ | (9,593) | | $ | — | | $ | (9,593) | | Net income (loss) | $ | — | | $ | — | | $ | — | | $ | (22,981) | | $ | — | | $ | (22,981) | |
| Shares repurchased | (36,417) | | — | | (1,001) | | — | | — | | (1,001) | | |
| | Stock based compensation | Stock based compensation | — | | — | | 960 | | — | | — | | 960 | | Stock based compensation | 4,766 | | — | | 646 | | — | | — | | 646 | |
| Dividends on common stock $0.15 per share) | — | | — | | — | | (3,763) | | — | | (3,763) | | |
| Dividends on common stock ($0.15 per share) | | Dividends on common stock ($0.15 per share) | — | | — | | — | | (4,031) | | — | | (4,031) | |
Change in net unrealized investment appreciation(1) | Change in net unrealized investment appreciation(1) | — | | — | | — | | — | | (9,828) | | (9,828) | | Change in net unrealized investment appreciation(1) | — | | — | | — | | — | | (50,826) | | (50,826) | |
Change in liability for underfunded employee benefit plans(2) | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (1,721) | | (1,721) | | Change in liability for underfunded employee benefit plans(2) | — | | — | | — | | — | | (2,916) | | (2,916) | |
| | Balance, September 30, 2021 | 25,080,923 | | $ | 25 | | $ | 203,014 | | $ | 567,411 | | $ | 44,079 | | $ | 814,529 | | |
| Balance, September 30, 2022 | | Balance, September 30, 2022 | 25,191,414 | | $ | 25 | | $ | 206,811 | | $ | 604,469 | | $ | (110,510) | | $ | 700,795 | |
(1)The change in net unrealized appreciation (depreciation) is net of reclassification adjustments and income taxes.
(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| (In Thousands) | (In Thousands) | 2022 | | 2021 | (In Thousands) | 2023 | | 2022 |
| Cash Flows From Operating Activities | Cash Flows From Operating Activities | | Cash Flows From Operating Activities | |
| Net income | Net income | $ | (5,089) | | | $ | 22,859 | | Net income | $ | (49,308) | | | $ | (5,089) | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities | Adjustments to reconcile net income to net cash provided by (used in) operating activities | | | | Adjustments to reconcile net income to net cash provided by (used in) operating activities | | | |
| Net accretion of bond premium | Net accretion of bond premium | 6,969 | | | 10,546 | | Net accretion of bond premium | 5,238 | | | 6,969 | |
| Depreciation and amortization | Depreciation and amortization | 8,079 | | | 4,887 | | Depreciation and amortization | 7,841 | | | 8,079 | |
| Stock-based compensation expense | Stock-based compensation expense | 2,590 | | | 3,074 | | Stock-based compensation expense | 3,124 | | | 2,590 | |
| Net investment (gains) losses | Net investment (gains) losses | 35,647 | | | (28,243) | | Net investment (gains) losses | 2,384 | | | 35,647 | |
| Net cash flows from equity and trading investments | Net cash flows from equity and trading investments | 29,725 | | | 34,504 | | Net cash flows from equity and trading investments | 116,080 | | | 29,725 | |
| Deferred income tax expense (benefit) | Deferred income tax expense (benefit) | (9,224) | | | 248 | | Deferred income tax expense (benefit) | (11,633) | | | (9,224) | |
| Changes in: | Changes in: | | | | Changes in: | | | |
| Accrued investment income | Accrued investment income | (1,773) | | | 668 | | Accrued investment income | (2,789) | | | (1,773) | |
| Premiums receivable | Premiums receivable | (57,570) | | | (7,780) | | Premiums receivable | (109,903) | | | (57,570) | |
| Deferred policy acquisition costs | Deferred policy acquisition costs | (14,930) | | | (7,966) | | Deferred policy acquisition costs | (21,067) | | | (14,930) | |
| Reinsurance receivables | Reinsurance receivables | (28,145) | | | 39,250 | | Reinsurance receivables | (40,692) | | | (28,145) | |
| Prepaid reinsurance premiums | Prepaid reinsurance premiums | (2,814) | | | 3,653 | | Prepaid reinsurance premiums | (10,125) | | | (2,814) | |
| Income taxes receivable | Income taxes receivable | (7,215) | | | (2,880) | | Income taxes receivable | (5,051) | | | (7,215) | |
| Other assets | Other assets | 6,758 | | | (8,456) | | Other assets | (1,596) | | | 6,758 | |
| Losses and loss settlement expenses | Losses and loss settlement expenses | (49,757) | | | (10,481) | | Losses and loss settlement expenses | 139,644 | | | (49,757) | |
| Unearned premiums | Unearned premiums | 48,560 | | | (5,914) | | Unearned premiums | 86,275 | | | 48,560 | |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | 1,403 | | | (21,348) | | Accrued expenses and other liabilities | 36,446 | | | 1,403 | |
| | Deferred income taxes | — | | | (1,009) | | |
| | Other, net | Other, net | 6,993 | | | (7,424) | | Other, net | 4,638 | | | 6,993 | |
| Cash from operating activities | Cash from operating activities | (24,704) | | | (4,671) | | Cash from operating activities | 198,814 | | | (24,704) | |
| | Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | (29,793) | | | $ | 18,188 | | Net cash provided by (used in) operating activities | $ | 149,506 | | | $ | (29,793) | |
| Cash Flows From Investing Activities | Cash Flows From Investing Activities | | Cash Flows From Investing Activities | |
| Proceeds from sale of available-for-sale investments | Proceeds from sale of available-for-sale investments | $ | 83,409 | | | $ | 170,637 | | Proceeds from sale of available-for-sale investments | $ | 48,749 | | | $ | 83,409 | |
| | Proceeds from call and maturity of available-for-sale investments | Proceeds from call and maturity of available-for-sale investments | 145,618 | | | 214,702 | | Proceeds from call and maturity of available-for-sale investments | 46,397 | | | 145,618 | |
| Proceeds from sale of other investments | Proceeds from sale of other investments | 3,243 | | | 3,616 | | Proceeds from sale of other investments | 3,482 | | | 3,243 | |
| Purchase of investments in mortgage loans | Purchase of investments in mortgage loans | (103) | | | — | | Purchase of investments in mortgage loans | (8,137) | | | (103) | |
| Purchase of investments available-for-sale | Purchase of investments available-for-sale | (262,359) | | | (331,644) | | Purchase of investments available-for-sale | (232,216) | | | (262,359) | |
| Purchase of other investments | Purchase of other investments | (5,447) | | | (6,021) | | Purchase of other investments | (14,899) | | | (5,447) | |
| Net purchases and sales of property and equipment | Net purchases and sales of property and equipment | (2,675) | | | (10,932) | | Net purchases and sales of property and equipment | (8,037) | | | (2,675) | |
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | $ | (38,314) | | | $ | 40,358 | | Net cash provided by (used in) investing activities | $ | (164,661) | | | $ | (38,314) | |
| Cash Flows From Financing Activities | Cash Flows From Financing Activities | | Cash Flows From Financing Activities | |
| Issuance of common stock | Issuance of common stock | $ | 846 | | | $ | (412) | | Issuance of common stock | $ | (223) | | | $ | 846 | |
| Repurchase of common stock | — | | | (2,008) | | |
| | Payment of cash dividends | Payment of cash dividends | (11,826) | | | (11,302) | | Payment of cash dividends | (12,122) | | | (11,826) | |
| Net cash used in financing activities | $ | (10,980) | | | $ | (13,722) | | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | $ | (12,345) | | | $ | (10,980) | |
| | Net Change in Cash and Cash Equivalents | Net Change in Cash and Cash Equivalents | $ | (79,087) | | | $ | 44,824 | | Net Change in Cash and Cash Equivalents | $ | (27,500) | | | $ | (79,087) | |
| Cash and Cash Equivalents at Beginning of Period | Cash and Cash Equivalents at Beginning of Period | 132,104 | | | 87,948 | | Cash and Cash Equivalents at Beginning of Period | 96,650 | | | 132,104 | |
| Cash and Cash Equivalents at End of Period | Cash and Cash Equivalents at End of Period | $ | 53,017 | | | $ | 132,772 | | Cash and Cash Equivalents at End of Period | $ | 69,150 | | | $ | 53,017 | |
| | Supplemental Disclosures of Cash Flow Information | | Supplemental Disclosures of Cash Flow Information | |
| Income taxes paid | | Income taxes paid | $ | 1,336 | | | $ | 21,537 | |
| Interest paid | | Interest paid | $ | 2,391 | | | $ | 2,391 | |
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
UNITED FIRE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share amounts or as otherwise noted)
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Business
United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance through a network of independent agencies. Our insurance company subsidiaries are licensed as property and casualty insurers in 50 states and the District of Columbia.
Basis of Presentation
The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K10-K/A for the year ended December 31, 2021,2022, including certain financial statement footnote disclosures, is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; loss settlement expenses; and pension and post-retirementpostretirement benefit obligations.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Management believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K10-K/A for the year ended December 31, 2021.2022.
Segment Information
Our property and casualty insurance business is reported as one business segment. The property and casualty insurance business profit or loss is consistent with consolidated reporting as disclosed on the Consolidated Statements of Income and Comprehensive Income. We analyze the property and casualty insurance business results based on profitability (i.e., loss ratios), expenses and return on equity. The Company's property and casualty insurance business was determined using a management approach to make decisions on operating matters, including allocating resources, assessing performance, determining which products to market and sell, determining distribution networks with insurance agents and monitoring the regulatory environment. The property and casualty insurance business products have similar economic characteristics and use a similar marketing and distribution strategy with our independent agents. We will continue to evaluate our operations on the basis of both statutory accounting principles prescribed or permitted by our states of domicile and GAAP.
Lloyd's Syndicates
On January 1, 2021, the Company became a member of Lloyd's of London ("Lloyd's"). As a member of Lloyd's, the Company is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699 and Syndicate 1699.5623. At September 30, 2022,2023, the Company's FAL investments were comprised of cash of $21,362$24,383 on deposit with Lloyd's in order to satisfy these FAL requirements.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, cash on deposit and held at Lloyd's and non-negotiable certificates of deposit with original maturities of three months or less.
Deferred Policy Acquisition Costs ("DAC")
Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the nine-month period ended September 30, 2022.2023.
| | | | | |
| |
| |
| Total |
| Recorded asset at beginning of period | $ | 91,446104,225 | |
| Underwriting costs deferred | 171,046202,768 | |
| Amortization of deferred policy acquisition costs | (156,116)(181,700) | |
Recorded asset at September 30, 20222023 | $ | 106,376125,292 | |
Property and casualty insurance policy acquisition costs deferred are amortized as premium revenue is recognized. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value. This takes into account the premium to be earned, losses and loss settlement expenses expected to be incurred and certain other costs expected to be incurred as the premium is earned.
Other Intangible Assets
Our other intangible assets, which consist primarily of agency relationships, trade names, state insurance licenses, and software, are being amortized using the straight-line method over periods ranging from two years to 15 years, with the exception of state insurance licenses, which are indefinite-lived and not amortized.
Long Term Debt
The Company executed a private placement debt transaction on December 15, 2020 between United Fire & Casualty Company ("UF&C"), and Federated Mutual Insurance Company, a mutual insurance company domiciled in Minnesota ("Federated Mutual"), and Federated Life Insurance Company, an insurance company domiciled in Minnesota ("Federated Life”Life" and, together with Federated Mutual, the "Note Purchasers").
UF&C sold an aggregate principal amount of $50,000 of notes due 2040 to the Note Purchasers. One note with a principal amount of $35,000 was issued to Federated Mutual and one note with a principal amount of $15,000 was issued to Federated Life subject to the terms of their respective notes. The notes are presented as a long term debt liability in the Consolidated Balance Sheets and as a financing activity in the Consolidated Statement of Cash Flows.
Interest payments under the surplus noteslong term debt are paid quarterly on March 15, June 15, September 15 and December 15 of each year (each such date, an "Interest Payment Date"). The interest rate will equal the rate that corresponds to the A.M. Best Co. (or its successor’s)successor's) financial strength rating for members of the United Fire & Casualty Pooled Group as of the applicable Interest Payment Date. For the nine-month period ended September 30, 2022,2023, interest totaled $2,391 and is included in accrued expenses and other liabilities in the Consolidated Balance Sheets and as interest expense in the Consolidated Statements of Income and Comprehensive Income. Payment of interest is subject to approval by the Iowa Insurance Division.
$2,391 and is included in accrued expenses and other liabilities in the Consolidated Balance Sheets and as Interest expense in the Consolidated Statements of Income and Comprehensive Income. Payment of interest is subject to approval by the Iowa Insurance Division.
Income Taxes
Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders' equity and do not impact federal income tax expense.
We reported a consolidated federal income tax benefit of $5,475$14,544 for the nine-month period ended September 30, 20222023 compared to an income tax expensebenefit of $1,690$5,475 during the same period of 2021.2022. Our effective tax rate for 20222023 and 20212022 is different than the federal statutory rate of 21 percent, due principally to the net effect of tax-exempt municipal bond interest income.
The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If, based on this review, it appears not more likely than not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at September 30, 20222023 or December 31, 2021.2022. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.
Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred taxes will not be realized. After considering all positive and negative evidence of taxable income in the carryback and carryforward periods and our tax planning strategy of holding debt securities with unrealized losses to maturity or recovery, we believe it is more likely than not that all the deferred assets will be realized. As a result, we have no valuation allowance at September 30, 2023 or December 31, 2022.
For the nine-month periods ended September 30, 20222023 and 2021,2022, we made payments for income taxes totaling $1,336 and $21,537, and $5,345, respectively. We did not receive a federal tax refund for the nine-month period ended September 30, 2023. For the nine-month period ended September 30, 2022, we received a federal tax refund of $10,789. We did not receive a tax refund during the nine-month period ended September 30, 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. We are under federal income tax examination for the years 2018 through 2020.
Leases
The Company determines if a contract contains a lease at inception of the contract. The Company's inventory of leases consists of operating leases which are recorded as a lease obligation liability disclosed in the "Accrued expenses and other liabilities" line on the Consolidated Balance Sheets and as a lease right-of-use asset disclosed in the "Other assets" line on the Consolidated Balance Sheets. The Company's operating leases consist of office space, vehicles, computer equipment and office equipment. The lease right-of-use asset represents the Company's right to use each underlying asset for the lease term and the lease obligation liability represents the Company's obligation over the lease term. The Company's lease obligation is recorded at the present value of the lease payments based on the term of the applied lease. Short-term leases of 12 months or less are recorded on the Consolidated Balance Sheets and lease payments are recognized on the Consolidated Statements of Income and Comprehensive Income. For more information on leases refer to Note 10 "Leases."
Variable Interest Entities
The Company and certain related parties are equity investors in one investment which the Company determined is a variable interest entity ("VIE") as a result of participation in the risks and rewards of the VIE based on the objectives and strategies of the VIE. The VIE is a limited liability company that primarily invests in commercial real estate. The Company and certain related parties are not the primary beneficiary 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
The Company and certain related parties are not the primary beneficiaries largely due to their inability to influence management or direct the activities that most significantly impact the VIE's economic performance. Based on these facts and circumstances, the Company has a variable interest in the VIE, but has not consolidated the VIE's financial results as it is not the primary beneficiary. The Company's investment is reported in other long-term investments in the Consolidated Balance Sheets and accounted for under the equity method of accounting. The fair value of the VIE at September 30, 20222023 was $2,342$2,650 and there are no future funding commitments.
Credit Losses
The Company recognizes credit losses for our available-for-sale fixed-maturity portfolio, reinsurance receivables, mortgage loans and premium receivables by setting up allowances which are remeasured each reporting period and recorded in the Consolidated Statements of Income and Comprehensive Income.
For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs.versus amortized cost, investment spreads widening or contracting, rating actions, payment and default history. For more information on credit losses and the allowance for credit losses for our available-for-sale fixed-maturity portfolio, see Note 2 "Summary of Investments."
An allowance for mortgage loan losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments which have similar risk characteristics. To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. On a quarterly basis, quantitative credit risk metrics, including, for example, cash-flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations. This allowance is presented as a separate line in the Consolidated Balance Sheets beneath the asset value as well as presented net and recorded through "Net investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income. For more information on credit losses and the allowance for credit losses for our investment in mortgage loans see Note 3 "Fair Value of Financial Instruments."
For reinsurance receivables, the Company's model estimates expected credit loss by multiplying the exposure at default by both the probability of default and loss given default ("LGD"). The LGD is estimated by the rating of the reinsurer, historical relationship with UFG, existence of letters of credit and known regulation for which the Company may be held accountable for.accountable. The ultimate LGD percentage is estimated after considering Moody’sMoody's experience with unsecured year 1one bond recovery rates from 1983-2017. The allowance calculated as of September 30, 20222023 is recorded through the line "Reinsurance receivables and recoverables" in the Consolidated Balance Sheets and through the line "Other underwriting expenses" in the Consolidated Statements of Income and Other Comprehensive Income. As of September 30, 2022,2023, the Company had a credit loss allowance for reinsurance receivables of $76.$130.
| | | | | | | | |
| Rollforward of credit loss allowance for reinsurance receivables: |
| | As of |
| | September 30, 20222023 |
Beginning balance, January 1, 20222023 | | $ | 10282 | |
| Current-period provision for expected credit losses | | 48 | |
| | |
| | |
Recoveries of amounts previously written off, if any | | (26) | |
Ending balance of the allowance for reinsurance receivables, September 30, 20222023 | | $ | 76130 | |
| | |
| | |
| | |
| | |
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.
Subsequent Events
In the preparation of the accompanying financial statements, the Company has evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure in the Company's financial statements.
Recently Issued Accounting Standards
Accounting Standards Adopted in 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
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.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%1 percent excise tax on corporate stock repurchases. The effective date of these provisions iswas January 1, 2023. The Company does not expect to be subject to CAMT in 2023 and does not expect the IRA to have ana material impact on the Company’sCompany's financial position and results of operations.
NOTE 2. SUMMARY OF INVESTMENTS
Fair Value of Investments
A reconciliation of the amortized cost to fair value of investments in our available-for-sale fixed maturity portfolio, presented on a consolidated basis, as of September 30, 20222023 and December 31, 2021,2022, is provided below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | | | | |
| Type of Investment | Cost or Amortized Cost | | Gross Unrealized Appreciation | | Gross Unrealized Depreciation | | Fair Value | | Allowance for Credit Losses | | Carrying Value |
| AVAILABLE-FOR-SALE | | | | | | | | | | | |
| Fixed maturities: | | | | | | | | | | | |
| Bonds | | | | | | | | | | | |
| U.S. Treasury | $ | 68,133 | | | $ | — | | | $ | 1,260 | | | $ | 66,873 | | | $ | — | | | $ | 66,873 | |
| U.S. government agency | 104,695 | | | 16 | | | 12,813 | | | 91,898 | | | — | | | 91,898 | |
| States, municipalities and political subdivisions | | | | | | | | | | | |
| General obligations: | | | | | | | | | | | |
| Midwest | 58,724 | | | — | | | 1,843 | | | 56,881 | | | — | | | 56,881 | |
| Northeast | 11,440 | | | — | | | 441 | | | 10,999 | | | — | | | 10,999 | |
| South | 55,335 | | | — | | | 2,201 | | | 53,134 | | | — | | | 53,134 | |
| West | 78,044 | | | — | | | 2,718 | | | 75,326 | | | — | | | 75,326 | |
| Special revenue: | | | | | | | | | | | |
| Midwest | 101,204 | | | 1 | | | 4,327 | | | 96,878 | | | — | | | 96,878 | |
| Northeast | 52,836 | | | — | | | 2,284 | | | 50,552 | | | — | | | 50,552 | |
| South | 168,395 | | | — | | | 8,895 | | | 159,500 | | | — | | | 159,500 | |
| West | 105,521 | | | — | | | 5,005 | | | 100,516 | | | — | | | 100,516 | |
| Foreign bonds | 21,251 | | | — | | | 2,915 | | | 18,336 | | | — | | | 18,336 | |
| Public utilities | 143,162 | | | 14 | | | 15,759 | | | 127,417 | | | — | | | 127,417 | |
| Corporate bonds | | | | | | | | | | | |
| Energy | 45,368 | | | — | | | 3,768 | | | 41,600 | | | — | | | 41,600 | |
| Industrials | 73,635 | | | 38 | | | 7,705 | | | 65,968 | | | — | | | 65,968 | |
| Consumer goods and services | 100,300 | | | — | | | 11,794 | | | 88,506 | | | — | | | 88,506 | |
| Health care | 37,903 | | | — | | | 6,366 | | | 31,537 | | | — | | | 31,537 | |
| Technology, media and telecommunications | 90,285 | | | — | | | 10,037 | | | 80,248 | | | — | | | 80,248 | |
| Financial services | 145,477 | | | — | | | 12,315 | | | 133,162 | | | 126 | | | 133,036 | |
| Mortgage-backed securities | 24,470 | | | — | | | 3,463 | | | 21,007 | | | — | | | 21,007 | |
| Collateralized mortgage obligations | | | | | | | | | | | |
| Government national mortgage association | 163,893 | | | — | | | 17,223 | | | 146,670 | | | — | | | 146,670 | |
| Federal home loan mortgage corporation | 88,565 | | | — | | | 16,716 | | | 71,849 | | | — | | | 71,849 | |
| Federal national mortgage association | 52,114 | | | — | | | 6,227 | | | 45,887 | | | — | | | 45,887 | |
| Asset-backed securities | 3,575 | | | 456 | | | 137 | | | 3,894 | | | — | | | 3,894 | |
| | | | | | | | | | | |
| Total Available-for-Sale Fixed Maturities | $ | 1,794,325 | | | $ | 525 | | | $ | 156,212 | | | $ | 1,638,638 | | | $ | 126 | | | $ | 1,638,512 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | | | | |
| Type of Investment | Cost or Amortized Cost | | Gross Unrealized Appreciation | | Gross Unrealized Depreciation | | Fair Value | | Allowance for Credit Losses | | Carrying Value |
| AVAILABLE-FOR-SALE | | | | | | | | | | | |
| Fixed maturities: | | | | | | | | | | | |
| Bonds | | | | | | | | | | | |
| U.S. Treasury | $ | 15,540 | | | $ | — | | | $ | 1,086 | | | $ | 14,454 | | | $ | — | | | $ | 14,454 | |
| U.S. government agency | 91,174 | | | — | | | 9,809 | | | 81,365 | | | — | | | 81,365 | |
| States, municipalities and political subdivisions | | | | | | | | | | | |
| General obligations: | | | | | | | | | | | |
| Midwest | 61,255 | | | 4 | | | 1,357 | | | 59,902 | | | — | | | 59,902 | |
| Northeast | 20,305 | | | 2 | | | 298 | | | 20,009 | | | — | | | 20,009 | |
| South | 65,638 | | | 3 | | | 2,199 | | | 63,442 | | | — | | | 63,442 | |
| West | 88,606 | | | 22 | | | 2,230 | | | 86,398 | | | — | | | 86,398 | |
| Special revenue: | | | | | | | | | | | |
| Midwest | 109,211 | | | 20 | | | 3,086 | | | 106,145 | | | — | | | 106,145 | |
| Northeast | 55,424 | | | — | | | 2,281 | | | 53,143 | | | — | | | 53,143 | |
| South | 194,674 | | | 7 | | | 7,822 | | | 186,859 | | | 55 | | | 186,804 | |
| West | 114,862 | | | 46 | | | 4,551 | | | 110,357 | | | 24 | | | 110,333 | |
| Foreign bonds | 36,127 | | | — | | | 4,992 | | | 31,135 | | | — | | | 31,135 | |
| Public utilities | 135,835 | | | 27 | | | 15,560 | | | 120,302 | | | — | | | 120,302 | |
| Corporate bonds | | | | | | | | | | | |
| Energy | 38,518 | | | — | | | 3,793 | | | 34,725 | | | — | | | 34,725 | |
| Industrials | 56,249 | | | — | | | 6,536 | | | 49,713 | | | — | | | 49,713 | |
| Consumer goods and services | 100,624 | | | — | | | 12,338 | | | 88,286 | | | — | | | 88,286 | |
| Health care | 31,209 | | | — | | | 6,110 | | | 25,099 | | | — | | | 25,099 | |
| Technology, media and telecommunications | 67,242 | | | — | | | 8,613 | | | 58,629 | | | 12 | | | 58,617 | |
| Financial services | 132,066 | | | 153 | | | 10,848 | | | 121,371 | | | — | | | 121,371 | |
| Mortgage-backed securities | 21,063 | | | — | | | 3,010 | | | 18,053 | | | — | | | 18,053 | |
| Collateralized mortgage obligations | | | | | | | | | | | |
| Government national mortgage association | 94,791 | | | — | | | 13,027 | | | 81,764 | | | — | | | 81,764 | |
| Federal home loan mortgage corporation | 95,451 | | | — | | | 10,825 | | | 84,626 | | | — | | | 84,626 | |
| Federal national mortgage association | 51,946 | | | 42 | | | 4,828 | | | 47,160 | | | — | | | 47,160 | |
| Asset-backed securities | 3,942 | | | 457 | | | 184 | | | 4,215 | | | — | | | 4,215 | |
| | | | | | | | | | | |
| Total Available-for-Sale Fixed Maturities | $ | 1,681,752 | | | $ | 783 | | | $ | 135,383 | | | $ | 1,547,152 | | | $ | 91 | | | $ | 1,547,061 | |
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| | | | | | | | | | | |
| | | | | | | | | | | |
| | December 31, 2021 | | | |
| December 31, 2022 | | December 31, 2022 | | |
| Type of Investment | Type of Investment | Cost or Amortized Cost | | Gross Unrealized Appreciation | | Gross Unrealized Depreciation | | Fair Value | Allowance for Credit Losses | | Carrying Value | Type of Investment | Cost or Amortized Cost | | Gross Unrealized Appreciation | | Gross Unrealized Depreciation | | Fair Value | Allowance for Credit Losses | | Carrying Value |
| AVAILABLE-FOR-SALE | AVAILABLE-FOR-SALE | | AVAILABLE-FOR-SALE | |
| Fixed maturities: | Fixed maturities: | | Fixed maturities: | |
| Bonds | Bonds | | Bonds | |
| U.S. Treasury | U.S. Treasury | $ | 42,425 | | | $ | 216 | | | $ | 718 | | | $ | 41,923 | | $ | — | | | $ | 41,923 | | U.S. Treasury | $ | 15,684 | | | $ | — | | | $ | 1,009 | | | $ | 14,675 | | $ | — | | | $ | 14,675 | |
| U.S. government agency | U.S. government agency | 60,074 | | | 2,155 | | | 562 | | | 61,667 | | — | | | 61,667 | | U.S. government agency | 94,092 | | | 35 | | | 9,721 | | | 84,406 | | — | | | 84,406 | |
| States, municipalities and political subdivisions | States, municipalities and political subdivisions | | States, municipalities and political subdivisions | |
| General obligations: | General obligations: | | General obligations: | |
| Midwest | Midwest | 71,863 | | | 2,483 | | | — | | | 74,346 | | — | | | 74,346 | | Midwest | 61,191 | | | 185 | | | 263 | | | 61,113 | | — | | | 61,113 | |
| Northeast | Northeast | 22,061 | | | 701 | | | — | | | 22,762 | | — | | | 22,762 | | Northeast | 15,518 | | | 18 | | | 73 | | | 15,463 | | — | | | 15,463 | |
| South | South | 90,171 | | | 3,873 | | | — | | | 94,044 | | — | | | 94,044 | | South | 64,851 | | | 57 | | | 927 | | | 63,981 | | — | | | 63,981 | |
| West | West | 93,968 | | | 5,110 | | | — | | | 99,078 | | — | | | 99,078 | | West | 87,094 | | | 163 | | | 712 | | | 86,545 | | — | | | 86,545 | |
| Special revenue: | Special revenue: | | Special revenue: | |
| Midwest | Midwest | 114,997 | | | 7,292 | | | — | | | 122,289 | | — | | | 122,289 | | Midwest | 103,107 | | | 224 | | | 1,065 | | | 102,266 | | — | | | 102,266 | |
| Northeast | Northeast | 55,811 | | | 3,921 | | | — | | | 59,732 | | — | | | 59,732 | | Northeast | 55,292 | | | 76 | | | 1,148 | | | 54,220 | | — | | | 54,220 | |
| South | South | 201,383 | | | 14,365 | | | 78 | | | 215,670 | | — | | | 215,670 | | South | 184,108 | | | 278 | | | 3,529 | | | 180,857 | | — | | | 180,857 | |
| West | West | 126,521 | | | 8,128 | | | — | | | 134,649 | | — | | | 134,649 | | West | 113,594 | | | 275 | | | 1,657 | | | 112,212 | | — | | | 112,212 | |
| Foreign bonds | Foreign bonds | 30,314 | | | 789 | | | 197 | | | 30,906 | | — | | | 30,906 | | Foreign bonds | 36,129 | | | — | | | 4,480 | | | 31,649 | | — | | | 31,649 | |
| Public utilities | Public utilities | 104,008 | | | 3,966 | | | 481 | | | 107,493 | | — | | | 107,493 | | Public utilities | 138,752 | | | 65 | | | 13,406 | | | 125,411 | | — | | | 125,411 | |
| Corporate bonds | Corporate bonds | | Corporate bonds | |
| Energy | Energy | 31,011 | | | 1,751 | | | 81 | | | 32,681 | | — | | | 32,681 | | Energy | 36,507 | | | — | | | 3,298 | | | 33,209 | | — | | | 33,209 | |
| Industrials | Industrials | 55,014 | | | 2,319 | | | 162 | | | 57,171 | | — | | | 57,171 | | Industrials | 58,334 | | | 62 | | | 5,554 | | | 52,842 | | — | | | 52,842 | |
| Consumer goods and services | Consumer goods and services | 71,543 | | | 1,912 | | | 611 | | | 72,844 | | — | | | 72,844 | | Consumer goods and services | 100,539 | | | — | | | 10,598 | | | 89,941 | | — | | | 89,941 | |
| Health care | Health care | 27,351 | | | 539 | | | 461 | | | 27,429 | | — | | | 27,429 | | Health care | 32,987 | | | 24 | | | 5,419 | | | 27,592 | | — | | | 27,592 | |
| Technology, media and telecommunications | Technology, media and telecommunications | 55,405 | | | 2,958 | | | 866 | | | 57,497 | | — | | | 57,497 | | Technology, media and telecommunications | 67,193 | | | — | | | 7,253 | | | 59,940 | | — | | | 59,940 | |
| Financial services | Financial services | 98,352 | | | 4,394 | | | 131 | | | 102,615 | | — | | | 102,615 | | Financial services | 132,849 | | | 851 | | | 9,408 | | | 124,292 | | 3 | | | 124,289 | |
| Mortgage-backed securities | Mortgage-backed securities | 25,075 | | | 167 | | | 229 | | | 25,013 | | — | | | 25,013 | | Mortgage-backed securities | 20,450 | | | — | | | 2,750 | | | 17,700 | | — | | | 17,700 | |
| Collateralized mortgage obligations | Collateralized mortgage obligations | | Collateralized mortgage obligations | |
| Government national mortgage association | Government national mortgage association | 109,968 | | | 2,322 | | | 1,772 | | | 110,518 | | — | | | 110,518 | | Government national mortgage association | 97,839 | | | — | | | 13,291 | | | 84,548 | | — | | | 84,548 | |
| Federal home loan mortgage corporation | Federal home loan mortgage corporation | 120,911 | | | 736 | | | 1,658 | | | 119,989 | | — | | | 119,989 | | Federal home loan mortgage corporation | 92,366 | | | — | | | 13,528 | | | 78,838 | | — | | | 78,838 | |
| Federal national mortgage association | Federal national mortgage association | 48,246 | | | 945 | | | 642 | | | 48,549 | | — | | | 48,549 | | Federal national mortgage association | 50,272 | | | 5 | | | 4,891 | | | 45,386 | | — | | | 45,386 | |
| Asset-backed securities | Asset-backed securities | 325 | | | 600 | | | — | | | 925 | | — | | | 925 | | Asset-backed securities | 3,932 | | | 466 | | | 145 | | | 4,253 | | — | | | 4,253 | |
| | Total Available-for-Sale Fixed Maturities | Total Available-for-Sale Fixed Maturities | $ | 1,656,797 | | | $ | 71,642 | | | $ | 8,649 | | | $ | 1,719,790 | | $ | — | | | $ | 1,719,790 | | Total Available-for-Sale Fixed Maturities | $ | 1,662,680 | | | $ | 2,784 | | | $ | 114,125 | | | $ | 1,551,339 | | $ | 3 | | | $ | 1,551,336 | |
Maturities
The amortized cost and fair value of available-for-sale fixed maturity securities at September 30, 2022,2023, by contractual maturity, are shown in the following tables. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.
| | Maturities | Maturities | | | | Maturities | | | |
| | Available-For-Sale | | | Available-For-Sale | |
| September 30, 2022 | Amortized Cost | | Fair Value | | |
| September 30, 2023 | | September 30, 2023 | Amortized Cost | | Fair Value | |
| Due in one year or less | Due in one year or less | $ | 45,019 | | | $ | 44,925 | | | Due in one year or less | $ | 84,646 | | | $ | 84,052 | | |
| Due after one year through five years | Due after one year through five years | 443,505 | | | 427,654 | | | Due after one year through five years | 518,815 | | | 496,253 | | |
| Due after five years through 10 years | Due after five years through 10 years | 540,068 | | | 488,978 | | | Due after five years through 10 years | 530,822 | | | 476,969 | | |
| Due after 10 years | Due after 10 years | 385,967 | | | 349,777 | | | Due after 10 years | 327,424 | | | 292,056 | | |
| Asset-backed securities | Asset-backed securities | 3,942 | | | 4,215 | | | Asset-backed securities | 3,575 | | | 3,894 | | |
| Mortgage-backed securities | Mortgage-backed securities | 21,063 | | | 18,053 | | | Mortgage-backed securities | 24,470 | | | 21,007 | | |
| Collateralized mortgage obligations | Collateralized mortgage obligations | 242,188 | | | 213,550 | | | Collateralized mortgage obligations | 304,573 | | | 264,407 | | |
| | | $ | 1,681,752 | | | $ | 1,547,152 | | | | $ | 1,794,325 | | | $ | 1,638,638 | | |
Net Investment Gains and Losses
Net investment gains (losses) on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net investment gains (losses) is as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Net investment gains (losses): | Net investment gains (losses): | | | Net investment gains (losses): | | |
| Fixed maturities: | Fixed maturities: | | Fixed maturities: | |
| Available-for-sale | Available-for-sale | $ | (98) | | | $ | 294 | | | $ | (1,397) | | | $ | (207) | | Available-for-sale | $ | (19) | | | $ | (98) | | | $ | (445) | | | $ | (1,397) | |
| Allowance for credit losses | Allowance for credit losses | (91) | | | 170 | | | (91) | | | 5 | | Allowance for credit losses | (125) | | | (91) | | | (123) | | | (91) | |
| | Equity securities | Equity securities | | Equity securities | |
| Change in the fair value | Change in the fair value | (13,078) | | | (1,314) | | | (32,403) | | | 20,513 | | Change in the fair value | 204 | | | (13,078) | | | (1,960) | | | (32,403) | |
| Sales | Sales | (93) | | | (1,168) | | | (1,767) | | | 8,183 | | Sales | (2,085) | | | (93) | | | 150 | | | (1,767) | |
| Mortgage loans allowance for credit losses | Mortgage loans allowance for credit losses | — | | | 5 | | | 5 | | | 5 | | Mortgage loans allowance for credit losses | 1 | | | — | | | (5) | | | 5 | |
| Other long-term investments | Other long-term investments | (187) | | | — | | | (229) | | | — | | Other long-term investments | 64 | | | (187) | | | (245) | | | (229) | |
| | Real estate | Real estate | (703) | | | (256) | | | 235 | | | (256) | | Real estate | — | | | (703) | | | 47 | | | 235 | |
| Total net investment gains (losses) | Total net investment gains (losses) | $ | (14,250) | | | $ | (2,269) | | | $ | (35,647) | | | $ | 28,243 | | Total net investment gains (losses) | $ | (1,960) | | | $ | (14,250) | | | $ | (2,581) | | | $ | (35,647) | |
The proceeds and gross realized gains (losses) on the sale of available-for-sale fixed maturity securities are as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Proceeds from sales | Proceeds from sales | $ | 18,399 | | | $ | 53,973 | | | $ | 83,409 | | | $ | 170,637 | | Proceeds from sales | $ | 4,940 | | | $ | 18,399 | | | $ | 48,749 | | | $ | 83,409 | |
| Gross realized gains | Gross realized gains | 12 | | | 690 | | | 459 | | | 843 | | Gross realized gains | — | | | 12 | | | 121 | | | 459 | |
| Gross realized losses | Gross realized losses | 110 | | | 396 | | | 1,857 | | | 1,051 | | Gross realized losses | 19 | | | 110 | | | 566 | | | 1,857 | |
Funding Commitment
Pursuant to an agreementagreements with one of our limited liability partnership investments, we are contractually committed through July 10, 2030 to make capital contributions upon the request of certain of the partnership.partnerships. Our remaining potential contractual obligation was $42,994$32,248 at September 30, 2022.2023.
In addition, the Company invested $25,000 in December 2019 in a limited liability partnership investment fund which is subject to a three-year lockup with a 60 day60-day minimum notice, with four possible repurchase dates per year after the three-year lockup period has concluded. The fair value of the investment at September 30, 20222023 was $24,994$25,218 and there are no remaining capital contributions with this investment.
Unrealized Appreciation and Depreciation
A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Change in net unrealized investment appreciation | | |
| Change in net unrealized investment appreciation (depreciation) | | Change in net unrealized investment appreciation (depreciation) | |
| Available-for-sale fixed maturities | Available-for-sale fixed maturities | $ | (197,594) | | | $ | (32,779) | | Available-for-sale fixed maturities | $ | (44,087) | | | $ | (197,594) | |
| Income tax effect | Income tax effect | 41,495 | | | 6,886 | | Income tax effect | 9,258 | | | 41,495 | |
| Total change in net unrealized investment appreciation, net of tax | $ | (156,099) | | | $ | (25,893) | | |
| Total change in net unrealized investment appreciation (depreciation), net of tax | | Total change in net unrealized investment appreciation (depreciation), net of tax | $ | (34,829) | | | $ | (156,099) | |
Credit Risk
An allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs.versus amortized cost, investment spreads widening or contracting, rating actions, payment and default history. The following table contains a rollforward of the allowance for credit losses for available-for-sale fixed maturity securities at September 30, 2022.2023. | | | | | | | | |
| | |
| Rollforward of allowance for credit losses for available-for-sale fixed maturity securities: |
| | As of |
| | September 30, 20222023 |
Beginning balance, January 1, 20222023 | | $ | —3 | |
| Additions to the allowance for credit losses for which credit losses were not previously recorded | | 91123 | |
| Reductions for securities sold during the period (realized) | | — | |
| Write-offs charged against the allowance | | — | |
| Recoveries of amounts previously written off | | — | |
Ending balance, September 30, 20222023 | | $ | 91126 | |
Fixed Maturities Unrealized Depreciation
The following tables summarize our fixed maturity securities that were in an unrealized loss position reported on a consolidated basis at September 30, 20222023 and December 31, 2021.2022. 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.
| | | September 30, 2022 | Less than 12 months | | 12 months or longer | | Total | |
| September 30, 2023 | | September 30, 2023 | Less than 12 months | | 12 months or longer | | Total |
| Type of Investment | Type of Investment | Number
of Issues | | Fair
Value | | Gross Unrealized
Depreciation | | Number
of Issues | | Fair
Value | | Gross Unrealized Depreciation | | Fair
Value | | Gross Unrealized Depreciation | Type of Investment | Number
of Issues | | Fair
Value | | Gross Unrealized
Depreciation | | Number
of Issues | | Fair
Value | | Gross Unrealized Depreciation | | Fair
Value | | Gross Unrealized Depreciation |
| AVAILABLE-FOR-SALE | AVAILABLE-FOR-SALE | | AVAILABLE-FOR-SALE | |
| Fixed maturities: | Fixed maturities: | | Fixed maturities: | |
| Bonds | Bonds | | Bonds | |
| U.S. Treasury | U.S. Treasury | 4 | | | $ | 6,472 | | | $ | 216 | | | 4 | | | $ | 7,982 | | | $ | 869 | | | $ | 14,454 | | | $ | 1,085 | | U.S. Treasury | 5 | | | $ | 54,358 | | | $ | 390 | | | 6 | | | $ | 12,515 | | | $ | 870 | | | $ | 66,873 | | | $ | 1,260 | |
| U.S. government agency | U.S. government agency | 24 | | | 69,948 | | | 5,812 | | | 3 | | | 11,417 | | | 3,997 | | | 81,365 | | | 9,809 | | U.S. government agency | 3 | | | 10,643 | | | 336 | | | 25 | | | 75,239 | | | 12,477 | | | 85,882 | | | 12,813 | |
| States, municipalities and political subdivisions | States, municipalities and political subdivisions | | States, municipalities and political subdivisions | |
| General obligations | General obligations | | General obligations | |
| Midwest | Midwest | 34 | | | 58,949 | | | 1,357 | | | — | | | — | | | — | | | 58,949 | | | 1,357 | | Midwest | 30 | | | 45,359 | | | 1,360 | | | 3 | | | 10,357 | | | 483 | | | 55,716 | | | 1,843 | |
| Northeast | Northeast | 8 | | | 16,807 | | | 298 | | | — | | | — | | | — | | | 16,807 | | | 298 | | Northeast | 4 | | | 7,716 | | | 214 | | | 1 | | | 3,283 | | | 227 | | | 10,999 | | | 441 | |
| South | South | 33 | | | 61,969 | | | 2,198 | | | — | | | — | | | — | | | 61,969 | | | 2,198 | | South | 23 | | | 37,383 | | | 989 | | | 9 | | | 15,751 | | | 1,212 | | | 53,134 | | | 2,201 | |
| West | West | 36 | | | 82,240 | | | 2,230 | | | — | | | — | | | — | | | 82,240 | | | 2,230 | | West | 26 | | | 54,944 | | | 1,498 | | | 8 | | | 20,382 | | | 1,220 | | | 75,326 | | | 2,718 | |
| Special revenue | Special revenue | | Special revenue | |
| Midwest | Midwest | 47 | | | 93,081 | | | 3,086 | | | — | | | — | | | — | | | 93,081 | | | 3,086 | | Midwest | 38 | | | 71,273 | | | 2,694 | | | 11 | | | 22,054 | | | 1,633 | | | 93,327 | | | 4,327 | |
| Northeast | Northeast | 21 | | | 53,143 | | | 2,281 | | | — | | | — | | | — | | | 53,143 | | | 2,281 | | Northeast | 11 | | | 27,061 | | | 956 | | | 8 | | | 23,491 | | | 1,328 | | | 50,552 | | | 2,284 | |
| South | South | 76 | | | 177,218 | | | 7,200 | | | 1 | | | 845 | | | 426 | | | 178,063 | | | 7,626 | | South | 42 | | | 95,076 | | | 3,480 | | | 33 | | | 64,424 | | | 5,415 | | | 159,500 | | | 8,895 | |
| West | West | 54 | | | 100,516 | | | 4,528 | | | — | | | — | | | — | | | 100,516 | | | 4,528 | | West | 39 | | | 59,134 | | | 2,017 | | | 19 | | | 41,380 | | | 2,988 | | | 100,514 | | | 5,005 | |
| Foreign bonds | Foreign bonds | 11 | | | 25,778 | | | 3,360 | | | 3 | | | 5,357 | | | 1,633 | | | 31,135 | | | 4,993 | | Foreign bonds | — | | | — | | | — | | | 9 | | | 18,336 | | | 2,915 | | | 18,336 | | | 2,915 | |
| Public utilities | Public utilities | 47 | | | 104,282 | | | 11,490 | | | 7 | | | 15,494 | | | 4,070 | | | 119,776 | | | 15,560 | | Public utilities | 7 | | | 17,689 | | | 621 | | | 49 | | | 109,217 | | | 15,138 | | | 126,906 | | | 15,759 | |
| Corporate bonds | Corporate bonds | | Corporate bonds | |
| Energy | Energy | 16 | | | 32,464 | | | 3,048 | | | 1 | | | 2,260 | | | 746 | | | 34,724 | | | 3,794 | | Energy | 4 | | | 8,604 | | | 294 | | | 15 | | | 32,996 | | | 3,474 | | | 41,600 | | | 3,768 | |
| Industrials | Industrials | 23 | | | 47,467 | | | 5,794 | | | 1 | | | 2,246 | | | 743 | | | 49,713 | | | 6,537 | | Industrials | 6 | | | 14,842 | | | 331 | | | 22 | | | 47,010 | | | 7,374 | | | 61,852 | | | 7,705 | |
| Consumer goods and services | Consumer goods and services | 32 | | | 80,971 | | | 9,318 | | | 7 | | | 18,406 | | | 7,498 | | | 99,377 | | | 16,816 | | Consumer goods and services | 7 | | | 22,863 | | | 976 | | | 28 | | | 65,643 | | | 10,818 | | | 88,506 | | | 11,794 | |
| Health care | Health care | 7 | | | 14,008 | | | 1,632 | | | — | | | — | | | — | | | 14,008 | | | 1,632 | | Health care | 3 | | | 6,604 | | | 223 | | | 11 | | | 24,933 | | | 6,143 | | | 31,537 | | | 6,366 | |
| Technology, media and telecommunications | Technology, media and telecommunications | 24 | | | 51,188 | | | 5,163 | | | 3 | | | 5,551 | | | 3,345 | | | 56,739 | | | 8,508 | | Technology, media and telecommunications | 5 | | | 17,505 | | | 865 | | | 28 | | | 61,492 | | | 9,172 | | | 78,997 | | | 10,037 | |
| Financial services | Financial services | 45 | | | 111,766 | | | 9,642 | | | 3 | | | 4,302 | | | 1,205 | | | 116,068 | | | 10,847 | | Financial services | 10 | | | 24,655 | | | 1,090 | | | 44 | | | 108,507 | | | 11,225 | | | 133,162 | | | 12,315 | |
| Mortgage-backed securities | Mortgage-backed securities | 44 | | | 8,247 | | | 1,162 | | | 6 | | | 9,806 | | | 1,847 | | | 18,053 | | | 3,009 | | Mortgage-backed securities | 4 | | | 5,656 | | | 195 | | | 48 | | | 15,352 | | | 3,268 | | | 21,008 | | | 3,463 | |
| Collateralized mortgage obligations | Collateralized mortgage obligations | | Collateralized mortgage obligations | |
| Federal home loan mortgage corporation | 25 | | | 41,694 | | | 4,755 | | | 17 | | | 42,935 | | | 6,071 | | | 84,629 | | | 10,826 | | |
| Federal national mortgage association | 15 | | | 24,997 | | | 1,237 | | | 7 | | | 17,495 | | | 3,590 | | | 42,492 | | | 4,827 | | |
| Government national mortgage association | 33 | | | 56,120 | | | 7,726 | | | 7 | | | 25,644 | | | 5,301 | | | 81,764 | | | 13,027 | | |
| Government National Mortgage Association | | Government National Mortgage Association | 18 | | | 75,767 | | | 1,169 | | | 40 | | | 70,903 | | | 16,054 | | | 146,670 | | | 17,223 | |
| Federal Home Loan Mortgage Corporation | | Federal Home Loan Mortgage Corporation | 3 | | | 7,655 | | | 2,523 | | | 32 | | | 64,194 | | | 14,193 | | | 71,849 | | | 16,716 | |
| Federal National Mortgage Association | | Federal National Mortgage Association | 6 | | | 14,078 | | | 421 | | | 20 | | | 31,810 | | | 5,806 | | | 45,888 | | | 6,227 | |
| Asset-backed securities | Asset-backed securities | 1 | | | 3,426 | | | 184 | | | — | | | — | | | — | | | 3,426 | | | 184 | | Asset-backed securities | — | | | — | | | — | | | 1 | | | 3,095 | | | 137 | | | 3,095 | | | 137 | |
| | Total Available-for-Sale Fixed Maturities | Total Available-for-Sale Fixed Maturities | 660 | | | $ | 1,322,751 | | | $ | 93,717 | | | 70 | | | $ | 169,740 | | | $ | 41,341 | | | $ | 1,492,491 | | | $ | 135,058 | | Total Available-for-Sale Fixed Maturities | 294 | | | $ | 678,865 | | | $ | 22,642 | | | 470 | | | $ | 942,364 | | | $ | 133,570 | | | $ | 1,621,229 | | | $ | 156,212 | |
The unrealized losses on our investments in available-for-sale fixed maturities were the result of interest rate movements. We have no intent to sell, and it is more likely than not that we will not be required to sell these securities until the fair value recovers to at least equal our cost basis or the securities mature.
| | | December 31, 2021 | Less than 12 months | | 12 months or longer | | Total | |
| December 31, 2022 | | December 31, 2022 | Less than 12 months | | 12 months or longer | | Total |
| Type of Investment | Type of Investment | Number
of Issues | | Fair
Value | | Gross Unrealized Depreciation | | Number
of Issues | | Fair
Value | | Gross Unrealized Depreciation | | Fair
Value | | Gross Unrealized Depreciation | Type of Investment | Number
of Issues | | Fair
Value | | Gross Unrealized Depreciation | | Number
of Issues | | Fair
Value | | Gross Unrealized Depreciation | | Fair
Value | | Gross Unrealized Depreciation |
| AVAILABLE-FOR-SALE | AVAILABLE-FOR-SALE | | AVAILABLE-FOR-SALE | |
| Fixed maturities: | Fixed maturities: | | Fixed maturities: | |
| Bonds | Bonds | | Bonds | |
| U.S. Treasury | U.S. Treasury | 6 | | | $ | 32,166 | | | $ | 630 | | | 1 | | | $ | 2,837 | | | $ | 88 | | | $ | 35,003 | | | $ | 718 | | U.S. Treasury | 4 | | | $ | 6,656 | | | $ | 212 | | | 4 | | | $ | 8,019 | | | $ | 797 | | | $ | 14,675 | | | $ | 1,009 | |
| U.S. government agency | U.S. government agency | 3 | | | 15,023 | | | 562 | | | — | | | — | | | — | | | 15,023 | | | 562 | | U.S. government agency | 24 | | | 70,158 | | | 5,606 | | | 3 | | | 11,242 | | | 4,115 | | | 81,400 | | | 9,721 | |
| States, municipalities and political subdivisions | States, municipalities and political subdivisions | | States, municipalities and political subdivisions | |
| | General obligations | | General obligations | |
| Midwest | | Midwest | 16 | | | 29,089 | | | 263 | | | — | | | — | | | — | | | 29,089 | | | 263 | |
| Northeast | | Northeast | 4 | | | 8,576 | | | 73 | | | — | | | — | | | — | | | 8,576 | | | 73 | |
| South | South | 1 | | | 1,195 | | | 78 | | | — | | | — | | | — | | | 1,195 | | | 78 | | South | 24 | | | 48,235 | | | 927 | | | — | | | — | | | — | | | 48,235 | | | 927 | |
| | West | | West | 27 | | | 62,652 | | | 711 | | | — | | | — | | | — | | | 62,652 | | | 711 | |
| Special revenue | | Special revenue | |
| Midwest | | Midwest | 35 | | | 67,101 | | | 1,065 | | | — | | | — | | | — | | | 67,101 | | | 1,065 | |
| Northeast | | Northeast | 14 | | | 37,484 | | | 1,148 | | | — | | | — | | | — | | | 37,484 | | | 1,148 | |
| South | | South | 58 | | | 126,388 | | | 3,124 | | | 1 | | | 866 | | | 405 | | | 127,254 | | | 3,529 | |
| West | | West | 39 | | | 83,622 | | | 1,658 | | | — | | | — | | | — | | | 83,622 | | | 1,658 | |
| Foreign bonds | Foreign bonds | 4 | | | 10,731 | | | 147 | | | 1 | | | 1,952 | | | 50 | | | 12,683 | | | 197 | | Foreign bonds | 9 | | | 21,377 | | | 1,861 | | | 5 | | | 10,272 | | | 2,619 | | | 31,649 | | | 4,480 | |
| Public utilities | Public utilities | 9 | | | 24,238 | | | 481 | | | — | | | — | | | — | | | 24,238 | | | 481 | | Public utilities | 45 | | | 101,867 | | | 8,737 | | | 9 | | | 19,979 | | | 4,669 | | | 121,846 | | | 13,406 | |
| Corporate bonds | Corporate bonds | | Corporate bonds | |
| Energy | Energy | 1 | | | 5,881 | | | 81 | | | — | | | — | | | — | | | 5,881 | | | 81 | | Energy | 15 | | | 28,612 | | | 1,930 | | | 1 | | | 4,597 | | | 1,368 | | | 33,209 | | | 3,298 | |
| Industrials | Industrials | 4 | | | 8,902 | | | 162 | | | — | | | — | | | — | | | 8,902 | | | 162 | | Industrials | 21 | | | 43,639 | | | 3,542 | | | 4 | | | 7,049 | | | 2,012 | | | 50,688 | | | 5,554 | |
| Consumer goods and services | Consumer goods and services | 10 | | | 26,367 | | | 611 | | | — | | | — | | | — | | | 26,367 | | | 611 | | Consumer goods and services | 28 | | | 69,320 | | | 4,440 | | | 7 | | | 20,620 | | | 6,157 | | | 89,940 | | | 10,597 | |
| Health care | Health care | 3 | | | 20,550 | | | 461 | | | — | | | — | | | — | | | 20,550 | | | 461 | | Health care | 5 | | | 9,829 | | | 487 | | | 6 | | | 15,928 | | | 4,933 | | | 25,757 | | | 5,420 | |
| Technology, media and telecommunications | Technology, media and telecommunications | 4 | | | 11,204 | | | 739 | | | 1 | | | 1,906 | | | 127 | | | 13,110 | | | 866 | | Technology, media and telecommunications | 23 | | | 49,970 | | | 3,279 | | | 5 | | | 9,970 | | | 3,974 | | | 59,940 | | | 7,253 | |
| Financial services | Financial services | 5 | | | 13,320 | | | 131 | | | — | | | — | | | — | | | 13,320 | | | 131 | | Financial services | 40 | | | 101,411 | | | 6,997 | | | 5 | | | 11,236 | | | 2,208 | | | 112,647 | | | 9,205 | |
| Mortgage-backed securities | Mortgage-backed securities | 12 | | | 13,740 | | | 229 | | | — | | | — | | | — | | | 13,740 | | | 229 | | Mortgage-backed securities | 38 | | | 7,909 | | | 1,056 | | | 12 | | | 9,791 | | | 1,693 | | | 17,700 | | | 2,749 | |
| Collateralized mortgage obligations | Collateralized mortgage obligations | | Collateralized mortgage obligations | |
| Federal home loan mortgage corporation | 11 | | | 48,256 | | | 1,752 | | | 1 | | | 1,032 | | | 20 | | | 49,288 | | | 1,772 | | |
| Federal national mortgage association | 18 | | | 50,701�� | | | 698 | | | 7 | | | 30,847 | | | 960 | | | 81,548 | | | 1,658 | | |
| Government national mortgage association | 6 | | | 21,806 | | | 521 | | | 4 | | | 5,297 | | | 121 | | | 27,103 | | | 642 | | |
| | Government National Mortgage Association | | Government National Mortgage Association | 29 | | | 48,898 | | | 4,500 | | | 12 | | | 35,650 | | | 8,791 | | | 84,548 | | | 13,291 | |
| Federal Home Loan Mortgage Corporation | | Federal Home Loan Mortgage Corporation | 21 | | | 35,456 | | | 5,629 | | | 19 | | | 43,383 | | | 7,900 | | | 78,839 | | | 13,529 | |
| Federal National Mortgage Association | | Federal National Mortgage Association | 14 | | | 24,146 | | | 1,281 | | | 7 | | | 16,674 | | | 3,611 | | | 40,820 | | | 4,892 | |
| Asset-backed securities | | Asset-backed securities | 1 | | | 3,452 | | | 145 | | | — | | | — | | | — | | | 3,452 | | | 145 | |
| | Total Available-for-Sale Fixed Maturities | Total Available-for-Sale Fixed Maturities | 97 | | | $ | 304,080 | | | $ | 7,283 | | | 15 | | | $ | 43,871 | | | $ | 1,366 | | | $ | 347,951 | | | $ | 8,649 | | Total Available-for-Sale Fixed Maturities | 534 | | | $ | 1,085,847 | | | $ | 58,671 | | | 100 | | | $ | 225,276 | | | $ | 55,252 | | | $ | 1,311,123 | | | $ | 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.
•Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years' experience and who have demonstrated knowledge of the subject security.
In order to determine the proper classification in the fair value hierarchy, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.
The mortgage loan portfolio consists entirely of commercial mortgage loans. The fair value of our mortgage loans is determined by modeling performed by our third-party fund manager based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value.
Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.
The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Supplemental Executive Retirement and Deferral Plan (the "Executive Retirement Plan"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plan. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of September 30, 2022,2023, the cash surrender value of the COLI policies was $9,930$11,000 which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.
Our long-term debt is not carried in the Consolidated Balance Sheet at fair value. The fair value of our long-term debt is estimated using Level 2 inputs based on quoted prices for similar financial instruments. The fair value is estimated using a discounted cash flowsflow analysis.
A summary of the carrying value and estimated fair value of our financial instruments at September 30, 20222023 and December 31, 20212022 is as follows:
| | | | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
| | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| Assets | Assets | | | | | | | | Assets | | | | | | | |
| Investments | Investments | | | | | | | | Investments | | | | | | | |
| Fixed maturities: | Fixed maturities: | | Fixed maturities: | |
| Available-for-sale securities | Available-for-sale securities | $ | 1,547,152 | | | $ | 1,547,061 | | | $ | 1,719,790 | | | $ | 1,719,785 | | Available-for-sale securities | $ | 1,638,638 | | | $ | 1,638,512 | | | $ | 1,551,339 | | | $ | 1,551,336 | |
| | Equity securities | Equity securities | 149,505 | | | 149,505 | | | 213,401 | | | 213,401 | | Equity securities | 51,217 | | | 51,217 | | | 169,106 | | | 169,106 | |
| Mortgage loans | Mortgage loans | 43,917 | | | 46,692 | | | 48,815 | | | 47,130 | | Mortgage loans | 42,280 | | | 45,534 | | | 35,302 | | | 37,898 | |
| Other long-term investments | Other long-term investments | 79,917 | | | 79,917 | | | 84,090 | | | 84,090 | | Other long-term investments | 93,836 | | | 93,836 | | | 86,276 | | | 86,276 | |
| Short-term investments | Short-term investments | 275 | | | 275 | | | 275 | | | 275 | | Short-term investments | — | | | — | | | 275 | | | 275 | |
| Cash and cash equivalents | Cash and cash equivalents | 53,017 | | | 53,017 | | | 132,104 | | | 132,104 | | Cash and cash equivalents | 69,150 | | | 69,150 | | | 96,650 | | | 96,650 | |
| Corporate-owned life insurance | Corporate-owned life insurance | 9,930 | | | 9,930 | | | 10,755 | | | 10,755 | | Corporate-owned life insurance | 11,000 | | | 11,000 | | | 10,588 | | | 10,588 | |
| Liabilities | Liabilities | | Liabilities | |
| Long Term Debt | Long Term Debt | 35,276 | | | 50,000 | | | 46,047 | | | 50,000 | | Long Term Debt | 34,456 | | | 50,000 | | | 36,168 | | | 50,000 | |
The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table includes financial instruments at September 30, 20222023 and December 31, 2021:2022:
| | September 30, 2022 | | Fair Value Measurements | |
| September 30, 2023 | | September 30, 2023 | | Fair Value Measurements |
| Description | Description | Total | | Level 1 | | Level 2 | | Level 3 | Description | Total | | Level 1 | | Level 2 | | Level 3 |
| AVAILABLE-FOR-SALE | AVAILABLE-FOR-SALE | | AVAILABLE-FOR-SALE | |
| Fixed maturities: | Fixed maturities: | | Fixed maturities: | |
| Bonds | Bonds | | Bonds | |
| U.S. Treasury | U.S. Treasury | $ | 14,454 | | | $ | — | | | $ | 14,454 | | | $ | — | | U.S. Treasury | $ | 66,873 | | | $ | — | | | $ | 66,873 | | | $ | — | |
| U.S. government agency | U.S. government agency | 81,365 | | | — | | | 81,365 | | | — | | U.S. government agency | 91,898 | | | — | | | 91,898 | | | — | |
| States, municipalities and political subdivisions | States, municipalities and political subdivisions | | States, municipalities and political subdivisions | |
| General obligations | General obligations | | General obligations | |
| Midwest | Midwest | 59,902 | | | — | | | 59,902 | | | — | | Midwest | 56,881 | | | — | | | 56,881 | | | — | |
| Northeast | Northeast | 20,009 | | | — | | | 20,009 | | | — | | Northeast | 10,999 | | | — | | | 10,999 | | | — | |
| South | South | 63,442 | | | — | | | 63,442 | | | — | | South | 53,134 | | | — | | | 53,134 | | | — | |
| West | West | 86,398 | | | — | | | 86,398 | | | — | | West | 75,326 | | | — | | | 75,326 | | | — | |
| Special revenue | Special revenue | | Special revenue | |
| Midwest | Midwest | 106,145 | | | — | | | 106,145 | | | — | | Midwest | 96,878 | | | — | | | 96,878 | | | — | |
| Northeast | Northeast | 53,143 | | | — | | | 53,143 | | | — | | Northeast | 50,552 | | | — | | | 50,552 | | | — | |
| South | South | 186,859 | | | — | | | 186,859 | | | — | | South | 159,500 | | | — | | | 159,500 | | | — | |
| West | West | 110,357 | | | — | | | 110,357 | | | — | | West | 100,516 | | | — | | | 100,516 | | | — | |
| Foreign bonds | Foreign bonds | 31,135 | | | — | | | 31,135 | | | — | | Foreign bonds | 18,336 | | | — | | | 18,336 | | | — | |
| Public utilities | Public utilities | 120,302 | | | — | | | 120,302 | | | — | | Public utilities | 127,417 | | | — | | | 127,417 | | | — | |
| Corporate bonds | Corporate bonds | | Corporate bonds | |
| Energy | Energy | 34,725 | | | — | | | 34,725 | | | — | | Energy | 41,600 | | | — | | | 41,600 | | | — | |
| Industrials | Industrials | 49,713 | | | — | | | 49,713 | | | — | | Industrials | 65,968 | | | — | | | 65,968 | | | — | |
| Consumer goods and services | Consumer goods and services | 88,286 | | | — | | | 88,286 | | | — | | Consumer goods and services | 88,506 | | | — | | | 88,506 | | | — | |
| Health care | Health care | 25,099 | | | — | | | 25,099 | | | — | | Health care | 31,537 | | | — | | | 31,537 | | | — | |
| Technology, media and telecommunications | Technology, media and telecommunications | 58,629 | | | — | | | 58,629 | | | — | | Technology, media and telecommunications | 80,248 | | | — | | | 80,248 | | | — | |
| Financial services | Financial services | 121,371 | | | — | | | 121,221 | | | 150 | | Financial services | 133,162 | | | — | | | 128,462 | | | 4,700 | |
| Mortgage-backed securities | Mortgage-backed securities | 18,053 | | | — | | | 18,053 | | | — | | Mortgage-backed securities | 21,007 | | | — | | | 21,007 | | | — | |
| Collateralized mortgage obligations | Collateralized mortgage obligations | | Collateralized mortgage obligations | |
| Government national mortgage association | Government national mortgage association | 81,764 | | | — | | | 81,764 | | | — | | Government national mortgage association | 146,670 | | | — | | | 146,670 | | | — | |
| Federal home loan mortgage corporation | Federal home loan mortgage corporation | 84,626 | | | — | | | 84,626 | | | — | | Federal home loan mortgage corporation | 71,849 | | | — | | | 71,849 | | | — | |
| Federal national mortgage association | Federal national mortgage association | 47,160 | | | — | | | 47,160 | | | — | | Federal national mortgage association | 45,887 | | | — | | | 45,887 | | | — | |
| Asset-backed securities | Asset-backed securities | 4,215 | | | — | | | 3,426 | | | 789 | | Asset-backed securities | 3,894 | | | — | | | 3,095 | | | 799 | |
| | Total Available-for-Sale Fixed Maturities | Total Available-for-Sale Fixed Maturities | $ | 1,547,152 | | | $ | — | | | $ | 1,546,213 | | | $ | 939 | | Total Available-for-Sale Fixed Maturities | $ | 1,638,638 | | | $ | — | | | $ | 1,633,139 | | | $ | 5,499 | |
| | EQUITY SECURITIES | EQUITY SECURITIES | | EQUITY SECURITIES | |
| Common stocks | Common stocks | | Common stocks | |
| Public utilities | Public utilities | $ | 13,720 | | | $ | 13,720 | | | $ | — | | | $ | — | | Public utilities | $ | 3,703 | | | $ | 3,703 | | | $ | — | | | $ | — | |
| Energy | Energy | 17,543 | | | 17,543 | | | — | | | — | | Energy | 9,536 | | | 9,536 | | | — | | | — | |
| Industrials | Industrials | 22,656 | | | 22,656 | | | — | | | — | | Industrials | 13,023 | | | 13,023 | | | — | | | — | |
| Consumer goods and services | Consumer goods and services | 37,768 | | | 37,768 | | | — | | | — | | Consumer goods and services | 11,127 | | | 11,127 | | | — | | | — | |
| Health care | Health care | 7,341 | | | 7,341 | | | — | | | — | | Health care | 1,959 | | | 1,959 | | | — | | | — | |
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| Technology, media and telecommunications | 5,612 | | | 5,612 | | | — | | | — | |
| Financial services | 6,257 | | | 6,257 | | | — | | | — | |
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| Total Equity Securities | $ | 51,217 | | | $ | 51,217 | | | $ | — | | | $ | — | |
| Short-Term Investments | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Money Market Accounts | $ | 13,977 | | | $ | 13,977 | | | $ | — | | | $ | — | |
| Corporate-Owned Life Insurance | $ | 11,000 | | | $ | — | | | $ | 11,000 | | | $ | — | |
| Total Assets Measured at Fair Value | $ | 1,714,832 | | | $ | 65,194 | | | $ | 1,644,139 | | | $ | 5,499 | |
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| December 31, 2022 | | | Fair Value Measurements |
| Description | Total | | Level 1 | | Level 2 | | Level 3 |
| AVAILABLE-FOR-SALE | | | | | | | |
| Fixed maturities: | | | | | | | |
| Bonds | | | | | | | |
| U.S. Treasury | $ | 14,675 | | | $ | — | | | $ | 14,675 | | | $ | — | |
| U.S. government agency | 84,406 | | | — | | | 84,406 | | | — | |
| States, municipalities and political subdivisions | | | | | | | |
| General obligations | | | | | | | |
| Midwest | 61,113 | | | — | | | 61,113 | | | — | |
| Northeast | 15,463 | | | — | | | 15,463 | | | — | |
| South | 63,981 | | | — | | | 63,981 | | | — | |
| West | 86,545 | | | — | | | 86,545 | | | — | |
| Special revenue | | | | | | | |
| Midwest | 102,266 | | | — | | | 102,266 | | | — | |
| Northeast | 54,220 | | | — | | | 54,220 | | | — | |
| South | 180,857 | | | — | | | 180,857 | | | — | |
| West | 112,212 | | | — | | | 112,212 | | | — | |
| Foreign bonds | 31,649 | | | — | | | 31,649 | | | — | |
| Public utilities | 125,411 | | | — | | | 125,411 | | | — | |
| Corporate bonds | | | | | | | |
| Energy | 33,209 | | | — | | | 33,209 | | | — | |
| Industrials | 52,842 | | | — | | | 52,842 | | | — | |
| Consumer goods and services | 89,941 | | | — | | | 89,941 | | | — | |
| Health care | 27,592 | | | — | | | 27,592 | | | — | |
| Technology, media and telecommunications | 59,940 | | | — | | | 59,940 | | | — | |
| Financial services | 124,292 | | | — | | | 118,617 | | | 5,675 | |
| Mortgage-backed securities | 17,700 | | | — | | | 17,700 | | | — | |
| Collateralized mortgage obligations | | | | | | | |
| Government national mortgage association | 84,548 | | | — | | | 84,548 | | | — | |
| Federal home loan mortgage corporation | 78,838 | | | — | | | 78,838 | | | — | |
| Federal national mortgage association | 45,386 | | | — | | | 45,386 | | | — | |
| Asset-backed securities | 4,253 | | | — | | | 3,452 | | | 801 | |
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| Total Available-for-Sale Fixed Maturities | $ | 1,551,339 | | | $ | — | | | $ | 1,544,863 | | | $ | 6,476 | |
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| Technology, media and telecommunications | 25,578 | | | 25,578 | | | — | | | — | |
| Financial services | 24,899 | | | 24,899 | | | — | | | — | |
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| Total Equity Securities | $ | 149,505 | | | $ | 149,505 | | | $ | — | | | $ | — | |
| Short-Term Investments | $ | 275 | | | $ | 275 | | | $ | — | | | $ | — | |
| Money Market Accounts | $ | 10,047 | | | $ | 10,047 | | | $ | — | | | $ | — | |
| Corporate-Owned Life Insurance | $ | 9,930 | | | $ | — | | | $ | 9,930 | | | $ | — | |
| Total Assets Measured at Fair Value | $ | 1,716,909 | | | $ | 159,827 | | | $ | 1,556,143 | | | $ | 939 | |
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| December 31, 2021 | | | Fair Value Measurements |
| Description | Total | | Level 1 | | Level 2 | | Level 3 |
| AVAILABLE-FOR-SALE | | | | | | | |
| Fixed maturities: | | | | | | | |
| Bonds | | | | | | | |
| U.S. Treasury | $ | 41,923 | | | $ | — | | | $ | 41,923 | | | $ | — | |
| U.S. government agency | 61,667 | | | — | | | 61,667 | | | — | |
| States, municipalities and political subdivisions | | | | | | | |
| General obligations | | | | | | | |
| Midwest | 74,346 | | | — | | | 74,346 | | | — | |
| Northeast | 22,762 | | | — | | | 22,762 | | | — | |
| South | 94,044 | | | — | | | 94,044 | | | — | |
| West | 99,078 | | | — | | | 99,078 | | | — | |
| Special revenue | | | | | | | |
| Midwest | 122,289 | | | — | | | 122,289 | | | — | |
| Northeast | 59,732 | | | — | | | 59,732 | | | — | |
| South | 215,670 | | | — | | | 215,670 | | | — | |
| West | 134,649 | | | — | | | 134,649 | | | — | |
| Foreign bonds | 30,906 | | | — | | | 30,906 | | | — | |
| Public utilities | 107,493 | | | — | | | 107,493 | | | — | |
| Corporate bonds | | | | | | | |
| Energy | 32,681 | | | — | | | 32,681 | | | — | |
| Industrials | 57,171 | | | — | | | 57,171 | | | — | |
| Consumer goods and services | 72,844 | | | — | | | 72,844 | | | — | |
| Health care | 27,429 | | | — | | | 27,429 | | | — | |
| Technology, media and telecommunications | 57,497 | | | — | | | 57,497 | | | — | |
| Financial services | 102,615 | | | — | | | 102,465 | | | 150 | |
| Mortgage-backed securities | 25,013 | | | — | | | 25,013 | | | — | |
| Collateralized mortgage obligations | | | | | | | |
| Government national mortgage association | 110,518 | | | — | | | 110,518 | | | — | |
| Federal home loan mortgage corporation | 119,989 | | | — | | | 119,989 | | | — | |
| Federal national mortgage association | 48,549 | | | — | | | 48,549 | | | — | |
| Asset-backed securities | 925 | | | — | | | — | | | 925 | |
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| Total Available-for-Sale Fixed Maturities | $ | 1,719,790 | | | $ | — | | | $ | 1,718,715 | | | $ | 1,075 | |
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| | EQUITY SECURITIES | EQUITY SECURITIES | | EQUITY SECURITIES | |
| Common stocks | Common stocks | | Common stocks | |
| Public utilities | Public utilities | $ | 17,940 | | | $ | 17,940 | | | $ | — | | | $ | — | | Public utilities | $ | 14,846 | | | $ | 14,846 | | | $ | — | | | $ | — | |
| Energy | Energy | 13,593 | | | 13,593 | | | — | | | — | | Energy | 19,743 | | | 19,743 | | | — | | | — | |
| Industrials | Industrials | 31,400 | | | 31,400 | | | — | | | — | | Industrials | 27,163 | | | 27,163 | | | — | | | — | |
| Consumer goods and services | Consumer goods and services | 56,233 | | | 56,233 | | | — | | | — | | Consumer goods and services | 43,139 | | | 43,139 | | | — | | | — | |
| Health care | Health care | 13,845 | | | 13,845 | | | — | | | — | | Health care | 7,981 | | | 7,981 | | | — | | | — | |
| Technology, media and telecommunications | Technology, media and telecommunications | 33,973 | | | 33,973 | | | — | | | — | | Technology, media and telecommunications | 28,213 | | | 28,213 | | | — | | | — | |
| Financial services | Financial services | 45,822 | | | 45,822 | | | — | | | — | | Financial services | 28,021 | | | 28,021 | | | — | | | — | |
| Nonredeemable preferred stocks | 595 | | | — | | | — | | | 595 | | |
| | Total Equity Securities | Total Equity Securities | $ | 213,401 | | | $ | 212,806 | | | $ | — | | | $ | 595 | | Total Equity Securities | $ | 169,106 | | | $ | 169,106 | | | $ | — | | | $ | — | |
| Short-Term Investments | Short-Term Investments | $ | 275 | | | $ | 275 | | | $ | — | | | $ | — | | Short-Term Investments | $ | 275 | | | $ | 275 | | | $ | — | | | $ | — | |
| Money Market Accounts | Money Market Accounts | $ | 43,351 | | | $ | 43,351 | | | $ | — | | | $ | — | | Money Market Accounts | $ | 31,289 | | | $ | 31,289 | | | $ | — | | | $ | — | |
| Corporate-Owned Life Insurance | Corporate-Owned Life Insurance | $ | 10,755 | | | $ | — | | | $ | 10,755 | | | $ | — | | Corporate-Owned Life Insurance | $ | 10,588 | | | $ | — | | | $ | 10,588 | | | $ | — | |
| Total Assets Measured at Fair Value | Total Assets Measured at Fair Value | $ | 1,987,572 | | | $ | 256,432 | | | $ | 1,729,470 | | | $ | 1,670 | | Total Assets Measured at Fair Value | $ | 1,762,597 | | | $ | 200,670 | | | $ | 1,555,451 | | | $ | 6,476 | |
The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.
We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. In addition, on a quarterly basis, we also test all securities in the portfolio and independently corroborate the valuations obtained from our third-party valuation service providers. Quarterly, we also perform deep dive analyses of the pricing method used by our third-party valuation service provider by selecting a random sample of securities by asset class and reviewing methodologies. In our opinion, the pricing obtained at September 30, 20222023 and December 31, 20212022 was reasonable.
For the three- and nine-month periods ended September 30, 2022,2023, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers'
quotes cannot be corroborated by other market observable data due to thevaluation processes. A change in significant unobservable natureinputs may result in a significantly higher or lower fair value measurement as of the brokers’ valuation processes.reporting date.
The following table provides a quantitative information about our Level 3 securities at September 30, 2022:2023:
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| Quantitative Information about Level 3 Fair Value Measurements |
| | Fair Value at | | Valuation Technique(s) | | Unobservable inputs | | Range of weighted average significant unobservable inputs |
| | September 30, 20222023 | | | |
Corporate bonds - financial servicesFixed Maturities corporate | | $ | 1504,700 | | | Fair value equals costThird-party valuation | | NAOffered quotes | | NA90.0% - 100.0% |
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| Fixed Maturities asset-backed securities | | 789799 | | | Discounted cash flow | | Probability of default | | 4% - 6% |
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The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended September 30, 2022:2023:
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| | | | | | | Corporate bonds | | Asset-backed securities | | Equities | | Total |
| Beginning Balance - 07/01/2022 | | | | | | | $ | 150 | | | $ | 842 | | | $ | — | | | $ | 992 | |
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Net unrealized gains (losses)(1) | | | | | | | — | | | (53) | | | — | | | (53) | |
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| Ending Balance - 09/30/2022 | | | | | | | $ | 150 | | | $ | 789 | | | $ | — | | | $ | 939 | |
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| | | | | | | Corporate bonds | | Asset-backed securities | | | | Total |
| Beginning Balance - July 1, 2023 | | | | | | | $ | 4,765 | | | $ | 837 | | | | | $ | 5,602 | |
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Net unrealized gains (losses)(1) | | | | | | | (65) | | | (38) | | | | | (103) | |
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| Ending Balance - September 30, 2023 | | | | | | | $ | 4,700 | | | $ | 799 | | | | | $ | 5,499 | |
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(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.
The following table provides a summary of the changes in fair value of our Level 3 securities for the nine-month period ended September 30, 2022:2023:
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| | Corporate bonds | | Asset-backed securities | | Equities | | Total |
| Beginning Balance - 01/01/2022 | | $ | 150 | | | $ | 925 | | | $ | 595 | | | $ | 1,670 | |
| Realized gains (losses) | | — | | | — | | | (595) | | | (595) | |
Net unrealized gains (losses)(1) | | — | | | (136) | | | — | | | (136) | |
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| Ending Balance - 09/30/2022 | | $ | 150 | | | $ | 789 | | | $ | — | | | $ | 939 | |
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| | Corporate bonds | | Asset-backed securities | | | | Total |
| Beginning Balance - January 1, 2023 | | $ | 5,675 | | | $ | 801 | | | | | $ | 6,476 | |
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Net unrealized gains (losses)(1) | | (975) | | | (2) | | | | | (977) | |
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| Ending Balance - September 30, 2023 | | $ | 4,700 | | | $ | 799 | | | | | $ | 5,499 | |
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(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.
Commercial Mortgage Loans
The following tables present the carrying value of our commercial mortgage loans and additional information at September 30, 20222023 and December 31, 2021:2022:
| | Commercial Mortgage Loans | Commercial Mortgage Loans | Commercial Mortgage Loans |
| | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
| Loan-to-value | Loan-to-value | Carrying Value | | Carrying Value | Loan-to-value | Carrying Value | | Carrying Value |
| Less than 65% | Less than 65% | $ | 29,583 | | | $ | 29,924 | | Less than 65% | $ | 36,883 | | | $ | 29,231 | |
| 65%-75% | 65%-75% | 17,174 | | | 17,277 | | 65%-75% | 8,706 | | | 8,716 | |
| Total amortized cost | Total amortized cost | $ | 46,757 | | | $ | 47,201 | | Total amortized cost | $ | 45,589 | | | $ | 37,947 | |
| Allowance for mortgage loan losses | Allowance for mortgage loan losses | (65) | | | (71) | | Allowance for mortgage loan losses | (55) | | | (49) | |
| Mortgage loans, net | Mortgage loans, net | $ | 46,692 | | | $ | 47,130 | | Mortgage loans, net | $ | 45,534 | | | $ | 37,898 | |
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| Mortgage Loans by Region |
| September 30, 2023 | | December 31, 2022 |
| Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| East North Central | $ | 3,245 | | | 7.1 | % | | $ | 3,245 | | | 8.6 | % |
| Southern Atlantic | 17,265 | | | 37.8 | | | 9,397 | | | 24.7 | |
| East South Central | 7,591 | | | 16.7 | | | 7,783 | | | 20.5 | |
| New England | 6,588 | | | 14.5 | | | 6,588 | | | 17.4 | |
| Middle Atlantic | 6,020 | | | 13.2 | | | 6,139 | | | 16.2 | |
| Mountain | 1,992 | | | 4.4 | | | 1,992 | | | 5.2 | |
| West North Central | 2,888 | | | 6.3 | | | 2,803 | | | 7.4 | |
| Total mortgage loans at amortized cost | $ | 45,589 | | | 100.0 | % | | $ | 37,947 | | | 100.0 | % |
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| Mortgage Loans by Region |
| September 30, 2022 | | December 31, 2021 |
| Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| East North Central | $ | 3,245 | | | 6.9 | % | | $ | 3,245 | | | 6.9 | % |
| Southern Atlantic | 9,443 | | | 20.2 | | | 9,578 | | | 20.3 | |
| East South Central | 7,845 | | | 16.8 | | | 8,028 | | | 17.0 | |
| New England | 6,588 | | | 14.1 | | | 6,588 | | | 14.0 | |
| Middle Atlantic | 14,592 | | | 31.2 | | | 14,789 | | | 31.3 | |
| Mountain | 2,227 | | | 4.8 | | | 2,227 | | | 4.7 | |
| West North Central | 2,817 | | | 6.0 | | | 2,746 | | | 5.8 | |
| Total mortgage loans at amortized cost | $ | 46,757 | | | 100.0 | % | | $ | 47,201 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage Loans by Property Type |
| September 30, 2023 | | December 31, 2022 |
| Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Commercial | | | | | | | |
| Multifamily | $ | 8,536 | | | 18.7 | % | | $ | 8,493 | | | 22.4 | % |
| Office | 11,030 | | | 24.3 | | | 11,267 | | | 29.7 | |
| Industrial | 10,003 | | | 21.9 | | | 10,056 | | | 26.5 | |
| Retail | 10,000 | | | 21.9 | | | 1,992 | | | 5.2 | |
| Mixed use/Other | 6,020 | | | 13.2 | | | 6,139 | | | 16.2 | |
| Total mortgage loans at amortized cost | $ | 45,589 | | | 100.0 | % | | $ | 37,947 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage Loans by Property Type |
| September 30, 2022 | | December 31, 2021 |
| Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Commercial | | | | | | | |
| Multifamily | $ | 16,934 | | | 36.2 | % | | $ | 16,986 | | | 36.0 | % |
| Office | 11,345 | | | 24.3 | | | 11,571 | | | 24.5 | |
| Industrial | 10,073 | | | 21.5 | | | 10,124 | | | 21.5 | |
| Retail | 2,227 | | | 4.8 | | | 2,227 | | | 4.7 | |
| Mixed use/Other | 6,178 | | | 13.2 | | | 6,293 | | | 13.3 | |
| Total mortgage loans at amortized cost | $ | 46,757 | | | 100.0 | % | | $ | 47,201 | | | 100.0 | % |
| | Amortized Cost Basis by Year of Origination and Credit Quality Indicator | Amortized Cost Basis by Year of Origination and Credit Quality Indicator | Amortized Cost Basis by Year of Origination and Credit Quality Indicator |
| | | 2022 | | 2020 | | 2019 | | 2018 | | Total | | | 2023 | | 2022 | | 2020 | | 2019 | | 2018 | | Total |
| Commercial mortgage loans: | Commercial mortgage loans: | | | | | | | | | | | Commercial mortgage loans: | | | | | | | | | | | | |
| Risk Rating: | Risk Rating: | | Risk Rating: | |
| 1-2 internal grade | 1-2 internal grade | | $ | 102 | | | $ | 5,406 | | | $ | 8,255 | | | $ | 17,992 | | | $ | 31,755 | | 1-2 internal grade | | $ | 8,136 | | | $ | 100 | | | 5,292 | | | $ | 7,897 | | | $ | 17,576 | | | $ | 39,001 | |
| 3-4 internal grade | 3-4 internal grade | | — | | | — | | | 8,414 | | | 6,588 | | | 15,002 | | 3-4 internal grade | | — | | | — | | | — | | | — | | | 6,588 | | | 6,588 | |
| 5 internal grade | 5 internal grade | | — | | | — | | | — | | | — | | | — | | 5 internal grade | | — | | | — | | | — | | | — | | | — | | | — | |
| 6 internal grade | 6 internal grade | | — | | | — | | | — | | | — | | | — | | 6 internal grade | | — | | | — | | | — | | | — | | | — | | | — | |
| 7 internal grade | 7 internal grade | | — | | | — | | | — | | | — | | | — | | 7 internal grade | | — | | | — | | | — | | | — | | | — | | | — | |
| Total commercial mortgage loans | Total commercial mortgage loans | | $ | 102 | | | $ | 5,406 | | | $ | 16,669 | | | $ | 24,580 | | | $ | 46,757 | | Total commercial mortgage loans | | $ | 8,136 | | | $ | 100 | | | $ | 5,292 | | | $ | 7,897 | | | $ | 24,164 | | | $ | 45,589 | |
| Current-period write-offs | Current-period write-offs | | — | | | — | | | — | | | — | | | — | | Current-period write-offs | | — | | | — | | | — | | | — | | | — | | | — | |
| Current-period recoveries | Current-period recoveries | | — | | | — | | | — | | | — | | | — | | Current-period recoveries | | — | | | — | | | — | | | — | | | — | | | — | |
| Current-period net write-offs | Current-period net write-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Current-period net write-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Commercial mortgage loans carrying value excludes accrued interest of $164.$173. As of September 30, 2022,2023, 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
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 September 30, 2022,2023, the Company had an allowance for mortgage loan losses of $65,$55, summarized in the following rollforward:
| | | | | | | | |
| Rollforward of allowance for mortgage loan losses: |
| | As of |
| | September 30, 20222023 |
Beginning balance, January 1, 20222023 | | $ | 7149 | |
| Current-period provision for expected credit losses | | (6)6 | |
| | |
| | |
Ending balance of the allowance for mortgage loan losses, September 30, 20222023 | | $ | 6555 | |
NOTE 4. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.
Liabilities for losses and loss settlement expenses reflect management's best estimates at a given point in time of what we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"), based on known facts, circumstances, and historical trends. Because property and casualty insurance reserves are estimates of the unpaid portions of incurred losses that have been reported to us, as well as losses that have been incurred but not reported, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses and related loss settlement expenses may vary materially from recorded amounts. We regularly update our reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported as a component of losses and loss settlement expenses incurred in the period such changes are determined.
The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we will take actionevaluate an appropriate response that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc., to render an opinion as to the reasonableness of our statutory reserves on an annual basis. The actuarial opinion is filed in those states where we are licensed.
On a quarterly basis, UFG's team of actuaries performs a detailed actuarial review of IBNR reserves. This review includes a comparison of results from the most recent analysis of reserves completed by both our internal and external actuaries. Senior management meets with our actuariesactuarial 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.
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 at September 30, 20222023 and December 31, 20212022 (net of reinsurance amounts):
| | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
Gross liability for losses and loss settlement expenses
at beginning of year | Gross liability for losses and loss settlement expenses
at beginning of year | $ | 1,514,265 | | | $ | 1,578,131 | | Gross liability for losses and loss settlement expenses
at beginning of year | $ | 1,497,274 | | | $ | 1,514,265 | |
| Ceded losses and loss settlement expenses | Ceded losses and loss settlement expenses | (112,900) | | | (131,843) | | Ceded losses and loss settlement expenses | (146,875) | | | (112,900) | |
Net liability for losses and loss settlement expenses
at beginning of year | Net liability for losses and loss settlement expenses
at beginning of year | $ | 1,401,365 | | | $ | 1,446,288 | | Net liability for losses and loss settlement expenses
at beginning of year | $ | 1,350,399 | | | $ | 1,401,365 | |
Losses and loss settlement expenses incurred
for claims occurring during | Losses and loss settlement expenses incurred
for claims occurring during | | Losses and loss settlement expenses incurred
for claims occurring during | |
| Current year | Current year | $ | 465,513 | | | $ | 701,064 | | Current year | $ | 538,941 | | | $ | 624,411 | |
| Prior years | Prior years | (1,218) | | | (48,909) | | Prior years | 59,184 | | | 12,890 | |
| Total incurred | Total incurred | $ | 464,295 | | | $ | 652,155 | | Total incurred | $ | 598,125 | | | $ | 637,301 | |
Losses and loss settlement expense payments
for claims occurring during | Losses and loss settlement expense payments
for claims occurring during | | Losses and loss settlement expense payments
for claims occurring during | |
| Current year | Current year | $ | 149,377 | | | $ | 277,115 | | Current year | $ | 131,408 | | | $ | 215,891 | |
| Prior years | Prior years | 380,188 | | | 419,963 | | Prior years | 371,723 | | | 472,377 | |
| Total paid | Total paid | $ | 529,565 | | | $ | 697,078 | | Total paid | $ | 503,131 | | | $ | 688,268 | |
Net liability for losses and loss settlement expenses
at end of year | $ | 1,336,095 | | | $ | 1,401,365 | | |
| Ceded loss and loss settlement expenses | 128,413 | | | 112,900 | | |
Net liability for losses and loss settlement expenses
at end of period | | Net liability for losses and loss settlement expenses
at end of period | $ | 1,445,394 | | | $ | 1,350,399 | |
| Ceded losses and loss settlement expenses | | Ceded losses and loss settlement expenses | 191,525 | | | 146,875 | |
Gross liability for losses and loss settlement expenses
at end of period | Gross liability for losses and loss settlement expenses
at end of period | $ | 1,464,508 | | | $ | 1,514,265 | | Gross liability for losses and loss settlement expenses
at end of period | $ | 1,636,918 | | | $ | 1,497,274 | |
There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific monetary impact of any individual factor on the development of reserves.
Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are 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, suchChanges in external and internal environments must be considered carefully when relying on prior development cannot be usedpatterns to project future reserve redundancies or deficiencies.positions.
We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our underwriters are aware of these exposures and use riders or endorsements to limit exposure.
Reserve Development
During 2023, the Company made additional refinements to its reserve review processes and analyses, including increased segmentation on unique exposures, which resulted in deeper insights and understanding of loss experience
Reserve Development
and significant movements in reserve development across a range of commercial liability lines of business. The significant driver of the reserve strengthening was an increase in long-tailed other liability reserves primarily due to increased loss cost trends related to economic and social inflation. The commercial auto line of business also experienced reserve strengthening in reaction to continuing loss trends in post-2020 accident years. These increases were offset by favorable development in workers' compensation and fire and allied lines.
The significant drivers of the unfavorable reserve development in the nine-month period ended September 30, 2022 was the favorable claims experience for thewere commercial automobile line of business and workers' compensation business. This favorable development was partially offset by unfavorable development for the other liability and commercial fire and allied line of business.lines. This was offset partially by favorable development in commercial automobile, workers' compensation and fidelity and surety. The unfavorable development in commercial other liability was due to paid loss and loss adjustment expense ("LAE") which was greater than reductions in reserves for unpaid loss and LAE. Emerging claim experience and deeper data insights during 2022 pointed to an increase in loss exposure on these longer tailed businesses driven in part by social and economic inflation. Commercial fire and allied developed unfavorably due to paid loss and LAE driven by catastrophe losses and increased severity on non-catastrophe claims, which was greater than reductions in reserves for unpaid loss and LAE. The favorable development for commercial automobile was driven by the favorable claims experience, especially for accident years 2021, 2020 and 2019. The favorable development for workers' compensation was primarily due to favorable claims experience in accident years 2017 to 2021. The unfavorable development for other liability was primarily driven by claim payments on claims in accident year 2021 and 2020. The unfavorable development for commercial fire and allied was driven by claim payments on property claims in accident year 2021 for many of which the cause of loss was wind or hail.
The significant drivers of the favorable reserve development for the full year of 2021 were the commercial automobile line of business along with a favorable contribution from the workers' compensation line of business. This favorable development was partially offset by unfavorable development from the commercial other liability line of business. Favorable development for both the commercial automobile line of business and the workers' compensation line of business was from both loss and loss adjustment expense ("LAE"). ReserveLAE where reductions of reserves for unpaid loss and LAEliabilities were more than sufficient to offset payments. The commercial other liability line of business was adversely affected by reserve strengtheningactual paid loss. Paid LAE reductions in reserves for reportedIBNR claims and reserve strengthening for incurred but unreported claims. The commercial other liability line of business reserve strengthening resulted in unfavorable development because paid loss exceeded the reduction in unpaid claim reserves butalso contributed favorable development forin addition to LAE partiallywhere reductions in reserves were more than sufficient to offset the unfavorable loss development.payments.
NOTE 5. EMPLOYEE BENEFITS
Net Periodic Benefit Cost
The components of the net periodic benefit cost for our pension and postretirement benefit plans are as follows:
| | | Pension Plan | | Postretirement Benefit Plan | | Pension Plan | | Postretirement Benefit Plan |
| Three Months Ended September 30, | Three Months Ended September 30, | 2022 | | 2021 | | 2022 | | 2021 | Three Months Ended September 30, | 2023 | | 2022 | | 2023 | | 2022 |
| | Net periodic benefit cost | Net periodic benefit cost | | Net periodic benefit cost | |
| Service cost | Service cost | $ | 1,120 | | | $ | 3,020 | | | $ | — | | | $ | — | | Service cost | $ | 954 | | | $ | 1,120 | | | $ | — | | | $ | — | |
| Interest cost | Interest cost | 1,933 | | | 1,728 | | | 1 | | | 1 | | Interest cost | 2,526 | | | 1,933 | | | — | | | 1 | |
| Expected return on plan assets | Expected return on plan assets | (4,723) | | | (4,202) | | | — | | | — | | Expected return on plan assets | (3,756) | | | (4,723) | | | — | | | — | |
| Amortization of prior service credit | Amortization of prior service credit | (820) | | | (809) | | | (3,771) | | | (3,765) | | Amortization of prior service credit | (820) | | | (820) | | | — | | | (3,771) | |
| Amortization of net loss | Amortization of net loss | 194 | | | 999 | | | 706 | | | 705 | | Amortization of net loss | 52 | | | 194 | | | — | | | 706 | |
| Special event plan closure | — | | | — | | | — | | | — | | |
| | Net periodic benefit cost | Net periodic benefit cost | $ | (2,296) | | | $ | 736 | | | $ | (3,064) | | | $ | (3,059) | | Net periodic benefit cost | $ | (1,044) | | | $ | (2,296) | | | $ | — | | | $ | (3,064) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Pension Plan | | Postretirement Benefit Plan |
| Nine Months Ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Net periodic benefit cost | | | | | | | |
| Service cost | $ | 3,361 | | | $ | 9,060 | | | $ | — | | | $ | 148 | |
| Interest cost | 5,798 | | | 5,184 | | | 2 | | | 71 | |
| Expected return on plan assets | (14,168) | | | (12,606) | | | — | | | — | |
| Amortization of prior service credit | (2,460) | | | (2,427) | | | (11,314) | | | (10,725) | |
| Amortization of net loss | 583 | | | 2,997 | | | 2,118 | | | 1,902 | |
| Special event plan closure | — | | | — | | | — | | | (20,177) | |
| Net periodic benefit cost | $ | (6,887) | | | $ | 2,208 | | | $ | (9,194) | | | $ | (28,781) | |
| | | | | | | |
Table of Contents | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Pension Plan | | Postretirement Benefit Plan |
| Nine Months Ended September 30, | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
| Net periodic benefit cost | | | | | | | |
| Service cost | $ | 2,863 | | | $ | 3,361 | | | $ | — | | | $ | — | |
| Interest cost | 7,579 | | | 5,798 | | | — | | | 2 | |
| Expected return on plan assets | (11,269) | | | (14,168) | | | — | | | — | |
| Amortization of prior service credit | (2,460) | | | (2,460) | | | — | | | (11,314) | |
| Amortization of net loss | 155 | | | 583 | | | — | | | 2,118 | |
| | | | | | | |
| Net periodic benefit cost | $ | (3,131) | | | $ | (6,887) | | | $ | — | | | $ | (9,194) | |
| | | | | | | |
A portion of the service cost component of net periodic pension and postretirement benefit costs is capitalized and amortized as part of deferred acquisition costs and is included in the line "Amortization of deferred policy acquisition costs" in the Consolidated Statements of Income and Comprehensive Income. The portion not related to the compensation and the other components of net periodic pension and postretirement benefit costs is included in the income statement line titled "other underwriting expenses."
In January 2021, the Company decided to changechanged the post-retirementpostretirement benefit plan to a voluntary plan funded exclusively by participants, commencing at the start of 2023. The impact of this decisionA related, previously disclosed adjustment is reflected in the table above, with a one-time adjustment presented in the line "Special event plan closure" andbeing amortized through an additional one-time adjustment in the line "Amortization of prior service credit" recorded in first quarter of 2021. There will be continuing. The amortization of prior service credits continued through the end of 2022 related to these plan changes. As of December 31, 2022, the postretirement benefit obligation was $0.
Employer Contributions
We previously disclosed in our Annual Report on Form 10-K10-K/A for the year ended December 31, 20212022 that we plannedare not required to contribute $4,000make a contribution to the pension plan in 2022. For the nine-month period ended September 30, 2022, we contributed $4,000 to the pension plan.for 2023.
NOTE 6. STOCK-BASED COMPENSATION
Non-Qualified Employee Stock Award Plan
The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, restricted stock units, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of UFG common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of UFG common stock issuable 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 September 30, 2022,2023, there were 1,300,4021,108,419 authorized shares remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees, who are in positions of substantial responsibility with UFG. The Board of Directors, in its discretion, has also delegated authority to management to grant a limited number of restricted stock units in situations where the Company is seeking to recruit or retain individuals.
Options granted pursuant to the Stock Plan are granted to buy shares of UFG's common stock at the market value of the stock on the date of grant. Options granted prior to March 2017 vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. Options granted after March 2017 vest and are exercisable in installments of 33.3 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the Stock Plan are granted at the market value of UFG's common stock on the date of the grant. Restricted stock units fully vest after three years or five years from the date of grant, unless accelerated upon the approval of the Board of Directors, at which time UFG common stock will be issued to the awardee.
The activity in the Stock Plan is displayed in the following table:
| | Authorized Shares Available for Future Award Grants | Authorized Shares Available for Future Award Grants | Nine Months Ended September 30, 2022 | | From Inception to September 30, 2022 | Authorized Shares Available for Future Award Grants | Nine Months Ended September 30, 2023 | | From Inception to September 30, 2023 |
| Beginning balance | Beginning balance | 1,317,819 | | | 1,900,000 | | Beginning balance | 1,342,119 | | | 1,900,000 | |
| Additional shares authorized | Additional shares authorized | — | | | 2,150,000 | | Additional shares authorized | — | | | 2,150,000 | |
| Number of awards granted | Number of awards granted | (171,385) | | | (3,622,141) | | Number of awards granted | (305,241) | | | (3,927,382) | |
| Number of awards forfeited or expired | Number of awards forfeited or expired | 153,968 | | | 872,543 | | Number of awards forfeited or expired | 71,541 | | | 985,801 | |
| Ending balance | Ending balance | 1,300,402 | | | 1,300,402 | | Ending balance | 1,108,419 | | | 1,108,419 | |
| Number of option awards exercised | Number of option awards exercised | 45,641 | | | 1,527,614 | | Number of option awards exercised | 4,000 | | | 1,537,336 | |
| Number of unrestricted stock awards granted | Number of unrestricted stock awards granted | — | | | 10,090 | | Number of unrestricted stock awards granted | — | | | 10,090 | |
| Number of restricted stock awards vested | Number of restricted stock awards vested | 45,113 | | | 262,974 | | Number of restricted stock awards vested | 28,100 | | | 295,945 | |
Non-Qualified Non-Employee Director Stock Plan
The United Fire Group, Inc. Non-Employee Director Stock Plan (formerly known as the 2005 Non-Qualified Non- Employee Director Stock Option and Restricted Stock Plan) (the "Director Stock Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of UFG's common stock to non-employee directors. On May 20, 2020, the Company’sCompany's shareholders approved amendments to the Director Stock Plan, previously approved by the Company’sCompany's Board of Directors, to (i) increase the number of shares available for future awards under the Director Stock Plan from 300,000 to 450,000, (ii) extend the expiration date of the Director Stock Plan from December 31, 2020 to December 31, 2029, (iii) allow for the grant of awards of restricted stock units, and (iv) rename the Director Stock Plan as the "United Fire Group, Inc. Non-Employee Director Stock Plan." At September 30, 2022,2023, the Company had 121,492103,600 authorized shares available for future issuance.
The Board of Directors has the authority to determine which non-employee directors receive awards, when restricted stock, restricted stock units and options shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options, restricted stock and restricted stock units (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option, restricted stock or restricted stock unit agreements (subject to limits set forth in the Director Stock Plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Stock Plan.
The activity in the Director Stock Plan is displayed in the following table:
| | Authorized Shares Available for Future Award Grants | Authorized Shares Available for Future Award Grants | Nine Months Ended September 30, 2022 | | From Inception to September 30, 2022 | Authorized Shares Available for Future Award Grants | Nine Months Ended September 30, 2023 | | From Inception to September 30, 2023 |
| Beginning balance | Beginning balance | 144,352 | | | 300,000 | | Beginning balance | 123,397 | | | 300,000 | |
| Additional authorization | Additional authorization | — | | | 150,000 | | Additional authorization | — | | | 150,000 | |
| Number of awards granted | Number of awards granted | (22,860) | | | (355,238) | | Number of awards granted | (31,380) | | | (386,618) | |
| Number of awards forfeited or expired | Number of awards forfeited or expired | — | | | 26,730 | | Number of awards forfeited or expired | 11,583 | | | 40,218 | |
| Ending balance | Ending balance | 121,492 | | | 121,492 | | Ending balance | 103,600 | | | 103,600 | |
| Number of option awards exercised | Number of option awards exercised | 8,580 | | | 150,581 | | Number of option awards exercised | 1,755 | | | 152,336 | |
| Number of restricted stock awards vested | Number of restricted stock awards vested | 18,510 | | | 117,001 | | Number of restricted stock awards vested | — | | | 117,001 | |
Stock-Based Compensation Expense
For the three-month periods ended September 30, 20222023 and 2021,2022, we recognized stock-based compensation expense of $828$949 and $959,$828, respectively. For the nine-month periods ended September 30, 20222023 and 2021,2022, we recognized stock-based compensation expense oof $3,124 and $2,590, respef $2,590 and $3,074, respectively.ctively.
As of September 30, 2022,2023, we had $4,387 in$6,542 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized over the remainder of 20222023 and
subsequent years according to the table below, except with respect to awards that are accelerated by the Board of Directors, in which case we will recognize any remaining compensation expense in the period in which the awards are accelerated.
| | | 2022 | | $ | 805 | | |
| 2023 | 2023 | | 2,272 | | 2023 | | $ | 1,034 | |
| 2024 | 2024 | | 1,115 | | 2024 | | 3,364 | |
| 2025 | 2025 | | 195 | | 2025 | | 1,878 | |
| 2026 | 2026 | | — | | 2026 | | 266 | |
| 2027 | | 2027 | | — | |
| Total | Total | | $ | 4,387 | | Total | | $ | 6,542 | |
NOTE 7. EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options, restricted stock awards and restricted stock unit awards.
We determine the dilutive effect of our outstanding stock options using the "treasury stock" method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average market value of our common stock during the reporting period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.
The components of basic and diluted earnings per share were as follows for the three- and nine-month periods ended September 30, 20222023 and 2021:2022:
| | | | Three Months Ended September 30, | | Three Months Ended September 30, |
| (In Thousands, Except Share Data) | (In Thousands, Except Share Data) | 2022 | | 2021 | (In Thousands, Except Share Data) | 2023 | | 2022 |
| | Basic | | Diluted | | Basic | | Diluted | | Basic | | Diluted | | Basic | | Diluted |
| Net income (loss) | Net income (loss) | $ | (22,981) | | | $ | (22,981) | | | $ | (9,593) | | | $ | (9,593) | | Net income (loss) | $ | 6,380 | | | $ | 6,380 | | | $ | (22,981) | | | $ | (22,981) | |
| Weighted-average common shares outstanding | Weighted-average common shares outstanding | 25,188,958 | | | 25,188,958 | | | 25,092,167 | | | 25,092,167 | | Weighted-average common shares outstanding | 25,263,523 | | | 25,263,523 | | | 25,188,958 | | | 25,188,958 | |
| Add dilutive effect of restricted stock unit awards | Add dilutive effect of restricted stock unit awards | — | | | — | | | — | | | — | | Add dilutive effect of restricted stock unit awards | — | | | 295,997 | | | — | | | — | |
| Add dilutive effect of stock options | Add dilutive effect of stock options | — | | | — | | | — | | | — | | Add dilutive effect of stock options | — | | | 19,814 | | | — | | | — | |
| Weighted-average common shares outstanding | Weighted-average common shares outstanding | 25,188,958 | | | 25,188,958 | | | 25,092,167 | | | 25,092,167 | | Weighted-average common shares outstanding | 25,263,523 | | | 25,579,334 | | | 25,188,958 | | | 25,188,958 | |
| Earnings (loss) per common share | Earnings (loss) per common share | $ | (0.91) | | | $ | (0.91) | | | $ | (0.38) | | | $ | (0.38) | | Earnings (loss) per common share | $ | 0.25 | | | $ | 0.25 | | | $ | (0.91) | | | $ | (0.91) | |
Awards excluded from diluted earnings per share calculation(1) | Awards excluded from diluted earnings per share calculation(1) | — | | | 392,062 | | | — | | | 865,966 | | Awards excluded from diluted earnings per share calculation(1) | — | | | 837,482 | | | — | | | 392,062 | |
(1)Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In Thousands, Except Share Data) | 2023 | | 2022 |
| Basic | | Diluted | | Basic | | Diluted |
| Net income (loss) | $ | (49,308) | | | $ | (49,308) | | | $ | (5,089) | | | $ | (5,089) | |
| Weighted-average common shares outstanding | 25,244,502 | | | 25,244,502 | | | 25,146,318 | | | 25,146,318 | |
| Add dilutive effect of restricted stock unit awards | — | | | — | | | — | | | — | |
| Add dilutive effect of stock options | — | | | — | | | — | | | — | |
| Weighted-average common shares outstanding | 25,244,502 | | | 25,244,502 | | | 25,146,318 | | | 25,146,318 | |
| Earnings (loss) per common share | $ | (1.95) | | | $ | (1.95) | | | $ | (0.20) | | | $ | (0.20) | |
Awards excluded from diluted earnings per share calculation(1) | — | | | 814,636 | | | — | | | 479,981 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In Thousands, Except Share Data) | 2022 | | 2021 |
| Basic | | Diluted | | Basic | | Diluted |
| Net income | $ | (5,089) | | | $ | (5,089) | | | $ | 22,859 | | | $ | 22,859 | |
| Weighted-average common shares outstanding | 25,146,318 | | | 25,146,318 | | | 25,095,733 | | | 25,095,733 | |
| Add dilutive effect of restricted stock unit awards | — | | | — | | | — | | | 216,527 | |
| Add dilutive effect of stock options | — | | | — | | | — | | | 115,058 | |
| Weighted-average common shares outstanding | 25,146,318 | | | 25,146,318 | | | 25,095,733 | | | 25,427,318 | |
| Earnings per common share | $ | (0.20) | | | $ | (0.20) | | | $ | 0.91 | | | $ | 0.90 | |
Awards excluded from diluted earnings per share calculation(1) | — | | | 479,981 | | | — | | | 674,921 | |
| | | | | | | |
NOTE 8. DEBT
Long Term Debt
The Company executed a private placement debt transaction on December 15, 2020 between UF&C, and Federated Mutual and Federated Life.
UF&C sold an aggregate principal amount of $50,000 of notes due 2040 to the Note Purchasers. One note with a principal amount of $35,000 was issued to Federated Mutual and one note with a principal amount of $15,000 was issued to Federated Life subject to the terms of their respective notes.
Interest payments under the surplus noteslong 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)successor's) financial strength rating for members of the United Fire & Casualty Pooled Group as of the applicable Interest Payment Date, as set forth in the table below. For the nine-month period ended September 30, 2022,2023, interest expense totaled $2,391. Payment of interest is subject to approval by the Iowa Insurance Division. On August 18, 2023, the Company received a downgrade from AM Best on the Financial Strength Rating (FSR) to A- (Excellent) from A (Excellent). As a result of this downgrade, the interest rate on the long term debt will increase to 6.875%, beginning with the December 15, 2023 payment, in accordance with the table below.
| | | | | |
| A.M. Best Co. Financial Strength Rating | Applicable Interest Rate |
| A+ | 5.875% |
| A | 6.375% |
| A- | 6.875% |
| B++ (or lower) | 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, (the "Administrative Agent"), issuing lender, swing-line lender and lender, and the other lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), providing for a $50,000 revolving credit facility, which includes a $20,000 letter of credit sub-facility and a $5,000 swing-line loan for working capital and other general corporate purposes. The Credit Agreement is provided by the Lenders on an unsecured basis, and UF&C has the option to increase the Credit Agreement by $100,000 if agreed to by the Lenders providing such incremental facility.
The Credit Agreement includes customary events of default, including default in payments of principals, default in payment of other indebtedness, change of control and voluntary and involuntary insolvency proceedings, the occurrence of which would allow the Lenders to accelerate payment of all amounts outstanding thereunder and terminate any further commitments to lend.
The entry into the Credit Agreement was completed as part of the Company’s regular course of financial planning and was not initiated as a result of market conditions resulting from the COVID-19 pandemic.
There was no outstanding balance on the Credit Agreement at September 30, 2023 and 2022, respectively and 2021, respectively.the Company has not utilized this facility since its inception. For the nine-month periods ended September 30, 20222023 and 2021,2022, we did not incur any interest expense related to the credit facility. We were
As of June 30, 2023, the Company was not in compliance with the minimum net worth covenant in the Credit Agreement. On August 7, 2023, Wells Fargo and the Company entered into an amended agreement and waiver which revised the minimum net worth covenant to reduce the requirements through the maturity of the agreement on March 31, 2024. As of September 30, 2023, the Company was in compliance with all covenants underin the Credit Agreement at September 30, 2022.Agreement.
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the three-month period ended September 30, 2022:2023:
| | | Liability for | | | Liability for | |
| | Net unrealized | | underfunded | | | Net unrealized | | underfunded | |
| | appreciation | | employee | | | appreciation | | employee | |
| | on investments | | benefit costs(1) | | Total | | on investments | | benefit costs(1) | | Total |
| Balance as of June 30, 2022 | (55,505) | | | (1,263) | | | $ | (56,768) | | |
| Balance as of June 30, 2023 | | Balance as of June 30, 2023 | (89,094) | | | (341) | | | $ | (89,435) | |
| Change in accumulated other comprehensive income (loss) before reclassifications | Change in accumulated other comprehensive income (loss) before reclassifications | (51,678) | | | (3,627) | | | (55,305) | | Change in accumulated other comprehensive income (loss) before reclassifications | (34,166) | | | (646) | | | (34,812) | |
| Reclassification adjustments from accumulated other comprehensive income (loss) | Reclassification adjustments from accumulated other comprehensive income (loss) | 853 | | | 710 | | | 1,563 | | Reclassification adjustments from accumulated other comprehensive income (loss) | 62 | | | 40 | | | 102 | |
| Balance as of September 30, 2022 | $ | (106,330) | | | $ | (4,180) | | | $ | (110,510) | | |
| Balance as of September 30, 2023 | | Balance as of September 30, 2023 | $ | (123,198) | | | $ | (947) | | | $ | (124,145) | |
(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.
The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the nine-month period ended September 30, 2022:2023:
| | | | | | | | | | | | | | | | | |
| | | Liability for | | |
| Net unrealized | | underfunded | | |
| appreciation | | employee | | |
| on investments | | benefit costs(1) | | Total |
| Balance as of January 1, 2022 | 49,769 | | | 4,568 | | | $ | 54,337 | |
| Change in accumulated other comprehensive income before reclassifications | (157,266) | | | (10,882) | | | (168,148) | |
| Reclassification adjustments from accumulated other comprehensive income (loss) | 1,167 | | | 2,134 | | | 3,301 | |
| Balance as of September 30, 2022 | $ | (106,330) | | | $ | (4,180) | | | $ | (110,510) | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| | | Liability for | | |
| Net unrealized | | underfunded | | |
| appreciation | | employee | | |
| on investments | | benefit costs(1) | | Total |
| Balance as of January 1, 2023 | (88,369) | | | 873 | | | $ | (87,496) | |
| Change in accumulated other comprehensive income before reclassifications | (35,438) | | | (1,942) | | | (37,380) | |
| Reclassification adjustments from accumulated other comprehensive income (loss) | 609 | | | 122 | | | 731 | |
| Balance as of September 30, 2023 | $ | (123,198) | | | $ | (947) | | | $ | (124,145) | |
| | | | | |
| | | | | |
(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.
NOTE 10. LEASES
The Company has operating leases consisting of office space, vehicle leases, computer equipment, and office equipment. Lease terms and options vary in the Company's operating leases dependent upon the underlying leased asset. We exclude options to extend or terminate a lease from our recognition as part of our right-of-use assets and lease liabilities until those options are known and/or executed, as we typically do not exercise options to purchase the underlying leased asset. As of September 30, 2022,2023, we have leases with remaining terms of one year to sevenfive years, some of which may include no options for renewal and others with options to extend the lease terms from six months to five years.
The components of our operating leases were as follows for the three- and nine-month periods ended September 30, 20222023 and 2021:2022:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | Components of lease expense: | Components of lease expense: | | Components of lease expense: | |
| Operating lease expense | Operating lease expense | | $ | 2,201 | | | $ | 1,748 | | | $ | 6,569 | | | $ | 5,297 | | Operating lease expense | | $ | 2,255 | | | $ | 2,201 | | | $ | 6,653 | | | $ | 6,569 | |
| Less sublease income | Less sublease income | | 53 | | | 53 | | | 160 | | | 160 | | Less sublease income | | 305 | | | 53 | | | 732 | | | 160 | |
| Net lease expense | Net lease expense | | 2,148 | | | 1,695 | | | 6,409 | | | 5,137 | | Net lease expense | | 1,950 | | | 2,148 | | | 5,921 | | | 6,409 | |
| Cash flows information related to leases: | Cash flows information related to leases: | | Cash flows information related to leases: | |
| Operating cash outflow from operating leases | Operating cash outflow from operating leases | | 2,170 | | | 1,714 | | | 6,471 | | | 5,192 | | Operating cash outflow from operating leases | | 1,952 | | | 2,170 | | | 5,996 | | | 6,471 | |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Part I, Item 1 "Financial Statements."
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our consolidated financial condition and results of operations on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are more fully described in our Management's Discussion and Analysis of Financial Condition and Results of Operations presented in Part II, Item 7 of our Annual Report on Form 10-K10-K/A for the year ended December 31, 2021.2022. There have been no changes in our critical accounting policies from December 31, 2021.2022.
INTRODUCTION
The purpose of this Management's Discussion and Analysis is to provide an understanding of our results of operations and consolidated financial condition. Our Management's Discussion and Analysis should be read in conjunction with our Consolidated Financial Statements and related notes, including those in Part II, Item 8 of our Annual Report on Form 10-K10-K/A for the year ended December 31, 2021.2022. Our Consolidated Financial Statements are prepared in accordance with GAAP. We also prepare financial statements for each of our insurance company subsidiaries based on statutory accounting principles and file them with insurance regulatory authorities in the states where they do business.
When we provide information on a statutory or other basis, we label it as such, otherwise all other data is presented in accordance with GAAP.
Please note that references to our commercial line “surety” was referenced in our previous filings as “fidelity and surety”.
BUSINESS OVERVIEW
Founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("UFG," the "Company," "we," "us," or "our") and its consolidated insurance subsidiaries provide insurance protection for individuals and businesses through several regional offices. Our property and casualty insurance company subsidiaries are licensed in 50 states plusand the District of Columbia and are represented by approximately 1,000 independent agencies.
Our primary sources of revenue are premiums and investment income. Major categories of expenses from our operations include losses and loss settlement expenses, underwriting and other operating expenses.
Reportable Segments
Our property and casualty insurance business operates and reports as one business segment. For more information, refer to Part I, Item 1, Note 1. "Nature of Operations and Basis of Presentation."
Lloyd's Syndicates
As of January 1, 2021, the Company became a member of Lloyd's of London ("Lloyd's"). As a member of Lloyd's, the Company is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699 and Syndicate 1699.5623. At September 30, 2022,2023, the Company's FAL investments were comprised of cash of $21.4$24.4 million on deposit with Lloyd's in order to satisfy these FAL requirements.
Personal Lines Business
In May 2020, the Company entered into a renewal rights agreement for our personal lines business, providing our independent insurance agents with the opportunity to transfer their personal lines policies to Nationwide Mutual Insurance Company ("Nationwide") beginning in the third quarter of 2020. Nationwide has been offering replacement policies to mostThe majority of ourthis transfer was completed by December 31, 2021. There is an immaterial amount of personal lines policyholders at the time of renewal. The transfer of policies is substantially complete, withbusiness remaining primarily in New Jersey being the only state where the Company has personal lines policies in force as of September 30, 2022. These policies will2023. The business remaining in New Jersey is scheduled to lapse overby the next three years.end of 2025.
Pooling Arrangement
All of our property and casualty insurance subsidiaries are members of an intercompany reinsurance pooling arrangement. The Company's pooling arrangement permits the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant’sparticipant's own surplus level.
Geographic Concentration
For the nine-month period ended September 30, 2022,2023, approximately 47.747.6 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri, and New Jersey.Louisiana.
Profit Factors
Our profitability is influenced by many factors, including price, competition, economic conditions, investment returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, prudent management of our investments, appropriate matching of assets and liabilities, effective use of ceded reinsurance and effective and efficient use of technology.
COVID-19
Since mid-March 2020, the COVID-19 pandemic has caused significant financial market volatility, economic uncertainty and interruptions to normal business activities.
In response to evolving pandemic conditions, UFG initially activated our pre-existing business continuity plans, dispatched the majority of its staff to work remotely, and implemented numerous safety measures for the safety and health of our employees. As a result of the reduction in COVID-19 community levels, an increasing number of UFG employees have resumed working onsite, although we continue to offer remote and hybrid work arrangements to employees.
The implementation of our business continuity plans has not had a material effect on our internal control environment at any time during the pandemic. Additionally, we believe our operational processes, internal controls over financial reporting and disclosures, and financial reporting systems continue to operate effectively in the present environment.
Nearly all of the policies we have issued specifically exclude business interruption coverage for losses due to viruses such as the COVID-19 pandemic, but we continue to carefully investigate each claim and intend to afford coverage when appropriate. We expect the effect of the COVID-19 pandemic on claims currently under our coverages to be manageable, based upon losses reported to date. We continue to evaluate the dynamic nature of the pandemic, including the emergence of variant strains, and cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. Additionally, if established written contract policy exclusions of business interruption coverage for losses attributable to the COVID-19 pandemic are voided or changed through legislation, regulations or interpretations by the courts, such changes have the potential to materially increase claims, losses and legal expenses which could impact our business, financial condition, results of operations and liquidity.
As of September 30, 2022, we intend to keep all assets currently leased and honor the terms of the contracts. We have also evaluated for impairment the four lease contracts in which we are the lessor. As of September 30, 2022, all payments on these contracts had been received and we fully expect to timely receive all future payments.
The Company's investment philosophy, objectives, approach and program have not changed as a result of the COVID-19 pandemic.
FINANCIAL HIGHLIGHTS
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In Thousands, Except Ratios) | (In Thousands, Except Ratios) | 2022 | | 2021 | | % | | 2022 | | 2021 | | % | (In Thousands, Except Ratios) | 2023 | | 2022 | | % | | 2023 | | 2022 | | % |
| Revenues | Revenues | | | Revenues | | |
| Net premiums earned | Net premiums earned | $ | 238,256 | | | $ | 238,909 | | | (0.3) | % | | $ | 703,746 | | | $ | 722,837 | | | (2.6) | % | Net premiums earned | $ | 259,456 | | | $ | 238,256 | | | 8.9 | % | | $ | 770,221 | | | $ | 703,746 | | | 9.4 | % |
| Investment income, net of investment expenses | Investment income, net of investment expenses | 11,606 | | | 11,571 | | | 0.3 | | | 32,062 | | | 42,447 | | | (24.5) | | Investment income, net of investment expenses | 16,459 | | | 11,606 | | | 41.8 | | | 40,508 | | | 32,062 | | | 26.3 | |
| | Net investment gains (losses) | Net investment gains (losses) | (14,250) | | | (2,269) | | | NM | | (35,647) | | | 28,243 | | | (226.2) | | Net investment gains (losses) | (1,960) | | | (14,250) | | | 86.2 | | | (2,581) | | | (35,647) | | | 92.8 | |
| Other income (loss) | Other income (loss) | (39) | | | 332 | | | (111.7) | | | (38) | | | 163 | | | (123.3) | | Other income (loss) | — | | | (39) | | | 100.0 | | | — | | | (38) | | | 100.0 | |
| Total revenues | Total revenues | $ | 235,573 | | | $ | 248,543 | | | (5.2) | % | | $ | 700,123 | | | $ | 793,690 | | | (11.8) | % | Total revenues | $ | 273,955 | | | $ | 235,573 | | | 16.3 | % | | $ | 808,148 | | | $ | 700,123 | | | 15.4 | % |
| | | | | | | | | | | | | | | |
| Benefits, Losses and Expenses | Benefits, Losses and Expenses | | | | | | | Benefits, Losses and Expenses | | | | | | |
| Losses and loss settlement expenses | Losses and loss settlement expenses | $ | 182,411 | | | $ | 175,444 | | | 4.0 | % | | $ | 464,295 | | | $ | 533,981 | | | (13.1) | % | Losses and loss settlement expenses | $ | 172,798 | | | $ | 182,411 | | | (5.3) | % | | $ | 598,125 | | | $ | 464,295 | | | 28.8 | % |
| Amortization of deferred policy acquisition costs | Amortization of deferred policy acquisition costs | 53,107 | | | 51,261 | | | 3.6 | | | 156,116 | | | 150,533 | | | 3.7 | | Amortization of deferred policy acquisition costs | 62,709 | | | 53,107 | | | 18.1 | | | 181,700 | | | 156,116 | | | 16.4 | |
| Other underwriting expenses | Other underwriting expenses | 30,487 | | | 35,468 | | | (14.0) | | | 87,885 | | | 82,236 | | | 6.9 | | Other underwriting expenses | 29,275 | | | 30,487 | | | (4.0) | | | 89,784 | | | 87,885 | | | 2.2 | |
| Interest expense | Interest expense | 797 | | | 797 | | | — | | | 2,391 | | | 2,391 | | | — | | Interest expense | 797 | | | 797 | | | — | | | 2,391 | | | 2,391 | | | — | |
| | Total benefits, losses and expenses | Total benefits, losses and expenses | $ | 266,802 | | | $ | 262,970 | | | 1.5 | % | | $ | 710,687 | | | $ | 769,141 | | | (7.6) | % | Total benefits, losses and expenses | $ | 265,579 | | | $ | 266,802 | | | (0.5) | % | | $ | 872,000 | | | $ | 710,687 | | | 22.7 | % |
| | Income (loss) before income taxes | Income (loss) before income taxes | $ | (31,229) | | | $ | (14,427) | | | (116.5) | % | | $ | (10,564) | | | $ | 24,549 | | | (143.0) | | Income (loss) before income taxes | $ | 8,376 | | | $ | (31,229) | | | 126.8 | % | | $ | (63,852) | | | $ | (10,564) | | | (504.4) | |
| Federal income tax expense (benefit) | Federal income tax expense (benefit) | (8,248) | | | (4,834) | | | (70.6) | | | (5,475) | | | 1,690 | | | NM | Federal income tax expense (benefit) | 1,996 | | | (8,248) | | | 124.2 | | | (14,544) | | | (5,475) | | | NM |
| Net income (loss) | Net income (loss) | $ | (22,981) | | | $ | (9,593) | | | (139.6) | | | $ | (5,089) | | | $ | 22,859 | | | (122.3) | % | Net income (loss) | $ | 6,380 | | | $ | (22,981) | | | 127.8 | | | $ | (49,308) | | | $ | (5,089) | | | (868.9) | % |
| | GAAP Ratios: | GAAP Ratios: | | | | GAAP Ratios: | | | |
| Net loss ratio (without catastrophes) | 65.2 | % | | 56.9 | % | | 14.6 | % | | 57.3 | % | | 61.4 | % | | (6.7) | % | |
Net underlying loss ratio (1) | | Net underlying loss ratio (1) | 60.5 | % | | 60.4 | % | | 0.2 | % | | 62.9 | % | | 58.9 | % | | 6.8 | % |
Catastrophes - effect on net loss ratio | Catastrophes - effect on net loss ratio | 11.4 | | | 16.5 | | | (30.9) | | | 8.7 | | | 12.5 | | | (30.4) | | Catastrophes - effect on net loss ratio | 5.9 | | | 11.4 | | | (48.2) | | | 7.8 | | | 8.7 | | | (10.3) | |
Net loss ratio(1) | 76.6 | % | | 73.4 | % | | 4.4 | % | | 66.0 | % | | 73.9 | % | | (10.7) | % | |
Expense ratio(2) | 35.1 | | | 36.3 | | | (3.3) | | | 34.6 | | | 32.2 | | | 7.5 | | |
Combined ratio(3) | 111.7 | % | | 109.7 | % | | 1.8 | % | | 100.6 | % | | 106.1 | % | | (5.2) | % | |
Reserve development - effect on net loss ratio (1) | | Reserve development - effect on net loss ratio (1) | 0.2 | | | 4.8 | | | (95.8) | | | 7.0 | | | (1.6) | | | 537.5 | |
Net loss ratio (2) | | Net loss ratio (2) | 66.6 | % | | 76.6 | % | | (13.1) | % | | 77.7 | % | | 66.0 | % | | 17.7 | % |
Expense ratio (3) | | Expense ratio (3) | 35.5 | | | 35.1 | | | 1.1 | | | 35.3 | | | 34.6 | | | 2.0 | |
Combined ratio (4) | | Combined ratio (4) | 102.1 | % | | 111.7 | % | | (8.6) | % | | 113.0 | % | | 100.6 | % | | 12.3 | % |
(1) TheNet underlying loss ratio is defined as the net loss ratio less impacts of catastrophes and non-catastrophe prior year reserve development.
(2) Net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our unaudited Consolidated Financial Statements.
(2) The expense(3) Expense ratio is calculated by dividing othernon-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) The combined(4) Combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.
NM = Not meaningful
The following is a summary of our financial performance for the three- and nine-month periods ended September 30, 2022:
RESULTS OF OPERATIONS
For the three-month period ended September 30, 2022,2023, net lossincome was $23.0$6.4 million compared to a net loss of $9.6$23.0 million for the same period of 2021.2022. The change was primarily due to a decreasean increase in earned premium, net investment gains and lower loss and LAE in the fair valuethird quarter of our investments2023 compared to net investment losses for the same period in equity securities along with higher losses and loss settlement expenses partially offset by lower other underwriting expenses.2022.
For the nine-month period ended September 30, 2022,2023, net loss was $5.1$49.3 million compared to a net incomeloss of $22.9$5.1 million for the same period of 2021.2022. The change was primarily due to a decreasehigher loss and LAE offset by an increase in earned premium and net investment gains compared to net investment losses for the fair value of our investmentssame period in 2022.
in equity securities and a decrease in net premiums earned partially offset by a decrease in losses and loss settlement expenses.
Net premiums earned decreased 0.3 percent and decreased 2.6 percent during the three- and nine-month periods ended September 30, 2022, respectively, compared to the same periods of 2021.Profitable growth is our primary consideration when putting new business on the books and these results reflect growth in assumed reinsurance, other liability, and surety. For the three-month period ended September 30, 2022, the overall average increase in renewal premiums was 9.5%, with 3.8% from exposure changes and 5.7% from rate increases. Excluding the workers' compensation line of business, the overall average increase in renewal premiums was 10.7%, with 4.0% from exposures changes and 6.7% from rate changes.
Net investment income was $11.6 million for the third quarter of 2022 as compared to $11.6 million for the same period in 2021. Third quarter of 2022 reflected a slight increase over third quarter of 2021 related to higher yields on the fixed income portfolio mostly offsetting the change in fair value of our investments in limited liability partnerships. The valuation of these investments in limited liability partnerships varies from period to period due to the current equity market conditions, specifically related to financial institutions. Year-to-date, net investment income was $32.1 million compared to net investment income of $42.4 million for the same period in 2021. The decrease in net investment income in the nine-month period ended September 30, 2022 was primarily due to the change in the fair value of our investments in limited liability partnerships.
The Company recognized net investment losses of $14.3 million during the third quarter of 2022, compared to net investment losses of $2.3 million for the same period in 2021. Year to date, the Company recognized net investment losses of $35.6 million during the nine-month period ended September 30, 2022, compared to net investment gains of $28.2 million for the same period in 2021. The change in the three- and nine-month periods ended September 30, 2022 as compared to the same period in 2021 was primarily due to the change in the fair value of our investments in equity securities.
Losses and loss settlement expenses increased by 4.0 percent during the three-month period ended September 30, 2022 driven by an increase in frequency of large losses and unfavorable reserve development, offset by lower catastrophe losses during the quarter. For the nine-month period ended September 30, 2022 the same metric decreased by 13.1 percent compared to the same period in 2021. The year-to-date change was primarily driven by lower catastrophe losses and a decrease in frequency and severity of claims.
The GAAP combined ratio increased by 2.0 percentage points to 111.7 percent for the third quarter of 2022, compared to 109.7 percent in the same period in 2021. The change was driven by an increase in the net loss ratio, most notably the reserve development effect on the ratio in the quarter. For the nine-month period ended September 30, 2022, the GAAP combined ratio decreased 5.5 percentage points to 100.6 percent compared to 106.1 percent for the nine-month period ended September 30, 2021. The decrease in the combined ratio during the nine-month period ended September 30, 2022 as compared to the same period in 2021 was driven by a decrease in the net loss ratio.
The net loss ratio increased 3.2 percentage points during the third quarter of 2022 as compared to the same period in 2021. This change was driven by unfavorable reserve development in the quarter and an increase in frequency of claims, offset by catastrophe loss improvement. Year-to-date, the net loss ratio decreased 7.9 percentage points to 66.0 percent compared to 73.9 percent for the nine-month period ended September 30, 2021. The year-to-date change was primarily driven by lower catastrophe losses and a decrease in the frequency and severity of claims.
Pre-tax catastrophe losses in the third quarter of 2022 added 11.4 percentage points to the combined ratio, which included 5.7 percentage points for the impacts from Hurricane Ian. This compares to 16.5 percentage points added to the combined ratio in the third quarter of 2021, and is 1.6 percentage points above our 10-year historical average for the third quarter. During the third quarter of 2022, the higher than average catastrophe losses were driven primarily by Hurricane Ian, however, there were 9 smaller catastrophic events, primarily wind and hail, which collectively resulted in above average catastrophe losses. Year-to-date catastrophe losses totaled $61.4 million ($1.93 per diluted share) compared to $90.3 million ($2.81 per diluted share) for the same period in 2021, which included losses from Hurricane Ida as well as winter storm Uri, which was a full retention loss.
Net premiums earned increased 8.9 percent and 9.4 percent during the three- and nine-month periods ended September 30, 2023, respectively, compared to the same periods of 2022. Profitable growth is our primary consideration when putting new business on the books and these results reflect growth in assumed reinsurance, other liability, and fire and allied lines. For the three-month period ended September 30, 2023, the overall average increase in renewal premiums was 11.0 percent, with 2.6 percent from exposure changes and 8.4 percent from rate increases. Excluding the workers' compensation line of business, the overall average increase in renewal premiums was 12.4 percent, with 2.7 percent from exposures changes and 9.7 percent from rate increases. Ceded premiums included reinstatement premiums for surety coverage due to large losses of $4.7 million and $10.5 million for the three- and nine-month periods ended September 30, 2023, respectively.
Net investment income was $16.5 million for the third quarter of 2023 as compared to $11.6 million for the same period in 2022. Income from our fixed income portfolio increased $1.7 million which was a result of higher investment yields due to higher interest rates. Income from cash and cash equivalents increased $1.7 million. Income on other long-term investments resulted in an additional $2.4 million of income as the valuation of the investments in limited liability partnerships varies from period to period due to the current market conditions. Dividends on equity securities decreased $0.7 million from the same period in 2022. Net investment income for the nine-month period ended September 30, 2023 was $8.4 million higher compared to the same period of 2022. The higher investment yields from our fixed income portfolio contributed $5.3 million, interest received on cash and cash equivalent balances increased $4.6 million and the change in value of our limited liability partnerships increased $0.5 million, offset by a decrease in dividends on equity securities of $0.9 million due to a strategic reallocation of equity securities to fixed income assets over the past two quarters and an increase in investment expenses of $1.1 million.
The Company recognized net investment losses of $2.0 million during the third quarter of 2023, compared to net investment losses of $14.3 million for the same period in 2022. Year-to-date, the Company recognized net investment losses of $2.6 million and $35.6 million during the nine-month periods ended September 30, 2023 and 2022, respectively. The change in the three- and nine-month periods ended September 30, 2023 as compared to the same period in 2022 was primarily due to the change in the fair value of our investments in equity securities.
Losses and loss settlement expenses decreased by 5.3 percent and increased 28.8 percent during the three- and nine-month periods ended September 30, 2023, compared to the same periods of 2022. The reduction during the three-month period was driven by a reduction in catastrophe losses and a reduction in unfavorable prior-year reserve development. The increase during the nine-month period was driven by an increase in prior year reserve development and underlying losses due primarily to the impact of emerging loss trends. Unfavorable reserve development was driven primarily by long-tail other liability lines of business as described previously in the Reserve Development section in Note 4. The increase in underlying losses during the nine-month period is due to a small number of large surety losses as well as increased ceded reinsurance costs and higher retentions across the broader portfolio. There is an additional underlying loss increase attributable to a shift in accident year loss ratio assumed reinsurance business as discussed in previous quarters. This business continues to perform in line with our expectations. These underlying loss increases are offset by improved profitability in other lines of business, namely in standard umbrella, where enhanced metrics have increased visibility into historic rate levels and profit outlook.
The GAAP combined ratio decreased by 9.6 percentage points to 102.1 percent for the third quarter of 2023, compared to 111.7 percent in the same period in 2022. The improvement was driven by a decrease in prior year reserve strengthening of 4.6 percentage points and a decrease in catastrophe loss contributing 5.5 percentage points, offset by an increase in underwriting expenses of 0.4 percentage points and an increase in the underlying loss ratio of 0.1 percentage points. The GAAP combined ratio increased by 12.4 percentage points to 113.0 percent for the nine-month period ended September 30, 2023, compared to 100.6 percent in the same period in 2022. The deterioration was driven by an increase in the underlying loss ratio of 4.0 percentage points, prior period reserve strengthening in the current year compared to favorable development in the prior period leading to an increase of 8.6 percentage points, an increase in underwriting expenses contributing 0.7 percentage points, offset by a decrease in catastrophe loss contributing 0.9 percentage points. Each of these are explained in more detail below.
The net loss ratio decreased 10.0 percentage points to 66.6 percent for the third quarter of 2023, compared to 76.6 percent in the same period in 2022. The decrease was driven by reduced prior period reserve strengthening and
lower catastrophe losses. Catastrophe losses are discussed below. Prior period reserve strengthening was 0.2 percent this quarter compared to 4.8 percent in the third quarter of 2022, driven by less unfavorable development in the third quarter of 2023 on other liability long-tail lines. The underlying loss ratio increased 0.1 percentage points to 60.5 percent for the third quarter of 2023, compared to 60.4 percent in the same period in 2022. This increase was driven by a small number of large surety losses and increases in assumed reinsurance, offset by improved profitability in other lines. These impacts are discussed in more detail in the loss and loss adjustment expense commentary above.
The net loss ratio increased 11.7 percentage points to 77.7 percent during the nine-month period ended September 30, 2023, compared to 66.0 percent in the same period in 2022. The underlying loss ratio of 62.9 percent increased 4.0 percentage points during the nine-month period ended September 30, 2023, compared to 58.9 percent in the same period in 2022. This is primarily due to a small number of large surety losses and associated reinsurance reinstatement premium in the quarter in addition to the impact of increased ceded reinsurance costs on 1/1/2023 renewals. Assumed reinsurance is also experiencing a higher underlying loss ratio as compared to this time last year. Prior period reserve development was 7.0 percent unfavorable year-to-date through September 30, 2023, as compared to 1.6 percent favorable in the same period last year. The prior period reserve strengthening in 2023 is primarily driven by an increase in long-tailed other liability lines and commercial auto, offset by workers' compensation and fire and allied lines. The prior period reserve release in 2022 was primarily driven by commercial auto and workers' compensation, offset by other liability.
Pre-tax catastrophe losses in the third quarter of 2023 added 5.9 percentage points to the combined ratio compared to 11.4 percentage points added to the combined ratio in the third quarter of 2022, and added 7.8 percentage points to the year-to-date loss ratio this year as compared to 8.7 percentage points during the same time period in 2022. Catastrophe losses were below expectations during the third quarter of 2023 and were approximately 6.0 points below the five-year historic mean catastrophe loss ratio for the third quarter of 2023.
The underwriting expense ratio for the third quarter of 20222023 was 35.135.5 percent compared to 36.335.1 percent for the third quarter of 2021.2022, an increase of 0.4 percentage points. The decrease was primarily driven by lower costs resulting fromimpact of surety reinsurance reinstatement premiums offset ongoing actions to sustainably reduce expenses. In addition to reducing expenses through careful vacancy management, we took the changeadditional step to implement a voluntary early retirement program that we anticipate will provide ongoing benefits to our expense ratio in design of our pension plan, which resulted in a reduction in quarterly expenses beginning in 2022. Year-to-date, the2024. The underwriting expense ratio for the nine-months ended September 30, 2023 was 34.635.1 percent compared to 32.234.6 percent infor the same time period in 2021.of 2022. The increase is a result of strategic investments in the expense ratio during the nine-month period ended September 30,talent and technology, surety reinsurance reinstatement premiums, and changes to our post-retirement benefit plans that reduced expenses in 2022 was primarily driven by a non-recurring benefit in the prior year related to the change in the design of our employee post-retirement health benefit plan.but have since concluded.
For a detailed discussion of our investment results, refer to the "Investment Portfolio" section below.
Reserve Development
For many liability claims, significant periods of time, ranging up to several years, and for certain construction defect claims, more than a decade, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement or other disposition of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability. Reserves for these long-tail coverages represent a significant portion of our overall carried reserves.
When establishing reserves and monitoring reserve adequacy, we analyze historical data and consider the potential impact of various loss development factors and trends, including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation, and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves, and for long-tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific dollar impact of any
individual factor on the development of reserves.
Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after information about a claim becomes available. This approach tends
2023 Development
The property and casualty insurance business experienced $4.4 million and $59.2 million reserve strengthening in net reserves for prior accident years for the three- and nine-month periods ended September 30, 2023, respectively. During the first half of 2023, the Company made additional advancements to produce,its reserve review processes and analyses, including increased segmentation on average, cautiously pessimistic caseunique exposures, which resulted in deeper insights and understanding of loss experience and significant movements in reserve development across a range of commercial liability lines of business. The significant driver of the reserve strengthening in the nine-month period ended September 30, 2023 was an increase in long-tailed other liability reserves which we expectprimarily due to resultincreased loss cost trends related to economic and social inflation. The commercial auto line of business also experienced reserve strengthening in some level ofreaction to continuing loss trends in post-2020 accident years. These increases were offset by favorable development over the course of settlement.in workers' compensation and fire and allied lines.
2022 Development
The property and casualty insurance business experienced $14.1 million of unfavorable development and $1.2 million of favorable development in our net reserves for prior accident years for the three- and nine-month periods ended September 30, 2022, respectively. For the three-month period ended September 30, 2022 the unfavorable development was primarily driven by $31.7 million other liability and $5.4 million commercial fire and allied lines of business offset by favorable development in commercial automobile and workers' compensation lines of business of $12.4 million and $11.6 million, respectively. For the nine-month period ended September 30, 2022 the overall favorable development was primarily driven by commercial automobile linelines of business and the workers' compensation line of business, with $28.9 million and $9.2 million, respectively, in net ultimate loss & loss adjustment expense estimates. The favorable reserve development was partially offset by unfavorable reserve development for $22.2 million other liability and $14.1 million commercial fire and allied lines.
2021 Development
The property and casualty insurance business experienced $11.1 million and $26.0 million of favorableReserve development
in our net reserves for prior accident years for the three- and nine-month periods ended September 30, 2021, respectively. For the three-month period ended September 30, 2021 the majority of favorable development was from commercial automobile with $11.0 million of favorable development followed by commercial fire and allied lines with $4.1 million favorable development. The favorable development was partially offset by $7.1 million of unfavorable development in commercial liability. All other lines of insurance, in total, contributed $3.1 million of favorable development during the quarter. For the nine-month period ended September 30, 2021 the majority of favorable development was from commercial automobile with $21.5 million favorable development, followed by workers' compensation with $7.7 million favorable development, commercial fire and allied lines with $5.6 million favorable development, and personal fire and allied lines with $4.0 million favorable development. Partially offsetting this was unfavorable development was contributed primarily by commercial liability with $17.1 million of unfavorable development. All other lines of insurance, in total, contributed $4.3 million of favorable development.
Development amounts can vary significantly from quarter-to-quarter and year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business. At September 30, 2022,2023, our total reserves were within a reasonable range of our actuarial estimates.
The following tables display our net premiums earned, net losses and loss settlement expenses and net loss ratio by line of business:
| | Three Months Ended September 30, | Three Months Ended September 30, | 2022 | | 2021 | Three Months Ended September 30, | 2023 | | 2022 |
| | | | | Net Losses | | | | | | Net Losses | | | | | | Net Losses | | | | | | Net Losses | | |
| | | | | and Loss | | | | | | and Loss | | | | | | and Loss | | | | | | and Loss | | |
| | | Net | | Settlement | | Net | | Net | | Settlement | | Net | | Net | | Settlement | | Net | | Net | | Settlement | | Net |
| (In Thousands, Except Ratios) | (In Thousands, Except Ratios) | Premiums | | Expenses | | Loss | | Premiums | | Expenses | | Loss | (In Thousands, Except Ratios) | Premiums | | Expenses | | Loss | | Premiums | | Expenses | | Loss |
| Unaudited | Unaudited | Earned | | Incurred | | Ratio | | Earned | | Incurred | | Ratio | Unaudited | Earned | | Incurred | | Ratio | | Earned | | Incurred | | Ratio |
| Commercial lines | Commercial lines | | | | | | | | | | | | Commercial lines | | | | | | | | | | | |
Other liability(1) | Other liability(1) | $ | 80,231 | | | $ | 85,738 | | | 106.9 | % | | $ | 75,559 | | | $ | 47,416 | | | 62.8 | % | Other liability(1) | $ | 78,090 | | | $ | 34,466 | | | 44.1 | % | | $ | 80,231 | | | $ | 85,738 | | | 106.9 | % |
Fire and allied lines(2) | Fire and allied lines(2) | 60,263 | | | 47,857 | | | 79.4 | | | 60,457 | | | 44,855 | | | 74.2 | | Fire and allied lines(2) | 64,531 | | | 53,602 | | | 83.1 | | | 60,263 | | | 47,857 | | | 79.4 | |
| Automobile | Automobile | 51,939 | | | 32,093 | | | 61.8 | | | 60,991 | | | 42,034 | | | 68.9 | | Automobile | 53,929 | | | 46,186 | | | 85.6 | | | 51,939 | | | 32,093 | | | 61.8 | |
| Workers' compensation | Workers' compensation | 14,043 | | | (1,888) | | | (13.4) | | | 15,183 | | | 11,265 | | | 74.2 | | Workers' compensation | 13,366 | | | 9,616 | | | 71.9 | | | 14,043 | | | (1,888) | | | (13.4) | |
Surety(3) | Surety(3) | 9,756 | | | 3,598 | | | 36.9 | | | 7,939 | | | 909 | | | 11.4 | | Surety(3) | 9,279 | | | 6,575 | | | 70.9 | | | 9,756 | | | 3,598 | | | 36.9 | |
| Miscellaneous | Miscellaneous | 267 | | | 449 | | | 168.2 | | | 323 | | | 176 | | | 54.5 | | Miscellaneous | 883 | | | 112 | | | 12.7 | | | 267 | | | 449 | | | 168.2 | |
| Total commercial lines | Total commercial lines | $ | 216,499 | | | $ | 167,847 | | | 77.5 | % | | $ | 220,452 | | | $ | 146,655 | | | 66.5 | % | Total commercial lines | $ | 220,078 | | | $ | 150,557 | | | 68.4 | % | | $ | 216,499 | | | $ | 167,847 | | | 77.5 | % |
| | | | | | | | | | | |
| Personal lines | Personal lines | | | | | Personal lines | | | | |
Fire and allied lines(4) | Fire and allied lines(4) | $ | 529 | | | $ | 1,195 | | | 225.9 | % | | $ | 2,559 | | | $ | 11,382 | | | NM | Fire and allied lines(4) | $ | 1,616 | | | $ | 1,304 | | | 80.7 | % | | $ | 529 | | | $ | 1,195 | | | 225.9 | |
| Automobile | Automobile | (1) | | | (775) | | | NM | | 734 | | | 343 | | | 46.7 | | Automobile | — | | | 49 | | | NM | | (1) | | | (775) | | | NM |
| Miscellaneous | Miscellaneous | 10 | | | (1,020) | | | NM | | 50 | | | (9) | | | (18.0) | | Miscellaneous | 5 | | | (83) | | | NM | | 10 | | | (1,020) | | | NM |
| Total personal lines | Total personal lines | $ | 538 | | | $ | (600) | | | (111.5) | % | | $ | 3,343 | | | $ | 11,716 | | | NM | Total personal lines | $ | 1,621 | | | $ | 1,270 | | | 78.3 | % | | $ | 538 | | | $ | (600) | | | (111.5) | % |
| Assumed reinsurance | Assumed reinsurance | $ | 21,219 | | | $ | 15,164 | | | 71.5 | % | | $ | 15,114 | | | $ | 17,073 | | | 113.0 | % | Assumed reinsurance | $ | 37,757 | | | $ | 20,971 | | | 55.5 | % | | $ | 21,219 | | | $ | 15,164 | | | 71.5 | % |
| | Total | Total | $ | 238,256 | | | $ | 182,411 | | | 76.6 | % | | $ | 238,909 | | | $ | 175,444 | | | 73.4 | % | Total | $ | 259,456 | | | $ | 172,798 | | | 66.6 | % | | $ | 238,256 | | | $ | 182,411 | | | 76.6 | % |
(1) Commercial lines “Other liability”"Other liability" is business insurance covering bodily injury and property damage arising from general business operations, accidents on the insured’sinsured's premises and products manufactured or sold.
(2) Commercial lines “Fire"Fire and allied lines”lines" includes fire, allied lines, commercial multiple peril and inland marine.
(3) Commercial lines “Surety”"Surety" previously referred to as “Fidelity"Fidelity and surety”.surety."
(4) Personal lines “Fire"Fire and allied lines”lines" includes fire, allied lines, homeowners and inland marine.
NM = Not meaningful
| | Nine Months Ended September 30, | Nine Months Ended September 30, | 2022 | | 2021 | Nine Months Ended September 30, | 2023 | | 2022 |
| | | | | Net Losses | | | | | | Net Losses | | | | | | Net Losses | | | | | | Net Losses | | |
| | | | | and Loss | | | | | | and Loss | | | | | | and Loss | | | | | | and Loss | | |
| | | Net | | Settlement | | Net | | Net | | Settlement | | Net | | Net | | Settlement | | Net | | Net | | Settlement | | Net |
| (In Thousands, Except Ratios) | (In Thousands, Except Ratios) | Premiums | | Expenses | | Loss | | Premiums | | Expenses | | Loss | (In Thousands, Except Ratios) | Premiums | | Expenses | | Loss | | Premiums | | Expenses | | Loss |
| Unaudited | Unaudited | Earned | | Incurred | | Ratio | | Earned | | Incurred | | Ratio | Unaudited | Earned | | Incurred | | Ratio | | Earned | | Incurred | | Ratio |
| Commercial lines | Commercial lines | | | | | | | | | | | | Commercial lines | | | | | | | | | | | |
| Other liability | Other liability | $ | 225,323 | | | $ | 159,859 | | | 70.9 | % | | $ | 225,572 | | | $ | 134,286 | | | 59.5 | % | Other liability | $ | 237,523 | | | $ | 194,115 | | | 81.7 | % | | $ | 225,323 | | | $ | 159,859 | | | 70.9 | % |
| Fire and allied lines | Fire and allied lines | 172,361 | | | 144,397 | | | 83.8 | | | 177,066 | | | 150,032 | | | 84.7 | | Fire and allied lines | 182,805 | | | 151,539 | | | 82.9 | | | 172,361 | | | 144,397 | | | 83.8 | |
| Automobile | Automobile | 157,927 | | | 107,021 | | | 67.8 | | | 190,238 | | | 151,632 | | | 79.7 | | Automobile | 154,806 | | | 136,875 | | | 88.4 | | | 157,927 | | | 107,021 | | | 67.8 | |
| Workers' compensation | Workers' compensation | 42,389 | | | 16,345 | | | 38.6 | | | 47,260 | | | 33,601 | | | 71.1 | | Workers' compensation | 40,413 | | | 19,316 | | | 47.8 | | | 42,389 | | | 16,345 | | | 38.6 | |
| Surety | Surety | 26,700 | | | 5,723 | | | 21.4 | | | 22,436 | | | 3,000 | | | 13.4 | | Surety | 27,611 | | | 15,668 | | | 56.7 | | | 26,700 | | | 5,723 | | | 21.4 | |
| Miscellaneous | Miscellaneous | 817 | | | 593 | | | 72.6 | | | 1,007 | | | 174 | | | 17.3 | | Miscellaneous | 1,522 | | | 277 | | | 18.2 | | | 817 | | | 593 | | | 72.6 | |
| Total commercial lines | Total commercial lines | $ | 625,517 | | | $ | 433,938 | | | 69.4 | % | | $ | 663,579 | | | $ | 472,725 | | | 71.2 | % | Total commercial lines | $ | 644,680 | | | $ | 517,790 | | | 80.3 | % | | $ | 625,517 | | | $ | 433,938 | | | 69.4 | % |
| | | | | | | | | | | |
| Personal lines | Personal lines | | | | | Personal lines | | | | |
| Fire and allied lines | Fire and allied lines | $ | 2,127 | | | $ | 2,144 | | | 100.8 | % | | $ | 13,120 | | | $ | 22,400 | | | 170.7 | % | Fire and allied lines | $ | 4,568 | | | $ | 3,631 | | | 79.5 | % | | $ | 2,127 | | | $ | 2,144 | | | 100.8 | % |
| Automobile | Automobile | — | | | (1,919) | | | NM | | 7,069 | | | 5,904 | | | 83.5 | | Automobile | — | | | (326) | | | NM | | — | | | (1,919) | | | NM |
| Miscellaneous | Miscellaneous | 42 | | | (1,110) | | | NM | | 337 | | | (1,369) | | | NM | Miscellaneous | 18 | | | (148) | | | NM | | 42 | | | (1,110) | | | NM |
| Total personal lines | Total personal lines | $ | 2,169 | | | $ | (885) | | | (40.8) | % | | $ | 20,526 | | | $ | 26,935 | | | 131.2 | % | Total personal lines | $ | 4,586 | | | $ | 3,157 | | | 68.8 | % | | $ | 2,169 | | | $ | (885) | | | (40.8) | % |
| Assumed reinsurance | Assumed reinsurance | $ | 76,060 | | | $ | 31,242 | | | 41.1 | % | | $ | 38,732 | | | $ | 34,321 | | | 88.6 | % | Assumed reinsurance | $ | 120,955 | | | $ | 77,178 | | | 63.8 | % | | $ | 76,060 | | | $ | 31,242 | | | 41.1 | % |
| | Total | Total | $ | 703,746 | | | $ | 464,295 | | | 66.0 | % | | $ | 722,837 | | | $ | 533,981 | | | 73.9 | % | Total | $ | 770,221 | | | $ | 598,125 | | | 77.7 | % | | $ | 703,746 | | | $ | 464,295 | | | 66.0 | % |
| |
NM = Not meaningful
Below are explanations regarding significant changes in the net loss ratios by line of business:
•Other liability lines - The net loss ratio deteriorated 44.1 and 11.4improved 62.8 percentage points respectively,and deteriorated 10.8 percentage points in the three- and nine-month periods ended September 30, 20222023, respectively, as compared to the same periods in 2021. Reserves2022. The improvement in the three-month period was driven by a reduction in prior year reserve strengthening as compared to the same period last year. In the third quarter of 2022, reserves were strengthened on other liability lines concentrated in supported umbrella and construction defect exposures, increasing the prospective view of loss costs in these long-tailed lines. This strengthening did not occur in the third quarter of 2023, resulting in an improved net loss ratio as compared to the third quarter of 2022. In addition, the underlying loss ratio also improved in the third quarter of 2023 from the same period last year due to a reduced outlook for supported umbrella driven by improved analytics that brought a greater understanding of historical umbrella rate levels. The deterioration in the nine-month period ended September 30, 2023 is related to an increase in the estimation of evolving loss trends primarily affecting construction defect and excess and surplus lines excess casualty. During the last half of 2022 as the frequencyand first half of large claims2023, a combination of deeper analytical insights and exhaustion of primary coverage limitsemerging claim experience has increased due to inflationary pressures and other factors. Thisour view of potential exposure within this line. Our prospective view of loss costs in these long-tailed lines has increased exposure to the excess umbrella policies.since this time last year.
•Commercial fire and allied lines - The net loss ratio deteriorated 5.23.7 percentage points in the three-month period ending September 30, 2022 as non-catastrophe commercial fire losses were offset by improved catastrophe losses as compared to 2021. The net loss ratioand improved 0.9 percentage points in the nine-month periods ended September 30, 2022 driven by catastrophe loss improvement.
•Commercial automobile - The net loss ratio improved 7.1 and 11.9 percentage points, respectively, in the three- and nine-month periods ended September 30, 20222023, respectively, as compared to the same periods in 2021. These improvements are2022. The deterioration in the direct result of our strategic planthree-month period is due to increaseincreased underlying losses offset by lower catastrophe losses. The improvement in the quality of this linenine-month period is due to favorable prior period development in 2023 versus unfavorable development in 2022, offset by non-renewing underperforming accountshigher catastrophe losses and increasing rates.underlying losses.
•Workers' compensation - The net loss ratio improved 87.6 and 32.5 percentage points, respectively, in the three- and nine-month periods ended September 30, 2022 as compared to the same periods in 2021. For both periods the recognition of lower loss adjustment expense and continued favorable loss experience allowed for reserve releases producing a negative loss ratio in the current three-month period and lowering the current nine-month period loss ratio. The prior year three- and nine-month periods higher loss ratios were impacted by severity adding to the differences between current and prior periods.
•Commercial automobile - The net loss ratio deteriorated 23.8 percentage points and 20.6 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022. This was driven by a strengthening of prior year reserves in the current year in reaction to continuing loss trends, as compared to a release of reserves in prior periods.
•Workers' compensation - The net loss ratio deteriorated 85.3 percentage points and 9.2 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022 primarily related to significant favorable prior year reserve development in the prior periods.
•Surety - The net loss ratio deteriorated 34.0 percentage points and 35.3 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022 primarily due to a small number of large claims and associated reinsurance reinstatement premiums. This business has historically delivered strong profitability, but can experience occasional periods of volatility. In addition, we are seeing a broader increase in risk within this line that aligns with macro-economic conditions, including inflation.
•Assumed reinsurance - The net loss ratio improved 41.5 and 47.516.0 percentage points respectively,and deteriorated 22.7 percentage points in the three- and nine-month periods ended September 30, 20222023, respectively, as compared to the same periods in 2021.2022. The improvement in both current periodsthe three-month period is primarily attributablea result of a reduction in catastrophe losses due to continued favorable loss experience and attractive reinsurance rates. This book had exposure toinitial reserves for Hurricane Ian in 2022. The material change in the current three-month period but notnine-month results was due to the levelcontinued enhanced analysis of catastrophes experiencedthis book of business. As discussed in our second quarter of 2023 results, this review resulted in adjustments in the prior period.allocation of loss reserves to better align with the exposures.
Financial Condition
Stockholders' equity decreased to $700.8$644.9 million at September 30, 2022,2023, from $879.1$740.1 million at December 31, 2021.2022. The Company's book value per share was $27.82,$25.53, which is a decrease of $7.23$3.83 per share, or 20.613.0 percent, from December 31, 2021.2022. The decrease is primarily attributable to the $156.1net loss of $49.3 million, decrease in the net unrealized value from ourdepreciation after tax of $34.8 million on fixed maturity securities, net of tax,and shareholder dividends of $11.8 million, and net losses of $5.1$12.1 million during the first nine months of 2022.2023.
Investment Portfolio
Our invested assets totaled $1.8 billion at September 30, 2022,2023, compared to $2.1$1.8 billion at December 31, 2021,2022, a decrease of $241.2$15.8 million. At September 30, 2022,2023, fixed maturity securities and equity securities made up 84.889.6 percent and 8.22.8 percent of the value of our investment portfolio, respectively. Because the primary purpose of our investment portfolio is to fund future claims payments, we use a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government and government agency bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to stay fully invested (i.e., minimize cash balances). If additional cash is needed, we have the ability to borrow funds available under our revolving credit facility.
Composition
We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation, regulatory requirements, interest rates and credit quality of assets. We administer our investment portfolio based on investment guidelines approved by management and the investment committee of our Board of Directors that comply with applicable statutory regulations.
The composition of our investment portfolio at September 30, 20222023 is presented at carrying value in the following table:
| | | | | | | | | | | |
| | Property & Casualty Insurance |
| | | | Percent |
| (In Thousands, Except Ratios) | | | of Total |
Fixed maturities (1) | | | |
| Available-for-sale | $ | 1,547,061 | | | 84.8 | % |
| | | |
| Equity securities | 149,505 | | | 8.2 | |
| Mortgage loans | 46,692 | | | 2.6 | |
| Other long-term investments | 79,917 | | | 4.4 | |
| Short-term investments | 275 | | | — | |
| Total | $ | 1,823,450 | | | 100.0 | % |
| | | | | | | | | | | |
| | Property & Casualty Insurance |
| | | | Percent |
| (In Thousands, Except Ratios) | | | of Total |
Fixed maturities (1) | | | |
| Available-for-sale | $ | 1,638,512 | | | 89.6 | % |
| | | |
| Equity securities | 51,217 | | | 2.8 | |
| Mortgage loans | 45,534 | | | 2.5 | |
| Other long-term investments | 93,836 | | | 5.1 | |
| Short-term investments | — | | | — | |
| Total | $ | 1,829,099 | | | 100.0 | % |
(1) Available-for-sale securities with fixed maturities are carried at fair value.
As of September 30, 20222023 and December 31, 2021,2022, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.
Credit Quality
The table below shows the composition of fixed maturity securities held in our available-for-sale and trading security portfolios by credit rating at September 30, 20222023 and December 31, 2021.2022. Information contained in the table is generally based upon the issued credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain credit ratings from Standard & Poor's.
| | (In Thousands, Except Ratios) | (In Thousands, Except Ratios) | September 30, 2022 | | December 31, 2021 | (In Thousands, Except Ratios) | September 30, 2023 | | December 31, 2022 |
| Rating | Rating | Carrying Value | | % of Total | | Carrying Value | | % of Total | Rating | Carrying Value | | % of Total | | Carrying Value | | % of Total |
| AAA | AAA | $ | 543,719 | | | 35.2 | % | | $ | 670,222 | | | 39.0 | % | AAA | $ | 634,694 | | | 38.7 | % | | $ | 540,485 | | | 34.8 | % |
| AA | AA | 490,427 | | | 31.7 | | | 586,426 | | | 34.1 | | AA | 444,910 | | | 27.2 | | | 482,369 | | | 31.1 | |
| A | A | 225,603 | | | 14.6 | | | 209,076 | | | 12.2 | | A | 234,433 | | | 14.3 | | | 232,668 | | | 15.0 | |
| Baa/BBB | Baa/BBB | 269,783 | | | 17.4 | | | 241,547 | | | 14.0 | | Baa/BBB | 304,011 | | | 18.6 | | | 278,247 | | | 17.9 | |
| Other/Not Rated | Other/Not Rated | 17,529 | | | 1.1 | | | 12,519 | | | 0.7 | | Other/Not Rated | 20,464 | | | 1.2 | | | 17,567 | | | 1.1 | |
| | | $ | 1,547,061 | | | 100.0 | % | | $ | 1,719,790 | | | 100.0 | % | | $ | 1,638,512 | | | 100.0 | % | | $ | 1,551,336 | | | 100.0 | % |
Duration
Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement we use to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.
Investment Results
We invest the premiums received from our policyholders in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Our net investment income increased slightly in the three-month periodthree- and nine-month periods ended September 30, 2022,2023, compared with the same periodperiods of 20212022 primarily due to the higher yields in the fixed income portfolio, offset byreinvestment in the changefixed income portfolio, higher income on cash and cash equivalents, and an increase in the fair value of our investments in limited liability partnerships. Net investment income decreased in the nine-month period ended September 30, 2022, compared with the same period of 2021 primarily due to the change in the fair value of our investments in limited liability partnerships. Fixed income securities average yields have risen from both the third quarter of 2021 and on a year-to-date basis driven by higher interest rates.
| | Investment Results | Investment Results | Investment Results |
| (unaudited) | (unaudited) | Three Months Ended September 30, | | Nine Months Ended September 30, | (unaudited) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In Thousands) | (In Thousands) | 2022 | | 2021 | | | 2022 | | 2021 | | (In Thousands) | 2023 | | 2022 | Change % | | 2023 | | 2022 | Change % |
| Investment income: | Investment income: | | | | | Investment income: | |
| Interest on fixed maturities | Interest on fixed maturities | $ | 12,792 | | | $ | 10,671 | | | | $ | 35,879 | | | $ | 32,441 | | | Interest on fixed maturities | $ | 14,472 | | | $ | 12,792 | | 13.1 | % | | $ | 41,192 | | | $ | 35,879 | | 14.8 | % |
| Dividends on equity securities | Dividends on equity securities | 1,325 | | | 1,383 | | | | 3,934 | | | 3,711 | | | Dividends on equity securities | 639 | | | 1,325 | | (51.8) | % | | 3,067 | | | 3,934 | | (22.0) | % |
| Income on other long-term investments | Income on other long-term investments | (1,348) | | | 1,305 | | | | (3,959) | | | 10,822 | | | Income on other long-term investments | 1,093 | | | (1,348) | | 181.1 | % | | (3,491) | | | (3,959) | | 11.8 | % |
| Other | Other | 891 | | | 605 | | | | 2,279 | | | 1,788 | | | Other | 2,574 | | | 891 | | 188.9 | % | | 6,868 | | | 2,279 | | 201.4 | % |
| Total investment income | Total investment income | $ | 13,660 | | | $ | 13,964 | | | | $ | 38,133 | | | $ | 48,762 | | | Total investment income | $ | 18,778 | | | $ | 13,660 | | 37.5 | % | | $ | 47,636 | | | $ | 38,133 | | 24.9 | % |
| Less investment expenses | Less investment expenses | 2,054 | | | 2,393 | | | | 6,071 | | | 6,315 | | | Less investment expenses | 2,319 | | | 2,054 | | 12.9 | % | | 7,128 | | | 6,071 | | 17.4 | % |
| Net investment income | Net investment income | $ | 11,606 | | | $ | 11,571 | | | | $ | 32,062 | | | $ | 42,447 | | | Net investment income | $ | 16,459 | | | $ | 11,606 | | 41.8 | % | | $ | 40,508 | | | $ | 32,062 | | 26.3 | % |
| | | Average yields: | Average yields: | | | | | Average yields: | |
| | Fixed income securities: | Fixed income securities: | | | | | Fixed income securities: | |
Pre-tax (1) | Pre-tax (1) | 3.07 | % | | 2.55 | % | | | 2.88 | % | | 2.58 | % | | Pre-tax (1) | 3.35 | % | | 3.07 | % | 0.28 | % | | 3.20 | % | | 2.88 | % | 0.31 | % |
(1) Fixed income securities yield excluding net unrealized investment gains/losses and expenses
We hold certain investments in limited liability partnerships that are recorded on the equity method of accounting, with changes in value of these investments recorded in investment income. In the three- and nine-month periods ended September 30, 2022,2023, the change in total value of our investments in limited liability partnerships resulted in aninvestment income of $1.1 million and investment loss of $3.5 million, respectively, as compared to investment losses of $1.3 million and $4.0 million as compared to investment income of $1.3 million and $10.8 million in the same periods of 2021.2022.
We had net investment losses of $14.3$2.0 million and $35.6$2.6 million during the three- and nine-month periods ended September 30, 2022,2023, respectively, as compared to net investment losses of $2.3$14.3 million and net investment gains $28.2$35.6 million in the same periods of 2021.2022. The change in the three- and nine-month periods ended September 30, 20222023 as compared to the same periods in 20212022 was primarily due to the changeincrease in the fair value of our investments in equity securities investments driven by equity market losses in 2022.
We regularly monitor the difference between our cost basis and the estimated fair value of our investments. For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs.versus amortized cost, investment spreads widening or contracting, rating actions, payment and default history.
Non-credit related changes in unrealized gains and losses on available-for-sale fixed maturity securities are recognized as a component of other comprehensive income, impact stockholders' equity and book value per share, but do not affect net income. We believe that any unrealized losses on our available-for-sale securities at September 30, 20222023 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.
For mortgage loans, an allowance for losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments that have similar risk characteristics. This allowance is presented as a separate line in the Consolidated Balance Sheets with an offset to "Net investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income.
To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. An example of a market linkedmarket-linked adjustment is the change in commercial market price appreciation or change in gross domestic product, with every point of fall leading to an increase in loss reserve. Local market economics are also considered. On a quarterly basis, quantitative
leading to an increase in loss reserve. Local market economics are also considered. On a quarterly basis, quantitative credit risk metrics, including for example, cash-flows,cash flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations. Our cash inflows are primarily a result of the receipt of premiums, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of losses and loss settlement expenses, the purchase of investments, operating expenses, dividends, pension plan contributions, and in recent years, common stock repurchases.
We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed by regulatory agencies in the United States.
On August 18, 2023, the Company received a credit rating downgrade from AM Best. The Financial Strength Rating (FSR) was downgraded to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) was downgraded to "a-" (Excellent) from "a" (Excellent) of the property/casualty subsidiaries of United Fire Group, Inc. Concurrently, AM Best has downgraded the Long-Term ICR to "bbb-" (Good) from "bbb" (Good) of UFG. The outlook of these Credit Ratings (ratings) has been revised to stable from negative. The Company has not experienced material impacts to its business or financial results as a result of the downgrade, but is subject to heightened risks associated with any further potential downgrades. Please see Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q for more information.
Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes.
Historically, we have generated substantial cash inflows from operations. It is our policy to invest the cash generated from operations in securities with maturities that, in the aggregate, correlate to the anticipated timing of payments for losses and loss settlement expenses. The majority of our assets are invested in available-for-sale fixed maturity securities.
The following table displays a consolidated summary of cash sources and uses for the nine-month periods ended September 30, 20222023 and 2021:2022:
| | Cash Flow Summary | Cash Flow Summary | Nine Months Ended September 30, | Cash Flow Summary | Nine Months Ended September 30, |
| (In Thousands) | (In Thousands) | 2022 | | 2021 | (In Thousands) | 2023 | | 2022 |
| Cash provided by (used in) | Cash provided by (used in) | | Cash provided by (used in) | |
| Operating activities | Operating activities | $ | (29,793) | | | $ | 18,188 | | Operating activities | $ | 149,506 | | | $ | (29,793) | |
| Investing activities | Investing activities | (38,314) | | | 40,358 | | Investing activities | (164,661) | | | (38,314) | |
| Financing activities | Financing activities | (10,980) | | | (13,721) | | Financing activities | (12,345) | | | (10,980) | |
| Net change in cash and cash equivalents | Net change in cash and cash equivalents | $ | (79,087) | | | $ | 44,825 | | Net change in cash and cash equivalents | $ | (27,500) | | | $ | (79,087) | |
Our cash flows were sufficient to meet our liquidity needs for the nine-month periods ended September 30, 20222023 and 20212022 and we anticipate they will be sufficient to meet our future liquidity needs for at least the next twelve12 months. We also have the ability to draw on our credit facility if needed.
Operating Activities
Net cash flows from operating activities had outflows of $29.8 million and inflows of $18.2 million for the nine-month periods ended September 30, 2022 and 2021, respectively. In the nine-month period ended September 30, 2022, the net operating cash outflows were driven by loss and loss adjustment expense and tax related outflows not being fully offset by premium and investment income cash inflows.
Operating Activities
Net cash flows from operating activities had inflows of $149.5 million and outflows of $29.8 million for the nine-month periods ended September 30, 2023 and 2022, respectively. In the nine-month period ended September 30, 2023, the net operating cash inflows were driven by premium and investment inflows offsetting loss and expense outflows.
Investing Activities
Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturity securities provide regular interest payments and allow us to match the duration of our liabilities. Equity securities provide dividend income, potential dividend income growth and potential appreciation. For further discussion of our investments, including our philosophy and our strategy for our portfolio, see the "Investment Portfolio" section of this Item 2.
In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed maturity securities can also can provide liquidity. During the next five years, $490.0$606.0 million, or 31.737.0 percent, of our fixed maturity portfolio will mature.
We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At September 30, 2022,2023, our cash and cash equivalents included $10.0$14.0 million related to these money market accounts, compared to $43.4$31.3 million at December 31, 2021.2022.
Net cash flows used by investing activities were $164.7 million for the nine-month period ended September 30, 2023, compared to net cash flows used by investing activities of $38.3 million for the nine-month period ended September 30, 2022, compared to net cash flows provided by investing activities of $40.4 million for the nine-month period ended September 30, 2021.2022. For the nine-month periods ended September 30, 20222023 and 2021,2022, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $232.3$98.6 million and $389.0$232.3 million, respectively. Our cash outflows for investment purchases were $267.9$255.3 million for the nine-month period ended September 30, 2022,2023, compared to $337.7$267.9 million for the same period of 2021.2022.
Financing Activities
Net cash flows used in financing activities was $11.0were $12.3 million for the nine-month period ended September 30, 2022 which decreased $2.72023, an increase of $1.4 million compared to $13.7$11.0 million used in the nine-month period ended September 30, 2021.
Credit Facilities
On March 31, 2020, United Fire & Casualty Company, as borrower ("Borrower"), a wholly owned subsidiary of United Fire Group, Inc. entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, issuing lender, swing lineswing-line lender and lender, and the other lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), providing for a $50 million revolving credit facility, which includes a $20 million letter of credit sub-facility and a $5 million swing lineswing-line loan for working capital and other general corporate purposes. The Credit Agreement is provided on an unsecured basis, and the Borrower has the option to increase the Credit Agreement by $100 million if agreed to by the Lenders providing such incremental facility. As of September 30, 20222023 and 2021,2022, there were no balances outstanding under the Credit Agreement. For the nine-month period ended September 30, 20222023 and 2021,2022, we did not incur any interest expense related to the credit facility. As of September 30, 2023, the Company was in compliance with the minimum net worth covenant in the Credit Agreement. For further discussion of the Credit Agreement, refer to Part I, Item 1, Note 8 "Debt."
Dividends
Dividends paid to shareholders totaled $11.8$12.1 million and $11.3$11.8 million in the nine-month periods ended September 30, 20222023 and 2021,2022, 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 will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds.
As a holding company with no independent operations of its own, we rely on dividends received from our insurance company subsidiaries in order to pay dividends to our common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws inof the states in which they are domiciled, and if applicable, commercially
domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at September 30, 2022,2023, UFG's sole direct insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $70.4$59.8 million in dividend payments without prior regulatory approval. We do not believe that these restrictions have a material impact in meeting the cash obligations of UFG.
Stockholders' Equity
Stockholders' equity decreased to $700.8$644.9 million at September 30, 2022,2023, from $879.1$740.1 million at December 31, 2021. 2022. The Company's bookbook value per share was $27.82,$25.53, which is a decrease of $7.23$3.83 per share, or 20.613.0 percent, from December 31, 2021.2022. The decrease is primarily attributable to the $156.1net loss of $49.3 million, decrease in the net unrealized value from ourdepreciation after tax of $34.8 million on fixed maturity securities, net of tax, stockholders'and shareholder dividends of $11.8 million, and net losses of $5.1$12.1 million during the first nine months of 2022.
Funding Commitments
Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through July 10, 2030, to make capital contributions upon the request of certain of the partnership.partnerships. Our remaining potential contractual obligation was $43.0$32.2 million at September 30, 2022.2023.
In addition, the Company invested $25.0 million in December 2019 in a limited liability partnership investment fund that is subject to a three yearthree-year lockup with a 60 day60-day minimum notice, with 4four possible repurchase dates per year after the three-year lockup period has concluded. The fair value of the investment at September 30, 20222023 was $25.0$25.2 million and there are no remaining capital contribution obligations with this investment.
MEASUREMENT OF RESULTS
Management evaluates our operations by monitoring key measures of growth and profitability. The following section provides further explanation of thecatastrophe losses, a key measuresmeasure management uses to evaluate our results.
Catastrophe losses is a commonly used financialan operational measure that useswhich utilizes the designations of the Insurance Services Office ("ISO") and are reported with losses and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25.0 million or more in U.S. industry-wide direct insured losses to property and that affect a significant number of insureds and insurers ("ISO catastrophe"). In addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may include U.S. or international losses that we believe are, or will be, material to our operations, either in amount or in number of claims made. Management, at times, may determine for comparison purposes that it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation. The frequency and severity of catastrophe losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance business, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in our periodic earnings.
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In Thousands) | (In Thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In Thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| ISO catastrophes | ISO catastrophes | $ | 27,816 | | | $ | 33,105 | | | $ | 62,179 | | | $ | 81,277 | | ISO catastrophes | $ | 10,749 | | | $ | 27,816 | | | $ | 56,354 | | | $ | 62,179 | |
Non-ISO catastrophes (1) | Non-ISO catastrophes (1) | (607) | | | 6,361 | | | (806) | | | 9,049 | | Non-ISO catastrophes (1) | 4,546 | | | (607) | | | 3,705 | | | (806) | |
| Total catastrophes | Total catastrophes | $ | 27,209 | | | $ | 39,466 | | | $ | 61,373 | | | $ | 90,326 | | Total catastrophes | $ | 15,295 | | | $ | 27,209 | | | $ | 60,059 | | | $ | 61,373 | |
(1) This number includes international assumed losses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to market risk arising from potential losses in our investment portfolio due to adverse changes in interest rates and market prices. However, we have the ability to hold fixed maturity investments to maturity. Our investment guidelines define the overall framework for managing our market and other investment risks, including accountability and controls. In addition, each of our subsidiaries has specific investment policies that delineate the investment limits and strategies that are appropriate given each entity's liquidity, surplus, product, and regulatory requirements. We respond to market risk by managing the character of investment purchases.
It is our philosophy that we do not utilize financial hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but rather attempt to mitigate our exposure through active portfolio management. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer. At September 30, 2022,2023, we did not have direct exposure to investments in sub-prime mortgages or other credit-enhancement exposures.
Our primary market risks are exposure to changes in interest rates and equity prices, and we have limited exposure to foreign currency exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC's rules and forms. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, no such change in our internal control over financial reporting occurred during the fiscal quarter to which this report relates. We believe our operational processes, internal controls over financial reporting and disclosures, and financial reporting systems are operating effectively in the present environment.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company is a party to a variety of legal proceedings. While the final outcome of these legal proceedings cannot be predicted with certainty, management believes all of the proceedings pending as of September 30, 20222023 to be ordinary and routine and does not expect these legal proceedings to have a material adverse effect on the Company's financial condition or results of operations.
ITEM 1A. RISK FACTORS
Our business is subject to a number of risks, including those identified in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K10-K/A for the year ended December 31, 20212022 filed with the SEC on February 25, 2022. March 1, 2023 and additionally by the following additional and updated risk factors:
AM Best recently announced a downgrade of the credit ratings of UFG and its property/casualty subsidiaries. A further downgrade in our financial strength or issuer credit ratings could result in a loss of business and could have a material adverse effect on our financial condition, results of operations and liquidity.
Ratings are an important factor in establishing the competitive position of insurance companies. Third-party rating agencies assess and rate the claims-paying ability, balance sheet strength and creditworthiness of insurers and reinsurers based on criteria established by the agencies. A.M. Best rates our property and casualty insurance companies on a group basis. Since 2012, A.M. Best has also provided an issuer credit rating to our parent holding company.
Financial strength and issuer credit ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength, creditworthiness and quality of insurers and reinsurers. These ratings are not evaluations directed to potential purchasers of our common stock, and are not recommendations to buy, sell or hold our common stock. These ratings are subject to change at any time and could be revised upward or downward or revoked at the discretion of the rating agency.
On August 18, 2023, UFG and our property/casualty subsidiaries received a rating downgrade from A.M. Best. For our property/casualty subsidiaries, the Financial Strength Rating (FSR) was downgraded to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) was downgraded to "a-" (Excellent) from "a" (Excellent). Concurrently, for UFG, AM Best has downgraded the Long-Term ICR to "bbb-" (Good) from "bbb" (Good). The outlook of these ratings has been revised to stable from negative.
The recent downgrades and any further downgrades in our financial strength ratings could adversely affect our ability to transact our current business, access the capital markets, lead to increased borrowing costs, or elevate interest rates. For more information, see Note 8 "Debt" in the Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Perceptions of the Company by investors, producers, other businesses and consumers could also be significantly impaired.
The ratings assigned by A.M. Best are an important factor in marketing our products. Our ability to retain our existing business, and to attract new business in our insurance operations is affected by our ratings from A.M. Best. Failure to maintain our ratings, or any other further adverse changes with respect to our ratings, could motivate current and future independent agents and policyholders to choose to transact their business with more highly rated competitors. If A.M. Best further downgrades our ratings or publicly indicates that our ratings are under review, it is possible that we will not be able to compete as effectively, leading to a decrease in premium revenue and earnings. For example, many of our agencies and policyholders have guidelines that require us to have an A.M. Best financial strength rating of "A-" or higher. A reduction of our A.M. Best ratings below "A-" could prevent us from issuing policies to a portion of our current policyholders or other potential policyholders with ratings requirements.
The failure of our insurance company subsidiaries to maintain their current ratings could dissuade a lender or reinsurance company from conducting business with us. A further ratings downgrade could also cause some of our
existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or creation of additional financial obligations.
Our stock price could become more volatile and your investment could lose value.
The market price of our common stock historically has been, and we expect will continue to be, subject to fluctuations. These fluctuations may be due to our operating results or factors specific to our operations (including those discussed in our risk factors), changes in securities analysts’ estimates of our future financial performance, ratings or recommendations, our results falling below our expectations and analysts’ and investors’ expectations, the failure of our capital return programs to meet analysts’ and investors’ expectations, significant catastrophe events, departure of key personnel, cyberattacks, or factors largely outside of our control, including those affecting the property and casualty insurance industry. The stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the actual operating performance of listed companies. These fluctuations could adversely affect the price of our common stock.
These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also have a material effect on our business, results of operations, financial condition and/or liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Under our share repurchase program, first announced in August 2007, we may purchase UFG common stock from time to time on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at our discretion and will depend upon a number of factors, including the share price, general economic and market conditions, and corporate and regulatory requirements. Our share repurchase program may be modified or discontinued at any time.
The following table provides information with respect toBoard of Directors reauthorized the share repurchase program in November 2022 through August 2024. There are 1,719,326 shares of common stock remaining under this authorization. There were no purchases of shares of common stock made by or on our behalf or by any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, during the three-month period ended September 30, 2022:2023.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Total Number of Shares | | Maximum Number of |
| Total | | | | Purchased as a Part of | | Shares that may yet be |
| Number of | | Average Price | | Publicly Announced | | Purchased Under the |
Period | Shares Purchased | | Paid per Share | | Plans or Programs | | Plans or Programs(1)
|
7/1/2022 - 7/31/2022 | — | | | $ | — | | | — | | | 1,719,326 | |
8/1/2022 - 8/31/2022 | — | | | — | | | — | | | 1,719,326 | |
| | | | | | | |
Total | — | | | $ | — | | | — | |
| | | 1,719,326 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Our share repurchase program was originally announced in August 2007. In August 2016, our Board of Directors authorized the repurchase of up to an additional 1,500,000 shares of common stock through the end of August 2018. This is in addition to the 1,528,886 shares of common stock remaining under its previous authorizations. In August 2018, our Board of Directors extended our share repurchase program through the end of August 2020. In August 2020, our Board of Directors extended our share repurchase program through the end of August 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.Securities Trading Plans of Officers and Directors
UFG has an Insider Trading Policy applicable to all individuals, including officers and directors of UFG, who have access to nonpublic information about UFG which limits the periods during which officers and directors are allowed to trade in Company securities. UFG's Insider Trading Policy permits trading plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), referred to as "Rule 10b5-1 trading plans." Under UFG's Insider Trading Policy, enactment of a Rule 10b5-1 trading plan by an officer or director requires approval by UFG's Nominating & Governance Committee, the Chief Executive Officer, or the Chief Financial Officer. During the third quarter of 2023, none of UFG's directors or officers adopted or terminated Rule 10b5-1 trading plans and none of UFG's directors or officers adopted or terminated a non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408(c) of Regulation S-K).
ITEM 6. EXHIBITS
| | | | | | | | | | | | | | | | | |
| Exhibit number | | Exhibit description | | Furnished herewith | Filed herewith |
10.1*10.1 | | | | | |
10.2*X | | Executive Employment Offer Letter, dated July 6, 2022, between the United Fire Group, Inc. and Kevin J. Leidwinger (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on July 7, 2022). | | | |
| 31.1 | | | | | X |
| 31.2 | | | | | X |
| 32.1 | | | | X | |
| 32.2 | | | | X | |
| 101.1 | | The following financial information from United Fire Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 20222023 formatted in Inline eXtensible Business Reporting Language (Inline XBRL): (i) Consolidated Balance Sheets as of September 30, 20222023 (unaudited) and December 31, 20212022; (ii) Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and nine-months ended September 30,, 2023 and 2022 and 2021; (iii) Consolidated Statement of Stockholders’ Equity (unaudited) for the three- and nine-months ended September 30,, 2023 and 2022 and 2021; (iv) Consolidated Statements of Cash Flows (unaudited) for the nine-months ended September 30,, 2023 and 2022 and 2021; and (v) Notes to Unaudited Consolidated Financial Statements, tagged as a block of text.
| | | X |
| 104.1 | | | | | X |
*Indicates a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| UNITED FIRE GROUP, INC. | | |
| (Registrant) | | |
| | | |
| /s/ Kevin J. Leidwinger | | /s/ Eric J. Martin |
| Kevin J. Leidwinger | | Eric J. Martin |
President, Chief Executive Officer, Director and Principal Executive Officer
| | SeniorExecutive Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer |
| | |
| | | |
November 3, 20222, 2023 | | November 3, 20222, 2023 |
| (Date) | | (Date) |
