United Fire Group Inc: Form 10-Q for the period ended Sep 30, 2023

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

CRITICAL ACCOUNTING POLICIES

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

INTRODUCTION

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

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

BUSINESS OVERVIEW

Founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("UFG," the "Company," "we," "us," or "our") and its consolidated insurance subsidiaries provide insurance protection for individuals and businesses through several regional offices. Our property and casualty insurance company subsidiaries are licensed in 50 states and the District of Columbia and are represented by approximately 1,000 independent agencies.

Our primary sources of revenue are premiums and investment income. Major categories of expenses from our operations include losses and loss settlement expenses, underwriting and other operating expenses.

Reportable Segments

Our property and casualty insurance business operates and reports as one business segment. For more information, refer to Part I, Item 1, Note 1. "Nature of Operations and Basis of Presentation."

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Lloyd's Syndicates

As of January 1, 2021, the Company became a member of Lloyd's of London ("Lloyd's"). As a member of Lloyd's, the Company is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699 and Syndicate 5623. At September 30, 2023, the Company's FAL investments were comprised of cash of $24.4 million on deposit with Lloyd's in order to satisfy these FAL requirements.

Personal Lines Business

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

Pooling Arrangement

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

Geographic Concentration

For the nine-month period ended September 30, 2023, approximately 47.6 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri, and Louisiana.

Profit Factors

Our profitability is influenced by many factors, including price, competition, economic conditions, investment returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, prudent management of our investments, appropriate matching of assets and liabilities, effective use of ceded reinsurance and effective and efficient use of technology.

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FINANCIAL HIGHLIGHTS

(1) Net underlying loss ratio is defined as the net loss ratio less impacts of catastrophes and non-catastrophe prior year reserve development.

(2) Net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our Consolidated Financial Statements.

(3) Expense ratio is calculated by dividing non-deferred underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance business.

(4) Combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.

NM = Not meaningful

RESULTS OF OPERATIONS

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

For the nine-month period ended September 30, 2023, net loss was $49.3 million compared to a net loss of $5.1 million for the same period of 2022. The change was primarily due to higher loss and LAE offset by an increase in earned premium and net investment gains compared to net investment losses for the same period in 2022.

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

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

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

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

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

The net loss ratio decreased 10.0 percentage points to 66.6 percent for the third quarter of 2023, compared to 76.6 percent in the same period in 2022. The decrease was driven by reduced prior period reserve strengthening and

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

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

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

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

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

Reserve Development

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

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

40 individual factor on the development of reserves.

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

2023 Development

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

2022 Development

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

Reserve development amounts can vary significantly from quarter-to-quarter and year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business. At September 30, 2023, our total reserves were within a reasonable range of our actuarial estimates.

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The following tables display our net premiums earned, net losses and loss settlement expenses and net loss ratio by line of business:

(In Thousands, Except Ratios)

Unaudited

(1) Commercial lines "Other liability" is business insurance covering bodily injury and property damage arising from general business operations, accidents on the insured's premises and products manufactured or sold.

(2) Commercial lines "Fire and allied lines" includes fire, allied lines, commercial multiple peril and inland marine.

(3) Commercial lines "Surety" previously referred to as "Fidelity and surety."

(4) Personal lines "Fire and allied lines" includes fire, allied lines, homeowners and inland marine.

NM = Not meaningful

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(In Thousands, Except Ratios)

Unaudited

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

• Other liability lines - The net loss ratio improved 62.8 percentage points and deteriorated 10.8 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022. The improvement in the three-month period was driven by a reduction in prior year reserve strengthening as compared to the same period last year. In the third quarter of 2022, reserves were strengthened on other liability lines concentrated in supported umbrella and construction defect exposures, increasing the prospective view of loss costs in these long-tailed lines. This strengthening did not occur in the third quarter of 2023, resulting in an improved net loss ratio as compared to the third quarter of 2022. In addition, the underlying loss ratio also improved in the third quarter of 2023 from the same period last year due to a reduced outlook for supported umbrella driven by improved analytics that brought a greater understanding of historical umbrella rate levels. The deterioration in the nine-month period ended September 30, 2023 is related to an increase in the estimation of evolving loss trends primarily affecting construction defect and excess and surplus lines excess casualty. During the last half of 2022 and first half of 2023, a combination of deeper analytical insights and emerging claim experience has increased our view of potential exposure within this line. Our prospective view of loss costs in these long-tailed lines has increased since this time last year.
• Commercial fire and allied lines - The net loss ratio deteriorated 3.7 percentage points and improved 0.9 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022. The deterioration in the three-month period is due to increased underlying losses offset by lower catastrophe losses. The improvement in the nine-month period is due to favorable prior period development in 2023 versus unfavorable development in 2022, offset by higher catastrophe losses and underlying losses.

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• Commercial automobile - The net loss ratio deteriorated 23.8 percentage points and 20.6 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022. This was driven by a strengthening of prior year reserves in the current year in reaction to continuing loss trends, as compared to a release of reserves in prior periods.
• Workers' compensation - The net loss ratio deteriorated 85.3 percentage points and 9.2 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022 primarily related to significant favorable prior year reserve development in the prior periods.
• Surety - The net loss ratio deteriorated 34.0 percentage points and 35.3 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022 primarily due to a small number of large claims and associated reinsurance reinstatement premiums. This business has historically delivered strong profitability, but can experience occasional periods of volatility. In addition, we are seeing a broader increase in risk within this line that aligns with macro-economic conditions, including inflation.
• Assumed reinsurance - The net loss ratio improved 16.0 percentage points and deteriorated 22.7 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, as compared to the same periods in 2022. The improvement in the three-month period is a result of a reduction in catastrophe losses due to initial reserves for Hurricane Ian in 2022. The material change in the nine-month results was due to the continued enhanced analysis of this book of business. As discussed in our second quarter of 2023 results, this review resulted in adjustments in the allocation of loss reserves to better align with the exposures.

Financial Condition

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

Investment Portfolio

Our invested assets totaled $1.8 billion at September 30, 2023, compared to $1.8 billion at December 31, 2022, a decrease of $15.8 million. At September 30, 2023, fixed maturity securities and equity securities made up 89.6 percent and 2.8 percent of the value of our investment portfolio, respectively. Because the primary purpose of our investment portfolio is to fund future claims payments, we use a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government and government agency bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to stay fully invested (i.e., minimize cash balances). If additional cash is needed, we have the ability to borrow funds available under our revolving credit facility.

Composition

We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation, regulatory requirements, interest rates and credit quality of assets. We administer our investment portfolio based on investment guidelines approved by management and the investment committee of our Board of Directors that comply with applicable statutory regulations.

The composition of our investment portfolio at September 30, 2023 is presented at carrying value in the following table:

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(In Thousands, Except Ratios)

(1) Available-for-sale securities with fixed maturities are carried at fair value.

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

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Credit Quality

The table below shows the composition of fixed maturity securities held in our available-for-sale security portfolios by credit rating at September 30, 2023 and December 31, 2022. Information contained in the table is generally based upon the issued credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain credit ratings from Standard & Poor's.

(In Thousands, Except Ratios)

Duration

Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement we use to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.

Investment Results

We invest the premiums received from our policyholders in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Our net investment income increased in the three- and nine-month periods ended September 30, 2023, compared with the same periods of 2022 primarily due to the higher yields in the fixed income portfolio, reinvestment in the fixed income portfolio, higher income on cash and cash equivalents, and an increase in the fair value of our investments in limited liability partnerships.

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Investment Results

(unaudited)

(In Thousands)

(1) Fixed income securities yield excluding net unrealized investment gains/losses and expenses

We hold certain investments in limited liability partnerships that are recorded on the equity method of accounting, with changes in value of these investments recorded in investment income. In the three- and nine-month periods ended September 30, 2023, the change in total value of our investments in limited liability partnerships resulted in investment income of $1.1 million and investment loss of $3.5 million, respectively, as compared to investment losses of $1.3 million and $4.0 million in the same periods of 2022.

We had net investment losses of $2.0 million and $2.6 million during the three- and nine-month periods ended September 30, 2023, respectively, as compared to net investment losses of $14.3 million and $35.6 million in the same periods of 2022. The change in the three- and nine-month periods ended September 30, 2023 as compared to the same periods in 2022 was primarily due to the increase in the fair value of our investments in equity securities driven by equity market losses in 2022.

We regularly monitor the difference between our cost basis and the estimated fair value of our investments. For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value versus amortized cost, investment spreads widening or contracting, rating actions, payment and default history.

Non-credit related changes in unrealized gains and losses on available-for-sale fixed maturity securities are recognized as a component of other comprehensive income, stockholders' equity and book value per share, but do not affect net income. We believe that any unrealized losses on our available-for-sale securities at September 30, 2023 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.

For mortgage loans, an allowance for losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments that have similar risk characteristics. This allowance is presented as a separate line in the Consolidated Balance Sheets with an offset to "Net investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income.

To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. An example of a market-linked adjustment is the change in commercial market price appreciation or change in gross domestic product, with every point of fall leading to an increase in loss reserve. Local market economics are also considered. On a quarterly basis, quantitative

47 credit risk metrics, including for example, cash flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations. Our cash inflows are primarily a result of the receipt of premiums, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of losses and loss settlement expenses, the purchase of investments, operating expenses, dividends, pension plan contributions, and in recent years, common stock repurchases.

We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed by regulatory agencies in the United States.

On August 18, 2023, the Company received a credit rating downgrade from AM Best. The Financial Strength Rating (FSR) was downgraded to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) was downgraded to "a-" (Excellent) from "a" (Excellent) of the property/casualty subsidiaries of United Fire Group, Inc. Concurrently, AM Best has downgraded the Long-Term ICR to "bbb-" (Good) from "bbb" (Good) of UFG. The outlook of these Credit Ratings (ratings) has been revised to stable from negative. The Company has not experienced material impacts to its business or financial results as a result of the downgrade, but is subject to heightened risks associated with any further potential downgrades. Please see Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q for more information.

Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes.

Historically, we have generated substantial cash inflows from operations. It is our policy to invest the cash generated from operations in securities with maturities that, in the aggregate, correlate to the anticipated timing of payments for losses and loss settlement expenses. The majority of our assets are invested in available-for-sale fixed maturity securities.

The following table displays a consolidated summary of cash sources and uses for the nine-month periods ended September 30, 2023 and 2022:

(In Thousands)

Our cash flows were sufficient to meet our liquidity needs for the nine-month periods ended September 30, 2023 and 2022 and we anticipate they will be sufficient to meet our future liquidity needs for at least the next 12 months. We also have the ability to draw on our credit facility if needed.

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Operating Activities

Net cash flows from operating activities had inflows of $149.5 million and outflows of $29.8 million for the nine-month periods ended September 30, 2023 and 2022, respectively. In the nine-month period ended September 30, 2023, the net operating cash inflows were driven by premium and investment inflows offsetting loss and expense outflows.

Investing Activities

Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturity securities provide regular interest payments and allow us to match the duration of our liabilities. Equity securities provide dividend income, potential dividend income growth and potential appreciation. For further discussion of our investments, including our philosophy and our strategy for our portfolio, see the "Investment Portfolio" section of this Item 2.

In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed maturity securities can also provide liquidity. During the next five years, $606.0 million, or 37.0 percent, of our fixed maturity portfolio will mature.

We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At September 30, 2023, our cash and cash equivalents included $14.0 million related to these money market accounts, compared to $31.3 million at December 31, 2022.

Net cash flows used by investing activities were $164.7 million for the nine-month period ended September 30, 2023, compared to net cash flows used by investing activities of $38.3 million for the nine-month period ended September 30, 2022. For the nine-month periods ended September 30, 2023 and 2022, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $98.6 million and $232.3 million, respectively. Our cash outflows for investment purchases were $255.3 million for the nine-month period ended September 30, 2023, compared to $267.9 million for the same period of 2022.

Financing Activities

Net cash flows used in financing activities were $12.3 million for the nine-month period ended September 30, 2023, an increase of $1.4 million compared to $11.0 million used in the nine-month period ended September 30, 2022.

Credit Facilities

On March 31, 2020, United Fire & Casualty Company, as borrower ("Borrower"), a wholly owned subsidiary of United Fire Group, Inc. entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, issuing lender, swing-line lender and lender, and the other lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), providing for a $50 million revolving credit facility, which includes a $20 million letter of credit sub-facility and a $5 million swing-line loan for working capital and other general corporate purposes. The Credit Agreement is provided on an unsecured basis, and the Borrower has the option to increase the Credit Agreement by $100 million if agreed to by the Lenders providing such incremental facility. As of September 30, 2023 and 2022, there were no balances outstanding under the Credit Agreement. For the nine-month period ended September 30, 2023 and 2022, we did not incur any interest expense related to the credit facility. As of September 30, 2023, the Company was in compliance with the minimum net worth covenant in the Credit Agreement. For further discussion of the Credit Agreement, refer to Part I, Item 1, Note 8 "Debt."

Dividends

Dividends paid to shareholders totaled $12.1 million and $11.8 million in the nine-month periods ended September 30, 2023 and 2022, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.

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Payments of any future dividends and the amounts of such dividends will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds.

As a holding company with no independent operations of its own, we rely on dividends received from our insurance company subsidiaries in order to pay dividends to our common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws of the states in which they are domiciled, and if applicable, commercially domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31, or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, at September 30, 2023, UFG's sole direct insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $59.8 million in dividend payments without prior regulatory approval. We do not believe that these restrictions have a material impact in meeting the cash obligations of UFG.

Stockholders' Equity

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

Funding Commitments

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

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

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MEASUREMENT OF RESULTS

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

Catastrophe losses is an operational measure which utilizes the designations of the Insurance Services Office ("ISO") and are reported with losses and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25.0 million or more in U.S. industry-wide direct insured losses to property and that affect a significant number of insureds and insurers ("ISO catastrophe"). In addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may include U.S. or international losses that we believe are, or will be, material to our operations, either in amount or in number of claims made. Management, at times, may determine for comparison purposes that it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation. The frequency and severity of catastrophe losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance business, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in our periodic earnings.

(In Thousands)

(1) This number includes international assumed losses.

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

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

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

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

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

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

Ratings are an important factor in establishing the competitive position of insurance companies. Third-party rating agencies assess and rate the claims-paying ability, balance sheet strength and creditworthiness of insurers and reinsurers based on criteria established by the agencies. A.M. Best rates our property and casualty insurance companies on a group basis. Since 2012, A.M. Best has also provided an issuer credit rating to our parent holding company.

Financial strength and issuer credit ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength, creditworthiness and quality of insurers and reinsurers. These ratings are not evaluations directed to potential purchasers of our common stock, and are not recommendations to buy, sell or hold our common stock. These ratings are subject to change at any time and could be revised upward or downward or revoked at the discretion of the rating agency.

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

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

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

The failure of our insurance company subsidiaries to maintain their current ratings could dissuade a lender or reinsurance company from conducting business with us. A further ratings downgrade could also cause some of our

53 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.