UNITED FIRE GROUP INC

Reinsurance is a contract by which one insurer, called the reinsurer, agrees to cover, under certain defined circumstances, a portion of the losses incurred by a primary insurer if a claim is made under a policy issued by the primary insurer. Our property and casualty insurance companies follow the industry practice of reinsuring a portion of their exposure to reduce the net liability on individual risks to predetermined limits and to protect us against catastrophic losses, such as a hurricane or tornado.

Ceded Reinsurance

Our reinsurance allows us to manage our risk, increase our underwriting capacity and protect us from large events. A summary of our key reinsurance programs are as follows:

Property & Casualty Core Excess of Loss ("XOL") Treaty

Our property and casualty working program, which we refer to as the core treaty, includes a multi-line layer which applies in excess of our retention and annual aggregate deductible, as well as property-only and casualty-only towers above the multi-line exhaustion point. Our core treaty incepts January 1, 2025, and each layer is fully placed. The core treaty structure has changed from the 2024 treaty year. The layer changes are summarized in the table below. Each layer includes provisions providing for extra-contractual and excess of policy limit losses and terrorism coverage. However, included coverage varies based on individual reinsurer participation of each layer. The multi-line treaty includes a provision that limits the per occurrence maximum limit to $12 million. Reinstatement is free and unlimited, upon erosion of the annual aggregate deductible. This treaty provides coverage to the majority of the commercial property and casualty business that we write. The multi-line treaty combined with the property per risk provides for a combined limit of $47 million coverage excess of the $3 million retention, as compared to $2.5 million retention for the years 2021 through 2016 and $2.0 million for the years 2015 through 2012. The new 1st Property Per Risk includes six free reinstatements of the full limit. The 2nd and 3rd Property Per Risk layers include one reinstatement to the full amount at the same premium. A semi-automatic property facultative treaty is in place providing coverage for a limit of $25 million excess of $50 million, which brings the combined treaty coverage limit available for an eligible risk to $72 million excess of $3 million. If we have a property risk that requires limits in excess of our reinsured limit, facultative reinsurance is obtained. The multi-line treaty combined with the casualty tower provides for a combined limit of $57 million excess of the $3 million retention. This treaty protects from a loss to an individual policyholder or clash event where an occurrence involves multiple policyholders. The new 1st Casualty includes six free reinstatements of the full limit, while the Casualty 2nd, 3rd and 4th include a single reinstatement of the full limit at the same premium. The casualty layers include a provision that limits the maximum amount of any one life for workers' compensation losses. At times we may obtain separate casualty facultative reinsurance to cover specific exposures or policies, based on particular exposures presented by a policyholder.

Property Catastrophe XOL

In 2024, the Company continued the pillar occurrence in addition to the property catastrophe XOL ceded reinsurance programs. No substantive structural changes were made to the property catastrophe XOL, however the pillar occurrence structure was changed to split Named Storm and Earthquake from All Other Perils. The event retention for Named Storm and Earthquake remains at $5.0 million while the event retention for All Other Perils was reduced to $4.0 million. The property catastrophe XOL remains fully placed, while the pillar occurrence placement was increased to 50%. We did not experience any property catastrophe events that produced a ceded loss to either program in 2023 or 2024.

Our corporate property catastrophe reinsurance program, effective January 1, 2025, is an XOL treaty. The program consists of $110 million in coverage for losses in excess of $20 million. The treaty protects from catastrophic events such as earthquakes, hail, windstorms, and fires. The treaty consists of three layers and is fully placed. It includes provisions providing for extra-contractual and excess of policy limit losses and contains exclusions for communicable diseases and cyber loss. In addition, it includes a terrorism exclusion. However, included coverage varies based on individual reinsurer participation of each layer. Additionally, each layer can be reinstated once to its full amount at the same premium. The property catastrophe treaty is largely unchanged from the 2024 treaty year.

Earthquake and Flood XOL Treaty

We delegate underwriting authority to write a portfolio of Pacific Coast earthquake business. This arrangement began in 2019. An excess of loss treaty, effective January 1, 2025, is in place to specifically and exclusively reinsure business written through this arrangement. This program consists of $130 million for losses in excess of $10 million and is fully placed. Each layer can be reinstated once to its full amount at the same premium.

Surety Per Principal XOL Treaty

Our surety treaty incepts on January 1, 2025 and is an excess of loss treaty. The program consists of $45 million in coverage for losses in excess of $5 million per principal. The first layer includes three paid reinstatements, while the second and third include one paid reinstatement. Losses are considered discovered to the treaty year in accordance with the contract terms and conditions. The surety treaty is largely unchanged from the 2024 treaty year.

Terrorism Coverage

Our principal terrorism reinsurance protection is the coverage provided through the Terrorism Risk Insurance Program Reauthorization Act of 2019 ("TRIPRA"), effective through December 31, 2027. TRIPRA coverage includes most direct commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an insurer, with exclusions for commercial automobile insurance, burglary and theft insurance, surety, professional liability insurance and farm owners' multiple peril insurance. For calendar year 2024, the aggregate losses exceeding a threshold of $200.0 million industry-wide would be covered under this protection. Our TRIPRA deductible was $132.6 million for 2024 and our TRIPRA deductible is expected to be $137.2 million for 2025. Our catastrophe and non-catastrophe reinsurance programs provide limited coverage for terrorism exposure excluding nuclear, biological and chemical-related claims.

Assumed Reinsurance

The Company offers reinsurance coverage for property and casualty insurance through traditional treaty reinsurance channels and participates in the Lloyd's market through its corporate member at Lloyd's. We target diversifying risks that complement our direct portfolio. The following provides more detail on the type of assumed reinsurance business we target.

•Treaty reinsurance with regional property and casualty carriers, including casualty XOL, property per risk, and property catastrophe XOL.

•Treaty reinsurance with professional reinsurers and Lloyd's syndicates.

•Mortgage reinsurance with Freddie Mac and Fannie Mae, private mortgage insurers and surety carriers.

•Treaty reinsurance on risks underwritten by managing general agents.

•Treaty reinsurance underwritten on our behalf through reinsurance intermediary management agreements (RIMA) that define underwriting boundaries by product, class and type.

In 2024, we broadened the scope of our assumed portfolio by growing our client base and building around the renewal business. We grew our standard property and casualty treaty business while holding our property catastrophe retrocessional and Lloyd's businesses to only modest change. We engaged in the mortgage reinsurance market where conditions were favorable. We also incepted a few new managing general agent programs in the cyber liability and transactional liability markets.

In 2023 we continued to grow our assumed programs by renewing the programs added in 2022 and continuing to diversify our risks. We reduced exposure in property catastrophe retrocessional treaty and managing general agent treaty, while significantly growing our standard property and casualty treaty and Lloyd's businesses.

In 2022, we continued to grow our assumed programs by renewing the programs added in 2021 and continuing to diversify our risks in retrocessional treaty, managing general agent, reinsurance intermediary, and financial lines. Losses and loss settlement expenses ceded increased in 2022 due to two lines of business, other liability and fire and allied lines. Other liability is seeing more recoveries due to inflationary pressures and fire and allied lines has seen an increase in severity, with both of these issues driving increasing ceded recovery.

Reinsurer Credit Quality

We use many reinsurers, both domestic and foreign, which helps us to avoid concentrations of credit risk associated with our reinsurance. Our criteria for selecting reinsurance markets is to generally require capital and surplus of at least $500.0 million and an A.M. Best rating or an S&P rating of at least "A-." If a reinsurer is rated by both rating agencies, then both ratings must be at least an "A-." All of our reinsurance capacity is placed with reinsurers holding a rating of A- or better. For the small amount of reinsurance capacity we utilize that doesn't meet our criteria, markets are required to collateralize the risk. The following table represents the primary reinsurers we utilize and their financial strength ratings as of December 31, 2024:

(1) Primary reinsurers participating in the property and casualty excess of loss programs.

(2) Primary reinsurers participating in the surety excess of loss program.

Refer to Part II, Item 8, Note 4 "Reinsurance" for further discussion of our reinsurance programs.