UNITED FIRE GROUP INC

Previous wording

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."

Current wording

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 and Supplementary Data."

Previous wording

Originally 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 companies. Our property and casualty insurance company subsidiaries are licensed in all 50 states and the District of Columbia and are represented by approximately 1,000 independent agencies.

Current wording

Originally 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 companies. 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.

Previous wording

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."

Current wording

Our property and casualty insurance business operates and reports as one business segment. For more information, refer to Note 13 "Segment Information" in Part I, Item 1.

Previous wording

As of January 1, 2021, the Company became a member of Lloyd's of London ("Lloyd's") through McIntyre Cedar Corporate Member LLP. As a member of Lloyd's, the Company is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699, Syndicate 5623 and Syndicate 2358.

Current wording

The Company is a member of Lloyd's through its insurance subsidiary McIntyre Cedar Corporate Member LLP. Lloyd's operates as an insurance marketplace whereby members join syndicates to underwrite property and casualty and reinsurance business through a managing agent in return for receiving premiums. The Company participates in Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699, Syndicate 5623, Syndicate 2358, Syndicate 1955 and Syndicate 1609. The Company is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's ("FAL"), to support participation in these syndicates.

Previous wording

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.

Current wording

All of our property and casualty insurance subsidiaries belong to an intercompany reinsurance pooling arrangement. Pooling arrangements permit the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant's own surplus level. Under such arrangements, the members share substantially all of the insurance business that is written and allocate the combined premiums, losses and expenses based on percentages defined in the arrangement

Previous wording

For the nine-month period ended September 30, 2024, approximately 47 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri, and Louisiana.

Current wording

For the three-month period ended March 31, 2025, approximately 49.1 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri, and New Jersey.

Previous wording

We evaluate profit or loss based upon operating and investment results. Profit or loss described in the following sections of this Management's Discussion and Analysis is reported on a pre-tax basis. Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, underwriting and other operating expenses. Management uses metrics to provide financial statement users with a better understanding of results of operations, including net premiums written and three components of the loss ratio: underlying loss ratio, impacts of catastrophes and non-catastrophe prior period reserve development.

Current wording

We evaluate profit or loss based upon operating and investment results. Profit or loss described in the following sections of this Management's Discussion and Analysis is reported on a pre-tax basis. Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, underwriting and other operating expenses. Management uses metrics to provide financial statement users with a better understanding of results of operations, including adjusted operating income and three components of the loss ratio: underlying loss ratio, impacts of catastrophes and non-catastrophe prior period reserve development.

Previous wording

Catastrophe losses is an operational measure which utilizes the designations of the Insurance Services Office ("ISO") and is reported with losses and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. In addition to ISO catastrophes, we also include those events ("non-ISO catastrophes"), which may include U.S. or international losses, that we believe are, or will be material to our operations, either in amount or in number of claims made. Catastrophes are not predictable and are unique in terms of timing and financial impact. While management estimates catastrophe losses as incurred, due to the inherently unique nature of catastrophe losses, the impact in a reporting period is inclusive of catastrophes that occurred in the reporting period, as well as development on catastrophes that may have occurred in prior periods. The following table shows the breakdown of ISO and non-ISO catastrophes for the three- and nine-month periods ended September 30, 2024 and 2023.

Current wording

Underlying loss ratio represents the net loss ratio less the impacts of catastrophes and non-catastrophe prior period reserve development. The underlying combined ratio represents the combined ratio less the impacts of catastrophes and non-catastrophe prior period reserve development. The Company believes that the underlying loss ratio and underlying combined ratio are meaningful measures to understand the underlying trends in the core business in the current accident year, removing the volatility of catastrophes and prior period impacts. Management believes separate discussions on catastrophe losses and prior period reserve development are important to understanding how the Company is managing catastrophe risk and in identifying developments in longer-tailed business. Catastrophe losses is an operational measure that utilizes the designations of the Insurance Services Office ("ISO") and is reported with losses and loss adjustment expense amounts net of reinsurance recoverables, unless specified otherwise. In addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may include U.S. or international losses, that we believe are, or will be, material to our operations, either in amount or in number of claims made. Catastrophes are not predictable and are unique in terms of timing and financial impact. While management estimates catastrophe losses as incurred, due to the inherently unique nature of catastrophe losses, the impact in a reporting period is inclusive of catastrophes that occurred in the reporting period, as well as development on catastrophes that may have occurred in prior periods. Prior period reserve development is the increase (unfavorable) or decrease (favorable) in incurred loss and loss adjustment expense reserves at the valuation dates for losses which occurred in previous calendar years. This measure excludes development on catastrophe losses.

Previous wording

Net premiums written is frequently used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies. Net premiums written is the amount charged for insurance policy contracts issued and recognized on an annualized basis at the effective date of the policy. Management believes net premiums written is a meaningful measure for evaluating insurance company sales performance and geographical expansion efforts. Net premiums written for an insurance company consists of direct premiums written and premiums assumed, less premiums ceded. Net premiums earned is calculated on a pro-rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the unexpired terms of the insurance policies in force. The difference between net premiums earned and net premiums written is the change in unearned premiums and the change in prepaid reinsurance premiums.

Current wording

Net written premium is the amount charged for insurance policy contracts issued and recognized on an annualized basis at the effective date of the policy. Net written premium is frequently used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies. Management believes net written premium is a meaningful measure for evaluating insurance company sales performance and geographical expansion efforts. Net written premium for an insurance company consists of direct written premium and assumed premiums, less ceded premiums. The following shows our written premium for the three-month periods ended March 31, 2025 and 2024.

Previous wording

Net investment income was $24.5 million for the third quarter of 2024, an increase of $8.0 million compared to the third quarter of 2023. Income from our fixed income portfolio increased by $4.2 million due to portfolio management actions and investing at higher interest rates. Income on other long-term investments resulted in an additional $4.3 million as the valuation of our investments in limited liability partnerships varies from period to period. Net investment income for the nine-month period ended September 30, 2024 was $58.8 million, an increase of $18.3 million compared to the same period of 2023. The change in value of our limited liability partnerships contributed $9.3 million, higher investment yields from our fixed income portfolio increased $8.6 million, interest received on cash and cash equivalent balances increased $3.7 million and was partially offset by a $2.7 million decrease in dividends on equity securities and higher investment expenses of $1.3 million.

Current wording

Net investment income was $23.5 million for the first quarter of 2025, an increase of $7.1 million compared to the same period in 2024. Income from our fixed income portfolio increased by $6.0 million due to portfolio management actions taken during the year ended December 31, 2024 and investing at higher interest rates. Income on other long-term investments increased $2.0 million driven by better returns in the first quarter of 2025. Dividends on equity securities decreased $0.3 million due to the strategic re-allocation from equity securities to fixed maturities in 2024, as described above. Other investment income decreased $0.3 million driven by interest on cash and cash equivalents.

Previous wording

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

Current wording

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

Previous wording

Our invested assets totaled $2.0 billion at September 30, 2024, compared to $1.9 billion at December 31, 2023, an increase of $109 million. During the first quarter of 2024, we liquidated the remainder of our equity securities portfolio to complete the strategic reallocation of equity securities to fixed income assets. At September 30, 2024, fixed maturity securities made up 92.9 percent of the value of our investment portfolio. 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 take advances through the Federal Home Loan Bank of Des Moines ("FHLB Des Moines") facility. During the first quarter of 2024, the Company announced and entered into an investment management agreement with New England Asset Management ("NEAM") effective as of February 1, 2024, pursuant to which NEAM will provide investment management services.

Current wording

We monitor our portfolio to appropriately manage risk, achieve portfolio objectives and maximize investment income as market conditions change. Our overall investment strategy is to stay fully invested (i.e., minimize cash balances). If additional cash is needed, we have the ability to take advances through the Federal Home Loan Bank of Des Moines ("FHLB Des Moines") facility. The Company entered into an investment management agreement with New England Asset Management ("NEAM") effective as of February 1, 2024, pursuant to which NEAM will provide investment management services.

Previous wording

The table below shows the composition of fixed maturity securities held in our available-for-sale security portfolios by credit rating at September 30, 2024 and December 31, 2023. Information contained in the table is generally based upon the issued credit ratings provided by external rating agencies.

Current wording

The following table shows the composition of fixed maturity securities by credit rating at March 31, 2025 and December 31, 2024. Information contained in the table is generally based upon the issued credit ratings provided by external rating agencies.

Previous wording

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. 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.

Current wording

Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement used to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. Invested assets and reserve liability accounts with similar durations will have an offsetting effect of any change in interest rates. The primary purpose for matching invested assets and reserve liabilities is liquidity, and 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.

Previous wording

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.

Current wording

Liquidity measures our ability to generate sufficient cash flows to meet our short-term 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, and common stock repurchases. When considering our liquidity and cash flow, it is important to distinguish between the needs of our insurance subsidiaries and the needs of the holding company, United Fire Group, Inc. As a holding company with no operations of its own, United Fire Group, Inc. derives its cash primarily from its insurance subsidiaries.

Previous wording

The following table displays a consolidated summary of cash sources and uses for the nine-month periods ended September 30, 2024 and 2023:

Current wording

The following table displays a consolidated summary of cash sources and uses for the three-month periods ended March 31, 2025 and 2024:

Previous wording

Our cash flows were sufficient to meet our liquidity needs for the nine-month periods ended September 30, 2024 and 2023 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.

Current wording

Our cash flows were sufficient to meet our liquidity needs for the three-month periods ended March 31, 2025 and 2024 and we anticipate they will be sufficient to meet our future liquidity needs. We also have the ability to draw on our credit facility if needed.

Previous wording

We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. At September 30, 2024, our cash and cash equivalents included $105.9 million related to these money market accounts, compared to $20.3 million at December 31, 2023. The increase in money market funds is primarily due to the timing of investment sales and purchases, which resulted in a temporary increase before reinvestment into other securities.

Current wording

At March 31, 2025, our cash and cash equivalents included $36.0 million related to money market accounts, compared to $23.1 million at December 31, 2024.

Previous wording

Net cash flows from operating activities had inflows of $184.0 million and inflows of $149.5 million for the nine-month periods ended September 30, 2024 and 2023, respectively. In the nine-month period ended September 30, 2024, the net operating cash inflows were driven by premium and investment income offsetting loss and expense outflows.

Current wording

Net cash flows provided by operating activities were $35.7 million and $36.2 million for the three-month periods ended March 31, 2025 and 2024, respectively. In the three-month period ended March 31, 2025, the net operating cash inflows were driven by premium and investment income offsetting loss and expense outflows.

Previous wording

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, $491.2 million, or 26.5 percent, of our fixed maturity portfolio will mature.

Current wording

Sales of investments and proceeds from calls or maturities of fixed maturity securities can also provide liquidity. During the next five years, $459.6 million, or 23.8 percent, of our fixed maturity portfolio will mature.

Previous wording

Net cash flows used in investing activities were $143.1 million for the nine-month period ended September 30, 2024, compared to net cash flows used in investing activities of $164.7 million for the nine-month period ended September 30, 2023. For the nine-month periods ended September 30, 2024 and 2023, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $541.2 million and $98.6 million, respectively. Our cash outflows for investment purchases were $675.4 million for the nine-month period ended September 30, 2024, compared to $255.3 million for the same period of 2023.

Current wording

Net cash flows used in investing activities were $48.2 million for the three-month period ended March 31, 2025, compared to net cash flows provided by investing activities of $83.9 million for the three-month period ended March 31, 2024. For the three-month periods ended March 31, 2025 and 2024, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $77.3 million and $127.8 million, respectively. Our cash outflows for investment purchases were $122.9 million for the three-month period ended March 31, 2025, compared to $41.4 million for the same period of 2024.

Previous wording

On December 22, 2023, UF&C became a member of the Federal Home Loan Bank of Des Moines ("FHLB Des Moines"). Membership allows access to loans or advances. As of September 30, 2024, there were no advances outstanding under the FHLB Des Moines agreement. For further information regarding the agreement with FHLB Des Moines, see Note 8 "Debt" contained in Part I, Item 1.

Current wording

In December 2023, UF&C became a member of FHLB Des Moines. Membership allows access to loans or advances pursuant to the terms of FHLB Des Moines' standard Advances, Pledge and Security Agreement (the "Advances Agreement"). As of March 31, 2025, there were no advances outstanding under the Advances Agreement. For further information regarding the agreement with FHLB Des Moines, see Note 8 "Debt" contained in Part I, Item 1.

Previous wording

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.

Current wording

Dividends paid to shareholders totaled $4.1 million and $4.0 million in each of the three-month periods ended March 31, 2025 and 2024, 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.

Previous wording

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, 2024, UFG's sole direct insurance company subsidiary, UF&C, is able to make a maximum of $42.1 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.

Current wording

As a holding company with no independent operations of its own, UFG relies on dividends received from its insurance company subsidiaries in order to pay dividends to its common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, under Iowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of the Iowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the preceding December 31 less any dividends paid in the previous 12 months, or net income of the preceding calendar year on a statutory basis less any dividends paid in the previous 12 months, 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 March 31, 2025, UFG's sole direct insurance company subsidiary, UF&C, is able to make a maximum of $51.9 million in dividend payments without prior regulatory approval. These restrictions are not expected to have a material impact in meeting the cash obligations of UFG.

Previous wording

Stockholders' equity increased to $785.8 million at September 30, 2024, from $733.7 million at December 31, 2023. The Company's book value per share was $31.01, which is an increase of $1.97 per share, or 6.8 percent, from December 31, 2023. The increase is primarily attributable to net income of $30.5 million and reduction in net unrealized losses of $31.2 million on fixed maturity securities, slightly offset with shareholder dividends of $12.2 million during the first nine months of 2024.

Current wording

Stockholders' equity increased to $817.7 million at March 31, 2025, from $781.5 million at December 31, 2024. The Company's book value per share was $32.13, which is an increase of $1.33 per share, or 4.3 percent, from December 31, 2024. The increase is primarily attributable to net income of $17.7 million and reduction in net unrealized losses of $20.5 million on fixed maturity securities, slightly offset with shareholder dividends of $4.1 million during the first three months of 2025.