United Fire Group - 10-Q quarterly report FY2021 Q3

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-34257

________________________

UNITED FIRE GROUP INC.

(Exact name of registrant as specified in its charter)


Iowa						45-2302834
(State of incorporation)						(I.R.S. Employer Identification No.)


118 Second Avenue SE
Cedar Rapids	Iowa	52401
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (319) 399-5700

Securities Registered Pursuant to Section 12(b) of the Exchange Act of 1934:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value	UFCS	The NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐

No ☒

As of November 1, 2021, 25,080,923 shares of common stock were outstanding.

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United Fire Group, Inc.

Index to Quarterly Report on Form 10-Q

September 30, 2021


			Page
Forward-Looking Information			1

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020			3

Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and nine -month periods ended S eptember 30, 2021 and 2020			4

Consolidated Statement of Stockholders’ Equity (unaudited) for the three- and nine -month periods ended September 30, 2021 and 2020			5

Consolidated Statements of Cash Flows (unaudited) for the three- and nine -month periods ended September 30, 2021 and 2020			7

Notes to Unaudited Consolidated Financial Statements			8


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37

Item 3. Quantitative and Qualitative Disclosures About Market Risk			53

Item 4. Controls and Procedures			53

Part II. Other Information

Item 1. Legal Proceedings			54

Item 1A. Risk Factors			54

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			54

Item 3. Defaults Upon Senior Securities			54

Item 4. Mine Safety Disclosures			54

Item 5. Other Information			54

Item 6. Exhibits			56

Signatures			57

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FORWARD-LOOKING INFORMATION

This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "remain(s) optimistic," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020 and in our other filings with the Securities and Exchange Commission ("SEC") for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.

Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:

•The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy; the occurrence of catastrophic events, including international events, significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics, including the ongoing impact of the novel coronavirus (COVID-19) pandemic (including the emergence of variant strains);

•The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses;

•Geographic concentration risk in our property and casualty insurance business;

•The potential disruption of our operations and reputation due to unauthorized data access, cyber-attacks or cyber-terrorism and other security breaches;

•Developments in general economic conditions, domestic and global financial markets, interest rates and other-than-temporary impairment losses that could affect the performance of our investment portfolio;

•Litigation or regulatory actions that could require us to pay significant damages, fines or penalties or change the way we do business;

•Our ability to effectively underwrite and adequately price insured risks;

•Changes in industry trends, an increase in competition and significant industry developments;

•Lowering of one or more of the financial strength ratings of our operating subsidiaries or our issuer credit ratings and the adverse impact such action may have on our premium writings, policy retention, profitability and liquidity;

•Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and other federal stimulus relief legislation, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions; changes in laws, regulations and stock exchange requirements relating to corporate governance and the cost of compliance;

•Our relationship with and the financial strength of our reinsurers; and

•Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network.

These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have

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any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

United Fire Group, Inc.
Consolidated Balance Sheets


(In Thousands, Except Share Data)	September 30, 2021		December 31, 2020
	(unaudited)
ASSETS
Investments
Fixed maturities
Available-for-sale, at fair value (amortized cost $1,655,228 in 2021 and $1,720,291 in 2020; allowance for credit losses $— in 2021 and $5 in 2020)	$	1,727,601	$	1,825,438

Equity securities at fair value (cost $81,797 in 2021 and $49,085 in 2020)	200,876		206,685
Mortgage loans	47,325		47,690
Less: allowance for mortgage loan losses	71		76
Mortgage loans, net	47,254		47,614
Other long-term investments	80,162		69,305
Short-term investments available-for-sale, at fair value (amortized cost $175 in 2021 and $175 in 2020)	175		175
	2,056,068		2,149,217
Cash and cash equivalents	132,772		87,948
Accrued investment income	13,947		14,615
Premiums receivable (net of allowance for doubtful accounts of $894 in 2021 and $687 in 2020)	325,072		317,292
Deferred policy acquisition costs	95,060		87,094
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $58,709 in 2021 and $55,141 in 2020)	136,196		129,874
Reinsurance receivables and recoverables (net of allowance for credit losses of $98 in 2021 and $190 in 2020)	121,290		160,540
Prepaid reinsurance premiums	9,312		12,965
Intangible assets	6,211		6,743

Income taxes receivable	69,074		66,194
Other assets	45,652		37,196
TOTAL ASSETS	$	3,010,654	$	3,069,678
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities

Losses and loss settlement expenses	$	1,567,650	$	1,578,131
Unearned premiums	458,931		464,845
Accrued expenses and other liabilities	101,447		126,624

Long term debt	50,000		50,000
Deferred tax liability	18,097		24,929
TOTAL LIABILITIES	$	2,196,125	$	2,244,529
Stockholders’ Equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,080,923 and 25,055,479 shares issued and outstanding in 2021 and 2020, respectively	$	25	$	25
Additional paid-in capital	203,014		202,359
Retained earnings	567,411		555,854
Accumulated other comprehensive income, net of tax	44,079		66,911
TOTAL STOCKHOLDERS’ EQUITY	$	814,529	$	825,149
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,010,654	$	3,069,678

The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.

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United Fire Group, Inc.

Consolidated Statements of Income and Comprehensive Income (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, Except Share Data)	2021		2020		2021		2020
Revenues
Net premiums earned	$	238,909	$	259,061	$	722,837	$	791,519
Investment income, net of investment expenses	11,571		7,244		42,447		22,303
Net realized investment gains (losses) (includes reclassifications for net unrealized investment gains/(losses) on available-for-sale securities of $214 and $(453) in 2021 and $54 and $13 in 2020; previously included in accumulated other comprehensive income)	(2,269)		15,212		28,243		(62,416)
Other income (loss)	332		604		163		6,323
Total revenues	$	248,543	$	282,121	$	793,690	$	757,729
Benefits, Losses and Expenses
Losses and loss settlement expenses	$	175,444	$	234,693	$	533,981	$	626,169
Amortization of deferred policy acquisition costs	51,261		52,095		150,533		158,440
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,586 and $4,899 in 2021 and $1,072 and $3,217 in 2020; previously included in accumulated other comprehensive income)	35,468		35,470		82,236		114,020
Goodwill impairment	—		15,091		—		15,091
Interest Expense	797		—		2,391		—
Total benefits, losses and expenses	$	262,970	$	337,349	$	769,141	$	913,720
Income (loss) before income taxes	$	(14,427)	$	(55,228)	$	24,549	$	(155,991)
Federal income tax expense (benefit) (includes reclassifications of $285 and $1,122 in 2021 and $213 and $672 in 2020; previously included in accumulated other comprehensive income)	(4,834)		(17,987)		1,690		(52,176)
Net Income (loss)	$	(9,593)	$	(37,241)	$	22,859	$	(103,815)
Other comprehensive income (loss)
Change in net unrealized appreciation on investments	$	(12,230)	$	4,116	$	(33,231)	$	44,586
Change in liability for underfunded employee benefit plans	(3,765)		—		(1,025)		—
Other comprehensive income (loss), before tax and reclassification adjustments	$	(15,995)	$	4,116	$	(34,256)	$	44,586
Income tax effect	3,359		(864)		7,194		(9,363)
Other comprehensive income (loss), after tax, before reclassification adjustments	$	(12,636)	$	3,252	$	(27,062)	$	35,223
Reclassification adjustment for net realized investment losses included in income	$	(214)	$	(54)	$	453	$	(13)
Reclassification adjustment for employee benefit costs included in expense	1,586		1,072		4,899		3,217
Total reclassification adjustments, before tax	$	1,372	$	1,018	$	5,352	$	3,204
Income tax effect	(285)		(213)		(1,122)		(672)
Total reclassification adjustments, after tax	$	1,087	$	805	$	4,230	$	2,532
Comprehensive income (loss)	$	(21,142)	$	(33,184)	$	27	$	(66,060)
Diluted weighted average common shares outstanding	25,092,167		25,031,234		25,427,318		25,023,401
Earnings (loss) per common share:
Basic	$	(0.38)	$	(1.49)	$	0.91	$	(4.15)
Diluted	(0.38)		(1.49)		0.90		(4.15)

The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.

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United Fire Group, Inc.

Consolidated Statement of Stockholders’ Equity (Unaudited)


	Common Stock
(In Thousands, Except Share Data)	Shares outstanding	Common stock		Additional paid-in capital		Retaining Earnings		Accumulated other comprehensive income		Total

Balance, January 1, 2021	25,055,479	$	25	$	202,359	$	555,854	$	66,911	$	825,149
Net income	—	—		—		18,702		—		18,702
Shares repurchased	(207)	—		(7)		—		—		(7)
Stock based compensation	64,583	—		522		—		—		522
Dividends on common stock ($0.15 per share)	—	—		—		(3,767)		—		(3,767)
Change in net unrealized investment appreciation(1)	—	—		—		—		(23,456)		(23,456)
Change in liability for underfunded employee benefit plans(2)	—	—		—		—		6,456		6,456

Balance, March 31, 2021	25,119,855	$	25	$	202,874	$	570,789	$	49,911	$	823,599

Net income	—	$	—	$	—	$	13,750	$	—	$	13,750
Shares repurchased	(31,027)	—		(1,000)		—		—		(1,000)
Stock based compensation	28,512	—		1,180		—		—		1,180
Dividends on common stock ($0.15 per share)	—	—		—		(3,772)		—		(3,772)
Change in net unrealized investment appreciation(1)	—	—		—		—		7,391		7,391
Change in liability for underfunded employee benefit plans(2)	—	—		—		—		(1,674)		(1,674)

Balance, June 30, 2021	25,117,340	$	25	$	203,054	$	580,767	$	55,628	$	839,474

Net income (loss)	—	$	—	$	—	$	(9,593)	$	—	$	(9,593)
Shares repurchased	(36,417)	—		(1,001)		—		—		(1,001)
Stock based compensation	—	—		960		—		—		960
Dividends on common stock ($0.15 per share)	—	—		—		(3,763)		—		(3,763)
Change in net unrealized investment appreciation(1)	—	—		—		—		(9,828)		(9,828)
Change in liability for underfunded employee benefit plans(2)	—	—		—		—		(1,721)		(1,721)

Balance, September 30, 2021	25,080,923	$	25	$	203,014	$	567,411	$	44,079	$	814,529

(1)The change in net unrealized appreciation is net of reclassification adjustments and income taxes.

(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.

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	Common Stock
(In Thousands, Except Share Data)	Shares outstanding		Common stock		Additional paid-in capital		Retaining Earnings		Accumulated other comprehensive income		Total

Balance, January 1, 2020	25,015,963		$	25	$	200,179	$	697,116	$	13,152	$	910,472
Net income (loss)	—		—		—		(72,534)		—		(72,534)
Shares repurchased	(70,467)		—		(2,741)		—		—		(2,741)
Stock based compensation	70,597		—		879		—		—		879
Dividends on common stock $0.33 per share)	—		—		—		(8,249)		—		(8,249)
Change in net unrealized investment appreciation(1)	—		—		—		—		4,500		4,500
Change in liability for underfunded employee benefit plans(2)	—		—		—		—		847		847
Cumulative effect of change in accounting principle	—		—		—		(30)		—		(30)
Balance, March 31, 2020	25,016,093		$	25	$	198,317	$	616,303	$	18,499	$	833,144

Net income	—		$	—	$	—	$	5,960	$	—	$	5,960

Stock based compensation	15,141		—		1,479		—		—		1,479
Dividends on common stock $0.33 per share)	—		—		—		(8,267)		—		(8,267)
Change in net unrealized investment appreciation(1)	—		—		—		—		27,504		27,504
Change in liability for underfunded employee benefit plans(2)	—		—		—		—		847		847

Balance, June 30, 2020	25,031,234		$	25	$	199,796	$	613,996	$	46,850	$	860,667

Net income (loss)	$	—	$	—	$	—	$	(37,241)	$	—	$	(37,241)

Stock based compensation	—		—		1,053		—		—		1,053
Dividends on common stock $0.33 per share)	—		—		—		(8,254)		—		(8,254)
Change in net unrealized investment appreciation(1)	—		—		—		—		3,209		3,209
Change in liability for underfunded employee benefit plans(2)	—		—		—		—		848		848

Balance, September 30, 2020	25,031,234		$	25	$	200,849	$	568,501	$	50,907	$	820,282

(1)The change in net unrealized appreciation is net of reclassification adjustments and income taxes.

(2)The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.

The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.

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United Fire Group, Inc.

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended September 30,
(In Thousands)	2021		2020
Cash Flows From Operating Activities
Net income (loss)	$	22,859	$	(103,815)
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Net accretion of bond premium	10,546		7,719
Depreciation and amortization	4,887		5,009
Goodwill impairment	—		15,091
Stock-based compensation expense	3,074		3,979
Net realized investment (gains) losses	(28,243)		62,416
Net cash flows from equity and trading investments	34,504		37,552
Deferred income tax benefit	248		(21,824)
Changes in:
Accrued investment income	668		154
Premiums receivable	(7,780)		5,482
Deferred policy acquisition costs	(7,966)		69
Reinsurance receivables	39,250		(127,551)
Prepaid reinsurance premiums	3,653		(2,734)
Income taxes receivable	(2,880)		(38,198)
Other assets	(8,456)		(11,616)
Losses and loss settlement expenses	(10,481)		133,329
Unearned premiums	(5,914)		(5,432)
Accrued expenses and other liabilities	(21,348)		4,593

Deferred income taxes	(1,009)		7,713
Other, net	(7,424)		15,196
Cash from operating activities	(4,671)		90,947

Net cash provided by (used in) operating activities	$	18,188	$	(12,868)
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	170,637	$	16,907

Proceeds from call and maturity of available-for-sale investments	214,702		239,438
Proceeds from sale of other investments	3,616		5,391
Purchase of investments in mortgage loans	—		(5,564)
Purchase of investments available-for-sale	(331,644)		(216,001)
Purchase of other investments	(6,021)		(4,829)
Net purchases and sales of property and equipment	(10,932)		(15,506)
Net cash provided by investing activities	$	40,358	$	19,836
Cash Flows From Financing Activities
Issuance of common stock	$	(412)	$	(568)
Repurchase of common stock	(2,008)		(2,741)
Payment of cash dividends	(11,302)		(24,777)
Net cash used in financing activities	$	(13,722)	$	(28,086)

Net Change in Cash and Cash Equivalents	$	44,824	$	(21,118)
Cash and Cash Equivalents at Beginning of Period	87,948		120,722
Cash and Cash Equivalents at End of Period	$	132,772	$	99,604

The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.

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UNITED FIRE GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share amounts or as otherwise noted)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Business

United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our") and its consolidated subsidiaries and affiliates are engaged in the business of writing property and casualty insurance through a network of independent agencies. Our insurance company subsidiaries are licensed as property and casualty insurers in 50 states and the District of Columbia.

Basis of Presentation

The unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X promulgated by the SEC. Certain financial information that is included in our Annual Report on Form 10-K for the year ended December 31, 2020, including certain financial statement footnote disclosures, is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statement categories that are most dependent on management estimates and assumptions include: investments; deferred policy acquisition costs; reinsurance receivables and recoverables; loss settlement expenses; and pension and post-retirement benefit obligations.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Management of UFG believes the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. The results reported for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020.

Segment Information

Our property and casualty insurance business is reported as one business segment. The property and casualty insurance business profit or loss is consistent with consolidated reporting as disclosed on the Consolidated Statements of Income and Comprehensive Income. We analyze the property and casualty insurance business results based on profitability (i.e., loss ratios), expenses and return on equity. The Company's property and casualty insurance business was determined using a management approach to make decisions on operating matters, including allocating resources, assessing performance, determining which products to market and sell, determining distribution networks with insurance agents and monitoring the regulatory environment. The property and casualty insurance business products have similar economic characteristics and use a similar marketing and distribution strategy with our independent agents. We will continue to evaluate our operations on the basis of both statutory accounting principles prescribed or permitted by our states of domicile and GAAP.

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Lloyd's Syndicates

On January 1, 2021, the Company became a member of Lloyd's of London ("Lloyd's"). As a member of Lloyd's, the Company is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971 and Syndicate 4747. At September 30, 2021, the Company's FAL investments were comprised of cash of $21,331 on deposit with Lloyd's in order to satisfy these FAL requirements.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, cash on deposit and held at Lloyd's and non-negotiable certificates of deposit with original maturities of three months or less.

Deferred Policy Acquisition Costs ("DAC")

Certain costs associated with underwriting new business (primarily commissions, premium taxes and variable underwriting and policy issue expenses associated with successful acquisition efforts) are deferred. The following table is a summary of the components of DAC, including the related amortization recognized for the nine-month period ended September 30, 2021.




	Total
Recorded asset at beginning of period	$	87,094
Underwriting costs deferred	158,499
Amortization of deferred policy acquisition costs	(150,533)
Recorded asset at September 30, 2021	$	95,060

Property and casualty insurance policy acquisition costs deferred are amortized as premium revenue is recognized. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value. This takes into account the premium to be earned, losses and loss settlement expenses expected to be incurred and certain other costs expected to be incurred as the premium is earned.

Goodwill

Goodwill assets arise as a result of business combinations and consist of the excess of the fair value of consideration paid over the tangible assets acquired and liabilities assumed. All of our goodwill assets relate to the acquisition of Mercer Insurance Group, Inc. on March 28, 2011. We evaluate goodwill assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill assets may exceed their implied fair value. Any impairment is recognized in the period that the impairment is identified. During the third quarter of 2020, we completed a quantitative analysis of our goodwill as a result of the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, as a result of the COVID-19 pandemic and due to the current year weather related catastrophes; and (ii) the fair value of our stock trading significantly below book value. As a result of the quantitative analysis, we recorded an impairment charge of $15,091 as of September 30, 2020. The impairment charge was determined based on completion of both a discounted cash flow and market value analysis.

Other Intangible Assets

Our other intangible assets, which consist primarily of agency relationships, trade names, state insurance licenses, and software, are being amortized using the straight-line method over periods ranging from two years to 15 years, with the exception of state insurance licenses, which are indefinite-lived and not amortized.

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Long Term Debt

The Company executed a private placement debt transaction on December 15, 2020 between United Fire & Casualty Company ("UF&C"), and Federated Mutual Insurance Company, a mutual insurance company domiciled in Minnesota ("Federated Mutual"), and Federated Life Insurance Company, an insurance company domiciled in Minnesota ("Federated Life” and, together with Federated Mutual, the "Note Purchasers").

UF&C sold an aggregate principal amount of $50,000 of notes due 2040 to the Note Purchasers. One note with a principal amount of $35,000 was issued to Federated Mutual and one note with a principal amount of $15,000 was issued to Federated Life subject to the terms of their respective notes. The notes are presented as a long term debt liability in the Consolidated Balance Sheets and as a financing activity in the Consolidated Statement of Cash Flows.

Interest payments under the surplus notes are paid quarterly on March 15, June 15, September 15 and December 15 of each year (each such date, an "Interest Payment Date"). The interest rate will equal the rate that corresponds to the A.M. Best Co. (or its successor’s) financial strength rating for members of the United Fire & Casualty Pooled Group as of the applicable Interest Payment Date. For the nine-month period ended September 30, 2021, interest totaled $2,391 and is included in accrued expenses and other liabilities in the Consolidated Balance Sheets and as Interest expense in the Consolidated Statements of Income and Comprehensive Income. Payment of interest is subject to approval by the Iowa Insurance Division.

Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss ("NOL") carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has considered the implications of the CARES Act on its tax provision. As of September 30, 2021, there was no income tax benefit as a result of the CARES Act. As of September 30, 2020, there was an income tax benefit of $17,768 as a result of the CARES Act.

Deferred tax assets and liabilities are established based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the year-to-year change in the net deferred tax asset or liability, except for certain changes in deferred tax amounts that affect stockholders' equity and do not impact federal income tax expense.

We reported consolidated federal income tax expense of $1,690 for the nine-month period ended September 30, 2021 compared to an income tax benefit of $52,176 during the same period of 2020. Our effective tax rate for 2021 and 2020 is different than the federal statutory rate of 21 percent, due principally to the net effect of tax-exempt municipal bond interest income. Our effective tax rate for 2020 is also different than the federal statutory rate of 21 percent, due principally to the impact of the provisions of the CARES Act.

The Company performs a quarterly review of its tax positions and makes a determination of whether it is more likely than not that the tax position will be sustained upon examination. If, based on this review, it appears not more likely than not that the positions will be sustained, the Company will calculate any unrecognized tax benefits and, if necessary, calculate and accrue any related interest and penalties. We did not recognize any liability for unrecognized tax benefits at September 30, 2021 or December 31, 2020. In addition, we have not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.

For the nine-month periods ended September 30, 2021 and 2020, we made payments for income taxes totaling $5,345 and $125, respectively. We did not receive a tax refund during the nine-month periods ended September 30, 2021 and 2020.

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We file a consolidated federal income tax return. We also file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examination for years before 2017.

Leases

The Company determines if a contract contains a lease at inception of the contract. The Company's inventory of leases consists of operating leases which are recorded as a lease obligation liability disclosed in the "Accrued expenses and other liabilities" line on the Consolidated Balance Sheets and as a lease right-of-use asset disclosed in the "Other assets" line on the Consolidated Balance Sheets. The Company's operating leases consist of office space, vehicles, computer equipment and office equipment. The lease right-of-use asset represents the Company's right to use each underlying asset for the lease term and the lease obligation liability represents the Company's obligation over the lease term. The Company's lease obligation is recorded at the present value of the lease payments based on the term of the applied lease. Short-term leases of 12 months or less are recorded on the Consolidated Balance Sheets and lease payments are recognized on the Consolidated Statements of Income and Comprehensive Income. For more information on leases refer to Note 10 "Leases."

Variable Interest Entities

The Company and certain related parties are equity investors in one investment which the Company determined is a variable interest entity ("VIE") as a result of participation in the risks and rewards of the VIE based on the objectives and strategies of the VIE. The VIE is a limited liability company that primarily invests in commercial real estate. The Company and certain related parties are not the primary beneficiary largely due to their inability to influence management or direct the activities that most significantly impact the VIE's economic performance. Based on these facts and circumstances, the Company has a variable interest in the VIE, but has not consolidated the VIE's financial results as it is not the primary beneficiary. The Company's investment is reported in other long-term investments in the Consolidated Balance Sheets and accounted for under the equity method of accounting. The fair value of the VIE at September 30, 2021 was $3,030 and there are no future funding commitments.

Credit Losses

The Company recognizes credit losses for our available-for-sale fixed-maturity portfolio, reinsurance receivables, mortgage loans and premium receivables by setting up allowances which are remeasured each reporting period and recorded in the Consolidated Statements of Income and Comprehensive Income.

For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history. For more information on credit losses and the allowance for credit losses for available-for-sale fixed-maturity portfolio, see Note 2 "Summary of Investments."

An allowance for mortgage loan losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments which have similar risk characteristics. To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. On a quarterly basis, quantitative credit risk metrics, including for example, cash-flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations. This allowance is presented as a separate line in the Consolidated Balance Sheets beneath the asset value as well as presented net and recorded through "Net realized investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income. For more information on credit losses and the allowance for credit losses for our investment in mortgage loans see Note 3 "Fair Value of Financial Instruments."

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For reinsurance receivables, the Company's model estimates expected credit loss by multiplying the exposure at default by both the probability of default and loss given default ("LGD"). The LGD is estimated by the rating of the reinsurer, historical relationship with UFG, existence of letters of credit and known regulation the Company may be held accountable for. The ultimate LGD percentage is estimated after considering Moody’s experience with unsecured year 1 bond recovery rates from 1983-2017. The allowance calculated as of September 30, 2021 is recorded through the line "Reinsurance receivables and recoverables" in the Consolidated Balance Sheets and through the line "Other underwriting expenses" in the Consolidated Statements of Income and Other Comprehensive Income. As of September 30, 2021, the Company had a credit loss allowance for reinsurance receivables of $98.


Rollforward of credit loss allowance for reinsurance receivable:
	As of
	September 30, 2021
Beginning balance, January 1, 2021	$	190
Current-period provision for expected credit losses	—

Recoveries of amounts previously written off, if any	(92)
Ending balance of the allowance for reinsurance receivable, September 30, 2021	$	98

With respect to premiums receivable, the Company utilizes an aging method to estimate credit losses. An allowance for doubtful accounts is based on a periodic evaluation of the aging and collectability of amounts due from agents and policyholders. "Premiums receivable" are presented in the Consolidated Balance Sheets net of an estimated allowance for doubtful accounts and recorded through "Other underwriting expenses" in the Consolidated Statements of Income and Comprehensive Income.

COVID-19 Pandemic

The COVID-19 pandemic caused significant financial market volatility, economic uncertainty and interruptions to normal business activities. As of the date of this report, we expect the effect of the COVID-19 pandemic on claims currently under our coverages to be manageable, based on the information presently available. However, the effects of the COVID-19 pandemic, including the emergence of variant strains, continue to evolve and we cannot predict the extent to which our business, results of operations, financial condition, liquidity, capital position, the value of investments we hold in our investment portfolio, premiums and the demand for our products and our ability to collect premiums or requirement to return premiums to our policyholders, will ultimately be impacted. Additionally, if established written contract policy exclusions of business interruption coverage for losses attributable to the COVID-19 pandemic are voided or changed through legislation, regulations or interpretations by the courts, such changes have the potential to materially increase claims, losses and legal expenses which may impact our business, financial condition, results of operations or liquidity. See further discussion in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Subsequent Events

In the preparation of the accompanying financial statements, the Company has evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure in the Company's financial statements.

Recently Issued Accounting Standards

Accounting Standards Adopted in 2021

Defined Benefit Plans - Disclosures

In August 2018, the FASB issued new guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension and postretirement plans. The new guidance removes the requirement for disclosing

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the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs in the next year and the sensitivity of postretirement health plans to one-percentage-point changes in medical trend rates. The new guidance is effective for annual periods beginning after December 15, 2020. The Company adopted the new guidance as of January 1, 2021. The new guidance modifies disclosures, but will not have an impact on the Company's financial position and results of operations.

Income Taxes

In December 2019, the FASB issued new guidance which simplifies the accounting for income taxes by removing certain exceptions to income tax accounting. The amendments also improve consistent application of and simplify GAAP for other areas of income tax accounting. The new guidance clarifies and amends existing guidance, including removing certain requirements that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, and requiring an entity to reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The new guidance is effective for annual periods beginning after December 15, 2020. The Company adopted the new guidance as of January 1, 2021. The new guidance did not have an impact on the Company’s financial position and results of operations.

NOTE 2. SUMMARY OF INVESTMENTS

Fair Value of Investments

A reconciliation of the amortized cost to fair value of investments in available-for-sale fixed maturity and short-term investments, presented on a consolidated basis, as of September 30, 2021 and December 31, 2020, is provided below:

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September 30, 2021
Type of Investment	Cost or Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value		Allowance for Credit Losses		Carrying Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	53,543	$	283	$	448	$	53,378	$	—	$	53,378
U.S. government agency	55,142		2,646		644		57,144		—		57,144
States, municipalities and political subdivisions
General obligations:
Midwest	68,996		2,714		—		71,710		—		71,710
Northeast	26,562		811		—		27,373		—		27,373
South	92,091		4,196		—		96,287		—		96,287
West	95,022		5,549		—		100,571		—		100,571
Special revenue:
Midwest	118,800		7,473		—		126,273		—		126,273
Northeast	55,940		4,072		—		60,012		—		60,012
South	201,920		14,723		87		216,556		—		216,556
West	127,709		8,119		—		135,828		—		135,828
Foreign bonds	30,331		1,008		175		31,164		—		31,164
Public utilities	95,948		5,138		281		100,805		—		100,805
Corporate bonds
Energy	28,060		2,263		65		30,258		—		30,258
Industrials	52,097		2,783		137		54,743		—		54,743
Consumer goods and services	60,554		2,477		757		62,274		—		62,274
Health care	27,385		639		531		27,493		—		27,493
Technology, media and telecommunications	53,421		3,707		740		56,388		—		56,388
Financial services	90,400		5,336		308		95,428		—		95,428
Mortgage-backed securities	22,251		249		127		22,373		—		22,373
Collateralized mortgage obligations
Government national mortgage association	115,576		3,038		1,358		117,256		—		117,256
Federal home loan mortgage corporation	127,461		1,089		1,588		126,962		—		126,962
Federal national mortgage association	55,697		1,252		532		56,417		—		56,417
Asset-backed securities	322		586		—		908		—		908

Total Available-for-Sale Fixed Maturities	$	1,655,228	$	80,151	$	7,778	$	1,727,601	$	—	$	1,727,601
Short-Term Investments	$	175	$	—	—		$	175	$	—	$	175
Total Available-for-Sale Investments	$	1,655,403	$	80,151	$	7,778	$	1,727,776	$	—	$	1,727,776

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December 31, 2020
Type of Investment	Cost or Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Fair Value		Allowance for Credit Losses		Carrying Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	149,481	$	482	$	25	$	149,938	$	—	$	149,938
U.S. government agency	60,502		4,016		—		64,518		—		64,518
States, municipalities and political subdivisions
General obligations:
Midwest	77,933		4,047		—		81,980		—		81,980
Northeast	29,071		1,379		—		30,450		—		30,450
South	104,522		5,448		—		109,970		—		109,970
West	102,590		7,431		—		110,021		—		110,021
Special revenue:
Midwest	115,956		9,142		—		125,098		—		125,098
Northeast	56,317		4,759		—		61,076		—		61,076
South	208,739		17,967		—		226,706		—		226,706
West	129,417		9,982		—		139,399		—		139,399
Foreign bonds	27,799		1,805		2		29,602		—		29,602
Public utilities	76,114		7,388		—		83,502		—		83,502
Corporate bonds
Energy	22,441		2,895		—		25,336		—		25,336
Industrials	39,513		3,744		—		43,257		—		43,257
Consumer goods and services	46,521		4,046		—		50,567		—		50,567
Health care	6,678		898		—		7,576		—		7,576
Technology, media and telecommunications	37,270		4,381		15		41,636		—		41,636
Financial services	93,736		7,564		269		101,031		5		101,026
Mortgage-backed securities	20,305		326		54		20,577		—		20,577
Collateralized mortgage obligations
Government national mortgage association	81,758		4,439		45		86,152		—		86,152
Federal home loan mortgage corporation	151,362		2,239		758		152,843		—		152,843
Federal national mortgage association	81,952		2,013		683		83,282		—		83,282
Asset-backed securities	314		612		—		926		—		926

Total Available-for-Sale Fixed Maturities	$	1,720,291	$	107,003	$	1,851	$	1,825,443	$	5	$	1,825,438

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Maturities

The amortized cost and fair value of available-for-sale fixed maturity securities at September 30, 2021, by contractual maturity, are shown in the following tables. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities, mortgage-backed securities and collateralized mortgage obligations may be subject to prepayment risk and are therefore not categorized by contractual maturity.


Maturities
	Available-For-Sale
September 30, 2021	Amortized Cost		Fair Value
Due in one year or less	$	55,041	$	55,699
Due after one year through five years	469,238		492,892
Due after five years through 10 years	353,810		373,415
Due after 10 years	455,832		481,679
Asset-backed securities	322		908
Mortgage-backed securities	22,251		22,373
Collateralized mortgage obligations	298,734		300,635
	$	1,655,228	$	1,727,601

Net Realized Investment Gains and Losses

Net realized gains on disposition of investments are computed using the specific identification method and are included in the computation of net income. A summary of the components of net realized investment gains (losses) is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net realized investment gains (losses):
Fixed maturities:
Available-for-sale	$	294	$	52	$	(207)	$	52
Allowance for credit losses	170		2		5		(8)

Trading Securities	—		382		—		(780)

Equity securities
Change in the fair value	(1,314)		21,962		20,513		(38,876)
Sales	(1,168)		(7,186)		8,183		(22,772)
Mortgage loans allowance for credit losses	5		—		5		(4)





Real estate	(256)		—		(256)		(28)
Total net realized investment gains (losses)	$	(2,269)	$	15,212	$	28,243	$	(62,416)

The proceeds and gross realized gains on the sale of available-for-sale fixed maturity securities are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Proceeds from sales	$	53,973	$	—	$	170,637	$	16,907
Gross realized gains	690		—		843		198
Gross realized losses	396		—		1,051		495

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Funding Commitment

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through July 10, 2030 to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $2,636 at September 30, 2021.

In addition, the Company invested $25,000 in December 2019 in a limited liability partnership investment fund which is subject to a three-year lockup with a 60 day minimum notice, with four possible repurchase dates per year, after the three-year lockup period is met. The fair value of the investment at September 30, 2021 was $24,786 and there are no remaining capital contributions with this investment.

Unrealized Appreciation

A summary of the changes in net unrealized investment appreciation during the reporting period is as follows:


	Nine Months Ended September 30,
	2021		2020
Change in net unrealized investment appreciation
Available-for-sale fixed maturities	$	(32,779)	$	44,574
Income tax effect	6,886		(9,361)
Total change in net unrealized investment appreciation, net of tax	$	(25,893)	$	35,213

Credit Risk

An allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history. The following table contains a rollforward of the allowance for credit losses for available-for-sale fixed maturity securities at September 30, 2021:


Rollforward of allowance for credit losses for available-for-sale fixed maturity securities:
	As of
	September 30, 2021
Beginning balance, January 1, 2021	$	5
Additions to the allowance for credit losses for which credit losses were not previously recorded	—


Recoveries of amounts previously written off	(5)
Ending balance, September 30, 2021	$	—

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The following tables summarize our fixed maturity securities that were in an unrealized loss position reported on a consolidated basis at September 30, 2021 and December 31, 2020. The securities are presented by the length of time they have been continuously in an unrealized loss position. Non-credit related unrealized losses are recognized as a component of other comprehensive income and represent other market movements that are not credit related, for example interest rate changes. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.



September 30, 2021	Less than 12 months					12 months or longer					Total
Type of Investment	Number of Issues	Fair Value		Gross Unrealized Depreciation		Number of Issues	Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	7	$	42,264	$	437	1	$	3,695	$	11	$	45,959	$	448
U.S. government agency	3	14,998		644		—	—		—		14,998		644
States, municipalities and political subdivisions





Special revenue


Special revenue - south	1	1,186		87		—	—		—		1,186		87

Foreign bonds	4	9,719		175		—	—		—		9,719		175
Public utilities	7	19,341		281		—	—		—		19,341		281
Corporate bonds
Energy	1	2,942		65		—	—		—		2,942		65
Industrials	2	5,915		137		—	—		—		5,915		137
Consumer goods and services	7	16,348		757		—	—		—		16,348		757
Health care	3	20,517		531		—	—		—		20,517		531
Technology, media and telecommunications	5	11,264		740		—	—		—		11,264		740
Financial services	3	6,457		52		1	4,744		256		11,201		308
Mortgage-backed securities	7	15,181		127		—	—		—		15,181		127
Collateralized mortgage obligations
Federal home loan mortgage corporation	21	71,358		1,191		4	18,604		397		89,962		1,588
Federal national mortgage association	8	27,410		438		4	4,559		94		31,969		532
Government national mortgage association	9	48,566		1,358		—	—		—		48,566		1,358


Total Available-for-Sale Fixed Maturities	88	$	313,466	$	7,020	10	$	31,602	$	758	$	345,068	$	7,778

The unrealized losses on our investments in available-for-sale fixed maturities were the result of interest rate movements. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.

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December 31, 2020	Less than 12 months					12 months or longer					Total
Type of Investment	Number of Issues	Fair Value		Gross Unrealized Depreciation		Number of Issues	Fair Value		Gross Unrealized Depreciation		Fair Value		Gross Unrealized Depreciation
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	5	$	86,371	$	25	—	$	—	$	—	$	86,371	$	25












Foreign bonds	1	2,000		2		—	—		—		2,000		2






Technology, media and telecommunications	1	2,020		15		—	—		—		2,020		15
Financial services	1	2,995		5		1	3,000		7		5,995		12
Mortgage-backed securities	2	8,099		53		5	118		1		8,217		54
Collateralized mortgage obligations
Federal home loan mortgage corporation	24	97,691		758		1	26		—		97,717		758
Federal national mortgage association	10	44,677		683		—	—		—		44,677		683
Government national mortgage association	2	12,394		45		1	24		—		12,418		45


Total Available-for-Sale Fixed Maturities	46	$	256,247	$	1,586	8	$	3,168	$	8	$	259,415	$	1,594

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NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.

Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:

•Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.

•Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.

•Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.

We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.

To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years' experience and who have demonstrated knowledge of the subject security.

In order to determine the proper classification in the fair value hierarchy, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.

When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.

The mortgage loan portfolio consists entirely of commercial mortgage loans. The fair value of our mortgage loans is determined by modeling performed by our third party fund manager based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value.

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Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.

For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Supplemental Executive Retirement and Deferral Plan (the "Executive Retirement Plan"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plan. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of September 30, 2021, the cash surrender value of the COLI policies was $10,067, which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.

Our long-term debt is not carried in the Consolidated Balance Sheet at fair value. The fair value of our long-term debt is estimated using Level 2 inputs based on quoted prices for similar financial instruments. The fair value is estimated using a discounted cash flows analysis.

A summary of the carrying value and estimated fair value of our financial instruments at September 30, 2021 and December 31, 2020 is as follows:


	September 30, 2021				December 31, 2020
	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Fixed maturities:
Available-for-sale securities	$	1,727,601	$	1,727,601	$	1,825,443	$	1,825,438

Equity securities	200,876		200,876		206,685		206,685
Mortgage loans	49,385		47,254		48,932		47,614
Other long-term investments	80,162		80,162		69,305		69,305
Short-term investments	175		175		175		175
Cash and cash equivalents	132,772		132,772		87,948		87,948
Corporate-owned life insurance	10,067		10,067		8,557		8,557
Liabilities
Long Term Debt	47,724		50,000		50,000		50,000

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The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table includes financial instruments at September 30, 2021 and December 31, 2020:


September 30, 2021			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	53,378	$	—	$	53,378	$	—
U.S. government agency	57,144		—		57,144		—
States, municipalities and political subdivisions
General obligations
Midwest	71,710		—		71,710		—
Northeast	27,373		—		27,373		—
South	96,287		—		96,287		—
West	100,571		—		100,571		—
Special revenue
Midwest	126,273		—		126,273		—
Northeast	60,012		—		60,012		—
South	216,556		—		216,556		—
West	135,828		—		135,828		—
Foreign bonds	31,164		—		31,164		—
Public utilities	100,805		—		100,805		—
Corporate bonds
Energy	30,258		—		30,258		—
Industrials	54,743		—		54,743		—
Consumer goods and services	62,274		—		62,274		—
Health care	27,493		—		27,493		—
Technology, media and telecommunications	56,388		—		56,388		—
Financial services	95,428		—		95,278		150
Mortgage-backed securities	22,373		—		22,373		—
Collateralized mortgage obligations
Government national mortgage association	117,256		—		117,256		—
Federal home loan mortgage corporation	126,962		—		126,962		—
Federal national mortgage association	56,417		—		56,417		—
Asset-backed securities	908		—		—		908

Total Available-for-Sale Fixed Maturities	$	1,727,601	$	—	$	1,726,543	$	1,058

































EQUITY SECURITIES
Common stocks
Public utilities	$	16,550	$	16,550	$	—	$	—
Energy	14,296		14,296		—		—
Industrials	36,464		36,464		—		—
Consumer goods and services	48,311		48,311		—		—
Health care	12,584		12,584		—		—
Technology, media and telecommunications	28,651		28,651		—		—

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Financial services	43,425		43,425		—		—
Nonredeemable preferred stocks	595		—		—		595
Total Equity Securities	$	200,876	$	200,281	$	—	$	595
Short-Term Investments	$	175	$	175	$	—	$	—
Money Market Accounts	$	20,555	$	20,555	$	—	$	—
Corporate-Owned Life Insurance	$	10,067	$	—	$	10,067	$	—
Total Assets Measured at Fair Value	$	1,959,274	$	221,011	$	1,736,610	$	1,653


December 31, 2020			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	149,938	$	—	$	149,938	$	—
U.S. government agency	64,518		—		64,518		—
States, municipalities and political subdivisions
General obligations
Midwest	81,980		—		81,980		—
Northeast	30,450		—		30,450		—
South	109,970		—		109,970		—
West	110,021		—		110,021		—
Special revenue
Midwest	125,098		—		125,098		—
Northeast	61,076		—		61,076		—
South	226,706		—		226,706		—
West	139,399		—		139,399		—
Foreign bonds	29,602		—		29,602		—
Public utilities	83,502		—		83,502		—
Corporate bonds
Energy	25,336		—		25,336		—
Industrials	43,257		—		43,257		—
Consumer goods and services	50,567		—		50,567		—
Health care	7,576		—		7,576		—
Technology, media and telecommunications	41,636		—		41,636		—
Financial services	101,031		—		100,781		250
Mortgage-backed securities	20,577		—		20,577		—
Collateralized mortgage obligations
Government national mortgage association	86,152		—		86,152		—
Federal home loan mortgage corporation	152,843		—		152,843		—
Federal national mortgage association	83,282		—		83,282		—
Asset-backed securities	926		—		—		926

Total Available-for-Sale Fixed Maturities	$	1,825,443	$	—	$	1,824,267	$	1,176

































EQUITY SECURITIES

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Common stocks
Public utilities	$	16,320	$	16,320	$	—	$	—
Energy	9,918		9,918		—		—
Industrials	36,556		36,556		—		—
Consumer goods and services	32,061		32,061		—		—
Health care	24,549		24,549		—		—
Technology, media and telecommunications	17,109		17,109		—		—
Financial services	69,577		69,577		—		—
Nonredeemable preferred stocks	595		—		—		595
Total Equity Securities	$	206,685	$	206,090	$	—	$	595
Short-Term Investments	$	175	$	175	$	—	$	—
Money Market Accounts	$	24,790	$	24,790	$	—	$	—
Corporate-Owned Life Insurance	$	8,557	$	—	$	8,557	$	—
Total Assets Measured at Fair Value	$	2,065,650	$	231,055	$	1,832,824	$	1,771

The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.

At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. In addition, on a quarterly basis, we also test all securities in the portfolio and independently corroborate the valuations obtained from our third-party valuation service providers. Quarterly, we also perform deep dive analysis of the pricing method used by our third-party valuation service provider by selecting a random sample of securities by asset class and reviewing methodologies. In our opinion, the pricing obtained at September 30, 2021 and December 31, 2020 was reasonable.

For the three- and nine-month periods ended September 30, 2021, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities.

Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes.

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The following table provides a quantitative information about our Level 3 securities at September 30, 2021:

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at

Valuation Technique(s)

Unobservable inputs

Range of weighted average significant unobservable inputs

September 30, 2021

Corporate bonds - financial services

150

Fair value equals cost

Fixed Maturities asset-backed securities

908

Discounted cash flow

Probability of default

4% - 6%

Nonredeemable preferred stocks

595

Discounted cash flow

Multiplier

3x - 4x

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended September 30, 2021:


	Corporate bonds		Asset-backed securities		Equities		Total
Balance at July 1, 2021	$	150	$	891	$	595	$	1,636

Net unrealized gains (losses)(1)	—		17		—		17





Balance at September 30, 2021	$	150	$	908	$	595	$	1,653

(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.

The following table provides a summary of the changes in fair value of our Level 3 securities for the nine-month period ended September 30, 2021:


	Corporate bonds		Asset-backed securities		Equities		Total
Balance at January 1, 2021	$	250	$	926	$	595	$	1,771

Net unrealized gains (losses)(1)	—		(18)		—		(18)




Transfers out	(100)		—		—		(100)
Balance at September 30, 2021	$	150	$	908	$	595	$	1,653

(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.

Commercial Mortgage Loans

The following tables present the carrying value of our commercial mortgage loans and additional information at September 30, 2021 and December 31, 2020:


Commercial Mortgage Loans
	September 30, 2021		December 31, 2020
Loan-to-value	Carrying Value		Carrying Value
Less than 65%	$	30,035	$	30,361
65%-75%	17,290		17,329
Total amortized cost	$	47,325	$	47,690
Allowance for mortgage loan losses	(71)		(76)
Mortgage loans, net	$	47,254	$	47,614

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Mortgage Loans by Region
	September 30, 2021				December 31, 2020
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
East North Central	$	3,245	6.9	%	$	3,245	6.8	%
Southern Atlantic	9,622		20.3		9,752		20.5
East South Central	8,071		17.1		8,197		17.2
New England	6,588		13.9		6,588		13.8
Middle Atlantic	14,826		31.3		14,936		31.2
Mountain	2,227		4.7		2,227		4.7
West North Central	2,746		5.8		2,745		5.8
Total mortgage loans at amortized cost	$	47,325	100.0	%	$	47,690	100.0	%


Mortgage Loans by Property Type
	September 30, 2021				December 31, 2020
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
Commercial
Multifamily	$	16,999	35.9	%	$	17,038	35.7	%
Office	11,645		24.6		11,861		24.9
Industrial	10,124		21.4		10,124		21.2
Retail	2,227		4.7		2,227		4.7
Mixed use/Other	6,330		13.4		6,440		13.5
Total mortgage loans at amortized cost	$	47,325	100.0	%	$	47,690	100.0	%


Amortized Cost Basis by Year of Origination and Credit Quality Indicator
	2021		2020		2019		2018		Total
Commercial mortgage loans:
Risk Rating:
1-2 internal grade	$	—	$	5,495	$	8,356	$	18,390	$	32,241
3-4 internal grade	—		—		8,496		6,588		15,084
5 internal grade	—		—		—		—		—
6 internal grade	—		—		—		—		—
7 internal grade	—		—		—		—		—
Total commercial mortgage loans	$	—	$	5,495	$	16,852	$	24,978	$	47,325
Current-period write-offs	—		—		—		—		—
Current-period recoveries	—		—		—		—		—
Current-period net write-offs	$	—	$	—	$	—	$	—	$	—

Commercial mortgage loans carrying value excludes accrued interest of $166. As of September 30, 2021, all loan receivables were current, with no delinquencies. The commercial mortgage loans originate with an initial loan-to-value ratio to provide sufficient collateral to absorb losses should a loan be required to foreclose. Mortgage loans are evaluated on a quarterly basis for impairment on an individual basis through a monitoring process and review of key credit indicators, such as economic trends, delinquency rates, property valuations, occupancy and rental rates and loan-to-value ratios. A loan is considered impaired when the Company believes it will not collect the contractual principal and interest set forth in the contractual terms of the loan. An internal grade is assigned to each mortgage loan, with a grade of 1 being the highest and least likely for an impairment and the lowest rating of 7 being the most

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likely for an impairment. An allowance for mortgage loan losses is established on each loan recognizing a loss for amounts which we believe will not be collected according to the contractual terms of the respective loan agreement. As of September 30, 2021, the Company had an allowance for mortgage loan losses of $71, summarized in the following rollforward:


Rollforward of allowance for mortgage loan losses:
	As of
	September 30, 2021
Beginning balance, January 1, 2021	$	76
Current-period provision for expected credit losses	(5)


Ending balance of the allowance for mortgage loan losses, September 30, 2021	$	71

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NOTE 4. RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES

Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.

Liabilities for losses and loss settlement expenses reflect management's best estimates at a given point in time of what we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"), based on known facts, circumstances, and historical trends. Because property and casualty insurance reserves are estimates of the unpaid portions of incurred losses that have been reported to us, as well as losses that have been incurred but not reported, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses and related loss settlement expenses may vary materially from recorded amounts. We regularly update our reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported as a component of losses and loss settlement expenses incurred in the period such changes are determined.

The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we will take action that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc., to render an opinion as to the reasonableness of our statutory reserves annually.

On a quarterly basis, UFG's internal actuary performs a detailed actuarial review of IBNR reserves. This review includes a comparison of results from the most recent analysis of reserves completed by both our internal and external actuaries. Senior management meets with our internal actuary to review, on a regular and quarterly basis, the adequacy of carried reserves based on results from this actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate.

We do not discount loss reserves based on the time value of money.

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The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves at September 30, 2021 and December 31, 2020 (net of reinsurance amounts):



	September 30, 2021		December 31, 2020
Gross liability for losses and loss settlement expenses at beginning of year	$	1,578,131	$	1,421,754
Ceded losses and loss settlement expenses	(131,843)		(68,536)
Net liability for losses and loss settlement expenses at beginning of year	$	1,446,288	$	1,353,218
Losses and loss settlement expenses incurred for claims occurring during
Current year	$	560,080	$	887,119
Prior years	(26,099)		(17,652)
Total incurred	$	533,981	$	869,467
Losses and loss settlement expense payments for claims occurring during
Current year	$	204,056	$	354,635
Prior years	318,573		421,762
Total paid	$	522,629	$	776,397
Net liability for losses and loss settlement expenses at end of year	$	1,457,641	$	1,446,288
Ceded loss and loss settlement expenses	110,009		131,843
Gross liability for losses and loss settlement expenses at end of period	$	1,567,650	$	1,578,131

There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific monetary impact of any individual factor on the development of reserves.

Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year. However, conditions and trends that have affected the reserve development for a given year do change. Therefore, such development cannot be used to project future reserve redundancies or deficiencies.

We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our underwriters are aware of these exposures and use riders or endorsements to limit exposure.

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Reserve Development

The significant drivers of the favorable reserve development in the nine-month period ended September 30, 2021 were the commercial automobile, workers' compensation, commercial fire and allied and personal fire and allied lines of business, partially offset by unfavorable development in commercial liability. The favorable development for commercial automobile was from loss adjustment expense ("LAE") where reductions in reserves were more than sufficient to offset paid LAE. Workers' compensation favorable development came from both loss and LAE. Reserve reductions for both items were more than sufficient to offset payments. The favorable development for commercial fire and allied lines was from LAE where reductions in reserves were more than sufficient to offset paid LAE. The favorable development for personal fire and allied lines came from both loss and LAE. Reserve reductions for both items were more than sufficient to offset payments. The unfavorable development for commercial liability is attributed to paid loss which was greater than the reductions of unpaid claim reserves; paid LAE was more than offset by reductions of reserves for unpaid LAE.

The significant drivers of the favorable reserve development for the full year of 2020 were the workers' compensation, commercial fire and allied lines, fidelity and surety and personal automobile lines of business The favorable development for workers' compensation was primarily from reductions in reserves for reported claims which were more than sufficient to offset paid loss. Reductions in reserves for IBNR claims also contributed favorable development in addition to LAE where reductions in reserves were more than sufficient to offset payments. Commercial fire and allied lines developed favorably because reductions in reserves for reported claims combined with reductions in reserves for IBNR claims were more than sufficient to offset paid loss. LAE also contributed favorable development with reductions in reserves more than sufficient to offset payments. Fidelity and surety loss developed favorably because a reduction in reserves for IBNR claims was more than sufficient to offset both paid loss and increases in reserves for reported claims. The personal automobile line of business developed favorably because reductions of reserves for reported claims combined with reductions of reserves for IBNR claims were more than sufficient to offset paid loss. LAE also contributed favorable development with reductions in reserves more than sufficient to offset payments. Much of the favorable development was offset by unfavorable development from three lines of business, with the largest contributions coming from commercial liability, reinsurance assumed and commercial automobile. The commercial liability line of business experienced unfavorable development due to paid loss which was greater than reductions in reserves for unpaid loss. LAE developed favorably and partially offset the unfavorable loss development. The unfavorable development for reinsurance assumed was due to paid loss which was greater than reductions in reserves for unpaid loss. The commercial automobile line of business experienced unfavorable development because paid loss was greater than reductions in reserves for unpaid loss, but a portion of the unfavorable loss development was offset by favorable development from LAE where payments were more than offset by reductions of reserves for unpaid loss adjustment expense. On an all lines combined basis, favorable development is attributable to LAE, which continues to benefit from additional litigation management efforts.

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NOTE 5. EMPLOYEE BENEFITS

Net Periodic Benefit Cost

The components of the net periodic benefit cost for our pension and postretirement benefit plans are as follows:


	Pension Plan				Postretirement Benefit Plan
Three Months Ended September 30,	2021		2020		2021		2020

Net periodic benefit cost
Service cost	$	3,020	$	2,707	$	—	$	432
Interest cost	1,728		2,066		1		253
Expected return on plan assets	(4,202)		(3,385)		—		—
Amortization of prior service credit	(809)		—		(3,765)		(2,021)
Amortization of net loss	999		979		705		94
Special event plan closure	—		—		—		—
Net periodic benefit cost	$	736	$	2,367	$	(3,059)	$	(1,242)



	Pension Plan				Postretirement Benefit Plan
Nine Months Ended September 30,	2021		2020		2021		2020

Net periodic benefit cost
Service cost	$	9,060	$	8,122	$	148	$	1,296
Interest cost	5,184		6,199		71		760
Expected return on plan assets	(12,606)		(10,154)		—		—
Amortization of prior service credit	(2,427)		—		(10,725)		(6,063)
Amortization of net loss	2,997		2,936		1,902		282
Special event plan closure	—		—		(20,177)		—
Net periodic benefit cost	$	2,208	$	7,103	$	(28,781)	$	(3,725)

A portion of the service cost component of net periodic pension and postretirement benefit costs is capitalized and amortized as part of deferred acquisition costs and is included in the line "Amortization of deferred policy acquisition costs" in the Consolidated Statements of Income and Comprehensive Income. The portion not related to the compensation and the other components of net periodic pension and postretirement benefit costs is included in the income statement line titled "other underwriting expenses."

In January 2021, the Company decided to change the post-retirement benefit plan to a voluntary plan funded exclusively by participants, commencing at the start of 2023. The impact of this decision is reflected in the table above, with a one-time adjustment presented in the line "Special event plan closure" and an additional adjustment in the line "Amortization of prior service credit" recorded in first quarter of 2021. There will be continuing amortization of prior service credits through the end of 2022 related to these plan changes.

Employer Contributions

We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 that we originally planned to contribute $10,000 to the pension plan in 2021. The Company has revised the expected contributions to $5,000 in 2021 because of the funded status of the plan. For the nine-month period ended September 30, 2021, we contributed $5,000 to the pension plan, completing our expected contributions for the year.

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NOTE 6. STOCK-BASED COMPENSATION

Non-Qualified Employee Stock Award Plan

The United Fire Group, Inc. 2008 Stock Plan (the "2008 Stock Plan") authorized the issuance of restricted and unrestricted stock awards, restricted stock units, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of UFG common stock to employees. In May 2014, the Registrant's shareholders approved an additional 1,500,000 shares of UFG common stock issuable at any time and from time to time pursuant to the 2008 Stock Plan, among other amendments, and renamed such plan as the United Fire Group, Inc. Stock Plan. In May 2021, the Registrant's shareholders approved an additional 650,000 shares of UFG common stock issuable at any time and from time to time pursuant to the Stock Plan, and among other amendments, renamed such plan as the United Fire Group, Inc. 2021 Stock and Incentive Plan (as amended, the "Stock Plan"). At September 30, 2021, there were 1,245,573 authorized shares remaining available for future issuance. The Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Stock Plan. Pursuant to the Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees, who are in positions of substantial responsibility with United Fire.

Options granted pursuant to the Stock Plan are granted to buy shares of UFG's common stock at the market value of the stock on the date of grant. Options granted prior to March 2017 vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. Options granted after March 2017 vest and are exercisable in installments of 33.3 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the Stock Plan are granted at the market value of UFG's common stock on the date of the grant. Restricted stock units fully vest after three years or five years from the date of grant, unless accelerated upon the approval of the Board of Directors, at which time UFG common stock will be issued to the awardee.

The activity in the Stock Plan is displayed in the following table:


Authorized Shares Available for Future Award Grants	Nine Months Ended September 30, 2021	From Inception to September 30, 2021
Beginning balance	700,680	1,900,000
Additional shares authorized	650,000	2,150,000
Number of awards granted	(161,857)	(3,450,756)
Number of awards forfeited or expired	56,750	646,329
Ending balance	1,245,573	1,245,573
Number of option awards exercised	7,884	1,481,973
Number of unrestricted stock awards granted	—	10,090
Number of restricted stock awards vested	52,302	216,680

Non-Qualified Non-Employee Director Stock Plan

The United Fire Group, Inc. Non-Employee Director Stock Plan (formerly known as the 2005 Non-Qualified Non- Employee Director Stock Option and Restricted Stock Plan) (the "Director Stock Plan") authorizes the issuance of restricted stock awards and non-qualified stock options to purchase shares of UFG's common stock to non-employee directors. On May 20, 2020, the Company’s shareholders approved amendments to the Director Stock Plan, previously approved by the Company’s Board of Directors, to (i) increase the number of shares available for future awards under the Director Stock Plan from 300,000 to 450,000, (ii) extend the expiration date of the Director Stock Plan from December 31, 2020 to December 31, 2029, (iii) allow for the grant of awards of restricted stock units, and

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(iv) rename the Director Stock Plan as the "United Fire Group, Inc. Non-Employee Director Stock Plan." At September 30, 2021, the Company had 144,352 authorized shares available for future issuance.

The Board of Directors has the authority to determine which non-employee directors receive awards, when restricted stock, restricted stock units and options shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options, restricted stock and restricted stock units (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option, restricted stock or restricted stock unit agreements (subject to limits set forth in the Director Stock Plan). The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Stock Plan.

The activity in the Director Stock Plan is displayed in the following table:


Authorized Shares Available for Future Award Grants	Nine Months Ended September 30, 2021	From Inception to September 30, 2021
Beginning balance	160,135	300,000
Additional authorization	—	150,000
Number of awards granted	(18,510)	(332,378)
Number of awards forfeited or expired	2,727	26,730
Ending balance	144,352	144,352
Number of option awards exercised	8,181	142,001
Number of restricted stock awards vested	—	98,491

Stock-Based Compensation Expense

For the three-month periods ended September 30, 2021 and 2020, we recognized stock-based compensation expense of $959 and $1,052, respectively. For the nine-month periods ended September 30, 2021 and 2020, we recognized stock-based compensation expense of $3,074 and $3,979, respectively.

As of September 30, 2021, we had $4,977 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized over the remainder of 2021 and subsequent years according to the table below, except with respect to awards that are accelerated by the Board of Directors, in which case we will recognize any remaining compensation expense in the period in which the awards are accelerated.



2021	$	973
2022	2,402
2023	1,339
2024	251
2025	12
Total	$	4,977

NOTE 7. EARNINGS PER COMMON SHARE

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share gives effect to all dilutive common shares outstanding during the reporting period. The dilutive shares we consider in our diluted earnings per share calculation relate to our outstanding stock options, restricted stock awards and restricted stock unit awards.

We determine the dilutive effect of our outstanding stock options using the "treasury stock" method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average market value of our common stock during the reporting period. This method also assumes that the

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proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.

The components of basic and diluted earnings per share were as follows for the three-month periods ended September 30, 2021 and 2020:


	Three Months Ended September 30,
(In Thousands, Except Share Data)	2021				2020
	Basic		Diluted		Basic		Diluted
Net income (loss)	$	(9,593)	$	(9,593)	$	(37,241)	$	(37,241)
Weighted-average common shares outstanding	25,092,167		25,092,167		25,031,234		25,031,234
Add dilutive effect of restricted stock unit awards	—		—		—		—
Add dilutive effect of stock options	—		—		—		—
Weighted-average common shares outstanding	25,092,167		25,092,167		25,031,234		25,031,234
Earnings (loss) per common share	$	(0.38)	$	(0.38)	$	(1.49)	$	(1.49)
Awards excluded from diluted earnings per share calculation(1)	—		865,966		—		820,124

(1)Outstanding awards that are not "in-the-money" are excluded from the diluted earnings per share calculation because the effect of including them would have been anti-dilutive.


	Nine Months Ended September 30,
(In Thousands, Except Share Data)	2021				2020
	Basic		Diluted		Basic		Diluted
Net income (loss)	$	22,859	$	22,859	$	(103,815)	$	(103,815)
Weighted-average common shares outstanding	25,095,733		25,095,733		25,023,401		25,023,401
Add dilutive effect of restricted stock unit awards	—		216,527		—		—
Add dilutive effect of stock options	—		115,058		—		—
Weighted-average common shares outstanding	25,095,733		25,427,318		25,023,401		25,023,401
Earnings (loss) per common share	$	0.91	$	0.90	$	(4.15)	$	(4.15)
Awards excluded from diluted earnings per share calculation(1)	—		674,921		—		515,984

NOTE 8. DEBT

Long Term Debt

The Company executed a private placement debt transaction on December 15, 2020 between UF&C, and Federated Mutual and Federated Life.

Interest payments under the surplus notes will be paid quarterly on March 15, June 15, September 15 and December 15 of each year (each such date, an "Interest Payment Date"). The interest rate will equal the rate that corresponds to the A.M. Best Co. (or its successor’s) financial strength rating for members of the United Fire & Casualty Pooled Group as of the applicable Interest Payment Date, as set forth in the table below. For the three- and nine-month

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periods ended September 30, 2021, interest expense totaled $797 and $2,391 , respectively. Payment of interest is subject to approval by the Iowa Insurance Division.


A.M. Best Co. Financial Strength Rating			Applicable Interest Rate
A+			5.875%
A			6.375%
A-			6.875%
B++ (or lower)			7.375%

Credit Facilities

On March 31, 2020, UF&C, a wholly owned subsidiary of the Company, entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent (the "Administrative Agent"), issuing lender, swing-line lender and lender, and the other lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), providing for a $50,000 revolving credit facility, which includes a $20,000 letter of credit sub-facility and a $5,000 swing-line loan for working capital and other general corporate purposes. The Credit Agreement is provided by the Lenders on an unsecured basis, and UF&C has the option to increase the Credit Agreement by $100,000 if agreed to by the Lenders providing such incremental facility.

The Credit Agreement includes customary events of default, including default in payments of principals, default in payment of other indebtedness, change of control and voluntary and involuntary insolvency proceedings, the occurrence of which would allow the Lenders to accelerate payment of all amounts outstanding thereunder and terminate any further commitments to lend.

The entry into the Credit Agreement was completed as part of the Company’s regular course of financial planning and was not initiated as a result of market conditions resulting from the COVID-19 pandemic.

There was no outstanding balance on the Credit Agreement at September 30, 2021 and 2020, respectively. For the nine-month periods ended September 30, 2021 and 2020, we did not incur any interest expense related to the credit facility. We were in compliance with all covenants under the Credit Agreement at September 30, 2021.

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the three-month period ended September 30, 2021:


			Liability for
	Net unrealized		underfunded
	appreciation		employee
	on investments		benefit costs(1)		Total
Balance as of June 30, 2021	67,005		(11,377)		$	55,628
Change in accumulated other comprehensive income before reclassifications	(9,661)		(2,975)		(12,636)
Reclassification adjustments from accumulated other comprehensive income (loss)	(167)		1,254		1,087
Balance as of September 30, 2021	$	57,177	$	(13,098)	$	44,079

(1) The preparation of financial statements in conformity with GAAP requires us to make various estimates and assumptions that affect the reporting of net periodic benefit cost, plan assets and plan obligations for each plan at the date of the financial statements. Actual results could differ from these estimates. One significant estimate relates to the calculation of the benefit obligation for each plan. We annually establish the discount rate, which is an estimate of the interest rate at which these benefits could be effectively settled, that is used to determine the present value of the respective plan's benefit obligations as of December 31.

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The following table shows the changes in the components of our accumulated other comprehensive income (loss), net of tax, for the nine-month period ended September 30, 2021:


			Liability for
	Net unrealized		underfunded
	appreciation		employee
	on investments		benefit costs(1)		Total
Balance as of January 1, 2021	83,070		(16,159)		$	66,911
Change in accumulated other comprehensive income before reclassifications	(26,252)		(810)		(27,062)
Reclassification adjustments from accumulated other comprehensive income (loss)	359		3,871		4,230
Balance as of September 30, 2021	$	57,177	$	(13,098)	$	44,079

NOTE 10. LEASES

The Company has operating leases consisting of office space, vehicle leases, computer equipment, and office equipment. Lease terms and options vary in the Company's operating leases dependent upon the underlying leased asset. We exclude options to extend or terminate a lease from our recognition as part of our right-of-use assets and lease liabilities until those options are known and/or executed, as we typically do not exercise options to purchase the underlying leased asset. As of September 30, 2021, we have leases with remaining terms of one year to seven years, some of which may include no options for renewal and others with options to extend the lease terms from six months to five years.

The components of our operating leases were as follows for the three- and nine-month periods ended September 30, 2021 and 2020:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Components of lease expense:
Operating lease expense	$	1,748	$	1,832	$	5,297	$	5,788
Less sublease income	53		53		160		239
Net lease expense	1,695		1,779		5,137		5,549
Cash flows information related to leases:
Operating cash outflow from operating leases	1,714		1,796		5,192		5,265

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our consolidated financial condition and results of operations on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are more fully described in our Management's Discussion and Analysis of Financial Condition and Results of Operations presented in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no changes in our critical accounting policies from December 31, 2020.

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 for the year ended December 31, 2020. Our Consolidated Financial Statements are prepared on the basis of 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 "Registrant," 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 plus 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 and Syndicate 4747. At September 30, 2021, the Company's FAL investments were comprised of cash of $21.3 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, subject to the receipt of applicable regulatory approvals. As part of this agreement, Nationwide has offered contracts to many of our personal lines agents across the country, with the exception of agents in Louisiana. In Louisiana, we began non-renewing all personal lines policies in January 2021. Nationwide has been offering replacement policies to most of our personal lines policyholders at the time of renewal. There are three categories of policies where they are refusing to offer replacement coverage directly.

UFG’s entry into a renewal rights agreement with Nationwide was completed as part of our long-term strategic planning, allowing us to focus on the success of our core commercial lines business, which represented 94 percent of our business mix at the time of the agreement. It was not initiated as a result of market conditions from the COVID-19 pandemic.

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, 2021, approximately 50.8 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri, and New Jersey.

Profit Factors

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

COVID-19

The spread of the COVID-19 virus, beginning in mid-March 2020, caused significant financial market volatility, economic uncertainty and interruptions to normal business activities. The COVID-19 pandemic has had a profound impact on day-to-day life, financial markets and the economy in the United States. The Company, in response to the challenges presented by the COVID-19 pandemic, activated its pre-existing business continuity plans to respond to a pandemic in mid-March 2020. With the exception of our essential services employees, UFG dispatched its staff to work remotely for the safety, health and well-being of our employees. We are fully operational, but have limited some non-essential travel. Our essential services employees are following recommended health and safety policies. We are and will continue to monitor the state and federal responses to the pandemic and, when appropriate, will

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adjust our operations in response. We have finalized our return to workplace plan for our employees, which gives employees the option to work fully remote, a hybrid schedule or return to the workplace 100 percent of the time depending on the position and with manager approval. On July 19, 2021, we implemented our plan with a certain portion of our employees returning to the workplace and then subsequently paused our plan due to the spread of the delta variant strain of COVID-19 in August 2021. At this time, our plan is to continue to pause our return to the workplace plan through December 31, 2021.

The implementation of our business continuity plans did not have a material effect on our internal control environment. We believe our operational processes, internal controls over financial reporting and disclosures, and financial reporting systems are operating effectively in the present environment.

Nearly all of the policies we have issued contain contract language that specifically excludes business interruption coverage for losses due to viruses such as the COVID-19 pandemic, but we continue to carefully scrutinize each claim and will afford coverage when appropriate. At this time, we expect the effect of the COVID-19 pandemic on claims currently under our coverages to be manageable, based on the information presently available. However, the effects of the COVID-19 pandemic, including the emergence of variant strains, continue to evolve and we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. Additionally, if established written contract policy exclusions of business interruption coverage for losses attributable to the COVID-19 pandemic are voided or changed through legislation, regulations or interpretations by the courts, such changes have the potential to materially increase claims, losses and legal expenses which could impact our business, financial condition, results of operations and liquidity.

We anticipate that the larger impact on our financial condition and results of operations will likely result from developments in the economy as a whole and the effect on financial markets and the investments we hold in our investment portfolio, premiums and demand for our products, and our ability to collect premiums or any requirement to return premiums to policyholders. We believe our current liquidity position is sufficient to maintain our current operations and we have the ability to draw on our credit facility if needed. See Part 1, Item 1, Note 8 "Debt" for more information. Our share repurchase program was suspended in mid-March 2020 and restarted in the first quarter of 2021. Also, the Company maintained the payment of quarterly cash dividends during 2020 and 2021, with the dividends paid in September 2021 marking the 214th consecutive quarter of paying dividends since March 1968.

Stockholders' equity decreased to $814.5 million at September 30, 2021, from $825.1 million at December 31, 2020. This decrease is primarily attributable to shareholder dividends of $11.3 million and a decrease in net unrealized investment gains on fixed maturity securities of $25.9 million, net of tax, partially offset by net income of $22.9 million, during the first nine months of 2021.

As of September 30, 2021, we intend to keep all assets currently leased and honor the terms of the contracts. Also, we have four lease contracts where we are the lessor which we evaluated for impairment. As of September 30, 2021, all payments on these contracts had been received and we fully expect to receive all future payments on time. In the event that we receive any lease-related relief provided to mitigate the economic effects of the COVID-19 pandemic, we elect not to evaluate whether or not the relief represents a lease modification.

The decline in certain sectors of the equity markets in 2020 due to the COVID-19 pandemic did have a material impact on the fair value of our investments in equity securities and limited liability partnerships, however those sectors have now recovered as of September 30, 2021. The Company's investment philosophy, objectives, approach and program have not changed as a result of the COVID-19 pandemic. During the nine-month period ended September 30, 2021 we had a recovery in the fair value of equity securities of $20.5 million and an increase in value of our investments in limited liability partnerships of $10.8 million from the values reported at December 31, 2020.

The Company has a highly rated fixed maturity portfolio, with low credit risk. The Company recognized a decrease in unrealized gains of $25.9 million, net of tax, at September 30, 2021 on its available-for-sale fixed maturity portfolio. In addition, we adopted new accounting guidance on January 1, 2020, which changes the measurement of credit losses for our investment in available-for-sale fixed maturities and our mortgage loans and also impacts our reinsurance receivables. The adoption of this new guidance resulted in an immaterial allowance for credit losses to

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be recorded for each of these assets on our balance sheet as of September 30, 2021. For more information on credit losses recognized in the three- and nine-month periods ended September 30, 2021, please refer to the Note 1 and Note 2 to Unaudited Consolidated Financial Statements of this Form 10-Q.

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FINANCIAL HIGHLIGHTS


	Three Months Ended September 30,								Nine Months Ended September 30,
(In Thousands, Except Ratios)	2021			2020			%		2021			2020			%
Revenues
Net premiums earned	$	238,909		$	259,061		(7.8)	%	$	722,837		$	791,519		(8.7)	%
Investment income, net of investment expenses	11,571			7,244			59.7		42,447			22,303			90.3


Net realized investment gains (losses)	(2,269)			15,212			(114.9)		28,243			(62,416)			(145.2)
Other income	332			604			(45.0)		163			6,323			(97.4)
Total revenues	$	248,543		$	282,121		(11.9)	%	$	793,690		$	757,729		4.7	%

Benefits, Losses and Expenses
Losses and loss settlement expenses	$	175,444		$	234,693		(25.2)	%	$	533,981		$	626,169		(14.7)	%
Amortization of deferred policy acquisition costs	51,261			52,095			(1.6)		150,533			158,440			(5.0)
Other underwriting expenses	35,468			35,470			—		82,236			114,020			(27.9)
Interest expense	797			—			NM		2,391			—			NM
Goodwill impairment	—			15,091			NM		—			15,091			NM
Total benefits, losses and expenses	$	262,970		$	337,349		(22.0)	%	$	769,141		$	913,720		(15.8)	%

Income (loss) before income taxes	$	(14,427)		$	(55,228)		(73.9)	%	$	24,549		$	(155,991)		(115.7)
Federal income tax expense (benefit)	(4,834)			(17,987)			(73.1)		1,690			(52,176)			(103.2)
Net income (loss)	$	(9,593)		$	(37,241)		(74.2)		$	22,859		$	(103,815)		(122.0)	%

GAAP Ratios:
Net loss ratio (without catastrophes)	56.9		%	69.2		%	(17.8)	%	61.4		%	63.8		%	(3.8)	%
Catastrophes - effect on net loss ratio	16.5			21.4			(22.9)		12.5			15.3			(18.3)
Net loss ratio(1)	73.4		%	90.6		%	(19.0)	%	73.9		%	79.1		%	(6.6)	%
Expense ratio(2)	36.3			33.8			7.4		32.2			34.4			(6.4)
Combined ratio(3)	109.7		%	124.4		%	(11.8)	%	106.1		%	113.5		%	(6.5)	%

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

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

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

NM = Not meaningful

The following is a summary of our financial performance for the three- and nine-month periods ended September 30, 2021:

RESULTS OF OPERATIONS

For the three-month period ended September 30, 2021, net loss was $9.6 million compared to a net loss of $37.2 million for the same period of 2020. The decrease in the net loss reported in third quarter of 2021 as compared to third quarter of 2020 was due to lower losses and loss settlement expenses and higher net investment income partially offset by a decrease in net premiums earned and net realized investment losses in third quarter of 2021 compared to net realized investment gains in third quarter of 2020.

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For the nine-month period ended September 30, 2021, net income was $22.9 million compared to a net loss of $103.8 million for the same period of 2020. The change was primarily due to an increase in net realized investment gains from an increase in the fair value of equity securities as compared to net realized investment losses for the same period of 2020, a decrease in losses and loss settlement expenses, a decrease in other underwriting expenses and an increase in net investment income. These were partially offset by a decrease in net premiums earned.

The third quarter of 2020, also included a one-time adjustment to write off goodwill of $15.1 million. This goodwill related to the acquisition of Mercer Insurance Group, Inc. in 2011.

Net premiums earned decreased 7.8 percent and 8.7 percent during the three- and nine-month periods ended September 30, 2021 compared to the same periods of 2020, respectively. The decrease in the three- and nine-month periods ended September 30, 2021 was primarily due to our focus on improving profitability through non-renewal of under-performing accounts in our commercial auto line of business and our exit of the personal lines business which began in September 2020.

Net investment income was $11.6 million for the third quarter of 2021 as compared to net investment income of $7.2 million for the same period in 2020. Year-to-date, net investment income was $42.4 million compared to net investment income of $22.3 million for the same period in 2020. The increase in net investment income in the three- and nine-month periods ended September 30, 2021 was due to an increase in the fair value of our investments in limited liability partnerships in the first nine months of 2021 as compared to the same periods in 2020. The valuation of these investments in limited liability partnerships varies from period to period due to the current equity market conditions, specifically related to financial institutions.

The Company recognized net realized investment losses of $2.3 million during the third quarter of 2021, compared to net realized investment gains of $15.2 million for the same period in 2020. Year to date, the Company recognized net realized investment gains of $28.2 million during the third quarter of 2021, compared to net realized investment losses of $62.4 million for the same period in 2020. The change in the three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, was primarily due to the change in the fair value of equity securities.

Losses and loss settlement expenses decreased by 25.2 percentage points and 14.7 percent percentage points during the three- and nine-month periods ended September 30, 2021, respectively, compared to the same periods in 2020. For the three- and nine-month periods ended September 30, 2021, the decrease in losses and loss settlement expenses was primarily due to a decrease in catastrophe losses and frequency and severity of commercial auto liability losses.

The GAAP combined ratio decreased by 14.7 percentage points to 109.7 percent for the third quarter of 2021, compared to 124.4 percent in the same period in 2020. For the nine-month period ended September 30, 2021, combined ratio decreased by 7.4 percentage points to 106.1 percent compared to 113.5 percentage points in the same period in 2020. For the nine-month period ended September 30, 2021, the decrease in the combined ratio was primarily driven by a decrease in the net loss ratio.

The GAAP net loss ratio decreased 17.2 percentage points and 5.2 percentage points during three- and nine-month periods ended September 30, 2021 as compared to the same periods in 2020. The decrease in the net loss ratio during the three- and nine-month periods ended September 30, 2021 as compared to the same periods in 2020 was primarily due to comparatively lower catastrophe losses and a decrease in the frequency and severity of commercial auto liability losses.

Pre-tax catastrophe losses in the third quarter of 2021 were lower when compared to third quarter of 2020, with catastrophe losses adding 16.5 percentage points to the combined ratio in 2021 as compared to 21.4 percentage points in 2020. Year-to-date, pre-tax catastrophe losses were 12.5 percentage points as compared to 15.3 percentage points during the same period in 2020. The most significant catastrophe losses in the third quarter of 2021 were from Hurricane Ida on our commercial and personal lines of business and from the European floods on our reinsurance assumed line of business. In the third quarter of 2020, the most significant catastrophe losses were from the August

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Midwest derecho and Hurricane Laura. Our 10-year historical average for third quarter catastrophe losses is 9.2 percentage points added to the combined ratio.

The expense ratio for the third quarter of 2021 was 36.3 percent compared to 33.8 percent for the third quarter in 2020. Year-to-date, the expense ratio was 32.2 percent compared to 34.4 percent as compared to the same period in 2020. The increase in the third quarter of 2021 was primarily due to improved performance in our book of business resulting in additions to profit sharing for our agents, employees, and program business. The decrease in the underwriting expense ratio year-to-date as compared to the same periods in 2020 was primarily due to the change in the design of our employee post-retirement benefit plans and a decrease in the acceleration of the amortization of our deferred acquisition costs due to improved profitability in our commercial auto line of business.

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

Reserve Development

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

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

Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after information about a claim becomes available. This approach tends to produce, on average, prudently conservative case reserves, which we expect to result in some level of favorable development over the course of settlement.

2021 Development

The property and casualty insurance business experienced $11.1 million and $26.0 million of favorable development in our net reserves for prior accident years for the three- and nine-month periods ended September 30, 2021, respectively. For the three-month period ended September 30, 2021 the majority of favorable development was from commercial auto with $11.0 favorable development followed by commercial fire and allied lines with $4.1 million favorable development. The favorable development was partially offset by $7.1 million of unfavorable development in commercial liability. All other lines of insurance, in total, contributed $3.1 million of favorable development during the quarter. The favorable development for commercial fire and allied lines was from both loss and loss adjustment expense ("LAE") where reductions in reserves were more than sufficient to offset payments. The favorable development for commercial automobile was from LAE where reductions in reserves were more than sufficient to offset paid LAE. The unfavorable development for commercial liability was from loss where reductions in loss reserves were not sufficient to offset paid loss.

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For the nine-month period ended September 30, 2021 the majority of favorable development was from commercial automobile with $21.5 million favorable development, followed by workers' compensation with $7.7 million favorable development, commercial fire and allied lines with $5.6 million favorable development, and personal fire and allied lines with $4.0 million favorable development. Partially offsetting this was unfavorable development was contributed primarily by commercial liability with $17.1 million of unfavorable development. All other lines of insurance, in total, contributed $4.3 million of favorable development. The favorable development for commercial automobile was from LAE where reductions in reserves were more than sufficient to offset paid LAE. Workers' compensation favorable development came from both loss and LAE; reserve reductions for both items were more than sufficient to offset payments. The favorable development for commercial fire and allied lines was from LAE where reductions in reserves were more than sufficient to offset paid LAE. The favorable development for personal fire and allied lines came from both loss and LAE; reserve reductions for both items were more than sufficient to offset payments. The unfavorable development for commercial liability is attributed to paid loss which was greater than the reductions of unpaid claim reserves; paid loss adjustment expense was more than offset by reductions of reserves for unpaid LAE.

2020 Development

The property and casualty insurance business experienced $6.3 million and $30.0 million of favorable development in our net reserves for prior accident years for the three- and nine-month periods ended September 30, 2020, respectively. For the three-month period ended September 30, 2020, the majority of favorable development was from the combination of workers' compensation with $5.6 million favorable development and commercial liability with $5.5 million favorable development. Partially offsetting favorable development was commercial automobile with $2.2 million of unfavorable development and reinsurance assumed with $1.6 million of unfavorable development. The favorable development for workers' compensation was primarily from reductions in claim reserves which were more than sufficient to offset paid loss. The favorable development for commercial liability was due to the combination of both loss and loss adjustment expense where reserve reductions were more than sufficient to offset payments. The adverse development for commercial automobile was attributed to an increase in severity of losses with paid losses greater than the reductions of unpaid claim reserves, paid LAE was more than offset by reductions of reserves for unpaid LAE. All other lines of insurance, in total, contributed $1.0 million of unfavorable development during the third quarter of 2020.

For the nine-month period ended September 30, 2020 the majority of favorable development was from workers' compensation with $21.6 million favorable development, followed by commercial fire and allied lines which contributed $12.6 million of favorable development. Partially offsetting favorable development was reinsurance assumed with $4.4 million of unfavorable development and commercial automobile with $2.1 million of unfavorable development. The favorable development for workers' compensation was primarily from reductions in claim reserves which were more than sufficient to offset paid loss. The adverse development for reinsurance assumed was attributed to paid loss which was greater than the reductions of unpaid claim reserves. All other lines of insurance, in total, contributed $2.3 million of favorable development during the third quarter of 2020.

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, 2021, our total reserves were within 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:


Three Months Ended September 30,	2021						2020
			Net Losses						Net Losses
			and Loss						and Loss
	Net		Settlement		Net		Net		Settlement		Net
(In Thousands, Except Ratios)	Premiums		Expenses		Loss		Premiums		Expenses		Loss
Unaudited	Earned		Incurred		Ratio		Earned		Incurred		Ratio
Commercial lines
Other liability	$	75,559	$	47,416	62.8	%	$	78,302	$	45,111	57.6	%
Fire and allied lines	60,457		44,855		74.2		59,267		52,436		88.5
Automobile	60,991		42,034		68.9		73,403		82,675		112.6
Workers' compensation	15,183		11,265		74.2		19,245		10,250		53.3
Fidelity and surety	7,939		909		11.4		7,356		(128)		(1.7)
Miscellaneous	323		176		54.5		378		78		20.6
Total commercial lines	$	220,452	$	146,655	66.5	%	$	237,951	$	190,422	80.0	%

Personal lines
Fire and allied lines	$	2,559	$	11,382	NM		$	5,144	$	29,451	NM
Automobile	734		343		46.7		7,055		8,322		118.0
Miscellaneous	50		(9)		(18.0)		295		(97)		(32.9)
Total personal lines	$	3,343	$	11,716	NM		$	12,494	$	37,676	NM
Reinsurance assumed	$	15,114	$	17,073	113.0	%	$	8,616	$	6,595	76.5	%

Total	$	238,909	$	175,444	73.4	%	$	259,061	$	234,693	90.6	%

NM = Not meaningful

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Nine Months Ended September 30,	2021						2020
			Net Losses						Net Losses
			and Loss						and Loss
	Net		Settlement		Net		Net		Settlement		Net
(In Thousands, Except Ratios)	Premiums		Expenses		Loss		Premiums		Expenses		Loss
Unaudited	Earned		Incurred		Ratio		Earned		Incurred		Ratio
Commercial lines
Other liability	$	225,572	$	134,286	59.5	%	$	235,018	$	135,748	57.8	%
Fire and allied lines	177,066		150,032		84.7		183,528		171,416		93.4
Automobile	190,238		151,632		79.7		225,103		205,994		91.5
Workers' compensation	47,260		33,601		71.1		57,873		24,205		41.8
Fidelity and surety	22,436		3,000		13.4		20,106		14		0.1
Miscellaneous	1,007		174		17.3		1,158		266		23.0
Total commercial lines	$	663,579	$	472,725	71.2	%	$	722,786	$	537,643	74.4	%

Personal lines
Fire and allied lines	$	13,120	$	22,400	170.7	%	$	24,933	$	55,372	222.1	%
Automobile	7,069		5,904		83.5		22,203		15,935		71.8
Miscellaneous	337		(1,369)		NM		905		2,561		283.0
Total personal lines	$	20,526	$	26,935	131.2	%	$	48,041	$	73,868	153.8	%
Reinsurance assumed	$	38,732	$	34,321	88.6	%	$	20,692	$	14,658	70.8	%

Total	$	722,837	$	533,981	73.9	%	$	791,519	$	626,169	79.1	%

NM = Not meaningful

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

•Commercial fire and allied lines - The net loss ratio improved 14.3 and 8.7 percentage points in the three and nine-month periods ended September 30, 2021, respectively, compared to the same periods of 2020. The improvement is primarily due to lower comparable catastrophe losses in the three and nine-month periods ended September 30, 2021 as compared to the same periods of 2020 along with a decrease in LAE expenses.

•Commercial automobile - The net loss ratio improved 43.7 and 11.8 percentage points in the three and nine-month periods ended September 30, 2021, respectively, compared to the same periods of 2020. The improvement in the three and nine-month periods ended September 30, 2021 is a direct result of our strategic plan to improve the profitability of this line of business through non-renew underperforming commercial auto accounts and seeking rate increase, which has led to a reduction in claims frequency and severity and a decrease in the number of commercial auto exposure units.

•Workers' compensation - The net loss ratio deteriorated 20.9 and 29.3 percentage points in the three and nine-month periods ended September 30, 2021, respectively, compared to the same periods of 2020. The deterioration is primarily attributable to paid loss for large claims, which have been more severe in the three and nine-month periods ended September 30, 2021 as compared to the same periods in 2020.

•Fidelity and surety - The net loss ratio deteriorated 13.1 and 13.3 percentage points in the three and nine-month periods ended September 30, 2021, respectively, compared to the same periods of 2020. The deterioration is primarily attributable to paid loss for large claims and large claims that were reported during the first and second quarters of 2021 as compared to the absence of large claims during 2020.

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•Personal fire and allied lines - The net loss ratio improved 127.7 and 51.4 percentage points in the three and nine-month periods ended September 30, 2021, respectively, compared to the same periods of 2020. The improvement is primarily due to lower comparable catastrophe losses in the three and nine-month periods ended September 30, 2021 as compared to the same periods of 2020.

•Reinsurance assumed - The net loss ratio deteriorated 36.5 and 17.8 percentage points in the three and nine-month periods ended September 30, 2021, respectively, compared to the same periods of 2020. The deterioration is primarily due to higher catastrophe losses in the three and nine-month periods ended September 30, 2021 as compared to the same periods of 2020.

Financial Condition

Stockholders' equity decreased to $814.5 million at September 30, 2021, from $825.1 million at December 31, 2020. The Company's book value per share was $32.48, which is a decrease of $0.45 per share, or 1.4 percent from December 31, 2020. The decrease is primarily attributable to a decrease in net unrealized investment gains on fixed maturity securities of $25.9 million, net of tax, and shareholder dividends of $11.3 million, partially offset by net income of $22.9 million during the first nine months of 2021.

Investment Portfolio

Our invested assets totaled $2.1 billion at September 30, 2021, compared to $2.1 billion at December 31, 2020, a decrease of $93.1 million. At September 30, 2021, fixed maturity securities and equity securities made up 84.0 percent and 9.8 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 bonds and tax-exempt U.S. municipal bonds.

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, 2021 is presented at carrying value in the following table:


	Property & Casualty Insurance
			Percent
(In Thousands, Except Ratios)			of Total
Fixed maturities (1)
Available-for-sale	$	1,727,601	84.0	%

Equity securities	200,876		9.8
Mortgage loans	47,254		2.2
Other long-term investments	80,162		4.0
Short-term investments	175		—
Total	$	2,056,068	100.0	%

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

As of September 30, 2021 and December 31, 2020, 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 and trading security portfolios, by credit rating at September 30, 2021 and December 31, 2020. 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)	September 30, 2021				December 31, 2020
Rating	Carrying Value		% of Total		Carrying Value		% of Total
AAA	$	696,706	40.3	%	$	817,142	44.8	%
AA	602,097		34.9		639,011		35.0
A	198,812		11.5		182,011		10.0
Baa/BBB	217,423		12.6		172,078		9.4
Other/Not Rated	12,563		0.7		15,196		0.8
	$	1,727,601	100.0	%	$	1,825,438	100.0	%

Duration

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

Investment Results

We invest the premiums received from our policyholders in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Our net investment income increased in the three- and nine-month periods ended September 30, 2021, compared with the same period of 2020 primarily due to the change in value of our investments in limited liability partnerships.

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, 2021, the change in value of our investments in limited liability partnerships resulted in investment income of $1.3 million and $10.8 million as compared to an investment income of $4.7 million and $13.8 million in the same periods of 2020.

We had net realized investment losses of $2.3 million and net realized investment gains of $28.2 million, respectively, during the three- and nine-month periods ended September 30, 2021, as compared to net realized investment gains of $15.2 million and net realized investment losses of $62.4 million in the same periods of 2020. The change in the three- and nine-month periods ended September 30, 2021 as compared to the same periods in 2020 was primarily due to the change in the fair value of equity securities.

We regularly monitor the difference between our cost basis and the estimated fair value of our investments. For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's

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expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history.

Non-credit related changes in unrealized gains and losses on available-for-sale fixed maturity securities are recognized as a component of other comprehensive income, impact stockholders' equity and book value per share, but do not affect net income. We believe that any unrealized losses on our available-for-sale securities at September 30, 2021 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 realized 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 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.

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.

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The following table displays a consolidated summary of cash sources and uses for the nine-month periods ended September 30, 2021 and 2020:


Cash Flow Summary	Nine Months Ended September 30,
(In Thousands)	2021		2020
Cash provided by (used in)
Operating activities	$	18,188	$	(12,868)
Investing activities	40,358		19,836
Financing activities	(13,722)		(28,086)
Net increase in cash and cash equivalents	$	44,824	$	(21,118)

Our cash flows were sufficient to meet our liquidity needs for the nine-month periods ended September 30, 2021 and 2020 and we anticipate they will be sufficient to meet our future liquidity needs for at least the next twelve months. We also have the ability to draw on our credit facility if needed.

Operating Activities

Net cash flows from operating activities had inflows of $18.2 million and outflows of $12.9 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

Investing Activities

Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturities 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 also can provide liquidity. During the next five years, $526.8 million, or 30.5 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, 2021, our cash and cash equivalents included $20.6 million related to these money market accounts, compared to $24.8 million at December 31, 2020.

Net cash flows provided by investing activities were $40.4 million for the nine-month period ended September 30, 2021, compared to net cash flows provided by investing activities of $19.8 million for the nine-month period ending September 30, 2020. For the nine-month periods ended September 30, 2021 and 2020, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of $389.0 million and $261.7 million, respectively.

Our cash outflows for investment purchases were $337.7 million for the nine-month period ended September 30, 2021, compared to $226.4 million for the same period of 2020.

Financing Activities

Net cash flows used in financing activities was $13.7 million for the nine-month period ended September 30, 2021 which decreased $14.4 million compared to $28.1 million used in the nine-month period ended September 30, 2020.

Credit Facilities

On March 31, 2020, United Fire & Casualty Company, as borrower ("Borrower"), wholly owned subsidiary of United Fire Group, Inc. entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National

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Association ("Wells Fargo"), as administrative agent, issuing lender, swing line lender and lender, and the other lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), providing for a $50,000 revolving credit facility, which includes a $20,000 letter of credit sub-facility and a $5,000 swing line loan for working capital and other general corporate purposes. The Credit Agreement is provided on an unsecured basis, and the Borrower has the option to increase the Credit Agreement by $100,000 if agreed to by the Lenders providing such incremental facility. As of September 30, 2021 and 2020, there were no balances outstanding under the Credit Agreement. For the nine-month period ended September 30, 2021 and 2020, we did not incur any interest expense related to the credit facility. For further discussion of the Credit Agreement, refer to Part I, Item 1, Note 8 "Debt."

Dividends

Dividends paid to shareholders totaled $11.3 million and $24.8 million in the nine-month periods ended September 30, 2021 and 2020, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.

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

As a holding company with no independent operations of its own, we rely on dividends received from our insurance company subsidiaries in order to pay dividends to our common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in 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, 2021, UFG's sole direct insurance company subsidiary, United Fire & Casualty Company, is able to make a maximum of $53.2 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 $814.5 million at September 30, 2021, from $825.1 million at December 31, 2020. The Company's book value per share was $32.48, which is a decrease of $0.45 per share, or 1.4 percent, from December 31, 2020. The decrease is primarily attributable to a decrease in net unrealized investment gains on fixed maturity securities of $25.9 million, net of tax, and shareholder dividends of $11.3 million, partially offset by net income of $22.9 million during the first nine months of 2021.

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OFF BALANCE SHEET ARRANGEMENTS

Funding Commitments

Pursuant to an agreement with one of our limited liability partnership investments, we are contractually committed through July 10, 2030, to make capital contributions upon request of the partnership. Our remaining potential contractual obligation was $2.6 million at September 30, 2021.

In addition, the Company invested $25.0 million in December 2019 in a limited liability partnership investment fund which is subject to a three year lockup with a 60 day minimum notice, with 4 possible repurchase dates per year after the three year lockup period is met. The fair value of the investment at September 30, 2021 was $24.8 million and there are no remaining capital contribution obligations with this investment.

MEASUREMENT OF RESULTS

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
ISO catastrophes	$	33,105	$	54,878	$	81,277	$	121,089
Non-ISO catastrophes (1)	6,361		483		9,049		172
Total catastrophes	$	39,466	$	55,361	$	90,326	$	121,261

(1) This number includes international assumed losses.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

It is our philosophy that we do not utilize financial hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but 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, 2021, we did not have direct exposure to investments in sub-prime mortgages or other credit-enhancement exposures.

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Interim Co-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 Interim Co-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 Interim Co-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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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its business, the Company is a party to a variety of legal proceedings. While the final outcome of these legal proceedings cannot be predicted with certainty, management believes all of the proceedings pending as of September 30, 2021 to be ordinary and routine and does not expect these legal proceedings to have a material adverse effect on the Company's financial condition or results of operations.

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks, including those identified in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 26, 2021. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also have a material effect on our business, results of operations, financial condition and/or liquidity.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Under our share repurchase program, first announced in August 2007, we may purchase UFG common stock from time to time on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at our discretion and will depend upon a number of factors, including the share price, general economic and market conditions, and corporate and regulatory requirements.

The following table provides information with respect to purchases of shares of common stock made by or on our behalf or by any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, during the three-month period ended September 30, 2021:


				Total Number of Shares	Maximum Number of
	Total			Purchased as a Part of	Shares that may yet be
	Number of	Average Price		Publicly Announced	Purchased Under the
Period	Shares Purchased	Paid per Share		Plans or Programs	Plans or Programs(1)
7/1/2021 - 7/31/2021	—	$	—	—	1,755,743
8/1/2021 - 8/31/2021	36,417	27.46		36,417	1,719,326
9/1/2021 - 9/30/2021	—	—		—	1,719,326
Total	36,417	$	27.46	36,417	1,719,326

(1) Our share repurchase program was originally announced in August 2007. In August 2016, our Board of Directors authorized the repurchase of up to an additional 1,500,000 shares of common stock through the end of August 2018. This is in addition to the 1,528,886 shares of common stock remaining under its previous authorizations. In August 2018, our Board of Directors extended our share repurchase program through the end of August 2020. In August 2020, our Board of Directors extended our share repurchase program through the end of August 2022. As of September 30, 2021, we remained authorized to repurchase 1,719,326 shares of common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

Table of Contents

None.

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ITEM 6. EXHIBIT INDEX

Exhibit number

Exhibit description

Furnished herewith

Filed herewith

10.1

United Fire Group, Inc. 2021 Stock and Incentive Plan Performance-Based Restricted Stock Unit Award Notice

10.2

United Fire Group, Inc. 2021 Stock and Incentive Plan Option Award Notice

10.3

United Fire Group, Inc. 2021 Stock and Incentive Plan Restricted Stock Unit Award Notice

31.1

Certification of Randy A. Ramlo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Randy L. Patten pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Randy A. Ramlo pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Randy L. Patten pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1

The following financial information from United Fire Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 formatted in Inline eXtensible Business Reporting Language (Inline XBRL): (i) Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020; (ii) Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and nine -months ended September 30, 2021 and 2020 (iii) Consolidated Statement of Stockholders’ Equity (unaudited) for the three- and nine -months ended September 30, 2021 and 2020; (iv) Consolidated Statements of Cash Flows (unaudited) for the three- and nine -months ended September 30, 2021 and 2020; and (v) Notes to Unaudited Consolidated Financial Statements, tagged as a block of text.

104.1

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.1)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


UNITED FIRE GROUP, INC.
(Registrant)

/s/ Randy A. Ramlo						/s/ Randy L. Patten
Randy A. Ramlo						Randy L. Patten
President, Chief Executive Officer, Director and Principal Executive Officer						Assistant Vice President, Interim Co-Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer


November 4, 2021						November 4, 2021
(Date)						(Date)

United Fire Group - 10-Q quarterly report FY2021 Q3

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