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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, 2020

or

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

Commission File Number 001-34257

________________________

 UNITED FIRE GROUP INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Indicate by check mark whether the registrant: (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 2, 2020, 25,031,234 shares of common stock were outstanding.

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United Fire Group, Inc.

Index to Quarterly Report on Form 10-Q

September 30, 2020

	Page
Forward-Looking Information	1
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	2
Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and nine-month periods ended September 30, 2020 and 2019	3
Consolidated Statement of Stockholders’ Equity (unaudited) for the three- and nine-month periods ended September 30, 2020 and 2019	4
Consolidated Statements of Cash Flows (unaudited) for the three- and nine-month periods ended September 30, 2020 and 2019	6
Notes to Unaudited Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3. Quantitative and Qualitative Disclosures About Market Risk	54
Item 4. Controls and Procedures	54
Part II. Other Information
Item 1. Legal Proceedings	55
Item 1A. Risk Factors	55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3. Defaults Upon Senior Securities	55
Item 4. Mine Safety Disclosures	55
Item 5. Other Information	56
Item 6. Exhibits	57
Signatures	58

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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, 2019 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;

•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 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, 2020		December 31, 2019
	(unaudited)
ASSETS
Investments
Fixed maturities
Available-for-sale, at fair value (amortized cost $1,612,626 in 2020 and $1,659,760 in 2019; allowance for credit losses $8 in 2020 and $— in 2019)	$	1,717,039	$	1,719,607
Trading securities, at fair value (amortized cost $12,258 in 2020 and $11,941 in 2019)	14,811		15,256
Equity securities at fair value (cost $61,467 in 2020 and $67,529 in 2019)	198,791		299,203
Mortgage loans	47,809		42,520
Less: allowance for mortgage loan losses	76		72
Mortgage loans, net	47,733		42,448
Other long-term investments	62,903		78,410
Short-term investments	175		175
	2,041,452		2,155,099
Cash and cash equivalents	99,604		120,722
Accrued investment income	15,028		15,182
Premiums receivable (net of allowance for doubtful accounts of $812 in 2020 and $1,239 in 2019)	352,150		357,632
Deferred policy acquisition costs	94,223		94,292
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $54,145 in 2020 and $50,183 in 2019)	127,990		116,989
Reinsurance receivables and recoverables (net of allowance for credit losses of $241 in 2020 and $— in 2019)	199,920		72,369
Prepaid reinsurance premiums	12,284		9,550
Goodwill and intangible assets	6,920		22,542
Income taxes receivable	57,388		19,190
Other assets	41,521		29,905
TOTAL ASSETS	$	3,048,480	$	3,013,472
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Future policy benefits and losses, claims and loss settlement expenses
Losses and loss settlement expenses	$	1,555,083	$	1,421,754
Unearned premiums	499,730		505,162
Accrued expenses and other liabilities	156,874		155,498
Deferred tax liability	16,511		20,586
TOTAL LIABILITIES	$	2,228,198	$	2,103,000
Stockholders’ Equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,031,234 and 25,015,963 shares issued and outstanding in 2020 and 2019, respectively	$	25	$	25
Additional paid-in capital	200,849		200,179
Retained earnings	568,501		697,116
Accumulated other comprehensive income, net of tax	50,907		13,152
TOTAL STOCKHOLDERS’ EQUITY	$	820,282	$	910,472
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,048,480	$	3,013,472

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)	2020		2019		2020		2019
Revenues
Net premiums earned	$	259,061	$	274,942	$	791,519	$	813,742
Investment income, net of investment expenses	7,244		13,291		22,303		43,923
Net realized investment gains (losses) (includes reclassifications for net unrealized investment gains/(losses) on available-for-sale securities of $54 and $13 in 2020 and $130 and $257 in 2019; previously included in accumulated other comprehensive income)	15,212		9,822		(62,416)		50,126
Other income	604		—		6,323		—
Total revenues	$	282,121	$	298,055	$	757,729	$	907,791
Benefits, Losses and Expenses
Losses and loss settlement expenses	$	234,693	$	211,752	$	626,169	$	596,001
Amortization of deferred policy acquisition costs	52,095		54,828		158,440		161,842
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,072 and $3,217 in 2020 and $1,124 and $3,372 in 2019; previously included in accumulated other comprehensive income)	35,470		36,003		114,020		104,370
Goodwill impairment	15,091		—		15,091		—
Total benefits, losses and expenses	$	337,349	$	302,583	$	913,720	$	862,213
Income (loss) before income taxes	$	(55,228)	$	(4,528)	$	(155,991)	$	45,578
Federal income tax expense (benefit) (includes reclassifications of $213 and $672 in 2020 and $209 and $654 in 2019; previously included in accumulated other comprehensive income)	(17,987)		(2,186)		(52,176)		7,595
Net Income (loss)	$	(37,241)	$	(2,342)	$	(103,815)	$	37,983
Other comprehensive income (loss)
Change in net unrealized appreciation on investments	$	4,116	$	15,410	$	44,586	$	77,360
Change in liability for underfunded employee benefit plans	—		—		—		—
Other comprehensive income, before tax and reclassification adjustments	$	4,116	$	15,410	$	44,586	$	77,360
Income tax effect	(864)		(3,237)		(9,363)		(16,246)
Other comprehensive income, after tax, before reclassification adjustments	$	3,252	$	12,173	$	35,223	$	61,114
Reclassification adjustment for net realized investment (gains) losses included in income	$	(54)	$	(130)	$	(13)	$	(257)
Reclassification adjustment for employee benefit costs included in expense	1,072		1,124		3,217		3,372
Total reclassification adjustments, before tax	$	1,018	$	994	$	3,204	$	3,115
Income tax effect	(213)		(209)		(672)		(654)
Total reclassification adjustments, after tax	$	805	$	785	$	2,532	$	2,461
Comprehensive income (loss)	$	(33,184)	$	10,616	$	(66,060)	$	101,558
Diluted weighted average common shares outstanding	25,031,234		25,176,334		25,023,401		25,643,744
Earnings (loss) per common share:
Basic	$	(1.49)	$	(0.09)	$	(4.15)	$	1.51
Diluted	(1.49)		(0.09)		(4.15)		1.48

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, 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.

.

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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, 2019	25,097,408		$	25	$	203,350	$	715,472	$	(30,472)	$	888,375
Net income	—		—		—		44,521		—		44,521
Stock based compensation	70,414		—		3,438		—		—		3,438
Dividends on common stock $0.31 per share)	—		—		—		(7,797)		—		(7,797)
Change in net unrealized investment appreciation(1)	—		—		—		—		26,279		26,279
Change in liability for underfunded employee benefit plans(2)	—		—		—		—		888		888
Cumulative effect of change in accounting principle	—		—		—		(513)		—		(513)
Balance, March 31, 2019	25,167,822		$	25	$	206,788	$	751,683	$	(3,305)	$	955,191
Net income (loss)	$	—	$	—	$	—	$	(4,196)	$	—	$	(4,196)
Shares repurchased	(1,507)		—		(69)		—		—		(69)
Stock based compensation	78,885		—		2,252		—		—		2,252
Dividends on common stock $0.33 per share)	—		—		—		(8,325)		—		(8,325)
Change in net unrealized investment appreciation(1)	—		—		—		—		22,562		22,562
Change in liability for underfunded employee benefit plans(2)	—		—		—		—		888		888
Balance, June 30, 2019	25,245,200		$	25	$	208,971	$	739,162	$	20,145	$	968,303
Net income (loss)	$	—	$	—	$	—	$	(2,342)	$	—	$	(2,342)
Shares repurchased	(177,249)		—		(8,058)		—		—		(8,058)
Stock based compensation	13,775		—		1,591		—		—		1,591
Dividends on common stock $0.33 per share)	—		—		—		(8,284)		—		(8,284)
Change in net unrealized investment appreciation(1)	—		—		—		—		12,070		12,070
Change in liability for underfunded employee benefit plans(2)	—		—		—		—		888		888
Balance, September 30, 2019	25,081,726		$	25	$	202,504	$	728,536	$	33,103	$	964,168

(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)	2020		2019
Cash Flows From Operating Activities
Net income (loss)	$	(103,815)	$	37,983
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Net accretion of bond premium	7,719		7,074
Depreciation and amortization	5,009		4,235
Goodwill impairment	15,091		—
Stock-based compensation expense	3,979		5,248
Net realized investment (gains) losses	62,416		(50,126)
Net cash flows from equity and trading investments	37,552		911
Deferred income tax benefit	(21,824)		8,829
Changes in:
Accrued investment income	154		170
Premiums receivable	5,482		(40,792)
Deferred policy acquisition costs	69		(5,704)
Reinsurance receivables	(127,551)		3,664
Prepaid reinsurance premiums	(2,734)		(887)
Income taxes receivable	(38,198)		3,029
Other assets	(11,616)		(17,645)
Losses and loss settlement expenses	133,329		48,056
Unearned premiums	(5,432)		35,296
Accrued expenses and other liabilities	4,593		16,821
Deferred income taxes	7,713		(434)
Other, net	15,196		437
Cash from operating activities	90,947		18,182
Net cash provided by (used in) operating activities	$	(12,868)	$	56,165
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	16,907	$	36,490
Proceeds from call and maturity of available-for-sale investments	239,438		206,478
Proceeds from sale of other investments	5,391		3,607
Purchase of investments in mortgage loans	(5,564)		(10,723)
Purchase of investments available-for-sale	(216,001)		(151,528)
Purchase of other investments	(4,829)		(16,939)
Purchase of property and equipment	$	(15,506)	(27,796)
Net cash provided by investing activities	19,836		39,589
Cash Flows From Financing Activities
Issuance of common stock	$	(568)	$	2,033
Repurchase of common stock	(2,741)		(8,127)
Payment of cash dividends	(24,777)		(24,406)