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 June 30, 2023

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 August 1, 2023, 25,264,558 shares of common stock were outstanding.

United Fire Group, Inc.

Index to Quarterly Report on Form 10-Q

June 30, 2023

	Page
Forward-Looking Information	1
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022	3
Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and six-month periods ended June 30, 2023 and 2022	4
Consolidated Statement of Stockholders' Equity (unaudited) for the three- and six-month periods ended June 30, 2023 and 2022	5
Consolidated Statements of Cash Flows (unaudited) for the six-month periods ended June 30, 2023 and 2022	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3. Quantitative and Qualitative Disclosures About Market Risk	51
Item 4. Controls and Procedures	51
Part II. Other Information
Item 1. Legal Proceedings	52
Item 1A. Risk Factors	52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3. Defaults Upon Senior Securities	52
Item 4. Mine Safety Disclosures	52
Item 5. Other Information	53
Item 6. Exhibits	54
Signatures	55

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/A for the year ended December 31, 2022 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:

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

◦Risks related to our investment portfolio that could negatively affect our profitability;

◦General macroeconomic conditions, interest rate risk, the impact of inflation and changes in governmental regulations and monetary policy;

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

◦The properties we insure are exposed to various natural perils that can give rise to significant claims costs;

◦Changing weather patterns and climate change add to the unpredictability, frequency and severity of catastrophe losses and may adversely affect our results of operations, liquidity and financial condition;

◦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;

◦We may be unable to attract, retain or effectively manage the succession of key personnel;

◦The risk of not being able to predict the rising cost of insurance claims resulting from changing societal expectations that lead to increasing litigation, broader definitions of liability, broader contract interpretations, more plaintiff-friendly legal decisions and larger compensatory jury awards;

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

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

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

◦Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, 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;

◦We will be at a competitive disadvantage if, over time, our competitors are more effective than us in their utilization of technology and evolving data analytics; and

◦We may be unable to secure reinsurance capacity that provides necessary risk protection at a reasonable cost.

◦Our stock price could become more volatile and your investment could lose value.

1

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.

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

United Fire Group, Inc.
Consolidated Balance Sheets

(In Thousands, Except Share Data)	June 30, 2023		December 31, 2022
	(unaudited)
ASSETS
Investments:
Fixed maturities
Available-for-sale, at fair value (amortized cost $1,681,117 in 2023 and $1,662,680 in 2022)	$	1,568,382	$	1,551,336
Equity securities at fair value (cost $59,922 in 2023 and $75,292 in 2022)	129,625		169,106
Mortgage loans	45,756		37,947
Less: allowance for mortgage loan losses	55		49
Mortgage loans, net	45,701		37,898
Other long-term investments	91,663		86,276
Short-term investments	250		275
Total investments	1,835,621		1,844,891
Cash and cash equivalents	79,704		96,650
Accrued investment income	14,738		14,480
Premiums receivable (net of allowance for doubtful accounts of $1,531 in 2023 and $1,575 in 2022)	463,686		365,729
Deferred policy acquisition costs	122,649		104,225
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $63,774 in 2023 and $59,566 in 2022)	133,950		133,113
Reinsurance receivables and recoverables (net of allowance for credit losses of $118 in 2023 and $82 in 2022)	194,866		170,953
Prepaid reinsurance premiums	12,970		11,300
Intangible assets	4,970		5,324
Deferred tax asset	22,479		15,531
Income taxes receivable	42,850		31,418
Other assets	89,394		88,672
TOTAL ASSETS	$	3,017,877	$	2,882,286
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Losses and loss settlement expenses	$	1,614,832	$	1,497,274
Unearned premiums	537,637		474,388
Accrued expenses and other liabilities	139,043		120,510
Long term debt	50,000		50,000
TOTAL LIABILITIES	$	2,341,512	$	2,142,172
Stockholders’ Equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,262,949 and 25,210,541 shares issued and outstanding in 2023 and 2022, respectively	$	25	$	25
Additional paid-in capital	208,987		207,030
Retained earnings	556,788		620,555
Accumulated other comprehensive income, net of tax	(89,435)		(87,496)
TOTAL STOCKHOLDERS’ EQUITY	$	676,365	$	740,114
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,017,877	$	2,882,286

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

3

United Fire Group, Inc.

Consolidated Statements of Income and Comprehensive Income (Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands, Except Share Data)	2023		2022		2023		2022
Revenues
Net premiums earned	$	254,638	$	231,262	$	510,765	$	465,490
Investment income, net of investment expenses	11,327		9,180		24,049		20,456
Net investment gains (losses) (includes reclassifications for net unrealized investment gains (losses) on available-for-sale securities of $(152) and $(692) in 2023 and $(716) and $(398) in 2022; previously included in accumulated other comprehensive income (loss))	1,124		(20,932)		(621)		(21,397)
Other income (loss)	—		26		—		1
Total revenues	$	267,089	$	219,536	$	534,193	$	464,550
Benefits, Losses and Expenses
Losses and loss settlement expenses	$	250,730	$	151,508	$	425,327	$	281,884
Amortization of deferred policy acquisition costs	59,156		52,538		118,991		103,009
Other underwriting expenses (includes reclassifications for employee benefit costs of $52 and $104 in 2023 and $900 and $1,800 in 2022; previously included in accumulated other comprehensive income (loss))	28,633		28,754		60,509		57,398
Interest expense	797		797		1,594		1,594
Total benefits, losses and expenses	$	339,316	$	233,597	$	606,421	$	443,885
Income (loss) before income taxes	$	(72,227)	$	(14,061)	$	(72,228)	$	20,665
Federal income tax expense (benefit) (includes reclassifications of $43 and $167 in 2023 and $339 and $461 in 2022; previously included in accumulated other comprehensive income (loss))	(15,845)		(3,604)		(16,540)		2,773
Net Income (loss)	$	(56,382)	$	(10,457)	$	(55,688)	$	17,892
Other comprehensive income (loss)
Change in net unrealized appreciation on investments	$	(19,616)	$	(50,691)	$	(1,612)	$	(133,656)
Change in liability for underfunded employee benefit plans	(820)		(4,591)		(1,640)		(9,183)
Other comprehensive income (loss), before tax and reclassification adjustments	$	(20,436)	$	(55,282)	$	(3,252)	$	(142,839)
Income tax effect	4,293		11,609		684		29,997
Other comprehensive income (loss), after tax, before reclassification adjustments	$	(16,143)	$	(43,673)	$	(2,568)	$	(112,842)
Reclassification adjustment for net investment losses included in income	$	152	$	716	$	692	$	398
Reclassification adjustment for employee benefit costs included in expense	52		900		104		1,800
Total reclassification adjustments, before tax	$	204	$	1,616	$	796	$	2,198
Income tax effect	(43)		(339)		(167)		(461)
Total reclassification adjustments, after tax	$	161	$	1,277	$	629	$	1,737
Comprehensive income (loss)	$	(72,364)	$	(52,853)	$	(57,627)	$	(93,213)
Diluted weighted average common shares outstanding	25,249,073		25,148,143		25,234,834		25,410,649
Earnings per common share:
Basic	$	(2.23)	$	(0.42)	$	(2.21)	$	0.71
Diluted	(2.23)		(0.42)		(2.21)		0.70

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

4

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, 2023	25,210,541	$	25	$	207,030	$	620,555	$	(87,496)	$	740,114
Net income	—	—		—		694		—		694
Stock based compensation	21,012	—		980		—		—		980
Dividends on common stock ($0.16 per share)	—	—		—		(4,037)		—		(4,037)
Change in net unrealized investment appreciation (depreciation)(1)	—	—		—		—		14,650		14,650
Change in liability for underfunded employee benefit plans(2)	—	—		—		—		(607)		(607)
Balance, March 31, 2023	25,231,553	$	25	$	208,010	$	617,213	$	(73,453)	$	751,795
Net income (loss)	—	$	—	$	—	$	(56,382)	$	—	$	(56,382)
Stock based compensation	31,396	—		977		—		—		977
Dividends on common stock ($0.16 per share)	—	—		—		(4,042)		—		(4,042)
Change in net unrealized investment appreciation (depreciation)(1)	—	—		—		—		(15,376)		(15,376)
Change in liability for underfunded employee benefit plans(2)	—	—		—		—		(606)		(606)
Balance, June 30, 2023	25,262.949	$	25	$	208,987	$	556,788	$	(89,435)	$	676,365

(1)The change in net unrealized appreciation (depreciation) 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.

5

	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, 2022	25,082,104	$	25	$	203,375	$	621,384	$	54,337	$	879,121
Net income	—	—		—		28,349		—		28,349
Stock based compensation	37,140	—		631		—		—		631
Dividends on common stock $0.15 per share)	—	—		—		(3,767)		—		(3,767)
Change in net unrealized investment appreciation (depreciation)(1)	—	—		—		—		(65,793)		(65,793)
Change in liability for underfunded employee benefit plans(2)	—	—		—		—		(2,916)		(2,916)
Balance, March 31, 2022	25,119,244	$	25	$	204,006	$	645,966	$	(14,372)	$	835,625
Net income	—	$	—	$	—	$	(10,457)	$	—	$	(10,457)
Shares repurchased	—	—		—		—		—		—
Stock based compensation	67,404	—		2,159		—		—		2,159
Dividends on common stock $0.15 per share)	—	—		—		(4,028)		—		(4,028)
Change in net unrealized investment appreciation(1)	—	—		—		—		(39,480)		(39,480)
Change in liability for underfunded employee benefit plans(2)	—	—		—		—		(2,916)		(2,916)
Balance, June 30, 2022	25,186,648	$	25	$	206,165	$	631,481	$	(56,768)	$	780,903

(1)The change in net unrealized appreciation (depreciation) 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.

6

United Fire Group, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
(In Thousands)	2023		2022
Cash Flows From Operating Activities
Net income	$	(55,688)	$	17,892
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Net accretion of bond premium	3,491		5,101
Depreciation and amortization	5,182		3,411
Stock-based compensation expense	2,175		1,762
Net investment (gains) losses	312		21,397
Net cash flows from equity and trading investments	39,553		29,161
Deferred income tax expense (benefit)	(6,433)		(6,602)
Changes in:
Accrued investment income	(258)		(683)
Premiums receivable	(97,957)		(56,235)
Deferred policy acquisition costs	(18,424)		(12,644)
Reinsurance receivables	(23,913)		(7,712)
Prepaid reinsurance premiums	(1,670)		(1,295)
Income taxes receivable	(11,432)		(1,270)
Other assets	(248)		(2,444)
Losses and loss settlement expenses	117,558		(54,437)
Unearned premiums	63,249		37,880
Accrued expenses and other liabilities	16,997		6,808
Other, net	5,370		4,036
Cash from operating activities	93,552		(33,766)
Net cash provided by (used in) operating activities	$	37,864	$	(15,874)
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	43,809	$	65,010
Proceeds from call and maturity of available-for-sale investments	28,036		104,349
Proceeds from sale of other investments	2,111		2,382
Purchase of investments in mortgage loans	(8,137)		(103)
Purchase of investments available-for-sale	(94,204)		(186,520)
Purchase of other investments	(12,511)		(3,344)
Net purchases and sales of property and equipment	(5,617)		697
Net cash provided by (used in) investing activities	$	(46,513)	$	(17,529)
Cash Flows From Financing Activities
Issuance of common stock	$	(218)	$	1,028
Payment of cash dividends	(8,079)		(7,795)
Net cash provided by (used in) financing activities	$	(8,297)	$	(6,767)
Net Change in Cash and Cash Equivalents	$	(16,946)	$	(40,170)
Cash and Cash Equivalents at Beginning of Period	96,650		132,104
Cash and Cash Equivalents at End of Period	$	79,704	$	91,934
Supplemental Disclosures of Cash Flow Information
Income taxes paid	$	1,324	$	21,525
Interest paid	$	1,594	$	1,594

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

7

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/A for the year ended December 31, 2022, 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 postretirement benefit obligations.

Management 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/A for the year ended December 31, 2022.

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.

Lloyd's Syndicates

On January 1, 2021, the Company became a member of Lloyd's of London ("Lloyd's") through McIntyre Cedar Corporate Member LLP. As a member of Lloyd's, the Company is required to maintain capital at Lloyd's, referred to

8

as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699 and Syndicate 5623. At June 30, 2023, the Company's FAL investments were comprised of cash of $24,383 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 six-month period ended June 30, 2023.

	Total
Recorded asset at beginning of period	$	104,225
Underwriting costs deferred	137,415
Amortization of deferred policy acquisition costs	(118,991)
Recorded asset at June 30, 2023	$	122,649

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.

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.

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 long term debt 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 six-month period ended June 30, 2023, interest totaled $1,594 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.

9

Income Taxes

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 a consolidated federal income tax benefit of $16,540 for the six-month period ended June 30, 2023 compared to an income tax expense of $2,773 during the same period of 2022. Our effective tax rate for 2023 and 2022 is different than the federal statutory rate of 21 percent, due principally to the net effect of tax-exempt municipal bond interest income.

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 June 30, 2023 or December 31, 2022. 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.

Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred taxes will not be realized. After considering all positive and negative evidence of taxable income in the carryback and carryforward periods and our tax planning strategy of holding debt securities with unrealized losses to maturity or recovery, we believe it is more likely than not that all the deferred assets will be realized. As a result, we have no valuation allowance at June 30, 2023 or December 31, 2022.

For the six-month periods ended June 30, 2023 and 2022, we made payments for income taxes totaling $1,324 and $21,525, respectively. We did not receive a federal tax refund for the six-month period ended June 30, 2023. For the six-month period ended June 30, 2022, we received a federal tax refund of $10,789.

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 2018.

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

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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 June 30, 2023 was $2,824 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 current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value versus amortized cost, investment spreads widening or contracting, rating actions, payment and default history. For more information on credit losses and the allowance for credit losses for our 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 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."

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 for which the Company may be held accountable. The ultimate LGD percentage is estimated after considering Moody's experience with unsecured year one bond recovery rates from 1983-2017. The allowance calculated as of June 30, 2023 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 June 30, 2023, the Company had a credit loss allowance for reinsurance receivables of $118.

Rollforward of credit loss allowance for reinsurance receivables:
	As of
	June 30, 2023
Beginning balance, January 1, 2023	$	82
Current-period provision for expected credit losses	36
Write-off charged against the allowance, if any	—
Recoveries of amounts previously written off, if any	—
Ending balance of the allowance for reinsurance receivables, June 30, 2023	$	118

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

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allowance for doubtful accounts and recorded through "Other underwriting expenses" in the Consolidated Statements of Income and Comprehensive Income.

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 2022

Inflation Reduction Act

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act ("IRA") which, among other changes, created a new corporate alternative minimum tax ("CAMT") based on adjusted financial statement income and imposes a 1 percent excise tax on corporate stock repurchases. The effective date of these provisions is January 1, 2023. The Company does not expect to be subject to CAMT in 2023 and does not expect the IRA to have a material 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 our available-for-sale fixed maturity portfolio, presented on a consolidated basis, as of June 30, 2023 and December 31, 2022, is provided below:

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June 30, 2023
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	$	22,609	$	—	$	1,045	$	21,564	$	—	$	21,564
U.S. government agency	90,766		—		9,521		81,245		—		81,245
States, municipalities and political subdivisions
General obligations:
Midwest	58,779		115		411		58,483		—		58,483
Northeast	11,458		—		60		11,398		—		11,398
South	55,446		24		709		54,761		—		54,761
West	83,761		68		795		83,034		—		83,034
Special revenue:
Midwest	102,770		172		809		102,133		—		102,133
Northeast	52,962		73		1,082		51,953		—		51,953
South	168,751		68		3,253		165,566		—		165,566
West	105,781		81		1,549		104,313		—		104,313
Foreign bonds	41,128		—		4,355		36,773		—		36,773
Public utilities	141,667		55		13,418		128,304		—		128,304
Corporate bonds
Energy	44,448		—		3,105		41,343		—		41,343
Industrials	63,748		135		5,270		58,613		—		58,613
Consumer goods and services	100,369		—		9,847		90,522		—		90,522
Health care	37,932		26		5,145		32,813		—		32,813
Technology, media and telecommunications	72,097		—		6,732		65,365		—		65,365
Financial services	137,047		112		10,766		126,393		1		126,392
Mortgage-backed securities	25,339		—		2,666		22,673		—		22,673
Collateralized mortgage obligations
Government national mortgage association	114,875		15		14,369		100,521		—		100,521
Federal home loan mortgage corporation	91,108		—		13,948		77,160		—		77,160
Federal national mortgage association	54,521		18		5,213		49,326		—		49,326
Asset-backed securities	3,755		498		126		4,127		—		4,127
Total Available-for-Sale Fixed Maturities	$	1,681,117	$	1,460	$	114,194	$	1,568,383	$	1	$	1,568,382

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December 31, 2022
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	$	15,684	$	—	$	1,009	$	14,675	$	—	$	14,675
U.S. government agency	94,092		35		9,721		84,406		—		84,406
States, municipalities and political subdivisions
General obligations:
Midwest	61,191		185		263		61,113		—		61,113
Northeast	15,518		18		73		15,463		—		15,463
South	64,851		57		927		63,981		—		63,981
West	87,094		163		712		86,545		—		86,545
Special revenue:
Midwest	103,107		224		1,065		102,266		—		102,266
Northeast	55,292		76		1,148		54,220		—		54,220
South	184,108		278		3,529		180,857		—		180,857
West	113,594		275		1,657		112,212		—		112,212
Foreign bonds	36,129		—		4,480		31,649		—		31,649
Public utilities	138,752		65		13,406		125,411		—		125,411
Corporate bonds
Energy	36,507		—		3,298		33,209		—		33,209
Industrials	58,334		62		5,554		52,842		—		52,842
Consumer goods and services	100,539		—		10,598		89,941		—		89,941
Health care	32,987		24		5,419		27,592		—		27,592
Technology, media and telecommunications	67,193		—		7,253		59,940		—		59,940
Financial services	132,849		851		9,408		124,292		3		124,289
Mortgage-backed securities	20,450		—		2,750		17,700		—		17,700
Collateralized mortgage obligations
Government national mortgage association	97,839		—		13,291		84,548		—		84,548
Federal home loan mortgage corporation	92,366		—		13,528		78,838		—		78,838
Federal national mortgage association