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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 March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34257
ufcs-20220331_g1.gif
________________________
 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 RapidsIowa
52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319399-5700
Securities Registered Pursuant to Section 12(b) of the Exchange Act of 1934:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par valueUFCSThe 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 May 2, 2022, 25,126,598 shares of common stock were outstanding.


United Fire Group, Inc.
Index to Quarterly Report on Form 10-Q
March 31, 2022
 Page
 
 
 


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, 2021 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;
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 impact of the COVID-19 pandemic, and the emergence of variant strains, on our business, financial conditions, results of operations, and liquidity;
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; and
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.
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
1

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)March 31,
2022
 December 31,
2021
 (unaudited)  
ASSETS   
Investments:   
Fixed maturities   
Available-for-sale, at fair value (amortized cost $1,671,758 in 2022 and $1,656,797 in 2021)
$1,651,468  $1,719,790 
Equity securities at fair value (cost $80,260 in 2022 and $84,605 in 2021)
194,230 213,401 
Mortgage loans47,042  47,201 
Less: allowance for mortgage loan losses66  71 
Mortgage loans, net46,976 47,130 
Other long-term investments84,007  84,090 
Short-term investments 275  275 
Total investments1,976,956  2,064,686 
Cash and cash equivalents109,522  132,104 
Accrued investment income13,935  13,396 
Premiums receivable (net of allowance for doubtful accounts of $559 in 2022 and $781 in 2021)
334,890  316,771 
Deferred policy acquisition costs95,762  91,446 
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $61,633 in 2022 and $60,142 in 2021)
138,721  137,702 
Reinsurance receivables and recoverables (net of allowance for credit losses of $83 in 2022 and $102 in 2021)
134,988  127,815 
Prepaid reinsurance premiums8,864  9,328 
Intangible assets5,856 6,034 
Income taxes receivable14,674 32,378 
Other assets95,829  81,061 
TOTAL ASSETS$2,929,997  $3,012,721 
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Liabilities   
Losses and loss settlement expenses$1,487,991  $1,514,265 
Unearned premiums446,051  439,733 
Accrued expenses and other liabilities103,077  102,849 
Long term debt50,000 50,000 
Deferred tax liability7,253  26,753 
TOTAL LIABILITIES$2,094,372  $2,133,600 
Stockholders’ Equity   
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,119,244 and 25,082,104 shares issued and outstanding in 2022 and 2021, respectively
$25  $25 
Additional paid-in capital204,006  203,375 
Retained earnings645,966  621,384 
Accumulated other comprehensive income, net of tax(14,372) 54,337 
TOTAL STOCKHOLDERS’ EQUITY$835,625  $879,121 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,929,997  $3,012,721 
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 March 31,
(In Thousands, Except Share Data)20222021
Revenues
Net premiums earned$234,228 $259,225 
Investment income, net of investment expenses11,276 17,081 
Net investment gains (losses) (includes reclassifications for net unrealized investment gains (losses) on available-for-sale securities of $318 in 2022 and $(807) in 2021; previously included in accumulated other comprehensive income (loss))
(465)24,508 
Other income (loss)(25)(79)
Total revenues$245,014 $300,735 
Benefits, Losses and Expenses
Losses and loss settlement expenses$130,376 $206,398 
Amortization of deferred policy acquisition costs50,471 53,265 
Other underwriting expenses (includes reclassifications for employee benefit costs of $900 in 2022 and $1,667 in 2021; previously included in accumulated other comprehensive income (loss))
28,644 18,368 
Interest expense797  
Total benefits, losses and expenses$210,288 $278,031 
Income before income taxes$34,726 $22,704 
Federal income tax expense (includes reclassifications of $122 in 2022 and $520 in 2021; previously included in accumulated other comprehensive income (loss))
6,377 4,002 
Net Income$28,349 $18,702 
Other comprehensive income (loss)
Change in net unrealized appreciation on investments$(82,965) $(30,497)
Change in liability for underfunded employee benefit plans(4,591)6,505 
Other comprehensive income (loss), before tax and reclassification adjustments$(87,556) $(23,992)
Income tax effect18,387  5,038 
Other comprehensive income (loss), after tax, before reclassification adjustments$(69,169) $(18,954)
Reclassification adjustment for net realized investment losses included in income$(318) $807 
Reclassification adjustment for employee benefit costs included in expense900  1,667 
Total reclassification adjustments, before tax$582 $2,474 
Income tax effect(122)(520)
Total reclassification adjustments, after tax$460 $1,954 
Comprehensive income (loss)$(40,360) $1,702 
Diluted weighted average common shares outstanding25,323,105 25,379,812 
Earnings per common share:
Basic$1.13 $0.75 
Diluted 1.12 0.74 
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 outstandingCommon stockAdditional paid-in capitalRetaining EarningsAccumulated other comprehensive incomeTotal
 
Balance, January 1, 202225,082,104 $25 $203,375 $621,384 $54,337 $879,121 
Net income   28,349  28,349 
Stock based compensation37,140  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, 202225,119,244 $25 $204,006 $645,966 $(14,372)$835,625 
(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.
Common Stock
(In Thousands, Except Share Data)Shares outstandingCommon stockAdditional paid-in capitalRetaining EarningsAccumulated other comprehensive incomeTotal
 
Balance, January 1, 202125,055,479 $25 $202,359 $555,854 $66,911 $825,149 
Net income— — — 18,702 — 18,702 
Shares repurchased(207)— (7)— — (7)
Stock based compensation64,583 — 522 — — 522 
Dividends on common stock $0.15 per share)
— — — (3,767)— (3,767)
Change in net unrealized investment appreciation (depreciation)(1)
— — — — (23,456)(23,456)
Change in liability for underfunded employee benefit plans(2)
— — — — 6,456 6,456 
Balance, March 31, 202125,119,855 $25 $202,874 $570,789 $49,911 $823,599 
(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.


5

United Fire Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
(In Thousands)2022 2021
Cash Flows From Operating Activities   
Net income$28,349  $18,702 
Adjustments to reconcile net income to net cash provided by (used in) operating activities 
Net accretion of bond premium2,906  3,586 
Depreciation and amortization1,668  1,628 
Stock-based compensation expense979  1,009 
Net investment (gains) losses465  (24,508)
Net cash flows from equity and trading investments18,387  38,737 
Deferred income tax benefit(1,234) 4,002 
Changes in: 
Accrued investment income(539) (47)
Premiums receivable(18,119) (11,097)
Deferred policy acquisition costs(4,316) (861)
Reinsurance receivables(7,173) (3,001)
Prepaid reinsurance premiums464  (448)
Income taxes receivable17,704  (14)
Other assets(14,768) (7,109)
Losses and loss settlement expenses(26,274) 34,894 
Unearned premiums6,318  (3,315)
Accrued expenses and other liabilities(3,469) (26,116)
Other, net247  (6,532)
Cash from operating activities(26,754)808 
Net cash provided by operating activities$1,595  $19,510 
Cash Flows From Investing Activities   
Proceeds from sale of available-for-sale investments$  $99,682 
Proceeds from call and maturity of available-for-sale investments65,407  72,617 
Proceeds from sale of other investments1,581  621 
Purchase of investments available-for-sale(82,942)(198,331)
Purchase of other investments(1,597) (2,423)
Net purchases and sales of property and equipment(2,510) (3,848)
Net cash used in investing activities$(20,061)$(31,682)
Cash Flows From Financing Activities   
Issuance of common stock$(349)$(487)
Repurchase of common stock (7)
Payment of cash dividends(3,767)(3,768)
Net cash used in financing activities$(4,116)$(4,262)
Net Change in Cash and Cash Equivalents$(22,582) $(16,434)
Cash and Cash Equivalents at Beginning of Period132,104 87,948 
Cash and Cash Equivalents at End of Period$109,522 $71,514 
The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.
6


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, 2021, 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 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, 2021.
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.


7

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, Syndicate 4747, Syndicate 2988 and Syndicate 1699. At March 31, 2022, the Company's FAL investments were comprised of cash of $21,333 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 three-month period ended March 31, 2022.
Total
Recorded asset at beginning of period$91,446 
Underwriting costs deferred54,787 
Amortization of deferred policy acquisition costs(50,471)
Recorded asset at March 31, 2022
$95,762 

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 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 three-month period ended March 31, 2022, interest totaled
8

$797 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
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 $6,377 for the three-month period ended March 31, 2022 compared to an income tax expense of $4,002 during the same period of 2021. Our effective tax rate for 2022 and 2021 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 March 31, 2022 or December 31, 2021. 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 three-month period ended March 31, 2022, we did not make a payment for income taxes. For the three-month period ended March 31, 2021, we made payments for income taxes totaling $14. For the three-month period ended March 31, 2022, we received a federal tax refund of $10,000. We did not receive a tax refund during the three-month period ended March 31, 2021.
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 facts and circumstances, the Company has a variable interest in the VIE, but has not consolidated the VIE's
9

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 March 31, 2022 was $2,686 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 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 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 March 31, 2022 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 March 31, 2022, the Company had a credit loss allowance for reinsurance receivables of $83.
Rollforward of credit loss allowance for reinsurance receivables:
As of
March 31, 2022
Beginning balance, January 1, 2022$102 
Recoveries of amounts previously written off, if any(19)
Ending balance of the allowance for reinsurance receivables, March 31, 2022
$83 

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.



10

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 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 modified disclosures, but did 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.








11

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, presented on a consolidated basis, as of March 31, 2022 and December 31, 2021, is provided below:
March 31, 2022
Type of InvestmentCost or Amortized Cost Gross Unrealized Appreciation Gross Unrealized Depreciation Fair ValueAllowance for Credit LossesCarrying Value
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$42,292 $6 $1,900 $40,398 $ $40,398 
U.S. government agency73,017 632 2,691 70,958  70,958 
States, municipalities and political subdivisions
General obligations:
Midwest70,491 745 42 71,194  71,194 
Northeast22,020 179 15 22,184  22,184 
South68,387 638 11 69,014  69,014 
West93,789 1,262 14 95,037  95,037 
Special revenue:
Midwest112,262 2,305 26 114,541  114,541 
Northeast55,684 769 142 56,311  56,311 
South198,958 3,820 365 202,413  202,413 
West124,791 1,879 53 126,617  126,617 
Foreign bonds35,264 226 1,584 33,906  33,906 
Public utilities117,845 800 3,979 114,666  114,666 
Corporate bonds
Energy39,143 506 952 38,697  38,697 
Industrials53,976 619 2,219 52,376  52,376 
Consumer goods and services77,509 490 3,933 74,066  74,066 
Health care28,314 158 2,496 25,976  25,976 
Technology, media and telecommunications62,204 847 2,881 60,170  60,170 
Financial services119,478 1,160 2,035 118,603  118,603 
Mortgage-backed securities23,293 35 1,310 22,018  22,018 
Collateralized mortgage obligations
Government national mortgage association102,710 148 4,856 98,002  98,002 
Federal home loan mortgage corporation104,844 53 4,926 99,971  99,971