ITEM 1A. RISK FACTORS
We provide readers with the following discussion of risks and uncertainties relevant to our business. These are factors that we believe could cause our actual results to differ materially from our historic or anticipated results. We could also be adversely affected by other factors, in addition to those listed here. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial could have a material effect on our business, results of operations, financial condition and/or liquidity.
Additional information concerning factors that could cause actual results to differ materially from those contained in the forward-looking statements is set forth in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Business Strategy
The success of our strategy may be adversely impacted by various internal and external factors.
We have set a strategy to grow our business. We expect to execute on our strategy, but our success could be impacted by several different risks including but not limited to regulatory changes, economic conditions, technological advancements, cybersecurity threats, operational risks, intense market competition, and talent risks. We continually monitor these risks and mitigate their potential likelihood and impact. We also adjust our strategy as needed as results are realized or projections indicate any potential weaknesses in the adequacy or execution of our strategic plan. Our efforts to successfully mitigate risks to our strategy are not guaranteed, which could materially impact our financial condition and the results of our operations.
Our core insurance business is dependent on strong and beneficial relationships with a large network of independent insurance agents and not maintaining these relationships could result in loss of sufficient business opportunities within our expertise and stated risk appetite.
Our direct insurance products are marketed exclusively through independent insurance agencies, all of which represent more than one company. We face competition within each agency to retain qualified independent agents. Our competitors include companies that market their products via independent agents, exclusive agents and companies that sell insurance directly to their customers.
Our distribution model is subject to the risks of possible loss of independent agencies for various reasons and the discretion agencies have to reduce their business with us. Other potential consequences of not maintaining strong and beneficial relationships include the loss of sufficient business opportunities within our specific risk appetite, impacting the quality of our underwriting and loss ratio. If the quality of the independent agencies with which we do business were to decline, policyholders might consider purchasing their insurance through different agencies or channels.
Our geographic concentration ties our performance to the business, economic and regulatory conditions of certain states.
Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, competitive, weather, and other conditions in the principal states in which we do business. With respect to regulatory conditions, the NAIC and state legislators continually reexamine existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws and regulations. In a time of financial uncertainty or a prolonged economic downturn, regulators may choose to adopt more restrictive insurance laws and regulations. Changes in regulatory or any other of these conditions could make it less attractive for us to do business in such states. In addition, our exposure to severe losses from localized natural perils, such as tornadoes, wildfires or hailstorms, is increased in those areas where we have written a significant amount of property insurance policies.
We will be at a competitive disadvantage if, over time, our competitors are more effective in pricing their products, development of new product offering, implementation of technology and data analytics.
We compete with many major U.S. and non-U.S. insurers and smaller regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies, and diversified financial services companies, including banks, mutual funds, broker-dealers and asset-managers. Our competitors may attempt to increase their market share by lowering rates. Losing business to competitors offering similar products at lower prices or who have a competitive advantage may adversely affect the results of our operations.
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We use various actuarial techniques and data analytics to understand our risk exposures such as frequency and severity of different types of insurance claims. The data we rely on for these analytics includes experience data from our own business (e.g., policies written, characteristics, coverages, and details of associated losses) and data attained from third parties, including industry results. We use outputs of predictive models and other analytics to assist in decision making related to underwriting, pricing, claims management (including reserving), and catastrophe risk exposure management.
Emerging technology, including artificial intelligence, offers opportunities to underwrite and price business more efficiently and accurately, thus lowering costs. If we are not able to use technology and data analytics as effectively as our competitors, our competitiveness and ability to write and retain business within our risk appetite will be impacted. This may reduce the profitability of the business we do write or retain and negatively affect our ability to meet our business objectives.
Our strategy's success could be affected by our timely ability to recognize and adapt to our position in the insurance cycle.
The risk presented by market conditions presents a unique set of challenges in the property and casualty insurance industry. The property and casualty insurance marketplace is cyclical in nature and has historically been characterized by soft markets (i.e., periods of relatively high levels of price competition, less restrictive underwriting standards and generally low premium rates) followed by hard markets (i.e., periods of capital shortages resulting in a lack of insurance availability, relatively low levels of price competition, more selective underwriting of risks and relatively high premium rates). During soft markets, we may lose business to competitors offering competitive insurance at lower prices. We may reduce our premiums or limit premium increases leading to a reduction in our profit margins and revenues. During hard markets, we may underprice our competition resulting in adverse selection and missed opportunities for higher profit margins.
Underwriting Risks
Our success depends primarily on our ability to underwrite risks effectively and adequately price the risks we insure.
The results of our operations and our financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of risks based on available information. Adequate rates are necessary to generate premiums sufficient to pay losses, loss settlement expenses and underwriting expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial amount of data, develop, and apply appropriate pricing techniques, closely monitor changes in trends and project both severity and frequency of losses with reasonable accuracy. We could underprice risks which would adversely affect our profit margins. Conversely, we could overprice risks, leading to reduced sales volume and competitiveness. Our ability to undertake these efforts successfully is subject to a number of risks and uncertainties, including but not limited to:
(1) The availability of sufficient reliable data and our ability to properly analyze available data.
(2) Market and competitive conditions.
(3) Changes in medical care expenses and restoration costs.
(4) Our selection and application of appropriate pricing techniques.
(5) Changes in the regulatory market, applicable legal liability standards and in the civil litigation system generally.
The demand for property and casualty insurance can also vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases. Fluctuations in demand and competition could produce underwriting results that would have a negative impact on the results of our operations and financial condition.
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Claims
We may be unable 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.
We refer to these phenomena collectively as "social inflation" and they present a significant challenge in accurately pricing risk and managing the liabilities that arise on insurance policies. As a commercial casualty insurance company, we have always been sensitive to the effects of emerging claims and coverage issues, including class action lawsuits. But more recent trends such as litigation financing have led to an unprecedented number of large liability losses for us as well as our competitors.
These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number and/or size of claims, resulting in further increases in our reserves. The effects of these and other unforeseen emerging claims and coverage issues are difficult to predict. Further examples of these issues include:
(1) Judicial expansion of policy coverage and the impact of new theories of liability.
(2) An increase in plaintiffs targeting property and casualty insurers in purported class action litigation regarding claims handling and other practices.
(3) Medical developments that link health issues to specific causes, resulting in liability or workers' compensation (for example, cumulative trauma).
(4) Claims relating to unanticipated consequences of current or new technologies.
(5) An increase in the variety, number and size of claims relating to liability losses, which often present complex coverage and damage valuation questions.
(6) Claims relating to potentially changing climate conditions, including higher frequency and severity of weather-related events.
(7) Adverse changes in loss cost trends, including inflationary pressure in medical cost and automobile repair costs.
Many of the policies we issue include exclusions and other conditions that define, and limit coverage, which are designed to manage our exposure to certain types of risks and expanding theories of legal liability. In addition, many of our policies limit the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter than the statutory period under which these claims can be brought by our policyholders. While these exclusions and limitations help us assess and control our loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted which modifies or bars the use of these exclusions and limitations. This could result in higher than anticipated losses by extending coverage beyond the intent of our underwriting. In some instances, these changes may not become apparent until sometime after we have issued the insurance policies that are affected by these changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.
We actively educate employees on the risk of social inflation and how best to defend against social inflation tactics. We endeavor to find ways to keep claims out of litigation and manage downward the length of time that certain claims are open. We also steer our portfolio away from business that is most exposed to these trends, and we target business in our assumed reinsurance operations and other alternative distribution channels that offer shorter tail risks.
Our reserves for property and casualty insurance losses and loss settlement expenses are based on estimates and may be inadequate, adversely impacting our financial results.
We maintain insurance reserves to cover our estimated ultimate unpaid liability for claims and claims adjustment expenses, including the estimated cost of the claims adjustment process, for reported and unreported claims and for future policy benefits. Our reserves may prove to be inadequate, which may result in future charges to earnings and/or a downgrade of our financial strength rating or the financial strength ratings of our insurance company subsidiaries.
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Insurance reserves represent our best estimate at a given point in time. They are not an exact calculation of liability but instead are complex estimates, which are a product of actuarial expertise and projection techniques based on assumptions and expectations about future events, many of which are highly uncertain.
The process of estimating claims and claims adjustment expense reserves involves a high degree of judgment. These estimates are based on historical data and the impact of various factors such as:
(1) Actuarial and statistical projections of the cost of settlement and administration of claims reflecting facts and circumstances known.
(2) Historical claims information and loss emergence patterns.
(3) Assessments of currently available data.
(4) Estimates of future trends in claims severity and frequency.
(5) Judicial theories of liability.
(6) Economic factors such as inflation.
(7) Estimates and assumptions regarding social, judicial and legislative trends, and actions such as class action lawsuits and judicial interpretation of coverages or policy exclusions.
(8) The level of insurance fraud.
Many of these factors are not quantifiable. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled.
Actual loss and loss settlement expenses paid might exceed our reserves. If our loss reserves are insufficient, or if we believe our loss reserves are insufficient to cover our actual loss and loss settlement expenses, we will have to increase our loss reserves and incur charges to our earnings, which could indicate that premium levels were insufficient. As such, deviations from one or more of these assumptions could result in a material adverse impact on our Consolidated Financial Statements and/or our financial strength rating.
For additional information about our reserving process and the factors we consider in estimating reserves, refer to the "Critical Accounting Estimates" section in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
We insure property that is exposed to various natural perils that can give rise to significant claims costs.
Our property and casualty insurance operations expose us to claims arising from catastrophic events affecting multiple policyholders. Such catastrophic events consist of various natural disasters, which may increase in severity and frequency due to climate change, including, but not limited to, hurricanes, tornadoes, hailstorms, wildfires, earthquakes, severe winter weather, volcanic eruptions, and man-made disasters such as terrorist acts (including biological, chemical or radiological events), explosions, infrastructure failures and results from political instability.
Property damage resulting from catastrophes is perhaps the largest short-term underwriting loss we face in the ordinary course of our business. Catastrophes may reduce our net income, cause substantial volatility in our financial results for any fiscal quarter or year or otherwise adversely affect our financial condition, liquidity or results of operations. Catastrophes may also negatively affect our ability to write new business.
In addition, it generally requires more time to determine our ultimate losses associated with a particular catastrophic event. The inability to access portions of the impacted area, the complexity of the losses, legal and regulatory uncertainty, and the nature of the information available for certain catastrophic events may affect our ability to estimate the claims and claim adjustment expense reserves. Such complex factors include, but are not limited to: determining the cause of the damage, evaluating general liability exposures, estimating additional living expenses, the impact of demand surge, infrastructure disruption, fraud, business interruption costs and reinsurance collectability.
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A catastrophic occurrence at the end or near the end of a reporting period may also affect the information available to us when estimating claims and claims adjustment expense reserves for the reporting period. As our claims experience for a particular catastrophe develops, we may be required to adjust our reserves to reflect our revised estimates of the total cost of claims. However, because the occurrence and severity of catastrophes are inherently unpredictable and may vary significantly from year to year and region to region, historical results of operations may not be indicative of future results of operations.
Following catastrophes there may be legislative, administrative, and judicial decisions that seek to expand insurance coverage for claims beyond the original intent of the policies or seek to prevent the application of deductibles. Our ability to manage catastrophic exposure may be limited by public policy considerations, the political environment, changes in the general economic climate and/or social responsibilities.
Financial
We are subject to certain risks related to our investment portfolio that could negatively affect our profitability.
Our investments are professionally managed by New England Asset Management ("NEAM") as of February 1, 2024. NEAM's investment decisions are governed by our management team and in accordance with our investment guidelines approved by our Board of Directors. Investment income is an important component of our net income and overall profitability. We invest premiums received from policyholders and other available cash to generate investment income and capital appreciation, while also maintaining sufficient liquidity to pay covered claims, operating expenses, and dividends. Our investment performance is sensitive to various factors including general economic conditions, changes in financial markets, global disruptions, and other factors beyond our control. Although our guidelines stress diversification in investment grade fixed maturity securities, our financial results may be adversely impacted by investment creditworthiness, fluctuations in interest rates, and disruptions in the financial and capital markets.
We seek to match the maturities of our investment portfolio with the estimated payment date of our loss and loss adjustment expense reserves to ensure strong liquidity and avoid having to liquidate securities to fund claims. Risk such as inadequate loss and loss adjustment reserves, a large natural catastrophe, or unfavorable trends in litigation could potentially result in the need to sell investments to fund these liabilities. This could result in significant realized losses depending on the conditions of the general market, interest rates and credit profile of individual securities. Further, our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the portion of the investment portfolio that is carried at fair value in our financial statements is not reflective of prices at which actual transactions could occur.
We exercise prudence and significant judgment in analyzing and validating fair values, which are primarily provided by third parties, for securities in our investment portfolio, including those that are not regularly traded in active markets. We also exercise prudence and significant judgment in determining whether the impairment of particular investments is temporary or other-than-temporary. Due to the inherent uncertainties involved in these judgments, we may incur unrealized losses and subsequently conclude that other-than-temporary write downs of our investments are required.
A downgrade in our financial strength or issuer credit ratings could result in a loss of business and could have a material adverse effect on our financial condition, results of operations and liquidity.
Ratings are an important factor in establishing the competitive position of insurance companies. Third-party rating agencies assess and rate the claims-paying ability, capital strength and creditworthiness of insurers and reinsurers based on criteria established by the agencies. Financial strength ratings and issuer credit ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength, creditworthiness and quality of insurers and reinsurers. These ratings are not evaluations directed to potential purchasers of our common stock, and are not recommendations to buy, sell or hold our common stock. These ratings are subject to change at any time and could be revised downward or revoked at the sole discretion of the rating agency.
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The ratings assigned by A.M. Best are an important factor in marketing our products. Our ratings from A.M. Best affect our ability to retain our existing business, and to attract new business in our insurance operations. Failure to maintain our ratings could motivate current and future independent agents and policyholders to transact their business with higher rated competitors. If A.M. Best further downgrades our ratings or publicly indicates that our ratings are under review, it is possible that we will not be able to compete as effectively, leading to a decrease in premium revenue and earnings. For example, many of our agencies and policyholders have guidelines that require us to have an A.M. Best financial strength rating of "A-" or higher. A reduction of our A.M. Best ratings below "A-" could prevent us from issuing policies to a portion of our current or future policyholders with ratings requirements.
The failure of our insurance company subsidiaries to maintain their current ratings could dissuade a lender or reinsurance company from conducting business with us. A ratings downgrade could also cause some of our existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or creation of additional financial obligations. For more information, refer to the "Financial Strength and Issuer Credit Rating" " section in Part I, Item 1 and Note 13 "Debt" contained in Part II, Item 8.
We may be unable to secure reinsurance capacity that provides necessary risk protection at a reasonable cost.
Our reinsurance strategy seeks to protect the Company from extremely adverse underwriting outcomes as well as unnecessary volatility in underwriting results. We purchase conservative levels of reinsurance as measured by our property catastrophe models, our economic capital model, and benchmarking with our peers.
We retain multiple reinsurance intermediaries to plan, create, and facilitate our ceded reinsurance placements. These intermediaries work closely with our risk, corporate underwriting, and finance departments to design reinsurance transactions that align with corporate strategy and risk appetite. Reinsurance transactions are supported by a large and diverse array of reinsurance providers to ensure that the capacity is reliable in each underwriting year. However, in hard reinsurance market conditions, reinsurance capacity can become constrained as reinsurers are pressed with concerns about capital or profitability. In these conditions, we may be unable to secure our desired reinsurance protection at a reasonable cost.
Lost reinsurance capacity could expose the Company to larger retained losses per loss occurrence, per risk, or per year in total. To mitigate this risk, we maintain a large panel of reinsurers and prefer to trade with partners that participate in each of our ceded programs. We transact with multiple intermediary companies to ensure full access to the entire reinsurance market. We monitor the credit quality of our reinsurance providers. We have a clear view of the criticality of various components of our reinsurance program. Finally, we maintain active dialogue with intermediaries and underwriters throughout the year.
Operations
We may be unable to attract, retain or effectively manage the succession of key personnel.
Our success depends on our ability to attract and retain key personnel, including members of our executive and senior management team. Any unplanned turnover or our failure to develop an adequate succession plan for one or more of our executive officers or other key positions could compromise our institutional knowledge base and erode our competitive advantage. The loss or limited availability of the services of one or more of our executive officers or other key personnel, or our inability to recruit and retain qualified executive officers or other key personnel in the future, could, at least temporarily, have a material adverse effect on our operating results and financial condition.
Changing weather patterns and climate change add to the unpredictability, frequency and severity of catastrophe losses and may adversely affect the results of our operations, liquidity and financial condition.
Long-term weather trends may be changing, a phenomenon that has been associated with extreme weather events linked to rising temperatures, including effects on global weather patterns, sea, land and air temperature, sea levels, rain, snow, and drought. Such changes in climate conditions could cause our underlying modeling data to be less accurate, limiting our ability to evaluate and manage our risk. Climate change also adds to the unpredictability of natural disasters and creates uncertainty as to future trends and exposures. Climate change presents risks in four categories to the Company:
(1) Physical Risk: The cost of natural perils may change. This is a concern for our property insurance underwriting strategy and, to a lesser extent, our real estate costs.
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(2) Regulatory Risk: Certain regulatory bodies may impose laws that require UFG to report Greenhouse Gas (GHG) emissions from our own operations and our strategies to mitigate emissions, resulting in compliance with such regulations requiring increased time and expense.
(3) Transition Risk: Financial risks arising from a global transition to a lower-carbon economy could impact long-term return on certain invested assets.
(4) Liability Risk: New areas of law enabling litigation alleging damage from climate change may present legal risk to UFG.
Unauthorized data access, cyber-attacks and other security breaches could have an adverse impact on our business and reputation.
We rely on computer systems to conduct critical business functions, such as customer service, marketing and sales activities, customer relationship management and producing financial statements. Our business and operations rely on secure and efficient processing, storage and transmission of customer and Company data, including personally identifiable information. Our ability to effectively operate our business depends upon our ability, and the ability of certain third-party vendors and business partners, to access our computer systems to perform necessary business functions, such as providing quotes and product pricing, billing and processing premiums, administering claims, and reporting our financial results.
We retain confidential information on our computer systems, including customer information and proprietary business information belonging to us, our policyholders, third party claimants and vendors. Our business and operations depend upon our ability to safeguard this personally identifiable information. Our systems may be vulnerable to unauthorized access and hackers, computer viruses, and other scenarios in which our data may be compromised.
Cyber-attacks involving these systems, or those of our third-party vendors, could be carried out remotely and from multiple sources and could interrupt, damage, or otherwise adversely affect the operations of these critical systems. Cyber-attacks could result in the modification or theft of data, the distribution of false information, or the denial of service to users. Threats to data security can emerge from a variety of sources and change rapidly, resulting in the ongoing need to expend resources to secure our data in accordance with customer expectations and statutory and regulatory requirements.
Any compromise of the security of our data could expose us to liability and harm our reputation, which could affect our business and results of operations. We continually enhance our operating procedures and internal controls to effectively support our business and comply with our regulatory and financial reporting requirements, but there can be no assurances that we will be able to implement security measures adequate to prevent every security breach.
Although, to date, we have not identified any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents that have, or are likely to, materially affect us, our business strategy, results of operation or financial condition, the scope and effect of any cyber-attack may remain undetected for a period of time. We maintain cyber liability insurance coverage that provides both third-party liability and first-party insurance coverage; however, our insurance may be insufficient to cover all losses and expenses related to a cyber-attack.
Federal and state policymakers have and will likely continue to propose increased regulation of the protection of personally identifiable information and appropriate protocols after a related cybersecurity breach. Compliance with these regulations and efforts to address continually developing cybersecurity risks may result in a material adverse effect on our results of operations, liquidity, financial condition, and financial strength.
We are subject to comprehensive laws and regulations, changes to which may have an adverse effect on our financial condition and results of operations.
Insurance is a highly regulated industry. We are subject to extensive supervision and regulation by the states in which we operate. As a public company, we are also subject to regulation at the federal level, which is susceptible to changes in the new presidential term. Our ability to comply with these laws and regulations and obtain necessary and timely regulatory action is, and will continue to be, critical to our success. Examples of regulations that pose a risk to our ability to earn profits include but are not limited to:
(1)Required licensing
(2)Regulation of insurance rates, fees and approval of policy forms
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(3)Restrictions on cancellation, nonrenewal or withdrawal
(4)Risk-based capital and capital adequacy requirements
(5)Transactions between insurance companies and their affiliates
(6)Required participation in guaranty funds and assigned risk pools
(7)Restrictions on the amount, type, nature, and quality of investments
(8)Terrorism risk insurance
(9)Accounting standards
(10)Corporate governance and public disclosure regulation
(11)Information privacy regulation
(12)Potential assessments for the provision of funds necessary for settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies
Compliance with these laws and regulations requires us to incur administrative costs that decrease our profits. These laws and regulations may also prevent or limit our ability to underwrite and price risks accurately; obtain timely premium rate increases necessary to cover increased costs; discontinue unprofitable relationships; or exit unprofitable markets and otherwise continue to operate our business profitably. In addition, our failure to comply with these laws and regulations could result in actions by state or federal regulators, including the imposition of fines and penalties or, in an extreme case, revocation of our ability to do business in one or more states. Finally, we could face individual, group and class action lawsuits by our policyholders and others for alleged violations of certain state laws and regulations. Each of these regulatory risks could have a negative effect on our profitability.
Macroeconomic conditions could materially and adversely affect our business, results of our operations, financial condition, and growth.
Macroeconomic conditions such as growth, inflation, market stability, and geopolitics can impact our operations, opportunities, and risk profile. Important sectors we follow include goods, services, and housing. Markets exhibit stability when credit is available, there is liquidity in the system, and banks are stable. Geopolitical concerns can also disrupt the business environment. All these factors can contribute to adverse financial consequences for UFG.
Shareholders
Our stock price could become more volatile, and your investment could lose value.
The market price of our common stock historically has been, and we expect will continue to be, subject to fluctuations. These fluctuations may be due to our operating results or factors specific to our operations (including those discussed within this Item 1A. Risk Factors section), changes in securities analysts' estimates of our future financial performance, ratings or recommendations, our results falling below our expectations and analysts' and investors' expectations, the failure of our capital return programs to meet analysts' and investors' expectations, significant catastrophe events, departure of key personnel, cyber-attacks, or factors largely outside of our control, including those affecting the property and casualty insurance industry. The stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the actual operating performance of listed companies. In addition, our stock is followed by a small number of analysts and the average daily trading volume tends to be low. These factors could adversely affect the price of our common stock.
Efforts to disrupt the structure, management or ownership of the Company could diminish the value of our common stock.
Our articles of incorporation and bylaws, as well as applicable laws governing corporations and insurance companies, contain provisions that could impede an attempt to replace or remove our management or prevent the sale of the Company that, in either case, could cause shareholders to believe that we are acting contrary to their best interests. In 2024, we amended and restated our bylaws to, among other things, enhance existing procedural mechanics and require additional disclosures in connection with shareholder nominations of directors and submissions of shareholder proposals to be included in the Company's proxy statement.
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Our articles of incorporation and bylaws, and state laws governing corporations and insurance companies, may discourage potential acquisition proposals, as well as delay, deter or prevent a change of control of the Company, in particular through unsolicited transactions. However, any such activity, regardless of its success, may still adversely affect market prices for our common stock.
The ability of our subsidiaries to pay dividends to UFG may affect our liquidity and ability to pay dividends to shareholders.
As a holding company, we have no significant independent operations of our own. Our principal sources of funds are dividends and other payments received from our subsidiaries. We rely on those subsidiaries' dividends for our liquidity, payment of dividends to shareholders and to make share repurchases. Dividends from those subsidiaries depend on their statutory surplus, earnings and regulatory restrictions.
State insurance laws limit the ability of insurance subsidiaries to pay dividends and require our insurance subsidiaries to maintain specified minimum levels of statutory capital and surplus. The actual ability to pay dividends may be further constrained by business and regulatory considerations, such as the impact of dividends on surplus, by our competitive position and by the amount of premiums that we can write. Ordinary dividend payments, or dividends that do not require prior approval by the insurance subsidiaries' domiciliary state insurance regulator are generally limited to amounts determined by a formula which varies by jurisdiction. Extraordinary dividends, on the other hand, require prior regulatory approval by the insurance subsidiaries' domiciliary state insurance regulator before they can be made.
In addition, competitive pressures generally require insurance companies to maintain insurance financial strength ratings. These restrictions and other regulatory requirements affect the ability of our insurance subsidiaries to make dividend payments to us. At times the Company may be unable to pay dividends on our common stock or we may be required to seek prior approval from the applicable regulatory authority before our insurance subsidiaries can make a dividend payment to the Company for distribution. In addition, the payment of dividends to shareholders is within the discretion of our Board of Directors and will depend on numerous factors, including our financial condition, our capital requirements and other factors that our Board of Directors considers relevant.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Overview
We recognize the importance of assessing, identifying, and managing risks associated with cybersecurity threats. Our cybersecurity risks are identified and addressed through a comprehensive, cross-functional approach to develop strategies for preserving the confidentiality, integrity and availability of Company and customer information, identifying, preventing and mitigating cybersecurity threats, and effectively responding to cybersecurity incidents.
Oversight
Cybersecurity risk oversight is a focus area of our Risk Management Committee and the full Board of Directors. The Risk Management Committee's charter requires it to assist the Board of Directors in identifying and evaluating risks inherent in our business and to oversee and review the significant policies, procedures, and practices employed to manage risks.The Risk Management Committee receives a quarterly cybersecurity update from the Chief Administrative Officer (CAO), which is shared with the full Board of Directors. The Board of Directors discusses cybersecurity matters and risks on a quarterly basis or more frequently, as needed, at the recommendation of the Risk Management Committee.
The Company's enterprise risk management committee (the "ERM Committee") is tasked with, among other responsibilities, identifying and evaluating operational risks, which includes risks associated with information technology and cybersecurity. The ERM Committee includes senior leaders across business functions, including the Chief Executive Officer (CEO), Chief Operating Officer (COO), Chief Financial Officer (CFO), Chief Legal Officer, Chief Risk Officer (CRO) and CAO. The ERM Committee, as part of its comprehensive risk management
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duties, discusses Company strategies to prevent cyber-attacks and the Company's response and remediation of threats. The CAO provides a quarterly report to the Risk Management Committee that summarizes cybersecurity risks, relevant events and other items of note identified by management or the ERM Committee. The ERM Committee meets independently of the Risk Management Committee, with a representative from the Risk Management Committee in attendance. Certain members of the ERM Committee are invited to attend and participate in meetings of the Risk Management Committee.
In addition, we maintain internal "risk evaluation teams" dedicated to assessing and managing the entity-level risks facing the Company. There are two risk evaluation teams that relate to cybersecurity risk: Cyber-Attack Prevention and Cyber-Attack Recovery. The CAO and Vice President of Technology Operations participate in both risk evaluation teams. The CAO likewise serves on the Business Continuity Team as the business continuity technology lead, a role in which she comprehensively evaluates IT system readiness and preparedness should a business continuity event involving cybersecurity or technology interruption occur.
The lead management team member responsible for cybersecurity matters is the CAO, who has 20 years of experience in information technology and a B.A. in Management Information Systems. She is assisted by the Vice President of Technology Operations, the Information Security Manager and Corporate Counsel, Privacy. The CAO regularly reviews the lines of accountability and responsibility to ensure alignment with the ERM Committee.
Cybersecurity Program
We have adopted a Written Information Security Program (WISP) designed to align with the guidelines recommended by the National Institute of Standards and Technology (NIST). We make ongoing continuous improvements to our information security program; specifically in the implementation of secure remote access solutions with multifactor authentication, next-generation endpoint detection and remediation, cloud-based security controls, automated scanning and outside validation of security controls. Additionally, we require all employees to complete cybersecurity training at least annually, with additional training targeted for employees with greater data access. When a specific cyber threat is identified, we may create additional trainings with targeted content for our employees. As part of our efforts to manage our cybersecurity risks, we have engaged an independent firm to assist with conducting penetration tests and provide advice on our information security program. We also carry insurance to mitigate losses from cyber events.
We have processes in place to oversee and identify risks from cybersecurity threats associated with our use of third-party service providers. All proposed third parties are subject to a preliminary assessment to identify those that may handle or have access to company information and scope appropriate due diligence activities relating to the engagement. Third-parties that may handle or have access to company information are subject to enhanced due diligence procedures prior to onboarding and security risk assessments at the time of onboarding, contract renewal, and upon detection of an increase in risk profile. We use a variety of inputs in such risk assessments, including information supplied by third-parties and information obtained through other channels. In addition, we require our providers to adhere to appropriate security requirements and controls, and we investigate security incidents that have impacted our third-party service providers, as appropriate.
We have established comprehensive incident response and recovery plans and intend to test and refine the effectiveness of those plans under the leadership of the Chief Human Resources Officer, who is accountable for the overall business continuity program at UFG. Our incident response and recovery plans address and guide our employees, management, and the Board of Directors on our response to a cybersecurity incident, including the requirements of notification, classification, analysis and communication of cybersecurity incidents based on the identified severity level. The ERM Committee is accountable for regularly reviewing and evaluating the corporate incident response plan and business continuity plan.
We have a process to appropriately identify and escalate incidents that would be considered "material" in nature and require disclosure under the SEC's reporting requirements. Our identification and escalation process requires any potentially material incidents to be escalated to the CAO, who would promptly meet with the ERM Committee to determine if the incident is considered material and trigger a reporting obligation through a Current Report on Form 8-K. We did not experience any material cyber incidents since the beginning of our last fiscal year.
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Cybersecurity Threats
To date, we have not identified any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, that have, or are likely to, materially affect us, our business strategy, results of operation or financial condition. Refer to "Item 1A. Risk Factors" in this Annual Report on Form 10-K, for additional discussion about cybersecurity-related risks.
ITEM 2. PROPERTIES
Our headquarters are located in Cedar Rapids, Iowa, where we own approximately 235,000 square feet of office and building space. In addition, we lease office and building space throughout the U.S. primarily for underwriting and claims operations in those locations. We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business, the Company is a party to a variety of legal proceedings. While the final outcome of these legal proceedings cannot be predicted with certainty, management believes all of the proceedings pending as of December 31, 2024 to be ordinary and routine and does not expect these legal proceedings to have a material adverse effect on the Company's financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Shareholders
The Company's common stock is traded on the Nasdaq stock market under the symbol "UFCS." On February 18, 2025, there were 606 holders of record of the Company's common stock. The number of record holders does not reflect shareholders who beneficially own common stock in nominee or street name but does include participants in our employee stock purchase plan.
Dividends
Our practice has been to pay quarterly cash dividends, which we have paid every quarter since March 1968.
For information regarding dividends paid to shareholders and the declaration and payment of future dividends, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", under heading "Liquidity and Capital Resources", subheading "Commitments for Capital Expenditures."
Issuer Purchases of Equity Securities
Under our share repurchase program, we may purchase our common stock from time to time on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at our discretion and will depend upon a number of factors, including the share price, general economic and market conditions, and corporate and regulatory requirements. Our share repurchase program may be modified or discontinued at any time. Our share repurchase program was most recently renewed in August 2024 through August 2026. There were no repurchases during the year ended December 31, 2024. As of December 31, 2024, there are 1,719,326 shares of common stock remaining under this authorization.
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United Fire Group, Inc. Common Stock Performance Graph
The following graph compares the performance of an investment in the Company's common stock from December 31, 2019 through December 31, 2024, with the Standard & Poor's 500 Index ("S&P 500 Index"), and the Standard & Poor's 600 Property and Casualty Index ("S&P 600 P&C Index"). The graph assumes $100 was invested on December 31, 2019 in our common stock and in each of the below listed indices and that all dividends were reinvested on the date of payment without payment of any commissions. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
The following table shows the data used in the total return performance graph above.
Period Ended
The foregoing performance graph is being furnished as part of this Annual Report on Form 10-K solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish our shareholders with such information, and therefore, shall not be deemed to be filed or incorporated by reference into any filings by the Company under the Securities Act or Exchange Act.
ITEM 6. [RESERVED]
Not applicable.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operation should be read in conjunction with Part II, Item 8, "Financial Statements and Supplementary Data." Amounts (except per share amounts) are presented in thousands, unless otherwise noted.
MD&A Index Page
Forward-Looking Statements 26
Business Overview 28
Critical Accounting Estimates 30
Non-GAAP Financial Measures 37
Results of Operations 38
Investments 46
Reinsurance 49
Liquidity and Capital Resources 52
Recently Issued Accounting Standards 55
FORWARD-LOOKING STATEMENTS
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, as amended (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" of this report 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 success of our strategy may be adversely impacted by various internal and external factors;
•Core insurance business is dependent on strong and beneficial relationships with a large network of independent insurance agents and not maintaining these relationships could result in loss of sufficient business opportunities within our expertise and stated risk appetite;
•Geographic concentration ties our performance to the business, economic and regulatory conditions of certain states;
•We will be at a competitive disadvantage if, over time, our competitors are more effective in pricing their products, development of new product offering, implementation of technology and data analytics;
•Our strategy's success could be affected by our timely ability to recognize and adapt to our position in the insurance cycle;
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•Our success depends primarily on our ability to underwrite risks effectively and adequately price the risks we insure;
•We may be unable 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;
•Reserves for property and casualty insurance losses and loss settlement expenses are based on estimates and may be inadequate, adversely impacting our financial results;
•We insure property that is exposed to various natural perils that can give rise to significant claims cost;
•We are subject to certain risks related to our investment portfolio that could negatively affect our profitability;
•A downgrade in our financial strength or issuer credit ratings could result in a loss of business and could have a material adverse effect on our financial condition, results of operations and liquidity;
•We may be unable to secure reinsurance capacity that provides necessary risk protection at a reasonable cost;
•We may be unable to attract, retain or effectively manage the succession of key personnel;
•Changing weather patterns and climate change add to the unpredictability, frequency and severity of catastrophe losses and may adversely affect the results of our operations, liquidity and financial conditions;
•Unauthorized data access, cyber-attacks and other security breaches could have an adverse impact on our business and reputation;
•We are subject to comprehensive laws and regulations, changes to which may have an adverse effect on our financial condition and results of operations;
•Macroeconomic conditions could materially and adversely affect our business, results of our operations, financial condition, and growth;
•Our stock price could become more volatile, and your investment could lose value;
•Efforts to disrupt the structure, management or ownership of the Company could diminish the value of our common stock; and
•The ability of our subsidiaries to pay dividends to UFG may affect our liquidity and ability to pay dividends to shareholders.
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 Securities and Exchange Commission ("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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BUSINESS OVERVIEW
Reportable Segments
We operate as one operating segment. Our revenues are primarily derived from premiums earned for property and casualty insurance products issued to customers. For additional information, see Note 10, Segment Information, in Part II, Item 8, "Financial Statements and Supplementary Data."
The following table shows the principle types of property and casualty insurance policies we write and issue, and which lines of business they are reported in:
Direct Writer Treaty Reinsurance(1) Lloyd's of London MGAs
Commercial Lines
Other Liability x P x
Fire and allied lines x P x
Automobile x P
Workers' compensation x P
Fidelity and surety x P
Other x x
Personal Lines
Fire and allied lines * P
Automobile *
Other *
Reinsurance Assumed NP x
* Personal lines direct business was discontinued in 2020 with an immaterial amount of exposure still in force due to certain regulatory non-renewal limitations. For more information, refer to Part I, Item 1 "Property and Casualty Insurance Business" under "Personal Lines Business."
(1) Treaty Reinsurance is split between proportional reinsurance (P) and non-proportional reinsurance (NP)
Commercial other liability - primarily business insurance covering bodily injury and property damage including construction defect, excess and surplus lines excess casualty, and standard umbrella. Proportional assumed reinsurance on these lines and professional liability coverage managed by an MGA partner.
Commercial fire and allied lines - primarily multi-peril non-liability property coverage, inland marine. Proportional assumed reinsurance on these lines and earthquake coverage managed by an MGA partner.
Commercial automobile - physical damage to an insured's vehicle, as well as liabilities to third parties. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft, flood or other causes. Automobile liability insurance covers bodily injury, damage to property resulting from automobile accidents caused by the insured, uninsured or under-insured motorists and the legal costs of defending the insured against lawsuits. Proportional reinsurance on these lines is also included.
Workers' compensation - business coverage for employees who are injured or become ill as a result of their job, including proportional assumed reinsurance for this coverage. Our workers' compensation insurance covers primarily small- to mid-sized accounts.
Fidelity and surety - contract and commercial surety bond coverage which guarantees performance and payment by our bonded principals, protects owners from failure to perform on the part of our principals, and protects material suppliers and subcontractors from nonpayment by our contractors.
Commercial other - commercial theft coverage, boiler and machinery and ocean marine business managed by an MGA partner.
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Personal - fire and allied lines includes proportional assumed reinsurance for homeowners multi-peril coverage.
Reinsurance assumed - primarily non-proportional assumed reinsurance and Lloyd's of London property and casualty syndicates.
Lloyd's of London ("Lloyds") Syndicates
The Company is a member of Lloyd's through its insurance subsidiary McIntyre Cedar Corporate Member LLP. Lloyd’s operates as an insurance marketplace whereby members join syndicates to underwrite property and casualty and reinsurance business through a managing agent in return for receiving premiums. The Company participates in Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988, Syndicate 1699, Syndicate 5623 and Syndicate 2358. The Company is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's ("FAL"), to support the participation in these syndicates.
Pooling Arrangement
All of our property and casualty insurance subsidiaries belong to an intercompany reinsurance pooling arrangement. Pooling arrangements permit the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant's own surplus level. Under such arrangements, the members share substantially all of the insurance business that is written and allocate the combined premiums, losses and expenses based on percentages defined in the arrangement.
Geographic Concentration
For the year ended December 31, 2024, 47.1 percent of our property and casualty premiums were written in Texas, California, Iowa, Missouri, and Louisiana.
In 2024, 2023 and 2022 the direct statutory premiums written by our property and casualty insurance operations were distributed as follows:
Years Ended December 31, % of Total
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CRITICAL ACCOUNTING ESTIMATES
Management's discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements. These statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), which requires us 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting estimates are those we believe affect the more significant judgments and estimates used in the preparation of our financial statements. Additional information about other significant accounting policies and estimates may be found in Note 1 "Summary of Significant Accounting Policies" in Part II, Item 8, "Financial Statements and Supplementary Data."
Investment Valuation
Upon acquisition, we classify investments in marketable securities as held-to-maturity, available-for-sale, or trading. We record investments in fixed maturity securities classified as available-for-sale and equity securities at fair value. Other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. We record mortgage loans at their amortized cost less any valuation allowance.
In general, investment securities are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility risk. Therefore, it is reasonably possible that changes in the fair value of our investment securities that are reported at fair value will occur in the near term and such changes could materially affect the amounts reported in the Consolidated Financial Statements. Also, it is reasonably possible that changes in the value of our investments in limited liability partnerships could occur in the future and such changes could materially affect our results of operations as reported in our Consolidated Financial Statements.
Fair Value Measurement
Information specific to the fair value measurement of our financial instruments and disclosures is incorporated by reference from Note 3 "Fair Value of Financial Instruments" contained in Part II, Item 8.
Losses and Loss Settlement Expenses
Reserves for losses and loss settlement expenses are reported using our best estimate of ultimate liability for claims that occurred prior to the end of any given reporting period but have not yet been paid. Before credit for reinsurance recoverables, these reserves were $1.8 billion and $1.6 billion at December 31, 2024 and 2023, respectively. We purchase reinsurance to mitigate the impact of large losses and catastrophic events. Loss and loss settlement expense reserves ceded to reinsurers were $198.1 million and $191.6 million at December 31, 2024 and 2023, respectively. Our reserves, before credit for reinsurance recoverables, by line of business as of December 31, 2024, were as follows:
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(In Thousands) Case Basis IBNR LossSettlementExpense Total Reserves
Commercial lines
Personal lines
Case-Basis Reserves
For each of our lines of business, our experienced claims personnel estimate case-basis reserves for reported claims. Establishing the case reserve for an individual claim is subjective and complex, requiring us to estimate future payments and values sufficient to settle the claim. Setting a reserve for an individual claim is an inherently uncertain process. When we establish and adjust individual claim reserves, we do so based on our knowledge of the circumstances and facts of the claim at a point in time. Upon notice of a claim, we establish a preliminary (average claim cost) reserve based on the limited claim information initially reported. Subsequently, we conduct an investigation of each reported claim, which allows us to more fully understand the factors contributing to the loss and our potential exposure. This investigation may extend over a long period of time. As our claim investigation progresses, and as our claims personnel identify trends in claims activity, we may refine and adjust our estimates of case-basis reserves. To evaluate and refine our overall reserving process, we track and monitor all claims until they are settled and paid in full, with all salvage, subrogation claims, and liability deductible recoveries being resolved.
Our loss reserves include amounts related to both short-tail and long-tail lines of business. A short-tail insurance product is one where claim settlement values are known comparatively quickly. Final settlement values for long-tail insurance products are sometimes not known for many years. The longer the time span between the incidence of a loss and the settlement of the claim, the more the final settlement can vary from the reserves initially established. Accordingly, long-tail insurance products can have significant implications on the reserving process.
Our short-tail lines of business include fire and allied lines, commercial property, automobile physical damage and inland marine. The amounts of the case-based reserves that we establish for claims in these lines depend upon various factors, such as individual claim facts (including type of coverage and severity of loss), our historical loss experience and trends in general economic conditions (including changes in replacement costs, medical costs and inflation).
Our long-tail lines of business include workers' compensation and other liability. In addition, certain product lines such as commercial automobile, commercial multi-peril and surety include both long-tail coverages and short-tail coverages. For many long-tail liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation
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and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability than for short-tail coverages.
The amounts of the case-basis loss reserves that we establish for claims in long-tail lines of business depend upon various factors, including individual claim facts (including type of coverage, severity of loss and underlying policy limits), company historical loss experience, legislative enactments, judicial decisions, legal developments in the awarding of damages, experience with alternative dispute resolution, changes in political attitudes and trends in general economic conditions, including the effects of inflation. As with our short-tail lines of business, we review and make changes to long-tail case-based reserves based on our review of continually evolving facts as they become available to us during the claims settlement process. Our adjustments to case-based reserves are reported in the financial statements in the period that new information arises about the claim. Examples of facts that become known that could cause us to change our case-based reserves include, but are not limited to: evidence that loss severity is different than previously assessed; new claimants who have presented claims; and the assessment that no coverage exists.
Incurred But Not Reported Reserves ("IBNR")
Most of our insurance policies are written on an occurrence basis that provides coverage if a loss occurs during the policy period, even if the insured reports the loss many years later. On a quarterly basis, the Company performs a detailed analysis of IBNR reserves. This analysis uses various projection methods to provide several estimates of ultimate loss or loss adjustment expense ("LAE") for each individual accident year and line of business. The projection methods include, but are not limited to, paid development; reported development; expected loss ratio methods; and Bornhuetter Ferguson methods on both a paid and reported basis. These methods may need to be adjusted for anomalies or outliers in the data, unusual internal or external trends, or other factors impacting the reliability/credibility of the historical company experience. Results of the projection methods are compared, and a point estimate of ultimate loss or LAE is established for each individual accident year and line of business. The specific projection methods used to establish point estimates vary depending on what is deemed most appropriate for a particular line of business and accident year. IBNR estimates are derived by subtracting reported loss from the final point estimates.
Senior management meets with our actuarial team and controller on a quarterly basis to review the adequacy of carried IBNR reserves based on the results of this actuarial analysis. Adjustments for changes in business and other factors not completely captured by the data within the actuarial analysis are made as deemed necessary. This method of establishing our IBNR reserves has consistently resulted in aggregate reserve levels that management believes are reasonable in comparison to the reserve estimates indicated by the actuarial analysis.
For our short-tail lines of business, IBNR reserves constitute a small portion of the overall reserves. These claims are generally reported and settled shortly after the loss occurs. In our long-tail lines of business, IBNR reserves constitute a relatively higher proportion of total reserves, because, for many liability claims, significant periods of time may elapse between the initial occurrence of the losses, the reporting of the losses to us, and the ultimate settlement of the losses.
Loss Settlement Expense Reserves
Loss settlement expense reserves include amounts ultimately allocable to individual claims, as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. We do not establish case reserves for these expenses. Instead, on a quarterly basis, management performs a statistical analysis to estimate the required reserve for unpaid loss settlement expenses using historical data.
LAE is composed of two distinct kinds of expenses which are defense and cost containment ("DCC") and adjusting and other ("A&O"). These two expense types have different purposes and characteristics which necessitates different estimation methods in order to provide a quarterly estimate of the required reserve for unpaid expense which is generally referred to as an LAE IBNR reserve.
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Reserves for unpaid DCC are estimated quarterly by line of business for each individual accident year using three methods: (1) Paid development, (2) Expected emergence of DCC, and (3) Bornhuetter Ferguson. Each of the three methods produces an estimate of the ultimate DCC cost for an individual accident year and the final estimate is generally a weighted average of the various methods. Inception to date paid DCC is subtracted from the final ultimate DCC estimate to provide the estimated DCC unpaid reserve for each individual accident year.
Reserves for unpaid A&O are estimated quarterly by line of business for each individual accident year using a single method. This method consists of applying a percentage factor to unpaid loss reserves. The percentage factor used differs by line of business and is established on an annual basis using year-end data. The percentage factor is evaluated and selected after reviewing the ratio of paid A&O to paid loss using calendar year data for the most recent five years.
Reinsurance Reserves
There are three distinct types of reserves for expected recoveries: (1) reported claim reserves, (2) loss IBNR, and (3) allocated LAE IBNR. Ceded reserves for reported claims are calculated by subtracting the primary retention from the claim value established by our claim adjuster. Ceded IBNR comes from multiple treaties and is reviewed quarterly by our reserving actuaries in conjunction with the direct IBNR. Multiple methods are utilized in the ceded IBNR which vary by line of business. These include estimates based on the relationship of ceded premium to direct premium, Bornhuetter Ferguson methods, and methods based on industry excess of loss factors. Some of our business is 100 percent ceded or based on a set quota share percentage. In those cases, ceded loss IBNR is typically formulaic based on direct loss IBNR. We will cede some allocated LAE expenses when we cede loss. Our ceded allocated LAE IBNR is estimated based on our ceded unpaid loss reserves and the general relation, by line of business, between LAE and loss.
Key Assumptions
The Company uses a number of key assumptions in establishing an estimate of loss and loss settlement expense reserves, including but not limited to the following: the Company's case-basis reserves reflect the most up-to-date information available about the unique circumstances of each individual known claim; judicial decisions or regulatory actions have been considered to the extent of our knowledge; new, emerging claim reporting and payment patterns will continue into the future consistent with the observable past; adjustments have been made for significant unique and unusual known claim events; and, to the best of our knowledge, there are no new, unidentified latent trends that would impact our overall reserves. These assumptions about future circumstances and expectations are inherently uncertain and subject to many risk factors including but not limited to heightened levels of inflation, increased litigation activity, changing weather patterns, and changing driver behaviors.
Therefore, our key assumptions are subject to change as actual claims occur and as we gain additional information about the variables that underlie our assumptions. Accordingly, management reviews and updates these assumptions periodically to ensure that the assumptions remain relevant and consistent with our current understanding of the environment. If necessary, management makes changes not only in the estimates derived from the use of these assumptions, but also in the assumptions themselves. Due to the inherent uncertainty in the loss reserving process, management believes that there is a reasonable chance that modification to key assumptions could individually, or in aggregate, result in reserve levels above or below the actual amount for which the related claims will eventually settle.
Adjustments to the reserves could be recorded in one year or multiple years, depending on when they are identified. This would also affect our financial position in that our equity would be adjusted by an amount equivalent to the net income impact. Any deficiency that would be recognized in our loss and loss settlement expense reserves usually does not have a material effect on our liquidity because the claims have not been paid. Conversely, if our estimates of ultimate unpaid loss and loss settlement expense reserves prove to be redundant, our future earnings and financial position would be improved. We believe our approach produces recorded reserves that are reasonable as to their relative position within a range of reasonable reserves from year-to-year.
Historical experience suggests reserve levels can vary considerably for an individual year before ultimate settlement values are known, but variation for the aggregate ultimate loss typically would fall in the range of 2.5% to 5%. The
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table below provides some scenarios for the impact of this development volatility on our reported net loss and loss adjustment reserves of $1.6 billion as of December 31, 2024.
(In Thousands)
% Impact from updated assumptions 2.5% 5.0%
Impact on total net reported Loss and LAE reserves $ 39,967 $ 79,935
In 2024, we changed the model used to review a portion of the LAE reserves. The reserves related to expenses not associated with individual claims (adjusting and other) are now reviewed using a projected claim count model. The methodologies relied upon for the remainder of the reserves were not altered but additional considerations were added to our models to aid in selecting key assumptions. In estimating our 2024 loss and loss settlement expense reserves, we did not anticipate future events or conditions that were inconsistent with past development patterns.
Certain of our lines of business are subject to the potential for greater loss and loss settlement expense development than others, which are discussed below:
Other Liability Reserves
Other liability is considered a long-tail line of business, as it can take a relatively long period of time to settle claims from prior accident years. This is partly due to the lag time between the date a loss or event occurs that triggers coverage and the date when the claim is actually reported. Defense costs are also a part of the insured expenses covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims. For the majority of our products, defense costs are outside of the policy limit, meaning that the amounts paid for defense costs are not subtracted from the available policy limit.
Factors that can cause uncertainty in estimating reserves in this line include: reporting time lags; the number of parties involved in the underlying tort action; whether the "event" triggering coverage is confined to only one time period or is spread over multiple time periods; the potential dollars involved in the individual claim actions; whether such claims were reasonably foreseeable and intended to be covered at the time the contracts were written (i.e., coverage disputes); and the potential for mass claim actions.
Claims with longer reporting time lags may result in greater inherent risk. This is especially true for alleged claims with a latency feature, particularly where courts have ruled that coverage is spread over multiple policy years, hence involving multiple defendants (and their insurers and reinsurers) and multiple policies (thereby increasing the potential dollars involved and the underlying settlement complexity). Claims with long latencies also increase the potential time lag between writing a policy in a certain market and the recognition that such policy has potential mass tort and/or latent claim exposure.
Our reserve for other liability claims at December 31, 2024 was $912.7 million and consisted of 3,862 claims,compared with $819.2 million, consisting of 4,351 claims at December 31, 2023. Of the $912.7 million total reserve for other liability claims,$101.4 millionis identified as DCC and $56.0 million is identified as A&O required in the settlement of claims.
Included in the other liability line of business are gross reserves for construction defect losses and loss settlement expenses. Construction defect exposure is unique because of its very long tail as claims can often take over six years to be reported to us and another four years to settle, on average. This exposure relates to a deficiency in the design or construction of a building or structure resulting from a failure to design or construct in a reasonably workmanlike manner, and/or in accordance with a buyer's reasonable expectation. In the cases involving latent defects, the determination of when a loss occurred is often unclear and governed by various theories that vary by state.Further, each state has a unique Statute of Repose that determines the length of time an insured has to report a claim generally from the date of substantial completion of a project.
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In addition to these issues, other variables contribute to a high degree of uncertainty in establishing reserves for construction defect claims. These variables include: whether coverage exists; when losses occur; the size of each loss; expectations for future interpretive rulings concerning contract provisions; and the extent to which the assertion of these claims will expand geographically. In recent years, we have implemented various underwriting measures that we anticipate will mitigate the amount of construction defect losses experienced, including further consideration of insured endorsements; stricter underwriting guidelines on the writing of residential contractors; and increased utilization of loss control.
Asbestos and Environmental Reserves
Included in the other liability and assumed reinsurance lines of business are reserves for asbestos and other environmental losses and loss settlement expenses. The estimation of loss reserves for environmental claims and claims related to long-term exposure to asbestos and other substances is one of the most difficult aspects of establishing reserves, especially given the inherent uncertainties surrounding such claims and the likelihood that these uncertainties will not be resolved for many years. Although we record our best estimate of loss and loss settlement expense reserves, the ultimate amounts paid upon settlement of such claims may be more or less than the amount of the reserves. At December 31, 2024 and 2023, we had $0.7 million and $0.8 million, respectively, in direct and assumed asbestos and environmental loss reserves.
Catastrophe Event Reserves
Catastrophe losses are inherent risks of the property and casualty insurance business. Catastrophic events include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds, winter storms and other natural disasters, along with man-made exposures to losses resulting from, without limitation, acts of terrorism and political instability. Some types of catastrophes are more likely to occur at certain times within the year than others, which adds an element of seasonality to our property and casualty insurance claims. The frequency and severity of catastrophic events are difficult to accurately predict in any year. However, some geographic locations are more susceptible to these events than others.
We control our direct insurance exposures in regions that are prone to naturally occurring catastrophic events through a combination of geographic diversification, restrictions on the amount and location of new business production in such regions, and reinsurance. We regularly assess our concentration of risk in natural catastrophe exposed areas and consider the impacts of climate change and the unpredictability of future trends in adjusting our geographic concentrations. We have strategies and underwriting standards to manage these exposures through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance coverage. We use catastrophe modeling and a risk concentration management tool to monitor and control our accumulations of potential losses in natural catastrophe exposed areas, such as the Gulf Coast and East Coast, as well as in areas of exposure in other countries where we are exposed to a portion of an insurer's underwriting risk under our assumed reinsurance contracts. Despite our efforts to manage our catastrophe exposure, the extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. The occurrence of one or more severe natural catastrophic events in heavily populated areas could have a material effect on our results of operations, financial condition or liquidity.
The process of estimating and establishing reserves for losses incurred from catastrophic events is inherently uncertain and the actual ultimate cost of a claim, net of reinsurance recoveries, may vary materially from the estimated amount reserved. Catastrophe modeling generally relies on multiple inputs based on experience, science, engineering and history, and the selection of those inputs requires a significant amount of judgment. The modeling results may also fail to account for risks that are outside the range of normal probability or are otherwise unforeseen. Because of this, actual results may differ materially from those derived from our modeling assumptions.
Commercial Automobile Reserves
Commercial automobile claim reserves are established at exposure based on information either known and provided or obtained through the claims investigation. The perspective and experience of the claims staff, which may include assumptions as to how the claim will develop over time, is incorporated in the investigation. Exposures are identified and reserves established within 30 to 60 days depending on the complexity of the case.
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Workers' Compensation Reserves
Like the other liability line of business, workers' compensation losses and loss settlement expense reserves are based upon variables that create uncertainty in estimating the ultimate reserve. Estimates for workers' compensation are particularly sensitive to assumptions about medical cost inflation. Other variables we consider and that contribute to the uncertainty in establishing reserves for workers' compensation claims include: state legislative and regulatory environments; trends in jury awards; and mortality rates. Because of these variables, the process of reserving for the ultimate loss and loss settlement expense to be incurred requires the use of informed judgment and is inherently uncertain. Consequently, actual loss and loss settlement expense reserves may deviate from our estimates and such deviations may be significant. Our reserve for workers' compensation claims at December 31, 2024 was $115.6 million and consisted of 1,042 claims, compared with $121.0 million, consisting of 1,077 claims, at December 31, 2023.
Reserve Development
We recognized a favorable development in our net reserves for prior accident years totaling $1.2 million for the year ended December 31, 2024 and adverse development of $67.8 million and $12.9 million for the years ended December 31, 2023 and 2022, respectively.
The following table details the pre-tax impact on our property and casualty insurance business' financial results and financial condition of reasonably likely reserve development. Our lines of business that have historically been most susceptible to significant volatility in reserve development have been shown separately and utilize hypothetical levels of volatility of 5.0 percent and 10.0 percent. Our other, less volatile, lines of business have been aggregated and utilize hypothetical levels of volatility of 3.0 percent and 5.0 percent.
(In Thousands)
Hypothetical Reserve Development Volatility Levels -10% -5% +5% +10%
Impact on loss and loss settlement expenses
Hypothetical Reserve Development Volatility Levels -5% -3% +3% +5%
Impact on loss and loss settlement expenses
Reserve development is discussed in more detail under the heading "Losses and Loss Settlement Expense" in the "Results of Operations" section in this Item 7.
Appointed Actuary
The Company terminated the engagement with Regnier Consulting Group, Inc. ("Regnier") as its appointed actuary for the year ended December 31, 2024. Beginning with the 2024 reporting period, the Company's Vice President of Actuarial Reserving will serve as the appointed actuary, approved by the Board of Directors. The Company has engaged a third party firm to provide an independent and unbiased assessment of the Company's reserves. We do not rely on the external consulting actuary's assessment to determine our recorded reserves; however, we review and discuss its observations on trends, key assumptions, and actuarial methodologies, and consider these items when determining our recorded reserves.
Pension Benefit Obligation
The process of estimating our pension benefit obligation and related benefit expense is inherently uncertain, and the actual cost of benefits may vary materially from the estimates recorded. These liabilities are particularly volatile due
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to their long-term nature and are based on several assumptions. The main assumptions used in the valuation of our pension benefit obligation are estimates related to: mortality of the employees and retirees eligible for benefits; expected long-term rates of return on investments; compensation increases; employee turnover; and liability discount rate. We have engaged an independent firm to assist in evaluating and establishing assumptions used in the valuation of our pension benefit obligations.
A change in any one or more of these assumptions is likely to result in an ultimate liability different from the original actuarial estimate. Such changes in estimates may be material. For example, a 100 basis point decrease in our estimated discount rate would increase the benefit obligation at December 31, 2024 by $22.1 million while a 100 basis point increase in the rate would decrease the pension benefit obligation by $18.2 million, for the same period.
A 100 basis point decrease in our estimated long-term rate of return on pension plan assets would increase the benefit expense for the year ended December 31, 2024 by $2.3 million, while a 100 basis point increase in the rate would decrease benefit expense by $2.3 million, for the same period. Corresponding with the impact on benefit expense, there would be an offsetting impact to pension plan assets.
In an effort to limit the impacts of interest rate exposure, in September 2023, we made a shift in our pension plan asset investment strategy to a liability driven investment ("LDI") approach to better match the timing of cash flows between payouts from the plan with cash flows from the asset portfolio as well as hedge interest rate risk between assets and liabilities.
NON-GAAP FINANCIAL MEASURES
We evaluate profit or loss based upon operating and investment results. Profit or loss described in the following sections of this Management's Discussion and Analysis is reported on a pre-tax basis. Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, underwriting and other operating expenses. Management uses metrics to provide financial statement users with a better understanding of results of operations, including adjusted operating income and three components of the loss ratio: underlying loss ratio, impacts of catastrophes and non-catastrophe prior period reserve development.
Adjusted operating income is calculated by excluding net investment gains and losses, after applicable federal and state income taxes from net income (loss). Management believes adjusted operating income is a meaningful measure for evaluating insurance company performance and a useful supplement to GAAP information because it better represents the normal, ongoing performance of our business. Investors and equity analysts who invest in and report on the insurance industry and the Company generally focus on this metric in their analyses.
Underlying loss ratio represents the net loss ratio less the impacts of catastrophes and non-catastrophe prior period reserve development. The underlying combined ratio represents the combined ratio less the impacts of catastrophes and non-catastrophe prior period reserve development. The Company believes that the underlying loss ratio and underlying combined ratio are meaningful measures to understand the underlying trends in the core business in the current accident year, removing the volatility of catastrophes and prior period impacts. Management believes separate discussions on catastrophe losses and prior period reserve development are important to understanding how the Company is managing catastrophe risk and in identifying developments in longer-tailed business. Catastrophe losses is an operational measure that utilizes the designations of the Insurance Services Office ("ISO") and is reported with losses and loss adjustment expense amounts net of reinsurance recoverables, unless specified otherwise. In addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may include U.S. or international losses, that we believe are, or will be, material to our operations, either in amount or in number of claims made. Catastrophes are not predictable and are unique in terms of timing and financial impact. While management estimates catastrophe losses as incurred, due to the inherently unique nature of catastrophe losses, the impact in a reporting period is inclusive of catastrophes that occurred in the reporting period, as well as development on catastrophes that may have occurred in prior periods. Prior period reserve development is the increase (unfavorable) or decrease (favorable) in incurred loss and loss adjustment expense reserves at the valuation dates for losses which occurred in previous calendar years. This measure excludes development on catastrophe losses.
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RESULTS OF OPERATIONS
The following table includes the consolidated results of our operations for the years ended December 31, 2024, 2023 and 2022, with more detailed components and discussion in the sections that follow. Discussions of the components of net income are presented on a pre-tax basis, unless otherwise noted.
Financial Highlights
Years Ended December 31, % Change
Revenues
Other income (loss) — — (295) NM (100.0)
Benefits, losses and expenses
GAAP Ratios:
Additional Loss Ratios:
Reserve development (4) — % 6.0 % 0.1 % NM NM
Underlying loss ratio (4) (Non-GAAP) 57.9 % 62.2 % 59.2 % (6.9) % 5.1 %
NM = not meaningful
(1) Net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net earned premiums. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our Consolidated Financial Statements.
(2) Expense ratio is calculated by dividing non-deferred underwriting expenses and amortization of deferred policy acquisition costs by net earned premiums. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance
business.
(3) Combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0
percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio.
(4) Underlying loss ratio is defined as the net loss ratio less impacts of catastrophes and non-catastrophe prior year reserve development.
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Net Written Premiums
Net written premiums is the amount charged for insurance policy contracts issued and recognized on an annualized basis at the effective date of the policy. Net written premiums is frequently used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies. Management believes net written premiums is a meaningful measure for evaluating insurance company sales performance and geographical expansion efforts. Net written premiums for an insurance company consists of direct written premiums and assumed premiums, less ceded premiums. The following shows our written premiums for the years ended December 31, 2024, 2023and2022:
See 'Premiums' below for a description of the changes in premiums for the years presented.
Revenues
Premiums
Net earned premiums are calculated on a pro-rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of written premiums applicable to the unexpired terms of the insurance policies in force. The difference between net earned premiums and net written premiums is the change in unearned premiums and the change in prepaid reinsurance premiums. Direct earned premiums are recognized ratably over the life of a policy and differ from direct written premiums, which are recognized on the effective date of the policy. The following shows our earned premiums for the years ended December 31, 2024, 2023and2022:
% Change
Direct Premiums
Direct premiums are the total policy premiums, net of cancellations, associated with policies issued and underwritten by our property and casualty insurance business. Direct premiums increased $92.0 million in 2024 as compared to 2023 and increased $75.9 million in 2023 as compared to 2022 primarily due to growth in our core commercial lines resulting from rate renewal increases, substantial new business production and stable retention.
Assumed Premiums
Assumed premiums are the total premiums associated with the insurance risk transferred to us by other insurance and reinsurance companies pursuant to reinsurance contracts. Assumed premiums increased $52.4 million in 2024 as compared to 2023 due to the addition of new programs and cedant growth, while assumed premiums increased $50.3 million in 2023 as compared to 2022 due primarily to increased reinsurance rates.
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Ceded Premiums
Ceded premiums is the portion of direct premiums that we cede to our reinsurers under our reinsurance contracts. The ratio of ceded premiums to direct premiums remained flat for 2024 as compared to 2023 due to rate decreases in property offsetting rate increases in casualty. Ceded premiums increased $2.2 million in 2024 due to growth in the subject premium base. For 2023, the ratio of ceded premiums to direct premiums increased as compared to 2022, due to significant reinsurance rate increases.
Net Investment Income
Net investment income was $82.0 million for the year ended December 31, 2024, an increase of $22.4 million or 37.5% from the year ended December 31, 2023. Interest on fixed maturities increased $13.5 million or 23.9%, as a result of portfolio management actions, including investing at higher rates and the strategic re-allocation of equity securities into fixed maturity securities. This strategic re-allocation of equity securities resulted in a decrease in dividend income of $3.2 million. Income on other long-term investments was $8.0 million for 2024, compared to zero in 2023, as the valuation of the investments in limited liability partnerships varies from period to period due to the current market conditions. Interest on short-term investments, and cash and cash equivalents increased $4.8 million due primarily to an increase in money market funds resulting from the timing of investment sales and purchases.
Net investment income was $59.6 million in December 31, 2023, an increase of $14.7 million or 32.7% from the year ended December 31, 2022. Interest on fixed maturities was up $7.5 million or 15.5%, driven by higher interest rates. This was partially offset by a decrease in dividends on equity securities of $1.6 million, due to a strategic reallocation of equity securities into fixed maturity securities. Income on other long-term investments in limited liability partnerships increased $3.2 million, and other investment income increased by $5.6 million related to investment income received on FAL, short term investments, and cash and cash equivalents.
The following details our annualized yield on average invested assets for the years ended December 31, 2024, 2023, and 2022:
Refer to Note 2 "Investments" in Part II, Item 8 for more information on net investment income.
Net Investment Gains (Losses)
Net investment losses were $5.4 million for the year ended December 31, 2024 as compared to net investment gains of $1.3 million for the year ended December 31, 2023. The primary reason for the change relates to management actions within the Company's fixed maturity portfolio to reinvest at higher rates.
Net investment gains were $1.3 million for the year ended December 31, 2023 as compared to net investment losses of $15.9 million for the year ended December 31, 2022. The primary reason for the change was attributable to the increase in market value of investments in equity securities throughout 2023 as compared to the decrease in market value of investments in equity securities through 2022.
Refer to Note 2 "Investments" in Part II, Item 8 for more information on investment gains and losses.
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Benefits, Losses and Expenses
Losses and Loss Settlement Expenses
The following shows losses and loss settlement expenses for the years ended December 31, 2024, 2023and2022:
For the year ended December 31, 2024, our loss and loss settlement expenses were $24.8 million, or 3.2%, lower than 2023 and our net loss ratio improved 11.1 points. This was driven by improvement in the underlying loss ratio, no prior year development, and a favorable year for catastrophe losses. The underlying loss ratio improvement was driven in part by higher pricing, continued favorable frequency in most major lines, and favorable large loss experience in property and surety. Favorable results are partially offset by an increase in current and prior accident year loss estimates for other liability reflecting continued efforts to strengthen liability reserves subject to increasing economic and social inflation influences.
The Company experienced $1.0 million of favorable development in our net reserves for prior accident years for the year ended December 31, 2024, which is the result of favorable development on catastrophe losses. For non-catastrophe losses, favorable development in commercial automobile and fire and allied lines was offset by adverse development in commercial other liability. The commercial automobile favorable development of $34.5 million is a function of case-basis and IBNR reserve strengthening efforts over the last several years. Favorable development in fire and allied lines of $10.5 million is driven in part by reactions to favorable large loss experience in recent accident years. Adverse development in commercial other liability reflects the company's continued response to increased loss settlements resulting from the impact of economic and social inflation, including increased litigation activity.
In 2024, our pre-tax catastrophe losses were $63.2 million, a decrease of $1.0 million compared to $64.2 million in 2023. In 2024, our catastrophe losses included 74 events. Catastrophe losses in 2024 added 5.4 percentage points to the combined ratio, which is below our historical 10-year average of 7.2 percentage points. The Company continues to evaluate and limit our exposure in regions prone to naturally occurring catastrophic events through a combination of geographic diversification and restrictions on the amount and location of new business production in such regions. We intend to continue with targeted underwriting and rate initiatives in some regions and/or purchase additional reinsurance as necessary to reduce our exposure.
2023 Results
For the year ended December 31, 2023, our loss and loss settlement expenses were $132.3 million, or 20.7%, higher than 2022 and our net loss ratio increased 7.4 points. The primary drivers were an increase in loss and loss settlement expenses of $80.4 million in commercial lines and $48.0 million in reinsurance assumed, partially offset by $64.2 million of catastrophe losses in 2023 for our direct and assumed reinsurance business as compared to $73.5 million in 2022.
The Company experienced $67.8 million of adverse development in our net reserves for prior accident years for the year ended December 31, 2023, which is comprised of $64.2 million on non-catastrophe losses and $3.6 million on catastrophe losses. Commercial other liability lines experienced adverse development of $52.9 million primarily in our excess and surplus lines excess casualty book along with some adverse development in standard umbrella and construction defect due to increasing severity pressures. The increases in these longer tailed lines, especially in
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accident years 2016-2019, related to social and economic inflation, and prompted a re-evaluation of trend assumptions for more recent accident years. The commercial automobile line of business also experienced adverse development of $9.0 million related to increasing severity largely in post-COVID-19 accident years. Commercial fire and allied lines experienced adverse development of $4.4 million largely due to development on both catastrophe and non-catastrophe losses, primarily from accident year 2022. The assumed reinsurance line of business contributed an additional $3.5 million of adverse development largely driven by catastrophe losses.
In 2023, our pre-tax catastrophe losses were $64.2 million, a decrease of $9.3 million compared to $73.5 million in 2022, and a decrease of $25.2 million as compared to $98.6 million in 2021. In 2023, our catastrophe losses included 61 events. Catastrophe losses in 2023 added 6.2 percentage points to the combined ratio, which is below our historical 10-year average of 7.2 percentage points.
2022 Results
For the year ended December 31, 2022, our losses and loss settlement expenses were $14.8 million, or 2.3%, lower than 2021 and our net loss ratio decreased 0.7 points. The primary driver was a reduction in loss and loss settlement expenses of $27.0 million in personal lines related to our exit of that business. This was offset by an increase in reinsurance assumed related to our growth in that business from and a decrease in our commercial lines. In 2022, catastrophe losses were $73.5 million in our direct business and assumed reinsurance business as compared to $98.6 million in 2021.
The Company experienced $12.9 million of adverse development in our net reserves for prior accident years for the twelve-month period ended December 31, 2022. Most of the adverse development was in commercial other liability with $47.8 million and commercial fire and allied with $24.8 million adverse development. This was offset partially by favorable development on commercial automobile which contributed $56.7 million. The unfavorable development in commercial other liability and commercial fire and allied was due to paid loss and loss adjustment expense ("LAE") which was greater than reductions in reserves for unpaid loss and LAE. The favorable development for commercial automobile was from both loss and LAE where reductions of reserves for unpaid liabilities were more than sufficient to offset actual paid loss and paid LAE. Reductions in reserves for IBNR claims also contributed favorable development.
Amortization of Deferred Policy Acquisition Costs ("DAC")
The following is a summary of the components of DAC, including amortization:
DAC is amortized over the period the related premiums are earned. Amortization increased for the years ended December 31, 2024 and 2023, primarily reflecting an increase in deferred underwriting costs associated with the growth of the business.
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Net Loss Ratios by Line
The following table provides our net loss ratio for the years ended December 31, 2024, 2023 and 2022:
Commercial lines
Personal lines
NM = not meaningful
(1) Reinsurance assumed includes Lloyd's of London
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Commercial Lines
The net loss ratio in our commercial lines of business was 63.1 percent in 2024 compared to 76.5 percent in 2023 and 69.8 percent in 2022. This result was driven by improvement in the underlying loss ratio, no prior year development compared to adverse development booked in 2023, and a favorable year for catastrophe losses.
Commercial Other Liability
We write numerous types of risk that are exposed to liability losses in our direct and assumed books of business. This includes, but is not limited to, bodily injury, property damage, standard umbrella, excess liability, and product liability (including construction defect) loss and loss adjustment expenses.
The net loss ratio increased 4.8 percentage points in 2024 compared to 2023. The Company has been strengthening reserves across our portfolio in response to increased loss settlements resulting from the impact of economic and social inflation, including increased litigation activity.
Commercial Fire and Allied Lines
The net loss ratio improved 25.1 percentage points in 2024 compared to 2023. This was driven by increased pricing and continued favorable frequency trends. In addition, large loss experience was very favorable in 2024 compared to earlier years and catastrophe experience was favorable in 2024.
Commercial Automobile
The net loss ratio improved 26.9 percentage points in 2024 compared to 2023. This was driven in part by consistent pricing increases throughout 2024 and continued favorable frequency trends associated with more restrictive underwriting guidelines and exposure appetite. Favorable prior year development also contributed in 2024 compared to 2023, given case-basis and IBNR reserve strengthening efforts over the last several years were sufficient to account for recent claim activity.
Workers' Compensation
The net loss ratio deteriorated 5.9 percentage points in 2024 compared to 2023. The Company continues to see favorable frequency trends offset by modest but positive severity pressure and medical inflation pressure. There was some prior year reserve increases in 2024 relative to 2023 due to the adjustment of ceded recovery expectations.
Fidelity and Surety
The net loss ratio improved 31.2 percentage points in 2024 compared to 2023. When surety losses occur, our loss is determined by estimating the cost to complete the remaining work and to pay the contractor's unpaid bills, offset by contract funds due to the contractor, reinsurance, and the value of any collateral to which we may have access. Significant improvement was driven by a return to longer term profitability levels and disciplined underwriting after elevated large loss activity in 2023 and 2022.
Personal Lines
The net loss ratio deteriorated 7.7 percentage points in 2024 compared to 2023, due to proportional assumed reinsurance for homeowners multi-peril coverage included in personal fire and allied lines. There is also an immaterial amount of personal lines business remaining, primarily in the state of New Jersey, with the last exposures due to certain regulatory, non-renewal limitations expected to lapse before December 31, 2025.
Reinsurance Assumed
The net loss ratio increased 1.3 percentage points in 2024 compared to 2023. Our assumed reinsurance portfolio is comprised of contracts that provide reinsurance protection to unaffiliated insurance companies. We only reinsure companies with attractive expected profitability, relevant materiality, and strong reputation. Our reinsurance business focuses on long-term relationships.
The 2024 non-catastrophe result was relatively consistent with 2023. The business is benefiting from increased pricing and tightly managed loss exposure. 2024 experienced increased catastrophe losses from one account and adverse prior year development driven by worse than expected losses associated with a few accounts.
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Underwriting Expenses
The following is a summary of underwriting expenses, including the underwriting expense ratio:
(1) Expense ratio is calculated by dividing non-deferred underwriting expenses and amortization of deferred policy acquisition costs by net earned premiums. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance
business.
The increase in expense ratio in 2024 as compared to 2023 is due primarily to investments in talent to deepen expertise across the Company; accelerated development of our new policy administration system that is now poised for implementation in 2025; and increased performance-based compensation for employees and agents due to current year achievements.
The increase in expense ratio in 2023 as compared to 2022 was primarily driven by prior year changes to our employee post-retirement benefit plans. These changes provided benefits to the underwriting expense ratio that concluded at the end of 2022. Additionally, the 2023 underwriting expense ratio increased due to reinsurance premiums which were offset by our ongoing actions to sustainably reduce expenses and direct premium growth.
Interest Expenses
The following is a summary of interest expense:
Our long term debt obligations are $50.0 million of private placement notes issued in December 2020 and $70.0 million of senior unsecured notes issued in May 2024. Interest expense increased in 2024 due to the issuance of the senior unsecured notes in May 2024. Refer to Note 13 "Debt" in Part II, Item 8 for more information on our long term debt.
Income Taxes
The following is a summary of income tax expense (benefit), including the effective tax rate:
(1)The effective tax rate is calculated by dividing 'Income tax expense (benefit)' by 'Income (loss) before income taxes'
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Income tax expense was $15.1 million in 2024, compared with an income tax benefit of $10.0 million in 2023 and $3.0 million in 2022. The consolidated effective tax rate for 2024 was 19.6 percent, compared with 25.2 percent in 2023 and (24.5) percent in 2022. The effective tax rate for the year ended December 31, 2024 differs from the statutory rate of 21% primarily due to interest earned on tax exempt bonds.
Refer to Note 7 "Income Tax" in Part II, Item 8 for more information on the Company's income taxes, including details regarding our deferred tax assets and liabilities.
Adjusted Operating Income (See "Non-GAAP Financial Measures")
The table below shows the adjustments made to reconcile Net income (loss) to Adjusted operating earnings:
Net Income Reconciliation
Income statement data
Less: Net investment gains (losses), after-tax (4,289) 1,006 (12,555)
Adjusted operating income reported in 2024 was primarily due to an increase in net earned premiums of $142.2 million combined with a decrease in the underlying loss ratio by 4.3 points to 57.9%, a decrease in the catastrophe loss ratio of 0.8 points to 5.4%, and no prior year reserve development. In addition, net investment income increased by $23.2 million, partially offset by net investment losses due to management actions within the Company's fixed maturity portfolio to reinvest at higher rates. The underwriting expense ratio increased 1.0 point to 35.9%.
Adjusted operating loss reported in 2023 was primarily due to an increase in losses and loss settlement expenses of $132.1 million attributable to adverse reserve development of $67.8 million which added 6.0 points to the loss ratio. In addition, an increase in amortization of deferred acquisition costs of $32.0 million contributed to the operating loss. These were partially offset with an increase in net earned premiums of $83.0 million and higher investment income of $15.0 million.
Adjusted operating income reported in 2022 was primarily due to a decrease in losses and loss settlement expenses of $14.8 million attributable to a decrease in the underlying loss ratio by 5.2 points to 59.2% and a decrease in the catastrophe loss ratio of 2.5 points to 7.7%. This was partially offset by a decrease in net earned premiums of $11.3 million and increased net investment losses on the portfolio due to $12.8 million of unrealized losses on equity securities held as of the end of the year.
INVESTMENTS
Investment Philosophy
The Company's assets are invested to preserve capital and maximize total return while maintaining an appropriate balance of risk. The risk-adjusted return on our portfolio is an important component of overall financial results, but quality and safety of principal is the highest priority of our investment program. We administer our investment portfolio based on investment guidelines approved by management and the Investment Committee of our Board of Directors that comply with applicable statutory regulations. The portfolio is structured to be compliant with state insurance laws that prescribe the quality, concentration and type of investments that may be made by insurance companies.
We monitor our portfolio to appropriately manage risk, achieve portfolio objectives and maximize investment income as market conditions change. Our overall investment strategy is to stay fully invested (i.e., minimize cash balances). If additional cash is needed, we have the ability to take advances through the Federal Home Loan Bank of Des Moines ("FHLB Des Moines") facility. The Company entered into an investment management agreement with New England Asset Management ("NEAM") effective as of February 1, 2024, pursuant to which NEAM will provide investment management services.
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Investment Portfolio
Our invested assets at December 31, 2024 totaled $2.1 billion as compared to $1.9 billion at December 31, 2023. We utilize a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government and government agency bonds and tax-exempt U.S. municipal bonds. The composition of our investment portfolio at December 31, 2024 is presented at carrying value in the following table:
Percent
(In Thousands, except ratios) Carrying Value of Total
Fixed maturities, available-for-sale(1)
US Treasury and government agencies $ 117,301 6.0 %
States, municipalities and political subdivisions 247,904 12.0
Asset-backed: —
Total Fixed maturities, available-for-sale 1,868,331 89.0
Short-term investments 100 —
(1) Available-for-sale securities with fixed maturities are carried at fair value.
(2) As a member of Lloyd’s, the Company participates in the Syndicate results which include the fair value of the investments. Starting in Q4 2024, these investments are included in other long-term investments. The fair value of Lloyd's syndicate investments included in other long-term investments was $82.2 million as of December 31, 2024.
Credit Quality
The following table shows the composition of fixed maturity securities by credit rating at December 31, 2024 and 2023. Information contained in the table is generally based upon issuer credit ratings provided by external rating agencies.
Rating Carrying Value % of Total Carrying Value % of Total
As of December 31, 2024 and 2023, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.
Duration
Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement used to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. Invested assets and reserve liability accounts with similar durations will have an offsetting effect of any change in interest rates. The primary purpose for matching invested assets and reserve liabilities is liquidity, and with appropriate matching, our investments will
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mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.
We analyze potential changes in the value of our investment portfolio due to the market risk factors noted above within the overall context of asset and liability management. A technique we use in the management of our investment portfolio specifically related to interest rate risk is the calculation of duration. Our actuaries estimate the payout pattern of our reserve liabilities to determine their duration, which is the present value of the weighted average payments expressed in years. We then establish a target duration for our investment portfolio so that at any given time the estimated cash generated by the investment portfolio will closely match the estimated cash required for the payment of the related reserves. We structure the investment portfolio to meet the target duration to achieve the required cash flow, based on liquidity and market risk factors.
The weighted average effective duration of our portfolio of fixed maturity securities was 4.2 years at December 31, 2024 compared to 4.0 years at December 31, 2023. Refer to Note 2 "Investments" in Part II, Item 8 for more information on maturities.
Unrealized Investment Gains and Losses
As of December 31, 2024, net unrealized investment losses, after tax, totaled $72.2 million compared to net unrealized losses, after tax, of $67.0 million and unrealized losses of $88.4 million as of December 31, 2023 and 2022, respectively. The unrealized investment loss position is a result of continued elevated interest rates during 2024, that resulted in a change in unrealized gains/losses for the year.
The net unrealized investment losses in 2023 and 2022 were a result of continued elevated interest rates, with a slight rate improvement in 2023, from 2022, that resulted in a small change in unrealized gains for 2023. Refer to Note 2 "Investments" in Part II, Item 8 for more information on net investment unrealized gains and losses.
Expected Credit Losses and Watch List
We prepare a watch list to identify securities to evaluate for expected credit losses. Factors used in preparing the watch list include fair values relative to amortized cost, ratings, negative ratings actions and other factors. Detailed analysis is performed for each security on the watch list to further assess the presence of credit impairment loss indicators and, where present, calculate an allowance for expected credit loss or direct write-down of a security’s amortized cost.
At December 31, 2024, our watch list included 10 fixed maturity securities in an unrealized loss position with an amortized cost of $21.8 million, no allowance for expected credit losses, unrealized losses of $2.2 million and a fair value of $24.0 million.
At December 31, 2023, we had no fixed maturity securities on a watch list.
Refer to Note 2 "Investments" in Part II, Item 8 for more information on our investments.
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REINSURANCE
Reinsurance is a contract by which one insurer, called the reinsurer, agrees to cover, under certain defined circumstances, a portion of the losses incurred by a primary insurer if a claim is made under a policy issued by the primary insurer. Our property and casualty insurance companies follow the industry practice of reinsuring a portion of their exposure to reduce the net liability on individual risks to predetermined limits and to protect us against catastrophic losses, such as a hurricane or tornado.
Ceded Reinsurance
Our reinsurance allows us to manage our risk, increase our underwriting capacity and protect us from large events. A summary of our key reinsurance programs are as follows:
Property & Casualty Core Excess of Loss ("XOL") Treaty
Our property and casualty working program, which we refer to as the core treaty, includes a multi-line layer which applies in excess of our retention and annual aggregate deductible, as well as property-only and casualty-only towers above the multi-line exhaustion point. Our core treaty incepts January 1, 2025, and each layer is fully placed. The core treaty structure has changed from the 2024 treaty year. The layer changes are summarized in the table below. Each layer includes provisions providing for extra-contractual and excess of policy limit losses and terrorism coverage. However, included coverage varies based on individual reinsurer participation of each layer. The multi-line treaty includes a provision that limits the per occurrence maximum limit to $12 million. Reinstatement is free and unlimited, upon erosion of the annual aggregate deductible. This treaty provides coverage to the majority of the commercial property and casualty business that we write. The multi-line treaty combined with the property per risk provides for a combined limit of $47 million coverage excess of the $3 million retention, as compared to $2.5 million retention for the years 2021 through 2016 and $2.0 million for the years 2015 through 2012. The new 1st Property Per Risk includes six free reinstatements of the full limit. The 2nd and 3rd Property Per Risk layers include one reinstatement to the full amount at the same premium. A semi-automatic property facultative treaty is in place providing coverage for a limit of $25 million excess of $50 million, which brings the combined treaty coverage limit available for an eligible risk to $72 million excess of $3 million. If we have a property risk that requires limits in excess of our reinsured limit, facultative reinsurance is obtained. The multi-line treaty combined with the casualty tower provides for a combined limit of $57 million excess of the $3 million retention. This treaty protects from a loss to an individual policyholder or clash event where an occurrence involves multiple policyholders. The new 1st Casualty includes six free reinstatements of the full limit, while the Casualty 2nd, 3rd and 4th include a single reinstatement of the full limit at the same premium. The casualty layers include a provision that limits the maximum amount of any one life for workers' compensation losses. At times we may obtain separate casualty facultative reinsurance to cover specific exposures or policies, based on particular exposures presented by a policyholder.
Layer Limit Retention Placement
Property Catastrophe XOL
In 2024, the Company continued the pillar occurrence in addition to the property catastrophe XOL ceded reinsurance programs. No substantive structural changes were made to the property catastrophe XOL, however the pillar occurrence structure was changed to split Named Storm and Earthquake from All Other Perils. The event retention for Named Storm and Earthquake remains at $5.0 million while the event retention for All Other Perils was reduced to $4.0 million. The property catastrophe XOL remains fully placed, while the pillar occurrence placement was increased to 50%. We did not experience any property catastrophe events that produced a ceded loss to either program in 2023 or 2024.
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Our corporate property catastrophe reinsurance program, effective January 1, 2025, is an XOL treaty. The program consists of $110 million in coverage for losses in excess of $20 million. The treaty protects from catastrophic events such as earthquakes, hail, windstorms, and fires. The treaty consists of three layers and is fully placed. It includes provisions providing for extra-contractual and excess of policy limit losses and contains exclusions for communicable diseases and cyber loss. In addition, it includes a terrorism exclusion. However, included coverage varies based on individual reinsurer participation of each layer. Additionally, each layer can be reinstated once to its full amount at the same premium. The property catastrophe treaty is largely unchanged from the 2024 treaty year.
Layer Limit Retention Placement
Earthquake and Flood XOL Treaty
We delegate underwriting authority to write a portfolio of Pacific Coast earthquake business. This arrangement began in 2019. An excess of loss treaty, effective January 1, 2025, is in place to specifically and exclusively reinsure business written through this arrangement. This program consists of $130 million for losses in excess of $10 million and is fully placed. Each layer can be reinstated once to its full amount at the same premium.
Layer Limit Retention Placement
Surety Per Principal XOL Treaty
Our surety treaty incepts on January 1, 2025 and is an excess of loss treaty. The program consists of $45 million in coverage for losses in excess of $5 million per principal. The first layer includes three paid reinstatements, while the second and third include one paid reinstatement. Losses are considered discovered to the treaty year in accordance with the contract terms and conditions. The surety treaty is largely unchanged from the 2024 treaty year.
Layer Limit Retention Placement
Terrorism Coverage
Our principal terrorism reinsurance protection is the coverage provided through the Terrorism Risk Insurance Program Reauthorization Act of 2019 ("TRIPRA"), effective through December 31, 2027. TRIPRA coverage includes most direct commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an insurer, with exclusions for commercial automobile insurance, burglary and theft insurance, surety, professional liability insurance and farm owners' multiple peril insurance. For calendar year 2024, the aggregate losses exceeding a threshold of $200.0 million industry-wide would be covered under this protection. Our TRIPRA deductible was $132.6 million for 2024 and our TRIPRA deductible is expected to be $137.2 million for 2025. Our catastrophe and non-catastrophe reinsurance programs provide limited coverage for terrorism exposure excluding nuclear, biological and chemical-related claims.
Assumed Reinsurance
The Company offers reinsurance coverage for property and casualty insurance through traditional treaty reinsurance channels and participates in the Lloyd's market through its corporate member at Lloyd's. We target diversifying risks that complement our direct portfolio. The following provides more detail on the type of assumed reinsurance business we target.
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•Treaty reinsurance with regional property and casualty carriers, including casualty XOL, property per risk, and property catastrophe XOL.
•Treaty reinsurance with professional reinsurers and Lloyd's syndicates.
•Mortgage reinsurance with Freddie Mac and Fannie Mae, private mortgage insurers and surety carriers.
•Treaty reinsurance on risks underwritten by managing general agents.
•Treaty reinsurance underwritten on our behalf through reinsurance intermediary management agreements (RIMA) that define underwriting boundaries by product, class and type.
In 2024, we broadened the scope of our assumed portfolio by growing our client base and building around the renewal business. We grew our standard property and casualty treaty business while holding our property catastrophe retrocessional and Lloyd's businesses to only modest change. We engaged in the mortgage reinsurance market where conditions were favorable. We also incepted a few new managing general agent programs in the cyber liability and transactional liability markets.
In 2023 we continued to grow our assumed programs by renewing the programs added in 2022 and continuing to diversify our risks. We reduced exposure in property catastrophe retrocessional treaty and managing general agent treaty, while significantly growing our standard property and casualty treaty and Lloyd's businesses.
In 2022, we continued to grow our assumed programs by renewing the programs added in 2021 and continuing to diversify our risks in retrocessional treaty, managing general agent, reinsurance intermediary, and financial lines. Losses and loss settlement expenses ceded increased in 2022 due to two lines of business, other liability and fire and allied lines. Other liability is seeing more recoveries due to inflationary pressures and fire and allied lines has seen an increase in severity, with both of these issues driving increasing ceded recovery.
Reinsurer Credit Quality
We use many reinsurers, both domestic and foreign, which helps us to avoid concentrations of credit risk associated with our reinsurance. Our criteria for selecting reinsurance markets is to generally require capital and surplus of at least $500.0 million and an A.M. Best rating or an S&P rating of at least "A-." If a reinsurer is rated by both rating agencies, then both ratings must be at least an "A-." All of our reinsurance capacity is placed with reinsurers holding a rating of A- or better. For the small amount of reinsurance capacity we utilize that doesn't meet our criteria, markets are required to collateralize the risk. The following table represents the primary reinsurers we utilize and their financial strength ratings as of December 31, 2024:
Name of Reinsurer A.M. Best S&P Rating
Swiss Reinsurance American Corporation(1) A+ AA-
Hannover Ruck SE(1)(2) A+ AA-
Everest Reinsurance Company(1)(2) A+ A+
Certain Underwriting Members of Lloyd's of London(1)(2) A+ AA-
Arch Reinsurance Company(1) A+ A+
Berkely Reinsurance Company(1) A+ A+
Partner Reinsurance Company of the US(1)(2) A+ A+
R&V Versicherung AG(1) NR A+
MS Amlin AG(1)(2) A+ A+
Renaissance Reinsurance US Inc(1) A+ A+
SCOR Reinsurance Company(1)(2) A A+
Axis Reinsurance Company(2) A A+
(1) Primary reinsurers participating in the property and casualty excess of loss programs.
(2) Primary reinsurers participating in the surety excess of loss program.
Refer to Part II, Item 8, Note 4 "Reinsurance" for further discussion of our reinsurance programs.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures our ability to generate sufficient cash flows to meet our short-term cash obligations and long-term cash obligations. Our cash inflows are primarily a result of the receipt of premiums, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of losses and loss settlement expenses, the purchase of investments, operating expenses, dividends, pension plan contributions, and common stock repurchases. When considering our liquidity and cash flow, it is important to distinguish between the needs of our insurance subsidiaries and the needs of the holding company, United Fire Group, Inc. As a holding company with no operations of its own, United Fire Group, Inc. derives its cash primarily from its insurance subsidiaries.
The sources of liquidity of the holding company are principally comprised of dividends from subsidiaries, existing surplus notes, investment income on holding company assets and the ability to raise long-term public financing under an SEC-filed registration statement or private placement offering. These sources of liquidity and cash flow support the general corporate needs of the holding company, interest and debt service, and investment in core businesses.
We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed by regulatory agencies in the United States.
Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes.
The following table displays a summary of cash sources and uses in 2024, 2023 and 2022:
Cash Flow Summary Years Ended December 31,
Cash provided by (used in)
Net increase (decrease) in cash and cash equivalents $ 98,903 $ 5,396 $ (35,454)
Our cash flows were sufficient to meet our current liquidity needs for the years ended December 31, 2024, 2023 and 2022 and we anticipate they will be sufficient to meet our future liquidity needs. We also have the ability to draw from our credit facility if needed.
At December 31, 2024, our cash and cash equivalents included $23.1 million related to money market accounts, compared to $20.3 million at December 31, 2023.
Operating Activities
Net cash flows provided by operating activities totaled $340.3 million and $171.7 million in 2024 and 2023, respectively. Net cash flows used by operating activities totaled $1.3 million in 2022. The primary cash inflows from operating activities include insurance premiums, reinsurance recoveries and net investment income. The primary cash outflows from operating activities are comprised of payment of losses and loss settlement expenses and
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operating expenses. Our cash flows from operating activities were sufficient to meet our liquidity needs for 2024, 2023 and 2022.
Investing Activities
Cash in excess of operating requirements is generally invested in fixed maturity securities. Fixed maturity securities provide regular interest payments and allow us to match the duration of our liabilities. For further discussion of our investments, including our philosophy and portfolio, see the Investment heading subcategory "Investment Portfolio" section contained in Part II, Item 7 of Management's Discussion and Analysis of Financial Condition and Results of Operations.
Sales of investments and proceeds from calls or maturities of fixed maturity securities also can provide liquidity. During the next five years, $0.5 billion, or 25.5 percent of our fixed maturity portfolio will mature.
Net cash flows used in investing activities totaled $292.5 million, $149.9 million and $19.2 million in 2024, 2023, and 2022, respectively. In 2024, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments that totaled $680.0 million compared to $162.1 million and $280.4 million for the same period in 2023 and 2022, respectively. Our cash outflows for investment purchases totaled $960.6 million in 2024, compared to $301.1 million and $297.5 million for the same period in 2023 and 2022, respectively.
Financing Activities
Net cash flows provided by financing activities totaled $51.1 million in 2024 due to the successful placement of $70.0 million of senior unsecured notes in May 2024. Net cash flows used in financing activities totaled $16.5 million and $15.0 million in 2023 and 2022, respectively. The net cash flows used in financing activities are primarily the payment of cash dividends of $16.2 million, $16.2 million and $15.9 million in 2024, 2023 and 2022, respectively.
Contractual Obligations and Commitments
As of December 31, 2024, our required annual payments relating to contractual and other obligations were as follows:
(In Thousands) Payments Due By Period
Loss and Loss Settlement Expense Reserves
The amounts presented are estimates of the dollar amounts and time periods in which we expect to pay out our gross loss and loss settlement expense reserves. Because the timing of future payments may vary from the stated contractual obligation, these amounts are estimates based upon historical payment patterns and may not represent actual future payments. Refer to "Critical Accounting Estimates — Losses and Loss Settlement Expenses" in this section for further discussion.
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Long term debt
Our long term debt obligations are $50.0 million of private placement notes issued in December 2020 and $70.0 million of senior unsecured notes issued in May 2024. For further discussion of our long term debt, refer to Part II, Item 8, Note 13 "Debt."
Operating Leases
Our operating lease obligations are for the rental of office space, vehicles, computer equipment and office equipment. For further discussion of our operating leases, refer to Part II, Item 8, Note 12 "Lease Commitments."
Profit-Sharing Commissions
We offer our agents a profit-sharing plan as an incentive for them to place high-quality property and casualty insurance business with us. Based on business produced by the agencies in 2024, property and casualty agencies expect to receive profit-sharing payments of $31.3 million in 2025.