XML 32 R11.htm IDEA: XBRL DOCUMENT v3.23.3
Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2023
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments FAIR VALUE OF FINANCIAL INSTRUMENTS
Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
•Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.
•Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.
•Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years' experience and who have demonstrated knowledge of the subject security.
In order to determine the proper classification in the fair value hierarchy, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.
When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.
The mortgage loan portfolio consists entirely of commercial mortgage loans. The fair value of our mortgage loans is determined by modeling performed by our third-party fund manager based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value.
Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Supplemental Executive Retirement and Deferral Plan (the "Executive Retirement Plan"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plan. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of September 30, 2023, the cash surrender value of the COLI policies was $11,000 which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.

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

A summary of the carrying value and estimated fair value of our financial instruments at September 30, 2023 and December 31, 2022 is as follows:
 September 30, 2023December 31, 2022
Fair ValueCarrying ValueFair ValueCarrying Value
Assets    
Investments    
Fixed maturities:
Available-for-sale securities$1,638,638 $1,638,512 $1,551,339 $1,551,336 
Equity securities51,217 51,217 169,106 169,106 
Mortgage loans42,280 45,534 35,302 37,898 
Other long-term investments93,836 93,836 86,276 86,276 
Short-term investments— — 275 275 
Cash and cash equivalents69,150 69,150 96,650 96,650 
Corporate-owned life insurance11,000 11,000 10,588 10,588 
Liabilities
Long Term Debt34,456 50,000 36,168 50,000 
The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table includes financial instruments at September 30, 2023 and December 31, 2022:

September 30, 2023Fair Value Measurements
DescriptionTotalLevel 1Level 2Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$66,873 $— $66,873 $— 
U.S. government agency91,898 — 91,898 — 
States, municipalities and political subdivisions
General obligations
Midwest56,881 — 56,881 — 
Northeast10,999 — 10,999 — 
South53,134 — 53,134 — 
West75,326 — 75,326 — 
Special revenue
Midwest96,878 — 96,878 — 
Northeast50,552 — 50,552 — 
South159,500 — 159,500 — 
West100,516 — 100,516 — 
Foreign bonds18,336 — 18,336 — 
Public utilities127,417 — 127,417 — 
Corporate bonds
Energy41,600 — 41,600 — 
Industrials65,968 — 65,968 — 
Consumer goods and services88,506 — 88,506 — 
Health care31,537 — 31,537 — 
Technology, media and telecommunications80,248 — 80,248 — 
Financial services133,162 — 128,462 4,700 
Mortgage-backed securities21,007 — 21,007 — 
Collateralized mortgage obligations
Government national mortgage association146,670 — 146,670 — 
Federal home loan mortgage corporation71,849 — 71,849 — 
Federal national mortgage association45,887 — 45,887 — 
Asset-backed securities3,894 — 3,095 799 
Total Available-for-Sale Fixed Maturities$1,638,638 $— $1,633,139 $5,499 
EQUITY SECURITIES
Common stocks
Public utilities$3,703 $3,703 $— $— 
Energy9,536 9,536 — — 
Industrials13,023 13,023 — — 
Consumer goods and services11,127 11,127 — — 
Health care1,959 1,959 — — 
Technology, media and telecommunications5,612 5,612 — — 
Financial services6,257 6,257 — — 
Total Equity Securities$51,217 $51,217 $— $— 
Short-Term Investments$— $— $— $— 
Money Market Accounts$13,977 $13,977 $— $— 
Corporate-Owned Life Insurance$11,000 $— $11,000 $— 
Total Assets Measured at Fair Value$1,714,832 $65,194 $1,644,139 $5,499 



December 31, 2022Fair Value Measurements
DescriptionTotalLevel 1Level 2Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury$14,675 $— $14,675 $— 
U.S. government agency84,406 — 84,406 — 
States, municipalities and political subdivisions
General obligations
Midwest61,113 — 61,113 — 
Northeast15,463 — 15,463 — 
South63,981 — 63,981 — 
West86,545 — 86,545 — 
Special revenue
Midwest102,266 — 102,266 — 
Northeast54,220 — 54,220 — 
South180,857 — 180,857 — 
West112,212 — 112,212 — 
Foreign bonds31,649 — 31,649 — 
Public utilities125,411 — 125,411 — 
Corporate bonds
Energy33,209 — 33,209 — 
Industrials52,842 — 52,842 — 
Consumer goods and services89,941 — 89,941 — 
Health care27,592 — 27,592 — 
Technology, media and telecommunications59,940 — 59,940 — 
Financial services124,292 — 118,617 5,675 
Mortgage-backed securities17,700 — 17,700 — 
Collateralized mortgage obligations
Government national mortgage association84,548 — 84,548 — 
Federal home loan mortgage corporation78,838 — 78,838 — 
Federal national mortgage association45,386 — 45,386 — 
Asset-backed securities4,253 — 3,452 801 
Total Available-for-Sale Fixed Maturities$1,551,339 $— $1,544,863 $6,476 
EQUITY SECURITIES
Common stocks
Public utilities$14,846 $14,846 $— $— 
Energy19,743 19,743 — — 
Industrials27,163 27,163 — — 
Consumer goods and services43,139 43,139 — — 
Health care7,981 7,981 — — 
Technology, media and telecommunications28,213 28,213 — — 
Financial services28,021 28,021 — — 
Total Equity Securities$169,106 $169,106 $— $— 
Short-Term Investments$275 $275 $— $— 
Money Market Accounts$31,289 $31,289 $— $— 
Corporate-Owned Life Insurance$10,588 $— $10,588 $— 
Total Assets Measured at Fair Value$1,762,597 $200,670 $1,555,451 $6,476 
The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.
At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. In addition, on a quarterly basis, we also test all securities in the portfolio and independently corroborate the valuations obtained from our third-party valuation service providers. Quarterly, we also perform deep dive analyses of the pricing method used by our third-party valuation service provider by selecting a random sample of securities by asset class and reviewing methodologies. In our opinion, the pricing obtained at September 30, 2023 and December 31, 2022 was reasonable.
For the three- and nine-month periods ended September 30, 2023, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities.
Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers'
valuation processes. A change in significant unobservable inputs may result in a significantly higher or lower fair value measurement as of the reporting date.
The following table provides quantitative information about our Level 3 securities at September 30, 2023:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value atValuation Technique(s)Unobservable inputsRange of weighted average significant unobservable inputs
September 30, 2023
Fixed Maturities corporate$4,700 Third-party valuationOffered quotes
90.0% - 100.0%
Fixed Maturities asset-backed securities799 Discounted cash flowProbability of default
4% - 6%
The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended September 30, 2023:

Corporate bonds Asset-backed securitiesTotal
Beginning Balance - July 1, 2023$4,765 $837 $5,602 
Net unrealized gains (losses)(1)
(65)(38)(103)
Ending Balance - September 30, 2023$4,700  $799 $5,499 
(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.

The following table provides a summary of the changes in fair value of our Level 3 securities for the nine-month period ended September 30, 2023:

Corporate bondsAsset-backed securitiesTotal
Beginning Balance - January 1, 2023$5,675 $801 $6,476 
Net unrealized gains (losses)(1)
(975)(2)(977)
Ending Balance - September 30, 2023$4,700 $799 $5,499 
(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.


Commercial Mortgage Loans
The following tables present the carrying value of our commercial mortgage loans and additional information at September 30, 2023 and December 31, 2022:
Commercial Mortgage Loans
September 30, 2023December 31, 2022
Loan-to-valueCarrying ValueCarrying Value
Less than 65%$36,883 $29,231 
65%-75%8,706 8,716 
Total amortized cost$45,589 $37,947 
Allowance for mortgage loan losses(55)(49)
Mortgage loans, net$45,534 $37,898 
Mortgage Loans by Region
September 30, 2023December 31, 2022
Carrying ValuePercent of TotalCarrying ValuePercent of Total
East North Central$3,245 7.1 %$3,245 8.6 %
Southern Atlantic17,265 37.8 9,397 24.7 
East South Central7,591 16.7 7,783 20.5 
New England6,588 14.5 6,588 17.4 
Middle Atlantic6,020 13.2 6,139 16.2 
Mountain1,992 4.4 1,992 5.2 
West North Central2,888 6.3 2,803 7.4 
Total mortgage loans at amortized cost$45,589 100.0 %$37,947 100.0 %
Mortgage Loans by Property Type
September 30, 2023December 31, 2022
Carrying ValuePercent of TotalCarrying ValuePercent of Total
Commercial   
Multifamily$8,536 18.7 %$8,493 22.4 %
Office11,030 24.3 11,267 29.7 
Industrial
10,003 21.9 10,056 26.5 
Retail
10,000 21.9 1,992 5.2 
Mixed use/Other
6,020 13.2 6,139 16.2 
Total mortgage loans at amortized cost$45,589 100.0 %$37,947 100.0 %
Amortized Cost Basis by Year of Origination and Credit Quality Indicator
20232022202020192018Total
Commercial mortgage loans:
Risk Rating:
1-2 internal grade$8,136 $100 5,292 $7,897 $17,576 $39,001 
3-4 internal grade— — — — 6,588 6,588 
5 internal grade— — — — — — 
6 internal grade— — — — — — 
7 internal grade— — — — — — 
Total commercial mortgage loans$8,136 $100 $5,292 $7,897 $24,164 $45,589 
Current-period write-offs— — — — — — 
Current-period recoveries— — — — — — 
Current-period net write-offs$— $— $— $— $— $— 

Commercial mortgage loans carrying value excludes accrued interest of $173. As of September 30, 2023, all loan receivables were current, with no delinquencies. The commercial mortgage loans originate with an initial loan-to-value ratio to provide sufficient collateral to absorb losses should a loan be required to foreclose. Mortgage loans are evaluated on a quarterly basis for impairment on an individual basis through a monitoring process and review of key credit indicators, such as economic trends, delinquency rates, property valuations, occupancy and rental rates and loan-to-value ratios. A loan is considered impaired when the Company believes it will not collect the contractual principal and interest set forth in the contractual terms of the loan. An internal grade is assigned to each mortgage loan, with a grade of 1 being the highest and least likely for an impairment and the lowest rating of 7 being the most
likely for an impairment. An allowance for mortgage loan losses is established on each loan recognizing a loss for amounts which we believe will not be collected according to the contractual terms of the respective loan agreement. As of September 30, 2023, the Company had an allowance for mortgage loan losses of $55, summarized in the following rollforward:
Rollforward of allowance for mortgage loan losses:
As of
September 30, 2023
Beginning balance, January 1, 2023$49 
Current-period provision for expected credit losses6 
Ending balance of the allowance for mortgage loan losses, September 30, 2023
$55