ORGANIZATION OF MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's Discussion and Analysis provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:

• Forward-Looking Statements
• Critical Accounting Policies
• Overview and Outlook
o Our Business
o Financial Overview
• Results of Operations
o Consolidated Financial Highlights
o Property and Casualty Insurance Segment Results
o Life Insurance Segment Results
o Investment Results
• Liquidity and Capital Resources
o Liquidity
o Capital Resources
o Stockholders' Equity
• Statutory and Other Financial Measures

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 and the Securities Exchange Act of 1934 for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about our company, the industry in which we operate, and beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "continues," "seeks," "estimates," "predicts," "should," "could," "may," "will continue," "might," "hope" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Part II Item 1A "Risk Factors" of this document. Among other factors that could cause our actual outcomes and results to differ are:

• The impact of the current unprecedented volatility in the financial markets, including the duration of the credit crisis and the effectiveness of governmental solutions.
• Additional government and NASDAQ policies relating to corporate governance, and the cost to comply.
• The valuation of pension and other postretirement benefit obligations.
• The calculation and recovery of deferred policy acquisition costs.
• Our relationship with our reinsurers.
• Our relationship with our agents.

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

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. Our discussion and analysis of our results of operations and financial condition are based upon our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies most sensitive to estimates include the following: the valuation of investments; the valuation of reserves for losses, claims, and loss settlement expenses; the valuation of reserves for future policy benefits; and the calculation of the deferred policy acquisition cost asset. These critical accounting policies are more fully described in our Management's Discussion and Analysis of Results of Operations and Financial Condition presented in our Annual Report on Form 10-K for the year ended December 31, 2007.

OVERVIEW AND OUTLOOK

Our Business

We operate property and casualty and life insurance businesses, marketing our products through independent agents. Although we maintain a broad geographic presence that includes most of the United States, more than half of our property and casualty premiums were written in Texas, Iowa, Colorado, Louisiana and Missouri for the first nine months of 2008. Approximately three-fourths of our life insurance premiums were written in Iowa, Wisconsin, Minnesota, Nebraska and Illinois for the first nine months of 2008.

We conduct our operations through two distinct segments: property and casualty insurance and life insurance. We manage these segments separately because they generally do not share the same customer base, and they each have different pricing and expense structures. We evaluate segment profit based upon operating and investment results. Segment profit or loss described in the following sections of the Management's Discussion and Analysis is reported on a pre-tax basis.

Financial Overview

In the third quarter of 2008, Hurricanes Gustav and Ike together were considerable financial events for us, resulting in more than $23.7 million in incurred losses and loss settlement expenses. This figure could potentially change as our loss adjustment process develops. These hurricanes made fairly direct hits on two of our three largest Gulf Coast exposures that we currently monitor - the southern Louisiana and Galveston-Houston areas. We are encouraged that the losses from both hurricanes will fall below our per-occurrence reinsurance retention limits and overall our book of business performed as expected.

Unlike other catastrophes that we experience as an insurer, United Fire was directly affected by Hurricanes Gustav and Ike. Due to Hurricane Gustav, our New Orleans claims office in Metairie closed for three days. Due to Hurricane Ike, our Gulf Coast regional office in Galveston closed for three weeks before reopening in a temporary facility in the Houston area. It may be several weeks before employees are able to reoccupy our leased office space in Galveston. Both of these events came shortly after the reopening of our home office in Cedar Rapids, which had sustained extensive damage due to record flooding in the Midwest during the second quarter of 2008. Our employees in the home office were displaced for 11 weeks, with some working from a temporary facility and some working from home, before being able to reoccupy our home office buildings.

During the third quarter of 2008, our life insurance segment recorded an other-than-temporary impairment of $5.8 million on holdings of Lehman Brothers fixed maturity securities. Without this impairment, net income for our life insurance segment for the nine months ended September 30, 2008 was comparable to the same period of 2007.

The investment environment has gone through unprecedented volatility in recent weeks. We have been impacted by this volatility, with our investments generating an unrealized loss of $40.0 million or 1.9 percent of our portfolio for the third quarter of 2008 ($102.5 million unrealized loss or 4.8 percent year-to-date). We continue to closely monitor current market conditions and evaluate the long-term impact of this recent market volatility on all of our investment holdings. Despite this recessionary period, our conservative philosophy towards the management of investments has helped us to maintain a strong portfolio and has resulted in the recognition of limited losses from impaired investments.

RESULTS OF OPERATIONS

Consolidated Financial Highlights



                                                         Three Months Ended                    Nine Months Ended
                                                            September 30,                        September 30,
(Dollars in Thousands)                               2008         2007         %           2008         2007        %

Revenues
Net premiums earned                               $ 128,017    $ 126,988       0.8  %   $ 374,234    $ 375,545     -0.4  %
Investment income, net of investment expenses        25,192       30,117     -16.4  %      81,091       92,369    -12.2  %
Realized investment gains (losses)                   (4,154  )       871       N/A         (4,364  )     4,365      N/A
Other income                                            326          243      34.2  %         709          490     44.7  %
                                                  $ 149,381    $ 158,219      -5.6  %   $ 451,670    $ 472,769     -4.5  %

Benefits, Losses and Expenses
Losses and loss settlement expenses               $ 120,267    $  78,450      53.3  %   $ 288,456    $ 190,495     51.4  %
Increase in liability for future policy benefits      6,696        3,472      92.9  %      17,902       10,468     71.0  %
Amortization of deferred policy acquisition costs    32,481       33,668      -3.5  %      97,036      100,289     -3.2  %
Other underwriting expenses                           7,810        5,514      41.6  %      20,298       17,672     14.9  %
Disaster charges and other related expenses             484            -       N/A          4,237            -      N/A
Interest on policyholders' accounts                   9,844       10,645      -7.5  %      30,507       32,671     -6.6  %
                                                  $ 177,582    $ 131,749      34.8  %   $ 458,436    $ 351,595     30.4  %
Income (loss) before income taxes                 $ (28,201  ) $  26,470       N/A      $  (6,766  ) $ 121,174      N/A
Federal income tax expense (benefit)                (11,375  )     7,399       N/A         (8,544  )    36,241      N/A
Net Income (Loss)                                 $ (16,826  ) $  19,071    -188.2  %   $   1,778    $  84,933    -97.9  %

Our results for the three- and nine-month periods ended September 30, 2008 deteriorated when compared to the three- and nine-month periods ended September 30, 2007, due primarily to a significant increase in catastrophe losses. For the third quarter of 2008, catastrophe losses were $36.7 million, compared to $4.8 million for the third quarter of 2007. Year-to-date, catastrophe losses were $53.1 million, compared to $10.4 million through September 30, 2007. Hurricanes Gustav and Ike were the largest catastrophes that we experienced this year, with both occurring during September 2008. We recorded $23.7 million in losses related to these two events.

Investment results also negatively impacted our 2008 income, with year-to-date investment income decreasing by $11.3 million or 12.2 percent. A year-over-year decline in short-term and money market interest rates and a reduction in our cash balances contributed to the decrease. Investment income was further reduced by the decrease in market values of our holdings in limited liability partnerships. The carrying amounts of these investments are increased or decreased to reflect our share of income or loss, and the change in carrying value is recorded in net investment income. These same factors also contributed to the reduction in investment income for the third quarter of 2008.

The decrease in realized investment gains and losses, both for the third quarter and year-to-date in 2008, was driven by the previously discussed write-down of Lehman Brothers fixed maturity securities.

Flooding events that impacted our home office and our Galveston branch office resulted in net reconstruction and recovery charges incurred of $.5 million for the third quarter, and $4.2 million through September 30, 2008. The amounts are net of insurance recoveries of $2.9 million.

In the nine-month period ended September 30, 2008, we reported a federal income tax benefit of $8.5 million, compared to federal income tax expense of $36.2 million at an effective tax rate of 29.9 percent for the nine-month period ended September 30, 2007. Our effective tax rate differs from the federal statutory rate of 35.0 percent due

Property and Casualty Insurance Segment Results

Property & Casualty Insurance Financial Results:        Three Months                Nine Months
                                                    Ended September 30,         Ended September 30,
(Dollars in Thousands)                               2008          2007         2008          2007
Net premiums written (1)                          $  111,895    $ 112,068    $  356,407    $  361,323
Net premiums earned                               $  117,278    $ 119,222    $  345,644    $  351,703
Losses and loss settlement expenses                 (116,536  )   (74,813  )   (278,275  )   (177,980  )
Amortization of deferred policy acquisition costs    (29,354  )   (31,240  )    (88,076  )    (91,595  )
Other underwriting expenses                           (5,389  )    (3,465  )    (14,021  )    (11,540  )
Underwriting income (loss)                        $  (34,001  ) $   9,704    $  (34,728  ) $   70,588

Investment income, net of underwriting expenses   $    7,124    $  10,439    $   25,184    $   32,782
Realized investment gains                              1,724          814         3,056         3,281
Other income (loss)                                      (32  )         8           (61  )         21
Disaster charges and other related expenses             (484  )         -        (4,237  )          -
Income (loss) before income taxes                 $  (25,669  ) $  20,965    $  (10,786  ) $  106,672

GAAP Ratios:
Net loss ratio                                          99.4  %      62.8  %       80.5  %       50.6  %
Expense ratio (2)                                       29.6  %      29.1  %       29.6  %       29.3  %
Combined ratio (1)                                     129.0  %      91.9  %      110.1  %       79.9  %
Combined ratio (without catastrophes) (1) (3)           97.7  %      87.9  %       94.7  %       76.9  %

(1) Please refer to the Statutory and other financial measures section of this report for further explanation of this measure.

(2) The expense ratio does not include the $.5 million and $4.2 million in net disaster charges which were incurred during in the three- and nine-month periods ended September 30, 2008, respectively.

(3) This ratio does not include the $10.8 million that was incurred in the second quarter of 2008 from a lawsuit related to Hurricane Katrina, which is pending appeal. We have not included the $10.8 million in our reported catastrophe amounts.

In the first nine months of 2008, our property and casualty insurance segment had a pre-tax loss of $10.8 million, compared to pre-tax income of $106.7 million in the first nine months of 2007. The deterioration is attributable to increased catastrophe losses and an adverse court decision that occurred during the first nine months of 2008 as compared to the first nine months of 2007.

Net premiums written decreased slightly in the third quarter and year to date in 2008 as compared to the same periods in 2007. This is primarily due to the competitive market environment, which continues to affect our growth through a continuation of gradual decreases in premium level in some of our lines of business, dating back to the third quarter of 2004. However, we are encouraged that, of the rate changes processed during the third quarter of 2008, approximately one-third were low-single digit percentage rate level increases. Additionally, our efficiency at processing new business was affected by having to establish and relocate to temporary locations as a result of the Midwest flooding that impacted our home office in June and Hurricane Ike that impacted our Galveston branch office in September.

In the third quarter of 2008, we recorded net disaster related charges of $.5 million which is the result of the flood damage our home office sustained in June and the damage to our Galveston, Texas branch office which occurred as the result of Hurricane Ike in September. For the nine months ended September 30, 2008, we have incurred disaster charges totaling $4.2 million, which is net of insurance reimbursements totaling $2.9 million for the flood damage to our home office. A portion of the costs incurred by our Galveston branch office will be subject to recovery under our insurance. As of September 30, 2008, no such recovery has been recorded against the expenses incurred.

Nine months ended September 30                2008                                          2007
(Dollars in Thousands)                                                                  Net Losses &
                                                                                            Loss
                             Net          Net Losses &                        Net        Settlement
                           Premiums      Loss Settlement     Net Loss       Premiums      Expenses     Net Loss
                            Earned      Expenses Incurred    Ratio (1)       Earned       Incurred      Ratio
Commercial lines:
Other liability (2)       $ 101,439    $           60,459        59.6  %   $ 102,446    $    40,039       39.1  %
Fire and allied lines (3)    82,074                98,427       119.9         88,878         50,677       57.0
Automobile                   75,652                51,019        67.4         73,497         48,371       65.8
Workers' compensation        38,950                26,083        67.0         35,930         17,752       49.4
Fidelity and surety          15,649                 2,503        16.0         15,252            513        3.4
Miscellaneous                   639                   130        20.3            642            269       41.9
Total commercial lines    $ 314,403    $          238,621        75.9  %   $ 316,645    $   157,621       49.8  %
Personal lines:
Fire and allied lines (4) $  15,951    $           29,111       182.5  %   $  15,765    $    10,672       67.7  %
Automobile                    9,463                 7,839        82.8         10,505          5,983       57.0
Miscellaneous                   241                   747         N/A            234            349        N/A
Total personal lines      $  25,655    $           37,697       146.9  %   $  26,504    $    17,004       64.2  %
Reinsurance assumed       $   5,586    $            1,957        35.0  %   $   8,554    $     3,355       39.2  %
Total                     $ 345,644    $          278,275        80.5  %   $ 351,703    $   177,980       50.6  %

(1) Please refer to the Statutory and other financial measures section of this report for further explanation of this measure.

(2) "Other liability" is business insurance covering bodily injury and property damage arising from general business operations, accidents on the insured's premises and products manufactured or sold.

(3) "Fire and allied lines" includes fire, allied lines, commercial multiple peril and inland marine.

(4) "Fire and allied lines" includes fire, allied lines, homeowners and inland marine.

The commercial lines pricing environment continues to be competitive, with an average of low-single digit percentage decreases in premium level during the third quarter of 2008. The largest decreases continue to be in our property lines of business in non-coastal states. Additionally, we continue to experience pressure on renewals, especially mid- to large-size accounts.

The personal lines pricing environment also continues to be competitive both in the auto and homeowners lines of business. A double-digit percentage rate increase in the homeowners line of business in Louisiana, which is effective in the fourth quarter of 2008, will likely help bolster our homeowners premium level in future quarters.

Policy retention remained strong in both personal and commercial lines of business, with a slight increase of approximately 1.7 percent for the three months ended September 30, 2008, as compared to the same period in 2007.

In nearly every line of business, a continuation of the competitive pricing environment has contributed to a deterioration of the net loss ratio. An increase in catastrophe losses during 2008 significantly contributed to the increase in the net loss ratio in the fire and allied lines; for both personal and commercial business. In the workers' compensation and other liability lines of business, the increase in losses was due to the higher frequency and severity experienced during the first nine months of 2008 as compared to the same period of 2007. In addition, we have been able to write more new business in the workers' compensation line in 2008, which has contributed to more new losses in 2008.

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Life Insurance Segment Results

Life Insurance Financial Results:                      Three Months               Nine Months
                                                    Ended September 30,       Ended September 30,
(Dollars in Thousands)                               2008         2007         2008         2007
Revenues
Net premiums written (1)                          $   10,545    $  7,459    $   28,112    $ 22,840
Net premiums earned                               $   10,739    $  7,766    $   28,590    $ 23,842
Investment income, net of investment expenses         18,068      19,678        55,907      59,587
Realized investment gains (losses)                    (5,878  )       57        (7,420  )    1,084
Other income                                             358         235           770         469
Total revenues                                    $   23,287    $ 27,736    $   77,847    $ 84,982

Benefits, losses and expenses
Losses and loss settlement expenses               $    3,731    $  3,637    $   10,181    $ 12,515
Increase in liability for future policy benefits       6,696       3,472        17,902      10,468
Amortization of deferred policy acquisition costs      3,127       2,428         8,960       8,694
Other underwriting expenses                            2,421       2,049         6,277       6,132
Interest on policyholders' accounts                    9,844      10,645        30,507      32,671
Total benefits, losses and expenses               $   25,819    $ 22,231    $   73,827    $ 70,480

Income (loss) before income taxes                 $   (2,532  ) $  5,505    $    4,020    $ 14,502

(1) Please refer to the Statutory and other financial measures section of this report for further explanation of this measure.

The principal product of our life insurance segment is the single premium deferred annuity. Pursuant to GAAP, we do not report annuity deposits as net premiums earned. Rather, we record annuity deposits as liabilities for future policyholder benefits. Revenues from annuities consist of policy surrender charges and investment income earned on policyholder deposits. During the third quarter of 2008, we recorded $52.7 million in annuity deposits compared to $59.2 million in the third quarter of 2007. During the first nine months of 2008, we recorded $115.2 million in annuity deposits compared to $125.7 million in the first nine months of 2007.

Over the past five years, we have allowed the level of our single premium deferred annuity business to grow more slowly, while we focused on increasing our writings of ordinary life insurance products. This shift in product mix is reflected in several income statement line items.

In the first nine months of 2008, our life insurance segment recorded pre-tax income of $4.0 million, compared to $14.5 million for the first nine months of 2007. The deterioration in our pre-tax income was primarily the result of the realized investment losses we incurred during the third quarter of 2008. Realized investment gains and losses decreased $5.9 million and $8.5 million for the three- and nine-month periods ended September 30, 2008 as compared to the same periods in 2007, primarily due to the write-down of Lehman Brothers fixed maturity securities in the third quarter of 2008.

Net premiums earned increased in both the third quarter of 2008 and year to date, due to the growth in sales of our traditional life insurance products, primarily single premium whole life insurance. Investment income decreased $1.6 million in the third quarter of 2008 and $3.7 million in the first nine months of 2008, as compared to the same periods in 2007. The decreases were primarily due to lower market interest rates and the contraction of our annuity business in 2008.

The liability for future policy benefits was $3.2 million greater in the third quarter 2008 and $7.4 million greater for the first nine months of 2008, as compared to the same periods in 2007, primarily due to an increase in sales of our traditional life insurance products.

In the third quarter of 2008, we experienced a net cash outflow of $32.7 million related to our annuity business, compared to a $17.7 million net cash outflow during the third quarter of 2007. In the first nine months of 2008, we experienced a net cash outflow of $58.1 million related to our annuity business, compared to a $73.2 million net cash outflow during the first nine months of 2007. The challenges we have faced in recent years in retaining existing and attracting new annuity business at an acceptable profit margin, is indicative of the competitive market in which we compete. This competitive market is the primary reason for the net cash outflows we have experienced in our annuity business.

. . .