United Fire Group Inc. — Q3 2022 Form 10-Q
Business and period: UFG writes property and casualty insurance through independent agencies and reports one business segment. This unaudited filing covers the three and nine months ended September 30, 2022; comparisons are with the same 2021 periods unless noted. Dollar amounts below are in millions, except per-share data and ratios.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net premiums earned | $238.3 | $238.9 | $703.7 | $722.8 |
| Net investment income | $11.6 | $11.6 | $32.1 | $42.4 |
| Net investment gains (losses) | $(14.3) | $(2.3) | $(35.6) | $28.2 |
| Net income (loss) | $(23.0) | $(9.6) | $(5.1) | $22.9 |
| Diluted EPS | $(0.91) | $(0.38) | $(0.20) | $0.90 |
| Net loss ratio | 76.6% | 73.4% | 66.0% | 73.9% |
| Underwriting expense ratio | 35.1% | 36.3% | 34.6% | 32.2% |
| Combined ratio | 111.7% | 109.7% | 100.6% | 106.1% |
Profitability and revenue: Q3 total revenue was $235.6 million versus $248.5 million; nine-month revenue was $700.1 million versus $793.7 million. Premiums earned declined 0.3% for the quarter and 2.6% year to date. Nine-month losses and loss settlement expenses fell 13.1% to $464.3 million, while acquisition-cost amortization rose 3.7% and other underwriting expenses rose 6.9%. Q3 underwriting was unprofitable, as the combined ratio exceeded 100%; the nine-month combined ratio was near breakeven. The nine-month figures include favorable prior-year reserve development.
Cash flow and liquidity: Operating cash flow was an outflow of $29.8 million for the first nine months, versus an inflow of $18.2 million in 2021. Investing activities used $38.3 million, compared with providing $40.4 million; financing activities used $11.0 million, primarily including $11.8 million of dividends. Cash and cash equivalents fell to $53.0 million from $132.1 million at year-end 2021. Management said cash flows and available resources should meet liquidity needs for at least the next 12 months and noted access to an undrawn $50 million revolving facility. The filing reports no outstanding revolver borrowings.
Balance sheet and capital: Total assets were $2.819 billion at September 30, 2022, down from $3.013 billion at December 31, 2021. Invested assets declined to $1.823 billion from $2.065 billion. Stockholders’ equity fell to $700.8 million from $879.1 million; book value per share was $27.82, down $7.23, or 20.6%. The decline chiefly reflected a $156.1 million after-tax reduction in unrealized value of available-for-sale fixed maturities, along with dividends and the net loss. Long-term debt remained $50.0 million, with notes due 2040; reported debt fair value was $35.3 million. Nine-month interest expense was $2.4 million.
Other key metrics: Net income included a $5.5 million federal tax benefit for the first nine months. Comprehensive loss was $169.9 million for that period, reflecting substantial investment-related other comprehensive losses. Fixed-income securities represented 84.8% of the investment portfolio; 81.5% were rated AAA, AA or A. Management said it had no intent, and did not expect to be required, to sell fixed maturities in unrealized loss positions before recovery or maturity.
Material changes and management commentary
- Net loss widened in Q3 and the company moved from nine-month net income in 2021 to a nine-month net loss in 2022. Management attributed the change mainly to weaker equity-security valuations; the nine-month comparison also reflected lower premiums earned and lower net investment income.
- Q3 losses and loss expenses rose 4.0%, driven by more frequent large losses and unfavorable reserve development, partly offset by lower catastrophe losses. Q3 prior-year reserve development was $14.1 million unfavorable, chiefly in other liability and commercial fire and allied, partly offset by favorable commercial auto and workers’ compensation development. For nine months, prior-year development was $1.2 million favorable, versus $26.0 million favorable in 2021.
- Q3 catastrophe losses were $27.2 million and added 11.4 percentage points to the combined ratio, including 5.7 points from Hurricane Ian. Nine-month catastrophe losses totaled $61.4 million, compared with $90.3 million in 2021.
- Renewal premiums increased on average 9.5% in Q3, comprising 5.7% rate increases and 3.8% exposure changes; excluding workers’ compensation, the increase was 10.7%. Management cited growth in assumed reinsurance, other liability and surety, while emphasizing profitable growth.
- Higher fixed-income yields partly offset weaker limited partnership investment results; net investment income was flat in Q3 but down 24.5% year to date. Equity-market losses drove most of the recognized investment losses. Fixed-maturity unrealized losses were attributed primarily to interest-rate movements.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management expects liquidity to be sufficient for at least the next 12 months, but cash flows are exposed to uncertain claim-payment timing, catastrophe losses and the timing or collectability of reinsurance recoveries.
- Key risks include underwriting and pricing adequacy, inflation and rising claim costs, reserve uncertainty—especially for long-tail liability claims—catastrophe and weather exposure, investment-market and interest-rate risk, and geographic concentration. About 47.7% of nine-month property and casualty premiums were written in Texas, California, Iowa, Missouri and New Jersey.
- Management reported that reserves were within actuarial estimates at September 30, but noted that ultimate claim costs can differ materially from estimates. Other liability reserve strengthening reflected large-claim frequency, exhausted primary limits and inflationary pressures.
- The company had a $43.0 million remaining potential capital-contribution commitment to an investment partnership through 2030. Management said it did not expect the Inflation Reduction Act provisions discussed in the filing to affect financial position or results, and did not expect to be subject to the corporate alternative minimum tax in 2023.
- Management described pending legal proceedings as ordinary and routine and did not expect them to have a material adverse effect. It also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track reserve development by line, particularly other liability and commercial fire and allied, and assess whether recent favorable commercial auto and workers’ compensation development persists.
- Review Hurricane Ian and other catastrophe claim estimates, reinsurance recoverables and any subsequent reserve adjustments.
- Monitor the investment portfolio’s realized and unrealized losses, the effect of interest rates on book value, and liquidity if securities must be sold before recovery or maturity.
- Assess premium growth and rate adequacy against inflation-driven claim severity, especially for excess and umbrella liability exposures.
- Confirm ongoing operating cash needs, dividend capacity and the status of the $43.0 million partnership commitment; insurance-subsidiary dividends are subject to regulatory limits.