United Fire Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. United Fire Group writes property and casualty insurance through independent agencies in 46 states and the District of Columbia. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net premiums earned | $263.6 | $276.5 | $532.5 | $538.8 |
| Net investment income | $12.7 | $14.1 | $15.1 | $30.6 |
| Net realized investment gains (losses) | $15.8 | $13.6 | $(77.6) | $40.3 |
| Net income (loss) | $6.0 | $(4.2) | $(66.6) | $40.3 |
| Diluted earnings (loss) per share | $0.24 | $(0.17) | $(2.66) | $1.57 |
| Combined ratio | 111.4% | 111.7% | 108.2% | 103.9% |
- Q2 pretax income was $4.2 million, versus a $4.6 million pretax loss a year earlier. Q2 net income included $5.7 million of pretax other income from the personal-lines renewal-rights agreement with Nationwide.
- For the first half, the $100.8 million pretax loss was driven chiefly by equity-market losses: the company recorded $60.8 million of losses from changes in equity-security fair values, compared with $37.1 million of gains in the prior-year period. A $34.2 million federal tax benefit, including $11.1 million related to the CARES Act, reduced the net loss.
- Q2 underwriting remained unprofitable: a combined ratio above 100% indicates underwriting losses. The Q2 ratio improved slightly year over year, while the first-half ratio worsened. Catastrophe losses contributed 19.2 percentage points to the Q2 net loss ratio, versus 8.0 points a year earlier; first-half catastrophe losses were $65.9 million, compared with $25.6 million.
Financial position, cash flow and capital
- At June 30, total assets were $3.03 billion, total liabilities $2.17 billion, and stockholders’ equity $860.7 million. Equity fell from $910.5 million at year-end 2019; book value per share was $34.38, down 5.5% from $36.40.
- Cash and cash equivalents were $146.3 million, up from $120.7 million at December 31, 2019. First-half operating cash flow was $4.2 million, down from $36.3 million; investing activities provided $41.1 million and financing activities used $19.8 million.
- Invested assets totaled $2.03 billion, down $123.4 million from year-end. Available-for-sale fixed maturities had a $32.0 million net-of-tax unrealized gain in the first half, recorded in other comprehensive income rather than earnings. Equity securities’ fair value declined $60.8 million year to date.
- The company had a $50 million unsecured revolving credit facility, including a $20 million letter-of-credit subfacility and a $5 million swing-line facility. No amount was drawn at June 30, and the company reported covenant compliance. No long-term debt balance is identified in the provided filing text.
- Dividends paid in the first half were $16.5 million, or $0.33 per share in each quarter. Share repurchases were suspended in mid-March; 70,467 shares totaling $2.7 million had been repurchased in the first half.
Changes, outlook and risks
- Net premiums earned declined 4.7% in Q2 and 1.2% for the first half, primarily as UFG non-renewed underperforming commercial-auto accounts to improve profitability. Management said COVID-19 had a less significant effect on premiums than these portfolio actions.
- Management attributed better Q2 loss performance in commercial auto and liability to lower claim frequency and portfolio actions, partly offset by elevated catastrophe losses. First-half losses also reflected increased non-catastrophe severity. Favorable prior-year reserve development was $10.0 million in Q2 and $23.8 million for the first half; management stated reserves were within actuarial estimates.
- UFG agreed to transfer personal-lines renewal rights to Nationwide beginning in Q3 2020, subject to regulatory approvals; Louisiana was excluded from the agent-contract offer, and UFG was evaluating its strategy there. Management said the agreement supports a focus on commercial lines, which represented 94% of the business mix.
- Management expected the effect of COVID-19 claims under existing coverage to be manageable based on information then available, but highlighted uncertainty around the pandemic’s effects on investments, demand, premium collection and possible premium returns. It warned that legislation, regulation or court action changing business-interruption exclusions could materially increase claims and legal expenses. Payment-leniency programs had not significantly affected cash flows or doubtful-account allowances by June 30.
- Other key risks include catastrophe frequency and severity, reserve-estimation uncertainty, geographic concentration, investment-market and interest-rate risk, underwriting and pricing execution, reinsurer strength, regulation and litigation. Approximately 49.5% of first-half property-and-casualty premiums were written in Texas, California, Iowa, Missouri and New Jersey.
- UFG reported no formal earnings guidance in the provided filing text. Management said operating cash flows and current capital and liquidity were sufficient for current needs and that it could access the credit facility if necessary. It performed a COVID-related goodwill and intangible-asset assessment and recorded no impairment.
Most important facts for investors to verify
- Whether commercial-auto remediation and improved Q2 core loss experience persist, and how catastrophe losses affect future combined ratios.
- Whether reserves remain adequate, especially for long-tail liability claims, despite favorable prior-year development.
- How equity-market movements, partnership valuations and lower investment income affect earnings, equity and book value.
- Regulatory approval and execution of the Nationwide renewal-rights transfer, including the unresolved Louisiana strategy.
- Potential COVID-19 coverage disputes or policyholder premium effects, and the company’s capacity to maintain cash flows and dividends under stress.