United Fire Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. UFG writes property and casualty insurance through independent agencies and reports one business segment. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net premiums earned | $234.2 million | $259.2 million |
| Total revenue | $245.0 million | $300.7 million |
| Net investment income | $11.3 million | $17.1 million |
| Net investment gains (losses) | $(0.5) million | $24.5 million |
| Income before income taxes | $34.7 million | $22.7 million |
| Net income | $28.3 million | $18.7 million |
| Diluted EPS | $1.12 | $0.74 |
| Operating cash flow | $1.6 million | $19.5 million |
- Net premiums earned fell 9.6%; management attributed the decline mainly to non-renewing underperforming commercial auto accounts and exiting personal lines.
- Losses and loss settlement expenses were $130.4 million, down 36.8%. The net loss ratio improved to 55.7% from 79.6%; catastrophe losses contributed 2.6 percentage points to the ratio, versus 11.3 points in Q1 2021.
- The GAAP combined ratio improved to 89.5% from 107.2%; below 100% generally indicates underwriting profitability. The expense ratio increased to 33.8% from 27.6%, partly because Q1 2021 included a one-time benefit from a post-retirement health plan change.
- Prior-year reserves developed favorably by $6.7 million, primarily from commercial auto, partly offset by unfavorable development in commercial other liability, commercial fire and allied, and assumed reinsurance. Management said reserves were within actuarial estimates at quarter-end.
Financial position, liquidity and capital
- Total assets were $2.93 billion and stockholders’ equity was $835.6 million at March 31, 2022. Equity declined from $879.1 million at year-end; book value per share was $33.27, down 5.1%. The decline chiefly reflected a $65.8 million after-tax reduction in unrealized fixed-maturity investment value and $3.8 million of dividends, partly offset by net income.
- Cash and cash equivalents were $109.5 million, down from $132.1 million at year-end. Cash decreased by $22.6 million during the quarter. Operating cash flow was $1.6 million; investing and financing activities used $20.1 million and $4.1 million, respectively.
- Long-term debt was $50.0 million, consisting of surplus notes due 2040. The company also had an unsecured $50.0 million revolving facility, with no balance outstanding and compliance with its covenants. Interest payments on the surplus notes require Iowa Insurance Division approval.
- Invested assets totaled $2.0 billion. Available-for-sale fixed maturities were $1.65 billion; their fair value was below amortized cost by $20.3 million. Management attributed unrealized losses primarily to interest-rate movements, said it did not intend to sell and did not expect to be required to sell the securities before recovery or maturity, and reported no credit-loss allowance on that portfolio.
- UFG paid $3.8 million in dividends, or $0.15 per share. Management stated that liquidity was sufficient for operations and expected cash flows to meet needs for at least the next 12 months; the revolver was available if needed.
Changes, outlook and risks
- Higher net income reflected substantially lower claims costs, including lower catastrophe losses and lower claim frequency and severity. That improvement was partly offset by lower earned premiums and investment income, a swing from investment gains to losses, and higher underwriting expenses.
- Investment income fell mainly because limited partnership investments produced a $0.2 million loss versus $6.6 million of income a year earlier. Net investment results also reflected equity-market fair-value changes; Q1 2021 included substantial equity-security gains.
- No specific earnings or premium guidance is provided in the supplied filing text. Management described its underwriting actions as focused on improving profitability, including commercial auto account non-renewals and rate increases.
- Key risks include catastrophe and weather losses, reserve-estimation uncertainty and inflation, interest-rate and equity-price exposure, investment valuation changes, geographic concentration, reinsurance recoveries, and evolving COVID-19 impacts. UFG warned that legal or regulatory changes affecting business-interruption exclusions could materially increase claims and expenses. It does not use derivatives to hedge investment risks.
- The company disclosed a $21.5 million potential capital-contribution commitment to a limited liability partnership through July 2030. It also reported $21.3 million of cash held at Lloyd’s to satisfy Funds at Lloyd’s requirements.
- Management characterized pending legal proceedings as ordinary and routine and did not expect them to have a material adverse effect. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether underwriting gains persist as catastrophe experience normalizes and commercial auto remediation continues.
- Reserve adequacy, particularly for long-tail liability claims, and whether favorable prior-year development continues or reverses.
- Investment portfolio sensitivity to interest rates and equity markets, including the effect of unrealized losses on book value and capital.
- Liquidity and cash-flow trends, including the timing of claims payments, reinsurance recoveries, and partnership capital calls.
- Regulatory constraints on insurance-subsidiary dividends and approval requirements for surplus-note interest payments.