United Fire Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; selected fourth-quarter results are noted below. Amounts are in U.S. dollars.
Business context
United Fire writes property and casualty insurance through independent agencies in 46 states and the District of Columbia. Its continuing operations are a single property and casualty segment, including commercial and personal lines and assumed reinsurance. The life insurance subsidiary was sold in March 2018 and is reported as discontinued operations.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Net premiums earned | $1,087.0 million | $1,037.5 million |
| Total revenues | $1,201.2 million | $1,070.2 million |
| Net income from continuing operations | $14.8 million | $2.3 million |
| Consolidated net income | $14.8 million | $27.7 million |
| Diluted EPS | $0.58 | $1.08 |
| Combined ratio | 109.0% | 104.0% |
| Operating cash flow | $93.8 million | $110.1 million |
| Cash and investments | $2,275.8 million | $2,138.6 million |
| Total assets | $3,013.5 million | $2,816.7 million |
| Stockholders’ equity | $910.5 million | $888.4 million |
Net premiums written rose 3.3% to $1,096.7 million. Net investment income increased 14.2% to $60.4 million, and net realized investment gains were $53.8 million, including a $51.2 million increase in the fair value of equity securities. The investment portfolio was $2,155.1 million; cash and cash equivalents were $120.7 million.
Loss and loss settlement expense reserves were $1,421.8 million gross and $1,353.2 million net of reinsurance. The company reported $5.3 million favorable prior-year reserve development, substantially less than the $54.2 million favorable development in 2018. The statutory property and casualty business reported a $22.4 million net loss and statutory surplus of $707.6 million, down from $774.3 million; management said statutory capital remained above required levels.
No balance was outstanding on the $50 million unsecured revolving credit facility at year-end. The facility was scheduled to mature February 2, 2020. The filing does not clearly establish whether it was renewed or replaced after that date.
Changes versus prior period and fourth-quarter results
- Continuing-operations net income improved from $2.3 million in 2018 to $14.8 million in 2019, helped by equity-market gains, premium growth and lower underwriting expenses. Consolidated net income fell from $27.7 million because 2018 included a $27.3 million after-tax gain on the life-business sale.
- The combined ratio worsened to 109.0% from 104.0%; a ratio above 100% generally indicates underwriting losses. The net loss ratio increased to 76.4% from 70.5%, while the expense ratio improved to 32.6% from 33.5%.
- Catastrophe losses increased to $64.4 million from $46.7 million in 2018, adding 5.9 percentage points to the 2019 combined ratio.
- For fourth-quarter 2019, the filing reports a $23.2 million net loss, versus a $29.3 million net loss in fourth-quarter 2018. Fourth-quarter 2019 pre-tax loss was $28.7 million. The annual discussion attributes pressure on results to commercial auto and auto-liability severity, Gulf Coast reserve strengthening and higher catastrophe losses; it does not provide a clear quarter-specific breakdown of the fourth-quarter loss.
Outlook, commentary and risks
- Management planned to reduce commercial auto exposure in 2020, cutting units in poorly performing segments and pursuing classes less concentrated in auto, in response to industry-wide loss severity.
- Management described the economic outlook entering 2020 as positive, with expectations of slow, steady growth, while acknowledging downside risks. The filing provides no quantified earnings or premium guidance.
- Material risks include reserve-estimation uncertainty, catastrophe exposure and geographic concentration, worsening auto claim severity, construction-defect and long-tail liability claims, reinsurance availability and collectability, investment-market and interest-rate volatility, and cyber threats. Texas, California, Iowa, Missouri and Colorado represented 49% of 2019 direct statutory premiums.
- Construction-defect reserves, excluding overall other-liability IBNR, rose to $60.4 million from $44.5 million, with claims increasing to 3,439 from 2,706. Management also disclosed that a 10% reserve inadequacy could reduce future pre-tax earnings by up to $142.2 million.
- The company had an A.M. Best “A” financial-strength rating for its pooled insurers and stated all insurers exceeded risk-based capital requirements. The auditor issued unqualified opinions on the financial statements and internal controls; reserve valuation was identified as a critical audit matter.
- Legal proceedings were described as ordinary and routine, with no material adverse effect expected. The company committed up to $14.1 million in additional capital contributions to limited partnerships through July 2028.
Most important facts for investors to verify
- Whether the $50 million revolving credit facility, due February 2, 2020, was renewed, replaced or otherwise addressed.
- Whether commercial auto pricing, underwriting and exposure reductions are improving loss trends, and how reserve development evolves in commercial liability and auto.
- Whether the $64.4 million catastrophe burden and higher construction-defect reserves remain within management’s estimates and reinsurance protection.
- How much of earnings reflects recurring underwriting and investment income versus equity-security fair-value gains; 2019’s $53.8 million realized gains included $51.2 million from equity valuation changes.
- The sustainability of capital, dividends and share repurchases given the statutory underwriting loss and the holding company’s reliance on regulated subsidiary dividends.