United Fire Group Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; financial statements are unaudited. UFG writes property and casualty insurance through independent agencies in 48 states and the District of Columbia.
Financial results and key metrics
- Q3: Net premiums earned were $259.1 million, down 5.8% year over year. Total revenue was $282.1 million, down 5.3%. Net loss was $37.2 million, or $1.49 per diluted share, versus a $2.3 million loss, or $0.09 per diluted share, in Q3 2019.
- First nine months: Net premiums earned were $791.5 million, down 2.7%; total revenue was $757.7 million, down 16.5%. Net loss was $103.8 million, or $4.15 per diluted share, compared with net income of $38.0 million, or $1.48 per diluted share, in 2019.
- Underwriting: The combined ratio was 124.4% in Q3 versus 110.0% a year earlier, and 113.5% year to date versus 106.0%. Ratios above 100% indicate underwriting losses. The Q3 net loss ratio was 90.6%, including 21.4 percentage points from catastrophe losses; year-to-date it was 79.1%, including 15.3 points from catastrophes.
- Catastrophes and reserves: Catastrophe losses were $55.4 million in Q3 and $121.3 million year to date, versus $19.3 million and $44.9 million, respectively, in 2019. Prior-year reserves developed favorably by $6.3 million in Q3 and $30.0 million year to date.
- Investments: Net investment income was $7.2 million in Q3, down 45.5%, and $22.3 million year to date, down 49.2%. Net realized investment gains were $15.2 million in Q3, but year-to-date realized losses were $62.4 million, versus gains of $50.1 million in 2019. The year-to-date result mainly reflected equity-security value changes and losses on equity sales.
- Balance sheet and liquidity: At September 30, total assets were $3.05 billion, total liabilities $2.23 billion, stockholders’ equity $820.3 million, and cash and cash equivalents $99.6 million. Book value per share was $32.77, down from $36.40 at year-end 2019. Operating cash flow was negative $12.9 million for the first nine months, versus positive $56.2 million in 2019; cash declined by $21.1 million.
- Debt and capital: No amounts were drawn on the $50 million unsecured revolving credit facility; UFG reported compliance with its covenants. Statutory capital and surplus was $605.5 million, down from $707.6 million at year-end; the company said subsidiaries remained above required levels.
Material changes and unusual items
- Higher catastrophe losses—particularly from 25 Q3 catastrophe events, including the August Midwest derecho and Hurricane Laura—were the principal underwriting pressure. UFG also paid $9.0 million in reinsurance reinstatement premium after the derecho exceeded the stated retention.
- UFG recorded a $15.1 million goodwill impairment after a quantitative assessment that cited COVID-related market disruption, weather catastrophes and the stock trading significantly below book value.
- The CARES Act contributed a $17.8 million income tax benefit. The reported year-to-date federal income tax benefit was $52.2 million.
- A renewal-rights agreement for personal lines with Nationwide began offering policy transfers in Q3, subject to regulatory approvals. UFG recognized $6.3 million of other income from the agreement. Louisiana and Florida agents were excluded from Nationwide’s offer, and UFG was still evaluating its strategy there; the filing also notes Nationwide had identified categories of policies for which it would not offer replacement coverage directly.
- Share repurchases were suspended in mid-March; none occurred in Q3. UFG continued its $0.33-per-share quarterly dividend.
Outlook, risks and contingencies
- Management expected the effects of COVID-19 claims under existing coverage to be manageable based on information available, but said the pandemic’s overall effects on claims, premiums, collections, investments, liquidity and results remained uncertain. Management said current liquidity was sufficient and the credit facility was available if needed.
- Management identified the economy and financial markets, catastrophe frequency and severity, reserve adequacy, investment values, premium demand and collections as material uncertainties. Changes to or invalidation of business-interruption virus exclusions through legislation, regulation or court decisions could materially increase claims, losses and legal expenses.
- Other key risks include long-tail reserve estimation, geographic concentration, reinsurance recoverability, underwriting and pricing, and interest-rate and equity-market exposure. UFG said it did not use financial hedges or derivatives to manage market risk.
- UFG had a $10.3 million potential capital-contribution commitment to a limited-liability partnership. Management characterized pending legal proceedings as ordinary and routine and did not expect a material adverse effect.
- No specific financial guidance was provided. Management said interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether catastrophe claims, reinsurance recoveries and the $9.0 million reinstatement premium develop as expected, and how they affect future underwriting results.
- Whether the deterioration in combined ratios persists, especially in catastrophe-exposed lines and personal lines, as UFG executes its commercial-auto profitability actions and Nationwide transition.
- Whether investment income and equity-related realized results recover, and the effect of market movements on book value and statutory capital.
- Whether COVID-19 coverage disputes or changes to policy exclusions create additional claims or legal exposure, and whether premium collections remain sound.
- Whether favorable prior-year reserve development continues and whether long-tail reserves remain adequate; management cautioned that past development is not predictive.
- Whether liquidity, capital and dividend capacity remain sufficient given negative year-to-date operating cash flow, statutory capital decline, and restrictions on subsidiary dividends.