United Fire Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. UFG writes property and casualty insurance through independent agencies and reports one operating segment. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net premiums earned | $224.7 | $263.6 | $483.9 | $532.5 |
| Total revenues | $244.4 | $297.8 | $545.1 | $475.6 |
| Net income (loss) | $13.8 | $6.0 | $32.5 | $(66.6) |
| Diluted earnings (loss) per share | $0.54 | $0.24 | $1.28 | $(2.66) |
| GAAP combined ratio | 100.8% | 111.4% | 104.3% | 108.2% |
Q2 net premiums earned fell 14.8% year over year; first-half premiums fell 9.1%. Management attributed the decline to non-renewal of underperforming commercial auto accounts and the ongoing exit from personal lines. Q2 loss and loss-adjustment expenses were $152.1 million, down from $205.0 million. The Q2 net loss ratio was 67.7%, including catastrophe losses adding 9.6 percentage points; the expense ratio was 33.1%. For the first half, the net loss ratio was 74.1% and the expense ratio 30.2%.
First-half investment results included $30.5 million of realized investment gains, versus $77.6 million of realized losses in the first half of 2020. Net investment income was $30.9 million, compared with $15.1 million. Management said equity-market-related valuation changes in limited liability partnership investments contributed materially to investment income and realized results. Q2 realized gains were $6.0 million, down from $15.8 million in Q2 2020.
At June 30, 2021, total assets were $3.06 billion, total liabilities $2.22 billion, and stockholders’ equity $839.5 million, up from $825.1 million at year-end 2020. Book value per share was $33.42, up 1.5% from year-end. The investment portfolio totaled $2.11 billion, including $1.78 billion of available-for-sale fixed maturities and $196.9 million of equity securities. Cash and cash equivalents were $118.5 million, including $21.3 million deposited at Lloyd’s to meet Funds at Lloyd’s requirements.
Net cash provided by operating activities was $34.8 million for the first half, compared with $4.2 million in 2020; investing activities provided $4.7 million and financing activities used $9.0 million. Cash increased $30.6 million to $118.5 million. UFG had $50.0 million of long-term surplus notes due 2040, with $1.6 million of first-half interest expense. Its $50.0 million unsecured revolving credit facility was undrawn, and the company reported compliance with its covenants.
Material changes and management commentary
- First-half earnings recovered from the prior-year loss, driven chiefly by the swing in investment gains and lower losses and underwriting expenses. The comparison is affected by the unusually large 2020 investment losses and a $11.1 million CARES Act-related tax benefit recorded in first-half 2020.
- The Q2 combined ratio improved to 100.8% from 111.4%, mainly as catastrophe losses and commercial auto claim frequency and severity were lower than in the prior-year quarter. The first-half ratio improved to 104.3% from 108.2%, but remained above 100%, indicating underwriting losses before investment income.
- First-half prior-year reserve development was $15.0 million favorable, including favorable development in commercial auto and workers’ compensation, partly offset by $10.0 million of unfavorable commercial liability development. Management said reserves were within actuarial estimates; reserve outcomes remain estimates subject to change.
- UFG became a Lloyd’s member on January 1, 2021, supporting underwriting through five syndicates. The company continued transferring or non-renewing personal-lines business under its renewal-rights arrangement with Nationwide.
- Management stated that current COVID-19 claim effects were expected to be manageable, but could not predict the pandemic’s ultimate effect on claims, premiums, collections, investments, liquidity, or demand. It highlighted potential material exposure if business-interruption exclusions were changed by legislation, regulation, or court decisions.
Outlook, risks, and other notable items
The filing provides no numerical earnings or premium guidance. Management said cash flows should be sufficient for liquidity needs for at least the next 12 months, with the credit facility available if needed. Principal risks include catastrophe frequency and severity, reserve adequacy, geographic concentration, underwriting and pricing, investment-market and interest-rate movements, reinsurer strength, litigation and regulatory changes, competition, cyber incidents, and COVID-19 developments.
Catastrophe losses were $21.6 million in Q2 2021 versus $50.6 million in Q2 2020, and $50.9 million for the first half versus $65.9 million. First-half net unrealized investment appreciation on fixed maturities declined $16.1 million after tax. The company resumed share repurchases in Q1 2021; it repurchased 31,027 shares in May at an average $32.23 per share. Quarterly dividends continued at $0.15 per share. A change to the post-retirement benefit plan produced a first-half special-event credit of $20.2 million; UFG also reduced its expected 2021 pension contribution from $10.0 million to $5.0 million and completed that contribution in the first half. Routine pending legal proceedings were not expected by management to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether premium contraction from commercial auto actions and the personal-lines exit stabilizes, and how that affects underwriting scale and profitability.
- Whether catastrophe losses, commercial auto severity, and workers’ compensation and commercial liability reserve development remain consistent with reported experience and estimates.
- How much first-half earnings depend on volatile equity and limited-partnership valuations, and whether investment results are sustainable.
- The composition and liquidity of cash and investments, including the $21.3 million held for Lloyd’s, and the effect of interest-rate or market-price changes on equity and book value.
- The terms and regulatory approval requirements for interest payments on the $50.0 million surplus notes, and the availability of dividends from insurance subsidiaries to the holding company.