United Fire Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. UFG writes property and casualty insurance through independent agencies and reports one operating segment. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net premiums earned | $254.6 | $231.3 | $510.8 | $465.5 |
| Net investment income | $11.3 | $9.2 | $24.0 | $20.5 |
| Net investment gains (losses) | $1.1 | ($20.9) | ($0.6) | ($21.4) |
| Losses and loss settlement expenses | $250.7 | $151.5 | $425.3 | $281.9 |
| Net income (loss) | ($56.4) | ($10.5) | ($55.7) | $17.9 |
| Net loss ratio | 98.4% | 65.5% | 83.3% | 60.6% |
| Combined ratio | 132.9% | 100.7% | 118.4% | 95.0% |
Premiums earned rose 10.1% for the quarter and 9.7% year to date. Q2 underwriting results deteriorated materially: the combined ratio above 100% indicates an underwriting loss. The six-month result also moved from profit to loss versus 2022. Net investment income increased, principally from higher fixed-income yields and cash income; investment gains/losses improved substantially against 2022, when equity-market declines weighed on results.
For the six months, operating cash flow was $37.9 million, compared with an outflow of $15.9 million in 2022. Investing activities used $46.5 million and financing activities used $8.3 million. Cash and cash equivalents were $79.7 million at June 30, down from $96.7 million at year-end 2022.
Financial position and capital
- Total assets were $3.018 billion; total liabilities were $2.342 billion at June 30, 2023.
- Investments totaled $1.836 billion, including $1.568 billion of available-for-sale fixed maturities. The fixed-maturity portfolio had $114.2 million of gross unrealized depreciation, which management attributed primarily to interest-rate movements; UFG said it did not intend, and was not likely to be required, to sell those securities before recovery or maturity.
- Stockholders’ equity was $676.4 million, down from $740.1 million at December 31, 2022. Book value per share was $26.77, down 8.8% from year-end, primarily due to the six-month net loss and $8.1 million of dividends.
- Long-term debt was $50 million, consisting of notes due 2040. The $50 million revolving credit facility had no borrowings outstanding. UFG reported noncompliance with the facility’s minimum-net-worth covenant at June 30; Wells Fargo agreed to an amended covenant and waiver reducing requirements through the facility’s March 31, 2024 maturity.
Material changes, outlook and risks
- Reserve strengthening: Prior-year net reserves were strengthened by $50.7 million in Q2 and $54.8 million in the first half. Management cited increased loss-cost trends related to economic and social inflation in long-tailed other-liability lines, as well as commercial auto trends; favorable development in workers’ compensation and fire and allied lines partly offset the increases.
- Claims and catastrophe experience: Severe weather catastrophe losses were $33.1 million in Q2 versus $28.0 million a year earlier, and $44.8 million for the first half versus $34.2 million. Q2 also included a small number of large surety losses and a $5.8 million one-time surety reinsurance reinstatement premium. Management noted higher ceded reinsurance costs and retentions.
- Pricing and expenses: Q2 average renewal premium increases were 8.5%, including 5.9% from rate and 2.6% from exposure changes; excluding workers’ compensation, the increase was 9.4%. The Q2 expense ratio improved to 34.5% from 35.2%, while the year-to-date ratio increased to 35.1% from 34.4%, reflecting talent and technology investment and the end of prior-year post-retirement plan expense reductions.
- Liquidity outlook: Management said cash flows were sufficient for the periods presented and expected liquidity to meet needs for at least the next 12 months; the undrawn credit facility is also available, subject to its terms. UFG provided no specific earnings or combined-ratio guidance in the filing.
- Other risks: Results remain exposed to reserve estimation uncertainty, severe weather and geographic concentration, inflation and litigation trends, reinsurance availability and cost, interest-rate and equity-market movements, and insurance ratings. Management said pending routine legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether subsequent claims experience supports the Q2 reserve strengthening, especially for other liability and commercial auto, and whether additional adverse development emerges.
- Whether pricing and underwriting actions improve loss and combined ratios after catastrophe losses, surety claims, and higher reinsurance costs.
- The status and terms of the minimum-net-worth covenant amendment and waiver, and the facility’s availability through its March 2024 maturity.
- How interest rates, equity markets, catastrophe activity, and reinsurance recoveries affect portfolio values, liquidity, and capital.
- Whether the reported 12-month liquidity expectation and planned shareholder dividends remain supportable as claims and operating cash flows develop.