United Fire Group, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with 2022. This is an annual report, not a standalone fourth-quarter results report. UFG is a property and casualty insurer operating in all 50 states and the District of Columbia, primarily through independent agencies. Its business is reported as one segment.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| Net premiums earned | $1,034.6 million | $951.5 million | Up 8.7% |
| Net premiums written | $1,066.9 million | $984.2 million | Up 8.4% |
| Total revenue | $1,095.5 million | $980.3 million | Up 11.7% |
| Net investment income | $59.6 million | $44.9 million | Up 32.7%; higher fixed-income yields were a main contributor |
| Net investment gains (losses) | $1.3 million | $(15.9) million | Improved year over year |
| Net income (loss) | $(29.7) million | $15.0 million | Loss of $1.18 per diluted share, versus diluted EPS of $0.59 |
| Net loss ratio | 74.4% | 67.0% | Higher losses and adverse prior-year development |
| Expense ratio | 34.9% | 34.5% | Increased 0.4 percentage points |
| Combined ratio | 109.3% | 101.5% | Above 100% indicates underwriting loss |
| Underlying loss ratio | 62.2% | 59.2% | Excludes catastrophe impacts and non-catastrophe prior-year reserve development |
Amounts in the table are rounded. UFG attributed the 2023 net loss mainly to higher losses and loss settlement expenses and higher deferred acquisition cost amortization, partly offset by premium growth, higher investment income, and investment gains. The 2023 net loss was also below 2021 net income of $80.6 million.
Cash, investments, debt, and capital
- Operating cash flow was $171.7 million in 2023, compared with cash used of $1.3 million in 2022. Cash and cash equivalents were $102.0 million at year-end, up from $96.7 million.
- Invested assets totaled $1.886 billion, including $1.687 billion of available-for-sale fixed maturities. The fixed-maturity portfolio had a 4.0-year weighted-average effective duration. After-tax net unrealized investment losses were $67.0 million, improved from $88.4 million in 2022.
- Total assets were $3.144 billion; total liabilities were $2.410 billion; stockholders’ equity was $733.7 million, down from $740.1 million. Book value per share was $29.04, versus $29.36.
- Reported long-term debt was $50.0 million, consisting of notes due 2040; 2023 interest expense was $3.3 million. UFG terminated its $50 million Wells Fargo revolving facility in December 2023 and had no outstanding advances. New Federal Home Loan Bank of Des Moines membership provides stated borrowing capacity of up to $392.2 million, subject to collateral and facility terms.
- Insurance subsidiaries had statutory capital above required levels. United Fire & Casualty Company could pay up to $58.6 million in dividends to the parent without prior regulatory approval at year-end, subject to applicable restrictions. UFG paid $16.2 million in shareholder dividends in 2023 and made no share repurchases.
Material changes versus 2022
- Net premiums earned increased 8.7%, with direct premiums written up 10.5% and assumed premiums written up 22.3%. Growth reflected core commercial business, expanded assumed programs, and Funds at Lloyd’s participation.
- Loss and loss settlement expenses increased 20.7% to $769.4 million. The net loss ratio rose 7.4 percentage points, and the combined ratio worsened to 109.3%.
- Prior accident-year reserves had $67.8 million of adverse development in 2023, compared with $12.9 million adverse in 2022 and $48.9 million favorable in 2021. The 2023 deterioration was driven mainly by commercial other liability and commercial automobile.
- Catastrophe losses fell to $64.2 million from $73.5 million and contributed 6.2 percentage points to the 2023 combined ratio, below UFG’s stated 10-year average of 7.2 points.
- Investment income rose, and net investment results shifted from a loss to a gain. Higher interest rates continued to weigh on fixed-maturity fair values, although the after-tax unrealized loss position improved.
- On August 18, 2023, A.M. Best downgraded the pooled insurers’ Financial Strength Rating from A to A- and their issuer rating from “a” to “a-”; UFG’s issuer rating fell from “bbb” to “bbb-.” The outlook was revised from negative to stable.
Outlook, risks, and unusual items
- The filing provides no quantified earnings, premium, or combined-ratio guidance. Management stated that cash flows were sufficient for 2023 liquidity needs and anticipated they would meet future needs.
- The 2024 property catastrophe excess-of-loss program was fully placed, providing $110 million of coverage in excess of a $20 million retention. A separate, fully placed earthquake and flood program provides $160 million in coverage above a $10 million retention. These protections remain subject to treaty terms, exclusions, limits, and reinsurer performance.
- Management identified pricing and underwriting execution, catastrophe frequency and severity, climate-related uncertainty, inflation and social inflation, long-tail reserve adequacy, investment market and interest-rate risk, reinsurance availability and cost, agency relationships, regulation, cyber threats, and the A.M. Best downgrade as material risks.
- Commercial other liability adverse reserve development was $52.9 million, with pressure particularly in excess casualty, umbrella, and construction defect. Commercial automobile had $9.0 million of adverse development. Management cited severity trends, including social and economic inflation and post-COVID accident-year experience.
- At year-end, gross loss and loss adjustment expense reserves were $1.639 billion. The filing illustrates that a 10% reserve inadequacy could reduce future pretax earnings by up to $163.9 million. The auditor identified valuation of loss and loss settlement expense reserves, including $584.9 million of IBNR reserves, as a critical audit matter.
- UFG expects to pay agents $23.9 million of profit-sharing commissions in 2024 based on 2023 business. The company entered an investment-management agreement with New England Asset Management effective February 1, 2024 and disclosed the planned departure of its Chief Investment and Strategy Officer by no later than May 24, 2024.
- Management reported no material adverse effect from the rating downgrade to date. Further downgrades could affect policy retention, new business, borrowing costs, and certain contractual obligations. The company reported no identified cyber threat or prior incident likely to have a material effect and considered pending legal proceedings ordinary and routine, with no expected material adverse effect.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The filing reported no material control changes or disagreements with accountants.
Important facts for investors to verify
- Whether commercial liability and automobile reserve strengthening persists, and how actual claims emergence compares with management’s estimates and the independent actuary’s range.
- Whether premium and rate growth can offset elevated losses, acquisition costs, and reinsurance costs and improve the combined ratio below 100%.
- Whether the A.M. Best A- rating and stable outlook are maintained; assess exposure to further downgrade and policyholder or agent rating requirements.
- The cost, exclusions, retentions, and recoverability of the 2024 reinsurance programs, particularly for catastrophe and delegated earthquake/flood business.
- How interest rates and investment markets affect portfolio income, unrealized losses, book value, and liquidity; also review the $28.6 million remaining potential capital commitment to limited liability partnerships.
- The terms and financial impact of the investment-management transition, and whether subsidiary dividend capacity remains adequate to support parent-company obligations and shareholder dividends.