United Fire Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted. UFG writes property and casualty insurance through independent agencies and reports one business segment.
Financial performance and position
- Q2: Net premiums earned rose 2.9% to $231.3 million. Total revenue fell 10.2% to $219.5 million, and UFG reported a net loss of $10.5 million, or $0.42 diluted loss per share, versus net income of $13.8 million, or $0.54 diluted EPS, a year earlier. Results reflected $20.9 million of net investment losses, mainly from equity-security fair-value declines, and lower investment income.
- First half: Net premiums earned declined 3.8% to $465.5 million; total revenue decreased 14.8% to $464.6 million. Net income was $17.9 million, or $0.70 diluted EPS, down from $32.5 million, or $1.28, in 2021. Net investment losses were $21.4 million versus gains of $30.5 million a year earlier.
- Underwriting: The GAAP combined ratio was 100.7% in Q2 versus 100.8% in Q2 2021; for the first half it improved to 95.0% from 104.3%. The first-half net loss ratio fell to 60.6% from 74.1%, while the expense ratio rose to 34.4% from 30.2%.
- Cash flow and liquidity: Operating cash flow was negative $15.9 million for the first half, compared with positive $34.8 million in 2021; cash and cash equivalents declined $40.2 million to $91.9 million. Management said cash flows should meet liquidity needs for at least 12 months and noted access to an undrawn $50 million revolving credit facility.
- Capital and debt: Total assets were $2.89 billion and stockholders’ equity was $780.9 million, versus $3.01 billion and $879.1 million at year-end 2021. Book value per share was $31.00, down 11.6%, mainly due to lower unrealized fixed-maturity values and dividends. Long-term debt remained $50 million; the notes are due in 2040. No revolver borrowings were outstanding.
- Investments: Total investments were $1.89 billion, down from $2.06 billion at year-end. Available-for-sale fixed maturities had $75.1 million of gross unrealized depreciation at June 30; management attributed losses to interest-rate movements and said it did not expect to need to sell the securities before recovery or maturity.
Material changes and management commentary
- Management cited lower catastrophe losses and reduced claim frequency and severity as key drivers of the first-half improvement in the loss and combined ratios. First-half catastrophe losses were $34.2 million versus $50.9 million in 2021, which included Winter Storm Uri.
- Q2 catastrophe losses added 12.1 percentage points to the combined ratio, above the company’s 10-year Q2 average; 18 smaller events drove the elevated amount.
- Prior-year reserves developed favorably by $15.4 million in the first half, mainly in commercial automobile and commercial other liability, partly offset by adverse development in other lines, including commercial fire and allied. Management said reserves were within actuarial estimates.
- Premiums earned increased in Q2 after two years of actions focused on profitability, including non-renewal of underperforming commercial auto accounts and exiting personal lines. Management said it began seeing positive growth signs in Q2; no quantified earnings or premium guidance was provided.
- Investment income declined, partly because limited partnership investments produced losses of $4.1 million for the first half versus income of $9.5 million in the prior-year period. Equity-market changes also drove the reported investment losses.
Risks, contingencies, and unusual items
- Key exposures include catastrophe and weather losses, inflation and rising claim costs, reserve-estimation uncertainty, litigation and changing legal interpretations, investment-market and interest-rate volatility, and geographic concentration. About 44.7% of first-half property and casualty premiums came from Texas, California, Iowa, Missouri, and New Jersey.
- The company had a $19.8 million potential capital-contribution commitment to a limited partnership through 2030. It also reported $21.3 million of cash held at Lloyd’s to support underwriting requirements.
- Management described pending legal proceedings as ordinary and routine and did not expect a material adverse effect. COVID-19 impacts remained uncertain; management said current claims appeared manageable but noted that changes to policy exclusions by law or courts could increase claims and expenses.
- UFG disclosed a $50 million surplus-note obligation whose interest payments require Iowa Insurance Division approval. It was in compliance with revolving-credit covenants at June 30.
- The filing’s exhibits reference a July 2022 retirement agreement and an executive employment offer letter; the filing text provided here does not clearly describe their operational details.
Important facts for investors to verify
- Whether underwriting performance remains profitable as catastrophe activity, claim inflation, and the expense ratio evolve.
- How equity-market and interest-rate movements affect investment income, realized results, accumulated other comprehensive income, and book value.
- Whether favorable prior-year reserve development persists and how commercial fire, liability, and auto claims develop.
- Whether operating cash flow recovers, given the first-half outflow and increased assumed-reinsurance activity.
- The details and implications of the referenced leadership agreements and any subsequent company disclosures.