United Fire Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless noted. UFG writes property and casualty insurance through independent agents and reports one business segment. Financial figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net premiums earned | $238.9 | $259.1 | $722.8 | $791.5 |
| Total revenue | $248.5 | $282.1 | $793.7 | $757.7 |
| Net investment income | $11.6 | $7.2 | $42.4 | $22.3 |
| Net realized investment gains (losses) | $(2.3) | $15.2 | $28.2 | $(62.4) |
| Net income (loss) | $(9.6) | $(37.2) | $22.9 | $(103.8) |
| Diluted EPS | $(0.38) | $(1.49) | $0.90 | $(4.15) |
| GAAP combined ratio | 109.7% | 124.4% | 106.1% | 113.5% |
Despite improvement, combined ratios remained above 100%, indicating underwriting losses before investment results. Q3’s net loss narrowed as lower claims and higher investment income more than offset lower premiums and a shift from realized investment gains to losses. Nine-month results turned profitable mainly because of higher realized equity investment gains, lower losses and expenses, and higher investment income. The 2020 comparison included a $15.1 million goodwill impairment in Q3.
Premiums earned fell 7.8% in Q3 and 8.7% year to date. Management attributed the decline to non-renewal of underperforming commercial auto accounts and the ongoing exit from personal lines. Net investment income benefited from limited partnership valuations; those values fluctuate with equity-market conditions. YTD realized gains principally reflect equity-security fair-value changes.
Underwriting, claims, and material changes
- Q3 and YTD net loss ratios were 73.4% and 73.9%, respectively; catastrophe losses added 16.5 and 12.5 percentage points. UFG reported $39.5 million of Q3 catastrophe losses and $90.3 million year to date, compared with $55.4 million and $121.3 million in 2020.
- Q3’s significant catastrophe events included Hurricane Ida and European floods affecting assumed reinsurance; 2020 comparatives included the Midwest derecho and Hurricane Laura. Q3 catastrophe impact remained above UFG’s 10-year Q3 average of 9.2 combined-ratio points.
- Prior-year reserves developed favorably by $11.1 million in Q3 and $26.0 million year to date. Commercial auto, workers’ compensation, and fire lines contributed favorably; commercial liability was unfavorable by $7.1 million in Q3 and $17.1 million year to date. Management stated total reserves were within actuarial estimates.
- Commercial auto loss ratios improved year over year, which management associated with rate increases and non-renewals that reduced exposure and claims frequency and severity. Workers’ compensation and fidelity and surety loss ratios deteriorated due to large claims; assumed reinsurance deteriorated due to higher catastrophe losses.
- The Q3 expense ratio rose to 36.3% from 33.8%, partly due to higher agent, employee, and program profit-sharing as results improved. The YTD ratio declined to 32.2% from 34.4%, aided by employee post-retirement plan changes and lower accelerated DAC amortization.
Financial position, cash flow, and capital
- At September 30, 2021, total assets were $3,010.7 million, total liabilities $2,196.1 million, and stockholders’ equity $814.5 million, versus $3,069.7 million, $2,244.5 million, and $825.1 million at December 31, 2020. Book value per share was $32.48, down $0.45, or 1.4%.
- Cash and cash equivalents were $132.8 million, up from $87.9 million at year-end. Nine-month operating cash flow was $18.2 million, versus an outflow of $12.9 million in 2020; investing activities provided $40.4 million and financing activities used $13.7 million. Cash increased $44.8 million.
- Long-term debt was $50 million, consisting of surplus notes due 2040 with a rating-linked interest rate; 2021 nine-month interest expense was $2.4 million. The $50 million unsecured revolving credit facility had no outstanding balance, and UFG reported covenant compliance.
- Invested assets totaled $2.06 billion: 84.0% fixed maturities and 9.8% equities. Fixed-maturity unrealized depreciation increased as interest rates moved, reducing after-tax unrealized gains by $25.9 million year to date. Management said it did not intend, and was not likely to be required, to sell the affected securities before recovery or maturity.
- Shareholder dividends were $11.3 million year to date; the quarterly dividend was $0.15 per share. UFG repurchased 36,417 shares in Q3. Insurance-subsidiary dividends are subject to regulatory limits; UFG said its subsidiary could pay up to $53.2 million without prior approval at quarter-end.
Outlook, risks, and unusual items
The filing provides no specific earnings or premium guidance. Management expected available cash flows to meet liquidity needs for at least the next 12 months and said the credit facility could be drawn if needed. It characterized COVID-19 claims as manageable based on available information, but noted uncertainty around the pandemic’s evolving effects, premium demand and collection, investment values, and possible premium returns. Changes to or court invalidation of business-interruption exclusions could materially increase claims, losses, and legal expenses.
Key risks include catastrophe frequency and severity, reserve-estimation uncertainty—particularly for long-tail liability claims—underwriting and pricing execution, geographic concentration, reinsurer strength and recoveries, interest-rate and equity-market movements, and potential cyber, legal, regulatory, and rating events. Approximately 50.8% of YTD property and casualty premiums were written in Texas, California, Iowa, Missouri, and New Jersey. UFG reported no direct subprime-mortgage exposure and no material adverse effect expected from ordinary, routine pending legal proceedings.
Other notable developments: UFG joined Lloyd’s in January 2021 and held $21.3 million of cash as Funds at Lloyd’s. It changed its post-retirement benefit plan to participant-funded beginning in 2023; a one-time plan-closure adjustment contributed to reported benefit costs. The pension contribution plan for 2021 was reduced from $10 million to $5 million, and the $5 million contribution was completed. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commercial auto pricing and non-renewals can improve underwriting without further weakening premium volume, and whether the combined ratio can move below 100%.
- How catastrophe losses, especially Ida and assumed-reinsurance events, and commercial-liability adverse development affect subsequent results and reserve adequacy.
- Whether investment income and realized gains are repeatable, given their sensitivity to equity markets and limited partnership valuations; also monitor fixed-income interest-rate effects on equity and book value.
- Whether COVID-19 coverage disputes, claims trends, or premium collection and demand create material effects beyond management’s current expectations.
- Liquidity and capital availability after required reinsurance, claims, Lloyd’s funding, debt interest, dividends, and any future share repurchases.