United Fire Group, Inc. — FY2021 Form 10-K
Business context and reporting period: Annual report for the year ended December 31, 2021, filed February 25, 2022. UFG writes property and casualty insurance through approximately 1,000 independent agencies and operates as one reportable segment. Its insurers are licensed in all 50 states and the District of Columbia. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $1,066.2 million | $1,068.6 million |
| Net premiums earned | $962.8 million | $1,055.1 million |
| Net premiums written | $941.3 million | $1,011.4 million |
| Net investment income | $55.8 million | $39.7 million |
| Net investment gains (losses) | $47.4 million | $(32.4) million |
| Net income (loss) | $80.6 million | $(112.7) million |
| Diluted EPS | $3.16 | $(4.50) |
| Net loss ratio / expense ratio / combined ratio | 67.7% / 32.6% / 100.3% | 82.4% / 33.5% / 115.9% |
| Cash from operating activities | $29.9 million | $41.4 million |
| Cash and cash equivalents at year-end | $132.1 million | $87.9 million |
| Total investments at year-end | $2,064.7 million | $2,149.2 million |
| Total assets / stockholders’ equity | $3,012.7 million / $879.1 million | $3,069.7 million / $825.1 million |
| Long-term debt | $50.0 million | $50.0 million |
The combined ratio remained slightly above 100%, indicating an underwriting loss overall before investment results. The filing reports favorable prior-year reserve development of $48.9 million in 2021. Gross loss and loss settlement expense reserves were $1,514.3 million; net reserves were $1,401.4 million.
Material changes versus the prior comparable period
- UFG returned to profitability from a $112.7 million net loss in 2020. The recovery reflected substantially lower incurred losses and underwriting expenses, higher net investment income, and $47.4 million in net investment gains, compared with investment losses in 2020.
- Net premiums earned fell 8.7%; net premiums written fell 6.9%. Direct premiums written declined 14.4%, largely reflecting non-renewal of underperforming commercial auto accounts and the ongoing exit from personal lines.
- Assumed premiums written rose to $130.4 million from $34.4 million, as UFG added programs and grew existing cedant relationships. Management said it planned to continue growing assumed reinsurance in 2022.
- Catastrophe losses declined to $98.6 million from $142.0 million, but remained above the 10-year average contribution to the combined ratio. Winter Storm Uri and development on a 2020 hailstorm exceeded the $20 million per-event reinsurance retention.
- Prior-period reserve development improved to $48.9 million favorable from $17.7 million favorable. Commercial auto and workers’ compensation contributed favorable development; commercial other liability had $20.7 million unfavorable development.
- Stockholders’ equity increased 6.5% to $879.1 million. Net unrealized investment gains after tax fell to $49.8 million from $83.1 million, largely due to higher interest rates and a smaller fixed-maturity portfolio.
Outlook, management commentary, risks and unusual items
- Outlook: The filing gives no quantified earnings, premium, or combined-ratio guidance. Management stated that it intended to continue growing assumed reinsurance. It described the investment environment as challenging, citing persistent inflation and uncertainty about interest rates and markets.
- Leadership: The CFO resigned in October 2021; two executives were serving as interim co-CFOs. CEO Randy Ramlo notified the board in February 2022 of his planned retirement, expected October 31, 2022. Searches for successors were underway.
- Underwriting and reserves: Results are exposed to catastrophe volatility, social inflation, rising repair and medical costs, long-tail liability claims, and uncertainty in reserve estimates. The auditor identified valuation of loss and loss settlement expense reserves, particularly IBNR, as a critical audit matter. Management’s carried reserves are estimates, and adverse development could materially affect earnings.
- Concentration and reinsurance: Texas, California, Iowa, Missouri and New Jersey accounted for about 50% of direct statutory premiums written. Reinsurance reduces exposure but does not eliminate UFG’s primary obligation to policyholders; recoveries also depend on reinsurer performance and coverage terms.
- Investments and liquidity: Fixed maturities were 83.3% of the investment portfolio; 39.8% of the portfolio was in tax-exempt municipal obligations. Rising rates can reduce fixed-maturity fair values and book value. Management said cash flows and available liquidity were sufficient for current and anticipated needs.
- Capital and debt: UFG had $50 million of surplus notes due 2040; interest payments require Iowa Insurance Division approval. Its $50 million revolving credit facility had no outstanding balance at year-end, and the company reported covenant compliance. Insurance subsidiaries’ dividends to the parent are subject to regulatory limits.
- COVID-19 and unusual items: Management expected COVID-related claims to be manageable based on information then available, but warned that changes to business-interruption exclusions could increase claims and legal costs. The 2020 comparison included a $15.1 million goodwill impairment and an $18.6 million tax benefit under the CARES Act; neither was a 2021 item.
- Other disclosures: Management considered pending litigation ordinary and routine and did not expect a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether premium reductions and portfolio reshaping improve underwriting profitability, and whether the combined ratio moves below 100% excluding catastrophe effects.
- Whether favorable reserve development continues, particularly given unfavorable commercial other liability development and the size of long-tail reserves.
- How assumed reinsurance growth performs as premiums expand, including catastrophe exposure, pricing adequacy and reserve development.
- The impact of catastrophe losses, inflation, interest-rate changes and municipal-bond exposure on earnings, book value and liquidity.
- Progress on CFO and CEO succession, and any effect of leadership transitions on execution and agent relationships.
- Future dividend capacity and capital flexibility, including regulatory limits on subsidiary distributions and the terms and approval requirements of the surplus notes.