United Fire Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; financial statements are unaudited and prepared under U.S. GAAP. UFG writes property and casualty insurance through independent agencies and operates as one reportable segment.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 or prior year-end |
|---|---|---|
| Net premiums earned | $268.8 million | $262.3 million; up 2.5% |
| Net investment income | $2.4 million | $16.5 million |
| Net realized investment gains (losses) | $(93.4) million | $26.7 million |
| Total revenues | $177.8 million | $305.5 million |
| Net income (loss) | $(72.5) million; $(2.90) per diluted share | $44.5 million; $1.74 per diluted share |
| Combined ratio | 105.2% | 95.6% |
| Cash from (used in) operating activities | $(2.5) million | $10.7 million |
| Cash and cash equivalents | $120.7 million | $120.7 million at December 31, 2019 |
| Total assets | $2.95 billion | $3.01 billion at December 31, 2019 |
| Stockholders’ equity | $833.1 million; book value $33.30 per share | $910.5 million; $36.40 per share at December 31, 2019 |
The underwriting loss ratio was 69.4% (62.6% in Q1 2019); catastrophe losses added 5.7 percentage points to the ratio versus 1.4 points a year earlier. The expense ratio rose to 35.8% from 33.0%. The combined ratio above 100% indicates an underwriting loss for the quarter. UFG reported $13.7 million of favorable prior-year reserve development.
At March 31, 2020, liabilities included $1.44 billion of loss and loss-adjustment expense reserves and $521.0 million of unearned premiums. The company reported no outstanding borrowings and had a new $50 million unsecured revolving credit facility, including a $20 million letter-of-credit subfacility. The facility may be increased by up to $100 million with lender approval. Cash used in financing was $11.7 million, including $8.2 million of dividends and $2.7 million of share repurchases.
Changes versus the prior comparable period
- Net loss replaced prior-year net income, primarily reflecting a $90.6 million fair-value loss on equity securities, lower investment income, and higher insurance losses and expenses.
- Net premiums earned increased 2.5%, primarily from rate increases, premium audits and endorsements.
- Loss and loss-adjustment expenses rose 13.6%. Management cited greater catastrophe and non-catastrophe loss severity, including a Houston manufacturing explosion and a Jefferson City hailstorm.
- Equity declined 8.5% from year-end, mainly due to the net loss, dividends and repurchases, partly offset by $4.5 million of after-tax unrealized gains on available-for-sale fixed maturities.
Outlook, commentary and risks
- Management issued no specific earnings or premium guidance. It said operating cash flows were sufficient for liquidity needs and expected to remain sufficient; it considered capital and liquidity adequate and had not needed to draw the credit facility.
- UFG said COVID-19 claims under existing coverages were expected to be manageable based on information then available, while emphasizing that the effects remained uncertain. Most policies were described as excluding virus-related business-interruption coverage. Legislative, regulatory or court changes to those exclusions could materially increase claims, losses and legal expenses.
- Management expected broader economic and market impacts to affect investment values, premium demand, premium collections and possible policyholder refunds. The equity-market decline materially reduced the value of equity and limited-liability partnership investments; management reported a $10.1 million decline in partnership investment value through investment income.
- First-quarter catastrophe losses were $15.3 million, compared with $3.6 million in Q1 2019 and a 10-year first-quarter average contribution of 2.9 percentage points to the combined ratio.
- Management reported reserves within its actuarial estimates, but noted that reserve estimates—especially for long-tail liability claims—are uncertain and may differ materially from ultimate payments. The filing also identifies geographic concentration, reinsurer, market, catastrophe, regulatory and litigation risks.
- The CARES Act contributed a $9.5 million income tax benefit. The company adopted the new expected-credit-loss accounting standard in 2020; it reported an immaterial adoption impact and recorded small allowances for fixed-maturity securities, mortgage loans and reinsurance receivables.
Important facts for investors to verify
- Whether equity-market and partnership investment losses, and investment income, recover or remain under pressure; assess the portfolio’s valuation and credit exposure.
- How catastrophe losses, claim severity and reserve development evolve, particularly in commercial liability, commercial fire and workers’ compensation.
- Whether COVID-19 changes claims, business-interruption coverage disputes, premium retention or collections, and policyholder refund requirements.
- Insurance-subsidiary statutory capital, financial-strength ratings, reinsurance recoverability and the availability of dividends to the holding company; GAAP equity alone does not establish regulatory capital adequacy.
- Progress against underwriting profitability: the combined ratio was 105.2%, with management citing higher loss severity and acquisition-cost amortization in underperforming lines.