United Fire Group, Inc. — Q3 2023 Form 10-Q
Business context and period. UFG is a property-and-casualty insurer operating through independent agencies and reports one business segment. This unaudited report covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless stated otherwise. Amounts below are in millions of dollars unless noted.
Financial results and key metrics
| Metric | Three months | Nine months |
|---|---|---|
| Net premiums earned | $259.5 (+8.9%) | $770.2 (+9.4%) |
| Total revenue | $274.0 (+16.3%) | $808.1 (+15.4%) |
| Net investment income | $16.5 (+41.8%) | $40.5 (+26.3%) |
| Net investment gains (losses) | $(2.0), versus $(14.3) | $(2.6), versus $(35.6) |
| Net income (loss) | $6.4, versus $(23.0) | $(49.3), versus $(5.1) |
| GAAP combined ratio | 102.1%, versus 111.7% | 113.0%, versus 100.6% |
- Third-quarter improvement reflected lower catastrophe losses and less unfavorable prior-year reserve development. The quarter remained above a 100% combined ratio, indicating an underwriting loss before investment results.
- Nine-month underwriting deterioration reflected higher underlying losses and unfavorable reserve development, partly offset by lower catastrophe losses. The net loss ratio was 77.7%, including a 62.9% underlying loss ratio, 7.0 points of unfavorable reserve development, and a 7.8-point catastrophe effect.
- Nine-month losses and loss settlement expenses rose 28.8% to $598.1 million. Prior-year reserve strengthening was $59.2 million, primarily in long-tail other liability and commercial auto, partly offset by favorable development in workers’ compensation and fire and allied lines.
- Operating cash flow was $149.5 million, compared with an outflow of $29.8 million in 2022. Investing and financing cash flows were $(164.7) million and $(12.3) million, respectively; cash and cash equivalents fell to $69.2 million from $96.7 million at year-end 2022.
- At September 30, total assets were $3.05 billion, total liabilities $2.41 billion, and stockholders’ equity $644.9 million, down from $740.1 million at December 31, 2022. Book value per share was $25.53, down 13.0% from year-end.
- Long-term debt was $50.0 million, due 2040. The $50.0 million revolving facility was undrawn. Cash flow and liquidity are discussed further below.
Changes, outlook, and material matters
- Management reported average Q3 renewal premium increases of 11.0%, including 8.4% from rate and 2.6% from exposure changes; excluding workers’ compensation, the increase was 12.4%. Premium growth included assumed reinsurance, other liability, and fire and allied lines.
- Net investment income increased with higher fixed-income yields and interest on cash. Fixed-income securities were 89.6% of the investment portfolio. The portfolio had $156.2 million of gross unrealized depreciation at quarter-end, primarily attributed to interest-rate movements; management said it did not intend, and was not more likely than not required, to sell the securities before recovery or maturity.
- On August 18, 2023, AM Best downgraded the insurance subsidiaries’ Financial Strength Rating to A- from A and UFG’s long-term issuer rating to “bbb-” from “bbb”; the outlook was revised to stable from negative. Management reported no material business or financial impact to date, but warned that further downgrades could affect business, borrowing costs, liquidity, and policy retention. The downgrade increases the debt rate to 6.875% beginning with the December 15, 2023 payment.
- UFG had failed the revolving-credit facility’s minimum-net-worth covenant at June 30. An August 7 amendment and waiver revised the covenant; UFG reported compliance with all facility covenants at September 30. Facility maturity is March 31, 2024.
- Management said operating cash flows were sufficient for liquidity needs and expects them to remain sufficient for at least the next 12 months; it also cited access to the credit facility. No quantified earnings or underwriting guidance is provided.
- Remaining potential capital contributions to limited-liability partnership investments were $32.2 million through July 2030. Dividends paid during the first nine months were $12.1 million; future dividends remain subject to board declaration and regulatory limits.
- Management highlighted economic and social inflation, long-tail claim severity, catastrophe exposure, large surety losses, reinsurance costs and availability, investment-market risk, and geographic concentration. Approximately 47.6% of nine-month premiums were written in Texas, California, Iowa, Missouri, and Louisiana. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether long-tail other liability and commercial auto reserves prove adequate as claims develop, and whether economic and social inflation continues to drive adverse development.
- Whether underlying loss trends, large surety claims, assumed reinsurance results, and reinsurance pricing or recoveries improve or worsen.
- Whether the A- rating is maintained and whether rating-related business, funding, or borrowing-cost effects emerge; also monitor compliance with the amended credit-facility covenant and its 2024 maturity.
- Whether operating cash generation, catastrophe exposure, and investment liquidity remain adequate, particularly given unrealized fixed-income losses and the $32.2 million potential investment commitment.