United Fire Group, Inc. — 2019 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Figures below are in U.S. dollars; financial statement amounts are rounded to millions. UFG writes property and casualty insurance through independent agencies in 46 states and the District of Columbia. Its life insurance subsidiary was sold in March 2018 and is reported as discontinued operations.
Financial results and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net premiums earned | $274.9 million | $264.7 million | $813.7 million | $766.8 million |
| Total revenues | $298.1 million | $291.9 million | $907.8 million | $818.1 million |
| Net income (loss) | $(2.3) million | $11.1 million | $38.0 million | $57.0 million |
| Continuing-operations diluted EPS | $(0.09) | $0.43 | $1.48 | $1.23 |
| Combined ratio | 110.0% | 105.5% | 106.0% | 102.5% |
Q3 underwriting losses exceeded premiums earned, as reflected in the 110.0% combined ratio. The net loss ratio was 77.0% and the expense ratio was 33.0%. Year to date, net income from continuing operations increased 20.2% to $38.0 million; the prior-year total net income included a $27.3 million after-tax gain on the life business sale.
Net realized investment gains were $9.8 million in Q3 and $50.1 million year to date, versus $14.0 million and $7.4 million in the comparable 2018 periods. The year-to-date increase was primarily driven by gains from changes in equity-security fair values. Net investment income was essentially flat year to date at $43.9 million.
At September 30, 2019, total assets were $3.014 billion, liabilities $2.050 billion and stockholders’ equity $964.2 million, compared with $2.817 billion, $1.928 billion and $888.4 million, respectively, at December 31, 2018. Cash and cash equivalents were $129.7 million, up from $64.5 million; invested assets totaled $2.125 billion. Book value per share was $38.44, up from $35.40.
Nine-month operating cash flow was $56.2 million, down from $69.2 million in 2018. Investing activities provided $39.6 million, while financing activities used $30.5 million. UFG had no balance outstanding under its $50 million revolving credit facility and reported compliance with its covenants. The facility matures February 2, 2020.
Material changes and management commentary
- Premiums earned rose 3.9% in Q3 and 6.1% year to date, primarily due to rate increases, premium audits and endorsements.
- The combined ratio worsened by 4.5 percentage points in Q3 and 3.5 points year to date. Catastrophe losses added 7.0 points to the Q3 ratio and 5.5 points year to date, versus 4.6 and 4.0 points in 2018.
- Management attributed higher losses to catastrophe activity, greater loss severity and current-year reserve additions in commercial auto and liability. Year-to-date prior-year reserve development was $0.8 million favorable, compared with $47.7 million favorable in 2018; commercial liability had $27.4 million of unfavorable development, partly offset by $26.3 million favorable in workers’ compensation.
- Equity increased mainly through $38.0 million of net income and $60.9 million of after-tax unrealized investment gains, partly offset by $24.4 million of dividends. UFG repurchased 178,756 shares for $8.1 million during the first nine months.
Outlook, risks and unusual items
The filing provides no specific earnings, premium-growth or combined-ratio guidance. Management said operating cash flows were sufficient for liquidity needs and expected them to remain sufficient, while noting that future capital needs depend on business growth, pricing, reserves and catastrophe-related cash requirements.
Key disclosed risks include catastrophe frequency and severity, adequacy of loss reserves, commercial auto and liability loss trends, geographic concentration, investment-market and interest-rate changes, reinsurance recoveries and disputes, underwriting and pricing, and regulatory, litigation and cyber risks. UFG reported that pending legal proceedings were ordinary and routine and were not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Other notable items: the company recorded a $20.3 million lease obligation at adoption of new lease accounting in January 2019, without a significant effect on financial position or results; it had a $16.0 million remaining potential capital-call commitment through July 2028. Management reported no material subsequent events and no other-than-temporary investment impairment write-downs during the first nine months.
Important facts for investors to verify
- Whether commercial auto and liability severity, reserve additions and catastrophe losses continue to pressure underwriting results and combined ratios.
- How much future earnings depend on volatile investment gains, particularly equity-security fair-value changes, versus underwriting and recurring investment income.
- Whether reported reserve adequacy remains supported by subsequent claims development; management states reserves were within actuarial estimates at September 30, 2019.
- The February 2020 maturity and renewal status of the undrawn credit facility, and the effect of regulatory limits on dividends from insurance subsidiaries.
- Whether the $16.0 million investment commitment or other liquidity needs change materially.