United Fire Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. UFG writes property and casualty insurance through independent agencies and reports one operating segment. Financial amounts below are in millions unless otherwise stated.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net premiums earned | $259.2 | $268.8; down 3.6% |
| Net investment income | $17.1 | $2.4 |
| Net realized investment gains (losses) | $24.5 | $(93.4) |
| Total revenue | $300.7 | $177.8 |
| Net income (loss) | $18.7; diluted EPS $0.74 | $(72.5); diluted loss per share $2.90 |
| Net cash from operating activities | $19.5 | $(2.5) |
| Cash and cash equivalents | $71.5 at March 31 | $87.9 at December 31, 2020 |
| Total assets / stockholders’ equity | $3,065.0 / $823.6 | $3,069.7 / $825.1 at December 31, 2020 |
| Long-term debt | $50.0 | Unchanged from December 31, 2020 |
- Underwriting: The net loss ratio was 79.6%, versus 69.4%; the expense ratio was 27.6%, versus 35.8%; and the combined ratio was 107.2%, versus 105.2%. A combined ratio above 100% indicates an underwriting loss before investment results.
- Catastrophes and reserves: Catastrophe losses were $29.2 million, adding 11.3 percentage points to the combined ratio, compared with $15.3 million and 5.7 points a year earlier. Winter storm Uri was the largest event; UFG reported $13.3 million of favorable prior-year reserve development, versus $13.7 million in Q1 2020.
- Investments: Invested assets totaled $2.14 billion. Fixed maturities were 85% of the portfolio; 87.9% of fixed maturities were rated AAA, AA or A. Unrealized fixed-maturity gains fell by $23.5 million, net of tax, during the quarter.
- Liquidity and capital: Operating cash flow was positive, but cash declined $16.4 million after investing and financing activity. The $50 million revolving credit facility was undrawn, and UFG reported covenant compliance. Cash includes $18.1 million held at Lloyd’s to meet Funds at Lloyd’s requirements. Equity per share was $32.79, down from $32.93 at year-end.
Material changes and management commentary
- Net income swung to a profit primarily because of the change in investment results: Q1 2021 included $24.5 million of realized gains, mainly from equity securities, while Q1 2020 included $93.4 million of realized losses. Management also cited higher investment income and lower other underwriting expenses. The prior-year comparison included a $9.5 million CARES Act tax benefit.
- Premiums declined as UFG non-renewed underperforming commercial auto accounts and continued exiting personal lines. These declines were partly offset by growth in reinsurance assumed and participation in Lloyd’s syndicates.
- The combined ratio worsened as catastrophe losses and commercial auto claim severity increased, partly offset by a lower expense ratio. The lower expense ratio was primarily attributed to changes in the post-retirement benefit plan. UFG recorded a one-time plan-closure adjustment after deciding the plan would become participant-funded beginning in 2023.
- UFG became a Lloyd’s member on January 1, 2021. Q1 syndicate results were based on estimates and may be revised in Q2 as reported information becomes available.
- Management said current liquidity was sufficient for operations and expected cash flows to meet future liquidity needs. The company maintained its quarterly dividend; Q1 dividends were $3.8 million, or $0.15 per share. Share repurchases resumed, with 207 shares bought during the quarter.
Outlook, risks and contingencies
The filing provides no specific earnings or premium guidance. Management expected the effect of COVID-19 claims to be manageable based on information then available, but noted uncertainty about the pandemic, economic conditions, investment values, premium demand and collections. Changes to business-interruption policy exclusions through legislation, regulation or court decisions could materially increase claims and legal expenses. Other key risks include catastrophe frequency and severity, reserve adequacy, geographic concentration, underwriting and pricing, investment-market and interest-rate changes, reinsurer strength, litigation, regulation and cyber incidents. Loss reserves are estimates and actual claim costs may differ materially. UFG disclosed a $6.1 million remaining potential capital contribution commitment to an investment partnership through 2030; management described pending legal proceedings as ordinary and routine and did not expect a material adverse effect.
Important facts for investors to verify
- How much of Q1 profit reflects recurring underwriting and investment income versus realized equity gains and the post-retirement plan adjustment.
- Whether winter storm Uri losses, commercial auto severity and catastrophe exposure develop further, and whether reinsurance recoveries are timely and collectible.
- The adequacy of loss reserves, including long-tail liability reserves and the favorable prior-year development reported this quarter.
- How Lloyd’s syndicate estimates change when reported results replace the initial estimates, and the effect of the personal-lines runoff on premiums and expenses.
- Liquidity after investment purchases, the availability and terms of the revolving facility, and capital requirements including Lloyd’s funds and partnership commitments.