United Fire Group, Inc. (the “Company” or “UFG”) (Nasdaq: UFCS) reported financial results for the three- month period ended June 30, 2023 (the “second quarter of 2023”) with a consolidated net loss of $56.4 million ($2.23 per diluted share) and consolidated adjusted operating loss of $2.27 per diluted share.
“Our second quarter results were impacted by reserve strengthening and seasonally elevated catastrophe losses,” said UFG President and CEO Kevin Leidwinger. “The reserve strengthening is a result of enhanced actuarial processes within our Company that have increased the depth of analysis and improved alignment with our unique product exposures. These enhancements in our actuarial processes foster greater confidence in our ability to estimate ultimate losses and provide more actionable feedback that aligns with the increasing levels of specialization being developed in the underwriting and claims organizations. While the adjustments coming out of these enhancements negatively impacted results in the short term, they position us to more effectively manage our portfolio going forward.
“In addition, the industry dealt with a historic level of catastrophe losses in the second quarter of 2023, with UFG experiencing catastrophe losses from 18 separate weather events that resulted in losses slightly above the five- and 10- year historic averages. We will continue to take action to improve the risk profile of our property business to reposition the portfolio and reduce volatility. During the second quarter of 2023, our property average premium increase was 19%, with rate increases of 12% and exposure increases of 7%.
“Our second quarter underlying loss ratio included approximately 3 points of impact from a small number of claims and associated reinsurance reinstatement premium in our surety business. This business has delivered strong profitability historically, but can experience occasional periods of volatility. We remain confident this business will deliver favorable returns over the long term.
“Despite these near-term impacts, there were many positive results in the second quarter of 2023 that demonstrate our progress in delivering consistent profitable growth. UFG produced double-digit growth in net premiums written in the second quarter, marking the fifth consecutive quarter of growth in net premiums written, and the second consecutive quarter of growth in our core commercial business. In addition to increases in new business and retention, average renewal premiums increased, with rate achievement up across all lines of business from the first quarter of 2023, and at the highest level in six quarters.
“Our actions to sustainably reduce costs led the second quarter of 2023 expense ratio to decrease 0.7 points from the prior year quarter while we continue to make strategic investments in the talent and technology capabilities necessary for success.
“UFG also recently announced the formation of distinct business units within our underwriting organization, establishing specialized operating models for small business and middle market. This action is a key step in UFG’s evolution from a generalist to a specialist company with the deeper levels of expertise necessary to be successful.
“Looking ahead, we remain confident that we are executing the actions necessary for UFG to deliver superior financial and operational performance over time.”
(1) Net premiums written is a performance measure reflecting the amount charged for insurance policy contracts issued and recognized on an annualized basis at the effective date of the policy. See Certain Performance Measures for additional information.
(2) Net underlying loss ratio is defined as the net loss ratio less impacts of catastrophes and non-catastrophe prior period reserve development. See Certain Performance Measures for additional information.
Consolidated Financial Highlights:
| Consolidated Financial Highlights | ||||||||||||
| (unaudited) | Three Months Ended June 30, | Six Months Ended June 30 | ||||||||||
| (In Thousands, Except Per Share Data) | 2023 | 2022 | 2023 | 2022 | ||||||||
| Net premiums earned | $ | 254,638 | $ | 231,262 | $ | 510,765 | $ | 465,490 | ||||
| Net premiums written | 299,076 | 261,065 | 572,344 | 502,075 | ||||||||
| Net underlying loss ratio (1) | 64.6 | % | 58.8 | % | 64.1 | % | 58.2 | % | ||||
| Catastrophes-effect on net loss ratio (1) | 13.0 | 12.1 | 8.8 | 7.3 | ||||||||
| Reserve development-effect on net loss ratio (1) | 20.8 | (5.4 | ) | 10.4 | (4.9 | ) | ||||||
| Net loss ratio | 98.4 | % | 65.5 | % | 83.3 | % | 60.6 | % | ||||
| Underwriting expense ratio | 34.5 | % | 35.2 | % | 35.1 | % | 34.4 | % | ||||
| GAAP combined ratio | 132.9 | % | 100.7 | % | 118.4 | % | 95.0 | % | ||||
| Underlying combined ratio (2) | 99.1 | % | 94.0 | % | 99.2 | % | 92.7 | % | ||||
|
Net investment income, net of investment expenses |
$ |
11,327 |
|
|
$ |
24,049 |
$ |
20,456 |
||||
| Net investment gains (losses) | 1,124 | (20,932 | ) | (621 | ) | (21,397 | ) | |||||
| Other income (loss) | (797 | ) | (771 | ) | (1,594 | ) | (1,593 | ) | ||||
|
Net income (loss) |
$ |
(56,382 |
) |
|
|
|
$ |
(55,688 |
) |
$ |
17,892 |
|
| Adjusted operating income (loss) (3) | $ | (57,270 | ) | $ | 6,080 | (55,197 | ) | 34,796 | ||||
| Net income (loss) per diluted share | $ | (2.23 | ) | $ | (0.42 | ) | $ | (2.21 | ) | $ | 0.70 | |
| Adjusted operating income (loss) per diluted share (3) | (2.27 | ) | (2.19 | ) | 1.37 | |||||||
| Return on equity (4) | (15.7 | )% | 4.3 | % | ||||||||
(1) Net underlying loss ratio is defined as the net loss ratio less impacts of catastrophes and non-catastrophe prior period reserve development. See Certain Performance Measures for additional information.
(2) Underlying combined ratio is defined as the GAAP combined ratio less impacts of catastrophes and non-catastrophe prior period reserve development. See Certain Performance Measures for additional information.
(3) Adjusted operating income (loss) is a non-GAAP financial measure of net income excluding net investment gains and losses, after applicable taxes. See Non-GAAP Financial Measure for more information and a reconciliation of adjusted operating income (loss) to net income.
(4) Return on equity is calculated by dividing annualized net income by average year-to-date stockholders’ equity.
Total Property & Casualty Underwriting Results
Second quarter 2023 results:
(All comparisons vs. second quarter 2022, unless noted otherwise)
Net premiums written grew year-over-year for the fifth consecutive quarter, increasing 14.6% over that time period with net premiums earned increasing 10.1% in the second quarter of 2023. Core commercial lines net premiums written growth remained strong, up 10.1% supported by increasing levels of rate, retention and new business, together with an overall increase in renewal premiums of 8.5%, with 2.6% from exposure changes and 5.9% from rate increases. Excluding the workers’ compensation line of business, the overall average increase in renewal premiums was 9.4%, with 2.5% from exposure changes and 6.9% from rate increases.
The combined ratio was 132.9%, up from 100.7%. This increase is primarily attributable to prior period reserve strengthening of 20.8% this quarter compared to favorable development of 5.4% in the second quarter of 2022. The majority of the strengthening is concentrated in long-tailed liability exposures of excess and surplus lines excess casualty and construction defect. This increase reflects a continued rigor and sophistication of actuarial analysis that affords greater understanding of the evolving industry trends for these lines. The catastrophe loss ratio was 13.0% in the current quarter, an increase of 0.9 points. The catastrophe loss ratio was approximately 2 points above the five-year and 10-year historic mean catastrophe loss ratio and within a normal range of variation despite significant, elevated outcomes for the industry. The underlying loss ratio of 64.6% increased 5.8 points. A small number of surety losses and associated reinsurance reinstatement premium contributed 3 points to this increase during the second quarter of 2023. Surety has been a long-term profitable line and results can be volatile. The underwriting expense ratio of 34.5% was 0.7 points lower, benefiting from actions to sustainably reduce costs that are offsetting strategic investments in talent and technology.
Investment Results
Second quarter 2023 results:
(All comparisons vs. second quarter 2022, unless noted otherwise)
Net investment income was $11.3 million for the second quarter of 2023, an increase of $2.1 million. Income from our fixed income portfolio increased by $1.2 million as we invested at higher interest rates. In addition, income from cash and cash equivalents increased $1.8 million. The valuation of our limited liability partnerships declined $3.5 million in the current quarter, representing $0.4 in additional loss compared to last year. The valuation of these investments in limited liability partnerships varies from period to period due to the current equity market conditions, specifically related to financial institutions.
| Investment Results |
||||||||||||
| (unaudited) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
| (In Thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||
| Investment income: | ||||||||||||
| Interest on fixed maturities | $ | 13,423 | $ | 12,196 | $ | 26,720 | $ | 23,087 | ||||
| Dividends on equity securities | 1,185 | 1,341 | 2,428 | 2,609 | ||||||||
| Income (loss) on other long-term investments | (3,504 | ) | (3,142 | ) | (4,584 | ) | (2,611 | ) | ||||
| Other | 2,434 | 682 | 4,294 | 1,390 | ||||||||
| Total investment income | $ | 13,538 | $ | 11,077 | $ | 28,858 | $ | 24,475 | ||||
| Less investment expenses | 2,211 | 1,897 | 4,809 | 4,019 | ||||||||
| Net investment income | $ | 11,327 | $ | 9,180 | $ | 24,049 | $ | 20,456 | ||||
| Average yields: |
||||||||||||
| Fixed income securities: | ||||||||||||
| Pre-tax(1) | 3.24 | % | 2.96 | % | 3.25 | % | 2.82 | % | ||||
(1) Fixed income securities yield excluding net unrealized investment gains/losses and expenses
| Balance Sheet | ||||||
| Balance Sheet | ||||||
| (In Thousands) | June 30, 2023
(unaudited) |
December 31, 2022 | ||||
| Invested assets | $ | 1,835,621 | $ | 1,844,891 | ||
| Cash | 79,704 | 96,650 | ||||
| Total assets | 3,017,877 | 2,882,286 | ||||
| Losses and loss settlement expenses | 1,614,832 | 1,497,274 | ||||
| Total liabilities | 2,341,512 | 2,142,172 | ||||
| Net unrealized investment gains (losses), after-tax | (89,095 | ) | (88,369 | ) | ||
| Total stockholders’ equity | 676,365 | 740,114 | ||||
| Book value per share | $ | 26.77 | $ | 29.36 | ||
Total consolidated assets as of June 30, 2023 were $3.0 billion, which included $1.8 billion of invested assets. The Company’s book value per share was $26.77, a decrease of $2.59 per share, or 8.8%, from December 31, 2022. This decrease is primarily related to the increase in loss and loss settlement expense reserves.
Capital Management
During the second quarter of 2023, the Company declared and paid a $0.16 per share cash dividend to shareholders of record as of June 2, 2023. UFG has paid a quarterly dividend every quarter since March 1968.
Earnings Call Access Information
An earnings call will be held at 9:00 a.m. CT on August 8, 2023, to allow securities analysts, shareholders and other interested parties the opportunity to hear management discuss the Company’s second quarter of 2023 results.
Teleconference: Dial-in information for the call is toll-free 1-844-492-3723. The event will be archived and available for digital replay through August 15, 2023. The replay access information is toll-free 1-877-344-7529; conference ID no. 1030244.
Webcast: An audio webcast of the teleconference can be accessed at the Company’s investor relations page at https://ir.ufginsurance.com/event/ or https://event.choruscall.com/mediaframe/webcast.html?webcastid=utfxpqlS. The archived audio webcast will be available until August 15, 2023.
Transcript: A transcript of the teleconference will be available on the Company’s website soon after the completion of the teleconference.