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UNITED FIRE GROUP INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with Part I, Item 1
"Financial Statements."
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our consolidated financial condition and results of operations on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are more fully described in our Management's Discussion and Analysis of Financial Condition and Results of Operations presented in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . There have been no changes in our critical accounting policies fromDecember 31, 2021 .
INTRODUCTION
The purpose of this Management's Discussion and Analysis is to provide an understanding of our results of operations and consolidated financial condition. Our Management's Discussion and Analysis should be read in conjunction with our Consolidated Financial Statements and related notes, including those in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Our Consolidated Financial Statements are prepared in accordance with GAAP. We also prepare financial statements for each of our insurance company subsidiaries based on statutory accounting principles and file them with insurance regulatory authorities in the states where they do business.
When we provide information on a statutory or other basis, we label it as such,
otherwise all other data is presented in accordance with GAAP.
BUSINESS OVERVIEW
Founded in 1946 asUnited Fire & Casualty Company ,United Fire Group, Inc. ("UFG, the "Company," "we," "us," or "our") and its consolidated insurance subsidiaries provide insurance protection for individuals and businesses through several regional offices. Our property and casualty insurance company subsidiaries are licensed in 50 states plus theDistrict of Columbia and are represented by approximately 1,000 independent agencies.
Our primary sources of revenue are premiums and investment income. Major
categories of expenses from our operations include losses and loss settlement
expenses, underwriting and other operating expenses.
Reportable Segments
Our property and casualty insurance business operates and reports as one
business segment. For more information, refer to Part I, Item 1, Note 1. "Nature
of Operations and Basis of Presentation."
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Table of Contents Lloyd's Syndicates As ofJanuary 1, 2021 , the Company became a member ofLloyd's of London ("Lloyd's"). As a member of Lloyd's, the Company is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's ("FAL"), to support underwriting of property and casualty and reinsurance business by Syndicate 1492, Syndicate 1729, Syndicate 1969, Syndicate 1971, Syndicate 4747, Syndicate 2988 and Syndicate 1699. AtMarch 31, 2022 , the Company's FAL investments were comprised of cash of$21.3 million on deposit with Lloyd's in order to satisfy these FAL requirements. Personal Lines Business InMay 2020 , the Company entered into a renewal rights agreement for our personal lines business, providing our independent insurance agents with the opportunity to transfer their personal lines policies toNationwide Mutual Insurance Company ("Nationwide") beginning in the third quarter of 2020. Nationwide has been offering replacement policies to most of our personal lines policyholders at the time of renewal. The transfer of policies is substantially complete, withNew Jersey being the only state where the Company has personal lines policies in force as ofMarch 31, 2022 . These policies will lapse over the next three years. Pooling Arrangement All of our property and casualty insurance subsidiaries are members of an intercompany reinsurance pooling arrangement. The Company's pooling arrangement permits the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant's own surplus level.
Geographic Concentration
For the three-month period ended
our property and casualty premiums were written in
Profit Factors
Our profitability is influenced by many factors, including price, competition, economic conditions, investment returns, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, prudent management of our investments, appropriate matching of assets and liabilities, effective use of ceded reinsurance and effective and efficient use of technology.
COVID-19
The spread of the COVID-19 virus, beginning inmid-March 2020 , caused significant financial market volatility, economic uncertainty and interruptions to normal business activities. The COVID-19 pandemic has had a profound impact on day-to-day life, financial markets and the economy inthe United States . The Company, in response to the challenges presented by the COVID-19 pandemic, activated its pre-existing business continuity plans to respond to a pandemic inmid-March 2020 . With the exception of our essential services employees, UFG dispatched its staff to work remotely for the safety, health and well-being of our employees. We have been and continue to be fully operational during the pandemic. In the second half of 2021, we gave employees the option to work fully remote, a hybrid schedule or return to the workplace 100 percent of the time depending on the position and with manager approval. Our employees who are working in the office are following recommended health and safety policies. We continue to evaluate our plan and will make any necessary adjustments in light of the emergence of variant strains and current case counts where our offices are located. We have implemented and will continue to implement any safety measures necessary for the safety and health of our employees. 34
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The implementation of our business continuity plans did not have a material
effect on our internal control environment. We believe our operational
processes, internal controls over financial reporting and disclosures, and
financial reporting systems are operating effectively in the present
environment.
Nearly all of the policies we have issued contain contract language that specifically excludes business interruption coverage for losses due to viruses such as the COVID-19 pandemic, but we continue to carefully scrutinize each claim and intend to afford coverage when appropriate. At this time, we expect the effect of the COVID-19 pandemic on claims currently under our coverages to be manageable, based on the information presently available. However, the effects of the COVID-19 pandemic, including the emergence of variant strains, continue to evolve and we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. Additionally, if established written contract policy exclusions of business interruption coverage for losses attributable to the COVID-19 pandemic are voided or changed through legislation, regulations or interpretations by the courts, such changes have the potential to materially increase claims, losses and legal expenses which could impact our business, financial condition, results of operations and liquidity. We believe our current liquidity position is sufficient to maintain our current operations and we have the ability to draw on our credit facility if needed. See Part 1, Item 1, Note 8 "Debt" for more information. Our share repurchase program was suspended inmid-March 2020 and restarted in the first quarter of 2021. Also, the Company maintained the payment of quarterly cash dividends, with the dividends paid inMarch 2022 marking the 216th consecutive quarter of paying dividends sinceMarch 1968 . Stockholders' equity decreased to$835.6 million atMarch 31, 2022 , from$879.1 million atDecember 31, 2021 . This decrease is primarily attributable to the$65.8 million decrease in the net unrealized value of our fixed maturity securities, net of tax, and shareholder dividends of$3.8 million , partially offset by net income of$28.3 million during the first three months of 2022. As ofMarch 31, 2022 , we intend to keep all assets currently leased and honor the terms of the contracts. Also, we have four lease contracts where we are the lessor which we evaluated for impairment. As ofMarch 31, 2022 , all payments on these contracts had been received and we fully expect to receive all future payments on time. In the event that we receive any lease-related relief provided to mitigate the economic effects of the COVID-19 pandemic, we elect not to evaluate whether or not the relief represents a lease modification. The Company's investment philosophy, objectives, approach and program have not changed as a result of the COVID-19 pandemic. The Company has a highly rated fixed maturity portfolio, with low credit risk. The Company recognized a decrease in the net unrealized value of our fixed maturity securities of$65.8 million , net of tax, atMarch 31, 2022 . In addition, we adopted new accounting guidance onJanuary 1, 2020 , which changes the measurement of credit losses for our investment in available-for-sale fixed maturities and our mortgage loans and also impacts our reinsurance receivables. The adoption of this new guidance resulted in an immaterial allowance for credit losses recorded on our balance sheet as ofMarch 31, 2022 . For more information on credit losses recognized in the three-month period endedMarch 31, 2022 , please refer to the Note 1 and Note 2 to the Unaudited Consolidated Financial Statements of this Form 10-Q. 35
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FINANCIAL HIGHLIGHTS
Three Months Ended March
31,
(In Thousands, Except Ratios) 2022 2021 %
Revenues
Net premiums earned$ 234,228 $ 259,225 (9.6) % Investment income, net of investment expenses 11,276 17,081 (34.0) Net investment gains (losses) (465) 24,508 (101.9) Other income (loss) (25) (79) (68.4) Total revenues$ 245,014 $ 300,735 (18.5) % Benefits, Losses and Expenses Losses and loss settlement expenses$ 130,376 $ 206,398 (36.8) % Amortization of deferred policy acquisition costs 50,471 53,265 (5.2) Other underwriting expenses 28,644 18,368 55.9 Interest expense 797 - NM Total benefits, losses and expenses$ 210,288 $ 278,031 (24.4) % Income before income taxes$ 34,726 $ 22,704 53.0 Federal income tax expense 6,377 4,002 59.3 Net income$ 28,349 $ 18,702 51.6 % GAAP Ratios: Net loss ratio (without catastrophes) 53.1 % 68.3 % (22.3) % Catastrophes - effect on net loss ratio 2.6 11.3 (77.0) Net loss ratio(1) 55.7 % 79.6 % (30.0) % Expense ratio(2) 33.8 27.6 22.5 Combined ratio(3) 89.5 % 107.2 % (16.5) % (1) The net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our unaudited Consolidated Financial Statements. (2) The expense ratio is calculated by dividing other underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance business. (3) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of the net loss ratio and the underwriting expense ratio. NM = Not meaningful
The following is a summary of our financial performance for the three-month
period ended
RESULTS OF OPERATIONS
For the three-month period endedMarch 31, 2022 , net income was$28.3 million compared to a net income of$18.7 million for the same period of 2021. The change was primarily due to a decrease in losses and loss settlement expenses partially offset by a decrease in net premiums earned, the change in the fair value of our investments in equity securities and a comparative increase in other underwriting expenses. Net premiums earned decreased 9.6 percent during the three-month period endedMarch 31, 2022 compared to the same period of 2021. The decrease in the three-month period endedMarch 31, 2022 was primarily due to our focus on improving profitability through non-renewal of underperforming accounts in our commercial auto line of business and our exit of the personal lines business. 36
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Net investment income was
compared to
investment income in the three-month period ended
due to the change in the fair value of our investments in limited liability
partnerships. 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.
The Company recognized net investment losses of$0.5 million during the first quarter of 2022, compared to net investment gains of$24.5 million for the same period in 2021. The change in the three-month period endedMarch 31, 2022 as compared to the same period in 2021 was primarily due to the change in the fair value of our investments in equity securities. Losses and loss settlement expenses decreased by 36.8 percentage points during the three-month period endedMarch 31, 2022 , compared to the same period in 2021. The change was primarily driven by lower catastrophe losses and a decrease in the frequency and severity of claims. The GAAP combined ratio decreased by 17.7 percentage points to 89.5 percent for the first quarter of 2021, compared to 107.2 percent in the same period in 2021. The decrease in the combined ratio during the three-month period endedMarch 31, 2022 as compared to the same period in 2021 was driven by a decrease in the net loss ratio. The GAAP net loss ratio decreased 23.9 percentage points during the three-month period endedMarch 31, 2022 as compared to the same period in 2021. The decrease in the net loss ratio during the three-month period endedMarch 31, 2022 as compared to the same period in 2021 was primarily due to a decrease in catastrophe losses and a decrease in the frequency and severity of claims. Pre-tax catastrophe losses in the first quarter of 2022 added 2.6 percentage points to the combined ratio in the first quarter of 2022, which is 0.7 percentage points below our 10-year historical average for first quarter catastrophe losses of 3.3 percentage points added to the combined ratio. This compares to 11.3 percentage points added to the combined ratio in the first quarter of 2021 which included losses from winter storm Uri, which was a full retention loss, with losses in excess of our stated reinsurance retention of$20.0 million . The underwriting expense ratio for the first quarter of 2022 was 33.8 percent compared to 27.6 percent for the first quarter of 2021. The increase in the expense ratio during the first quarter of 2022 was primarily due to the one-time benefit recognized in first quarter of 2021 from the change in the design of our employee post-retirement health benefit plan.
For a detailed discussion of our investment results, refer to the "Investment
Portfolio" section below.
Reserve Development For many liability claims, significant periods of time, ranging up to several years, and for certain construction defect claims, more than a decade, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement or other disposition of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability. Reserves for these long-tail coverages represent a significant portion of our overall carried reserves. When establishing reserves and monitoring reserve adequacy, we analyze historical data and consider the potential impact of various loss development factors and trends, including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation, and changes and trends in general economic conditions, including the effects of inflation. All of these factors 37
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influence our estimates of required reserves and, for long-tail lines these
factors can change over the course of the settlement of the claim. However,
there is no precise method for evaluating the specific dollar impact of any
individual factor on the development of reserves.
Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as practicable after information about a claim becomes available. This approach tends to produce, on average, cautiously pessimistic case reserves, which we expect to result in some level of favorable development over the course of settlement. 2022 Development The property and casualty insurance business experienced$6.7 million of favorable development in our net reserves for prior accident years for the three-month period endedMarch 31, 2022 . The majority of the favorable development came from the commercial automobile line of business which had$12.7 million favorable development. Partially offsetting the favorable development was unfavorable development from three lines of business: commercial other liability experienced$3.7 million of unfavorable development, commercial fire and allied experienced$2.9 million of unfavorable development, and reinsurance assumed experienced$2.3 million of unfavorable development. All other lines of business, in total, contributed$2.9 million of favorable development. The favorable development for commercial automobile was from both loss and loss adjustment expense ("LAE") where reductions of reserves for unpaid liabilities were more than sufficient to offset actual paid loss and paid LAE. Commercial other liability experienced unfavorable development primarily from paid LAE which was greater than reductions in reserves for unpaid LAE. Commercial fire and allied experienced unfavorable development primarily from loss development in accident year 2021 from four large claims. Reinsurance assumed developed unfavorably due to paid loss and increased claim reserves which were greater than reductions in reserves for incurred but not reported ("IBNR") claims.
2021 Development
The property and casualty insurance business experienced$13.3 million of favorable development in our net reserves for prior accident years for the three-month period endedMarch 31, 2021 . The three lines of business contributing the majority of the favorable development were: commercial fire and allied lines which had$13.7 million favorable development, personal fire and allied lines with$3.6 million of favorable development, and fidelity and surety with$1.8 million of favorable development. Both loss and LAE contributed to the favorable development. A partial offset to the favorable development came from two lines of business that had unfavorable development, with the largest portion coming from commercial other liability which experienced$5.4 million of unfavorable development and the remainder coming from reinsurance assumed which was$3.1 million unfavorable. All other lines combined contributed favorable reserve development of$2.7 million . Commercial other liability experienced unfavorable development primarily due to paid loss which was greater than reductions in reserves for unpaid loss. Favorable LAE development partially offset the unfavorable loss experience Development amounts can vary significantly from quarter-to-quarter and year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business. AtMarch 31, 2022 , our total reserves were within our actuarial estimates. 38
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The following tables display our net premiums earned, net losses and loss
settlement expenses and net loss ratio by line of business:
Three Months Ended March 31, 2022 2021
Net Losses Net Losses
and Loss and Loss
Net Settlement Net Net Settlement Net
(In Thousands, Except Ratios) Premiums Expenses Loss Premiums Expenses Loss
Unaudited Earned Incurred Ratio Earned Incurred Ratio
Commercial lines
Other liability $ 70,569 $ 36,801 52.1 % $ 75,359 $ 42,147 55.9 %
Fire and allied lines 58,748 45,236 77.0 58,332 62,974 108.0
Automobile 53,232 32,333 60.7 65,977 67,202 101.9
Workers' compensation 14,609 5,078 34.8 16,502 7,780 47.1
Fidelity and surety 8,120 375 4.6 7,360 1,079 14.7
Miscellaneous 279 162 58.1 349 (18) (5.2)
Total commercial lines $ 205,557 $ 119,985 58.4 % $ 223,879 $ 181,164 80.9 %
Personal lines
Fire and allied lines $ 950 $ 1,191 125.4 $ 6,221 $ 4,609 74.1 %
Automobile 1 (729) NM 4,040 3,300 81.7
Miscellaneous 17 (18) (105.9) 177 90 50.8
Total personal lines $ 968 $ 444 45.9 $ 10,438 $ 7,999 76.6 %
Reinsurance assumed $ 27,703 $ 9,947 35.9 % $ 24,908 $ 17,235 69.2 %
Total $ 234,228 $ 130,376 55.7 % $ 259,225 $ 206,398 79.6 %
NM = Not meaningful
Below are explanations regarding significant changes in the net loss ratios by line of business: •Commercial fire and allied lines - The net loss ratio improved 31.0 percentage points in the three-month period endedMarch 31, 2022 as compared to the same period in 2021. The improvement is attributable to a significant decrease in catastrophe losses in first quarter of 2022 as compared to the same period in 2021. The first quarter of 2021 included losses from winter storm Uri, which was a full retention loss, with losses in excess of our stated reinsurance retention of$20.0 million •Commercial automobile - The net loss ratio improved 41.2 percentage points in the three-month period endedMarch 31, 2022 as compared to the same period of 2021. The improvement is attributable to a decrease in severity of commercial auto losses, which is the direct result of our strategic plan to increase the quality of our commercial auto book of business through non renewing underperforming accounts and rate increases. •Workers' compensation - The net loss ratio improved 12.3 percentage points in the three-month period endedMarch 31, 2022 as compared to the same period of 2021. The improvement is attributable to less large claim activity in the first quarter of 2022 as compared to the same period of 2021. •Fidelity and surety - The net loss ratio improved 10.1 percentage points in the three-month period endedMarch 31, 2022 as compared to the same period of 2021. The improvement is primarily attributable to the 39
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absence of large claim activity during the first quarter of 2022 as compared to
a large claim that was reported during the first quarter of 2021.
•Reinsurance assumed - The net loss ratio improved 33.3 percentage points in the three-month period endedMarch 31, 2022 as compared to the same period of 2021. The improvement is attributable to favorable loss experience and attractive reinsurance rates.
Financial Condition
Stockholders' equity decreased to$835.6 million atMarch 31, 2022 , from$879.1 million atDecember 31, 2021 . The Company's book value per share was$33.27 , which is a decrease of$1.78 per share, or 5.1 percent fromDecember 31, 2021 . The decrease is primarily attributable to the$65.8 million decrease in the net unrealized value from our fixed maturity securities, net of tax, and shareholder dividends of$3.8 million , partially offset by net income of$28.3 million during the first three months of 2022.
Investment Portfolio
Our invested assets totaled$2.0 billion atMarch 31, 2022 , compared to$2.1 billion atDecember 31, 2021 , a decrease of$87.7 million . AtMarch 31, 2022 , fixed maturity securities and equity securities made up 83.5 percent and 9.8 percent of the value of our investment portfolio, respectively. Because the primary purpose of our investment portfolio is to fund future claims payments, we use a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxableU.S. government bonds and tax-exemptU.S. municipal bonds.
Composition
We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation, regulatory requirements, interest rates and credit quality of assets. We administer our investment portfolio based on investment guidelines approved by management and the investment committee of our Board of Directors that comply with applicable statutory regulations.
The composition of our investment portfolio at
carrying value in the following table:
Property & Casualty Insurance
Percent
(In Thousands, Except Ratios) of Total
Fixed maturities (1)
Available-for-sale $ 1,651,468 83.5 %
Equity securities 194,230 9.8
Mortgage loans 46,976 2.3
Other long-term investments 84,007 4.4
Short-term investments 275 -
Total $ 1,976,956 100.0 %
(1) Available-for-sale securities fixed maturities are carried at fair value.
As of
investments in subprime mortgages or other credit enhancement vehicles.
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Table of Contents Credit Quality The table below shows the composition of fixed maturity securities held in our available-for-sale and trading security portfolios, by credit rating atMarch 31, 2022 andDecember 31, 2021 . Information contained in the table is generally based upon the issued credit ratings provided by Moody's, unless the rating is unavailable, in which case we obtain credit ratings fromStandard & Poor's . (In Thousands, Except Ratios) March 31, 2022 December 31, 2021 Rating Carrying Value % of Total Carrying Value % of Total AAA$ 611,813 37.1 % $ 670,222 39.0 % AA 540,494 32.7 586,426 34.1 A 221,711 13.4 209,076 12.2 Baa/BBB 262,323 15.9 241,547 14.0 Other/Not Rated 15,127 0.9 12,519 0.7$ 1,651,468 100.0 %$ 1,719,790 100.0 % Duration Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement we use to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.
Investment Results
We invest the premiums received from our policyholders in order to generate investment income, which is an important component of our revenues and profitability. The amount of investment income that we are able to generate is affected by many factors, some of which are beyond our control. Some of these factors are volatility in the financial markets, economic growth, inflation, interest rates, world political conditions, terrorist attacks or threats of terrorism, adverse events affecting other companies in our industry or the industries in which we invest and other unpredictable national or world events. Our net investment income decreased in the three-month period endedMarch 31, 2022 , compared with the same period of 2021 primarily due to the change in the fair value of our investments in limited liability partnerships. We hold certain investments in limited liability partnerships that are recorded on the equity method of accounting, with changes in value of these investments recorded in investment income. In the three-month period endedMarch 31, 2022 , the change in value of our investments in limited liability partnerships resulted in an investment loss of$0.2 million as compared to investment income of$6.6 million in the same period of 2021. We had net investment losses of$0.5 million during the three-month period endedMarch 31, 2022 , as compared to net investment gains of$24.5 million in the same period of 2021. The change in the three-month period endedMarch 31, 2022 as compared to the same period in 2021 was primarily due to the change in the fair value of our equity securities investments. We regularly monitor the difference between our cost basis and the estimated fair value of our investments. For our available-for-sale fixed-maturity portfolio an allowance for credit losses is recorded net of available-for-sale fixed maturities in the Consolidated Balance Sheets and a corresponding credit loss recognized as a realized loss or gain in the Consolidated Statements of Income and Comprehensive Income. The Company determines if an allowance for credit losses is recorded based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as market value vs. amortized cost, investment spreads widening or contracting, rating actions, payment and default history. 41
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Table of Contents Non-credit related changes in unrealized gains and losses on available-for-sale fixed maturity securities are recognized as a component of other comprehensive income, impact stockholders' equity and book value per share, but do not affect net income. We believe that any unrealized losses on our available-for-sale securities atMarch 31, 2022 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature. For mortgage loans, an allowance for losses is established based on historical loss information of the collective pool of the Company's commercial mortgage loan investments that have similar risk characteristics. This allowance is presented as a separate line in the Consolidated Balance Sheets with an offset to "Net investment gains (losses)" in the Consolidated Statements of Income and Comprehensive Income. To calculate the allowance for mortgage loan losses, the Company starts with historical loan experience to predict the future expected losses and then layers on a market-linked adjustment. An example of a market linked adjustment is the change in commercial market price appreciation or change in gross domestic product, with every point of fall leading to an increase in loss reserve. Local market economics are also considered. On a quarterly basis, quantitative credit risk metrics, including for example, cash-flows, rent rolls and financial statements are reviewed for each loan to determine if it is performing in line with its expectations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures our ability to generate sufficient cash flows to meet our short- and long-term cash obligations. Our cash inflows are primarily a result of the receipt of premiums, reinsurance recoveries, sales or maturities of investments, and investment income. Cash provided from these sources is used to fund the payment of losses and loss settlement expenses, the purchase of investments, operating expenses, dividends, pension plan contributions, and in recent years, common stock repurchases. We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various rating agencies, at a level considered necessary by management to enable our insurance company subsidiaries to compete and (2) sufficient capital to enable our insurance company subsidiaries to meet the capital adequacy tests performed by regulatory agencies inthe United States . Cash outflows may be variable because of the uncertainty regarding settlement dates for losses. In addition, the timing and amount of individual catastrophe losses are inherently unpredictable and could increase our liquidity requirements. The timing and amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage disputes. Historically, we have generated substantial cash inflows from operations. It is our policy to invest the cash generated from operations in securities with maturities that, in the aggregate, correlate to the anticipated timing of payments for losses and loss settlement expenses. The majority of our assets are invested in available-for-sale fixed maturity securities. 42
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The following table displays a consolidated summary of cash sources and uses for
the three-month periods ended
Cash Flow Summary Three Months Ended
(In Thousands) 2022
2021
Cash provided by (used in)
Operating activities $ 1,595$ 19,510 Investing activities (20,061) (31,682) Financing activities (4,116) (4,262) Net change in cash and cash equivalents$ (22,582)
Our cash flows were sufficient to meet our liquidity needs for the three-month periods endedMarch 31, 2022 and 2021 and we anticipate they will be sufficient to meet our future liquidity needs for at least the next twelve months. We also have the ability to draw on our credit facility if needed.
Operating Activities
Net cash flows from operating activities had inflows of
million
Investing Activities
Cash in excess of operating requirements is generally invested in fixed maturity securities and equity securities. Fixed maturity securities provide regular interest payments and allow us to match the duration of our liabilities. Equity securities provide dividend income, potential dividend income growth and potential appreciation. For further discussion of our investments, including our philosophy and our strategy for our portfolio, see the "Investment Portfolio" section of this Item 2. In addition to investment income, possible sales of investments and proceeds from calls or maturities of fixed maturity securities also can provide liquidity. During the next five years,$552.2 million , or 33.4 percent, of our fixed maturity portfolio will mature. We invest funds required for short-term cash needs primarily in money market accounts, which are classified as cash equivalents. AtMarch 31, 2022 , our cash and cash equivalents included$42.9 million related to these money market accounts, compared to$43.4 million atDecember 31, 2021 . Net cash flows used by investing activities were$20.1 million for the three-month period endedMarch 31, 2022 , compared to net cash flows used by investing activities of$31.7 million for the three-month period endingMarch 31, 2021 . For the three-month periods endedMarch 31, 2022 and 2021, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of$67.0 million and$172.9 million , respectively.
Our cash outflows for investment purchases were
three-month period ended
period of 2021.
Financing Activities
Net cash flows used in financing activities was
period ended
million
Credit Facilities
On
wholly owned subsidiary of
agreement (the "Credit Agreement") with
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Association ("Wells Fargo"), as administrative agent, issuing lender, swing line
lender and lender, and the other lenders from time to time party thereto
(collectively with Wells Fargo, the "Lenders"), providing for a $50,000
revolving credit facility, which includes a $20,000 letter of credit
sub-facility and a $5,000 swing line loan for working capital and other general
corporate purposes. The Credit Agreement is provided on an unsecured basis, and
the Borrower has the option to increase the Credit Agreement by $100,000 if
agreed to by the Lenders providing such incremental facility. As of March 31,
2022 and 2021, there were no balances outstanding under the Credit Agreement.
For the three-month period ended March 31, 2022 and 2021, we did not incur any
interest expense related to the credit facility. For further discussion of the
Credit Agreement, refer to Part I, Item 1, Note 8 "Debt."
Dividends
Dividends paid to shareholders totaled$3.8 million and$3.8 million in the three-month periods endedMarch 31, 2022 and 2021, respectively. Our practice has been to pay quarterly cash dividends, which we have paid every quarter sinceMarch 1968 . Payments of any future dividends and the amounts of such dividends will depend upon factors such as net income, financial condition, capital requirements, and general business conditions. We will only pay dividends if declared by our Board of Directors out of legally available funds. As a holding company with no independent operations of its own, we rely on dividends received from our insurance company subsidiaries in order to pay dividends to our common shareholders. Dividends payable by our insurance subsidiaries are governed by the laws in the states in which they are domiciled, and if applicable, commercially domiciled. In all cases, these state laws permit the payment of dividends only from earned surplus arising from business operations. For example, underIowa law, the maximum dividend or distribution that may be paid within a 12-month period without prior approval of theIowa Insurance Commissioner is generally restricted to the greater of 10 percent of statutory surplus as of the precedingDecember 31 , or net income of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. Other states in which our insurance company subsidiaries are domiciled may impose similar restrictions on dividends and distributions. Based on these restrictions, atMarch 31, 2022 , UFG's sole direct insurance company subsidiary,United Fire & Casualty Company , is able to make a maximum of$71.4 million in dividend payments without prior regulatory approval. We do not believe that these restrictions have a material impact in meeting the cash obligations of UFG. Stockholders' Equity Stockholders' equity decreased to$835.6 million atMarch 31, 2022 , from$879.1 million atDecember 31, 2021 . The Company's book value per share was$33.27 , which is a decrease of$1.78 per share, or 5.1 percent, fromDecember 31, 2021 . The decrease is primarily attributable to the$65.8 million decrease in the net unrealized value from our fixed maturity securities, net of tax, stockholders' dividends of$3.8 million , partially offset by net income of$28.3 million during the first three months of 2022.
Funding Commitments
Pursuant to an agreement with one of our limited liability partnership
investments, we are contractually committed through
capital contributions upon request of the partnership. Our remaining potential
contractual obligation was
In addition, the Company invested$25.0 million inDecember 2019 in a limited liability partnership investment fund that is subject to a three year lockup with a 60 day minimum notice, with 4 possible repurchase dates per year after the three-year lockup period has concluded. The fair value of the investment atMarch 31, 2022 was$24.7 million and there are no remaining capital contribution obligations with this investment. 44
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Table of Contents MEASUREMENT OF RESULTS Management evaluates our operations by monitoring key measures of growth and profitability. The following section provides further explanation of the key measures management uses to evaluate our results. Catastrophe losses is a commonly used financial measure that uses the designations of theInsurance Services Office ("ISO") and are reported with losses and loss settlement expense amounts net of reinsurance recoverables, unless specified otherwise. According to the ISO, a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in$25.0 million or more inU.S. industry-wide direct insured losses to property and that affect a significant number of insureds and insurers ("ISO catastrophe"). In addition to ISO catastrophes, we also include as catastrophes those events ("non-ISO catastrophes"), which may includeU.S. or international losses that we believe are, or will be, material to our operations, either in amount or in number of claims made. Management, at times, may determine for comparison purposes that it is more meaningful to exclude extraordinary catastrophe losses and resulting litigation. The frequency and severity of catastrophe losses we experience in any year affect our results of operations and financial position. In analyzing the underwriting performance of our property and casualty insurance business, we evaluate performance both including and excluding catastrophe losses. Portions of our catastrophe losses may be recoverable under our catastrophe reinsurance agreements. We include a discussion of the impact of catastrophes because we believe it is meaningful for investors to understand the variability in our periodic earnings. Three Months Ended March 31, (In Thousands) 2022 2021 ISO catastrophes$ 7,905 $ 27,090 Non-ISO catastrophes (1) (1,728) 2,157 Total catastrophes$ 6,177 $ 29,247
(1) This number includes international assumed losses.
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Table of Contents
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