Newswires
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/A for the year endedDecember 31, 2022 . There have been no changes in our critical accounting policies fromDecember 31, 2022 .
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/A for the year endedDecember 31, 2022 . 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."
33
--------------------------------------------------------------------------------
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, Syndicate 1699 and Syndicate 5623. AtMarch 31, 2023 , the Company's FAL investments were comprised of cash of$23.7 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 beginning in the third quarter of 2020. The majority of this transfer was completed byDecember 31, 2021 . There is an immaterial amount of personal lines business remaining primarily inNew Jersey as ofMarch 31, 2023 . The business remaining inNew Jersey is scheduled to lapse by the end of 2025.
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.
34
--------------------------------------------------------------------------------
Table of Contents
FINANCIAL HIGHLIGHTS
Three Months Ended March 31,
(In Thousands, Except Ratios) 2023 2022 %
Revenues
Net premiums earned $ 256,127 $ 234,228 9.3 %
Investment income, net of investment expenses 12,722 11,276 12.8
Net investment gains (losses) (1,745) (465) (275.3)
Other income (loss) - (25) 100.0
Total revenues $ 267,104 $ 245,014 9.0 %
Benefits, Losses and Expenses
Losses and loss settlement expenses $ 174,597 $ 130,376 33.9 %
Amortization of deferred policy acquisition costs 59,835 50,471 18.6
Other underwriting expenses 31,876 28,644 11.3
Interest expense 797 797 -
Total benefits, losses and expenses $ 267,105 $ 210,288 27.0 %
Income (loss) before income taxes $ (1) $ 34,726 (100.0) %
Federal income tax expense (benefit) (695) 6,377 (110.9)
Net income (loss) $ 694 $ 28,349 (97.6)
GAAP Ratios:
Net underlying loss ratio (1) 63.5 % 57.5 % 10.4 %
Catastrophes - effect on net loss ratio (1) 4.6 2.6 76.9
Reserve development-effect on net loss ratio (1) 0.1 (4.4) 102.3
Net loss ratio (2) 68.2 % 55.7 % 22.4 %
Expense ratio (3) 35.8 33.8 5.9
Combined ratio (4) 104.0 % 89.5 % 16.2 %
(1) Net underlying loss ratio is defined as the net loss ratio less impacts of
catastrophes and non-catastrophe prior year reserve development.
(2) 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 Consolidated
Financial Statements.
(3) Expense ratio is calculated by dividing non-deferred 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.
(4) 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, 2023 , net income was$0.7 million compared to a net income of$28.3 million for the same period of 2022. The change was primarily due to higher loss and loss adjustment expenses offset by an increase in earned premium. Net premiums earned increased 9.3 percent during the three-month period endedMarch 31, 2023 compared to the same period of 2022. Profitable growth is our primary consideration when putting new business on the books and these results reflect growth in assumed reinsurance, other liability, and surety. For the three-month period ended 35
--------------------------------------------------------------------------------
Table of ContentsMarch 31, 2023 , the overall average increase in renewal premiums was 7.4%, with 2.9% from exposure changes and 4.5% from rate increases. Excluding the workers' compensation line of business, the overall average increase in renewal premiums was 8.9%, with 3.1% from exposures changes and 5.8% from rate increases. Net investment income was$12.7 million for the first quarter of 2023 as compared to$11.3 million for the same period in 2022. The first quarter of 2023 experienced increased fixed maturity income of$2.4 million which was a result of higher investment yields due to higher interest rates. This was partially offset by the change in 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$1.7 million during the first quarter of 2023, compared to net investment losses of$0.5 million for the same period in 2022. The change in the three-month period endedMarch 31, 2023 as compared to the same period in 2022 was primarily due to the change in the fair value of our investments in equity securities. Losses and loss settlement expenses increased by 33.9 percent during the three-month period endedMarch 31, 2023 , compared to the same period of 2022, driven by an increase in underlying losses due primarily to the impact of emerging loss trends that led to adverse prior period development in the third and fourth quarters of 2022 as well as increased ceded reinsurance costs and higher retentions across the broader portfolio. There is an additional increase attributable to a shift in accident year loss ratio assumed reinsurance business. This business continues to perform in line with our expectations. The GAAP combined ratio increased by 14.5 percentage points to 104.0 percent for the first quarter of 2023, compared to 89.5 percent in the same period in 2022. The deterioration was driven by an increase in the underlying loss ratio of 6.0 percentage points, unfavorable prior period reserve development in the current quarter compared to favorable development in the prior period leading to an increase of 4.5 percentage points, and increases in catastrophe loss and underwriting expenses contributing 2.0 percentage points each. Each of these are explained in more detail below. The net loss ratio increased 12.5 percentage points during the first quarter of 2023 as compared to the same period in 2022. The underlying loss ratio of 63.5% increased 6.0 percentage points which was partially driven by the impacts of the third and fourth quarter 2022 reserve strengthening in long-tailed other liability lines of business that increased our prospective view of loss costs as well as increased ceded reinsurance costs and retentions across the broader portfolio. Also contributing was a shift in accident year loss ratio assumptions for the assumed reinsurance book resulting in a greater portion of loss attributed to the current accident year that better reflects the exposure for this business. This shift was effectively neutral across the total loss ratio. Unfavorable prior period reserve development was 0.1% this quarter compared to favorable development of 4.4% in the first quarter of 2022. Pre-tax catastrophe losses in the first quarter of 2023 added 4.6 percentage points to the combined ratio compared to 2.6 percentage points added to the combined ratio in the first quarter of 2022. Elevated severe weather losses resulted in this increase of 2.0 percentage points compared to last year. The catastrophe loss ratio was 1.3 percentage points above our 10-year historic mean catastrophe loss ratio, and in line with our 5-year historical average for the first quarter. The underwriting expense ratio for the first quarter of 2023 was 35.8 percent compared to 33.8 percent for the first quarter of 2022. The expense ratio increased 2.0 percentage points compared to the first quarter of 2022 as a result of strategic investments in talent and technology, as well as changes to our post-retirement benefit plans that reduced expenses in 2022 but have since concluded.
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
36
--------------------------------------------------------------------------------
Table of Contents 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 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, conservative case reserves, which we expect to result in some level of favorable development over the course of settlement.
2023 Development
The property and casualty insurance business experienced$4.1 million unfavorable development in our net reserves for prior accident years for the three-month period endedMarch 31, 2023 . This was driven by development on catastrophe losses. Fire and allied lines experienced unfavorable development on wind and hail catastrophes primarily from 2022 storms, as well as unfavorable development in assumed reinsurance. Non-catastrophe reserve development was flat with unfavorable development in commercial other liability and workers' compensation offset by favorable development in fire and allied lines and commercial automobile.
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. Reserve 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, 2023 , our total reserves were within a reasonable range of our actuarial estimates. 37
--------------------------------------------------------------------------------
Table of Contents
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, 2023 2022
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(1) $ 78,405 $ 52,844 67.4 % $ 70,569 $ 36,801 52.1 %
Fire and allied lines(2) 56,466 45,881 81.3 58,748 45,236 77.0
Automobile 48,972 36,781 75.1 53,232 32,333 60.7
Workers' compensation 13,245 8,051 60.8 14,609 5,078 34.8
Surety(3) 11,946 1,221 10.2 8,120 375 4.6
Miscellaneous 265 137 51.7 279 162 58.1
Total commercial lines $ 209,299 $ 144,915 69.2 % $ 205,557 $ 119,985 58.4 %
Personal lines
Fire and allied lines(4) $ 1,952 $ 2,186 112.0 % $ 950 $ 1,191 125.4
Automobile - (254) NM 1 (729) NM
Miscellaneous 7 (46) NM 17 (18) (105.9)
Total personal lines $ 1,959 $ 1,886 96.3 % $ 968 $ 444 45.9 %
Assumed reinsurance $ 44,869 $ 27,796 61.9 % $ 27,703 $ 9,947 35.9 %
Total $ 256,127 $ 174,597 68.2 % $ 234,228 $ 130,376 55.7 %
(1) Commercial lines "Other liability" is business insurance covering bodily
injury and property damage arising from general business operations, accidents
on the insured's premises and products manufactured or sold.
(2) Commercial lines "Fire and allied lines" includes fire, allied lines,
commercial multiple peril and inland marine.
(3) Commercial lines "Surety" previously referred to as "Fidelity and surety".
(4) Personal lines "Fire and allied lines" includes fire, allied lines,
homeowners and inland marine.
NM = Not meaningful
Below are explanations regarding significant changes in the net loss ratios by
line of business:
•Other liability lines - The net loss ratio deteriorated 15.3 percentage points in the three-month period endedMarch 31, 2023 as compared to the same period in 2022. This deterioration is related to an increase in severity driven by construction defect and an increase in frequency in standard umbrella. During the last half of 2022, a combination of deeper analytical insights and emerging claim experience has increased our view of potential exposure within this line. Our prospective view of loss costs in these long-tailed lines increased during the last half of 2022. •Commercial fire and allied lines - The net loss ratio deteriorated 4.3 percentage points in the three-month period endedMarch 31, 2023 as compared to the same period in 2022 primarily due to an increase in catastrophe losses. The first quarter of 2023 experienced both unfavorable development from prior year catastrophes as well as losses from winter storms and wind and hail events that occurred in the current quarter. In addition, there has been a modest impact from increased ceded reinsurance costs and higher retentions across the broader portfolio. 38
--------------------------------------------------------------------------------
Table of Contents •Commercial automobile - The net loss ratio deteriorated 14.4 percentage points in the three-month period endedMarch 31, 2023 as compared to the same period in 2022 primarily due to favorable prior year reserve development being smaller in 2023 as compared to 2022. Benefits from our specialized claims operating model drove favorable emergence in 2022. •Workers' compensation - The net loss ratio deteriorated 26.0 percentage points in the three-month period endedMarch 31, 2023 as compared to the same period in 2022 primarily related to unfavorable prior year reserve development in the current quarter as compared to favorable reserve development in the same period of 2022. There was also a small number of large losses in the current quarter contributing to the increase. •Assumed reinsurance - The net loss ratio deteriorated 26.0 percentage points in the three-month period endedMarch 31, 2023 as compared to the same period in 2022. This deterioration is driven by a favorable release of catastrophe reserves that occurred in the first quarter of 2022, and growth in reinsurance treaties with less exposure to catastrophes.
Financial Condition
Stockholders' equity increased to$751.8 million atMarch 31, 2023 , from$740.1 million atDecember 31, 2022 . The Company's book value per share was$29.80 , which is an increase of$0.44 per share, or 1.5 percent, fromDecember 31, 2022 . The increase is primarily attributable to the$14.7 million increase in the net unrealized value from our fixed maturity securities, net of tax, and net income of$0.7 million , offset by shareholder dividends of$4.0 million during the first three months of 2023.
Investment Portfolio
Our invested assets totaled$1.9 billion atMarch 31, 2023 , compared to$1.8 billion atDecember 31, 2022 , an increase of$34.8 million . AtMarch 31, 2023 , fixed maturity securities and equity securities made up 84.7 percent and 8.5 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 and government agency bonds and tax-exemptU.S. municipal bonds. Our overall investment strategy is to stay fully invested (i.e., minimize cash balances). If additional cash is needed, we have the ability to borrow funds available under our revolving credit facility.
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:
39
--------------------------------------------------------------------------------
Table of Contents
Property & Casualty Insurance
Percent
(In Thousands, Except Ratios) of Total
Fixed maturities (1)
Available-for-sale $ 1,591,169 84.7 %
Equity securities 159,378 8.5
Mortgage loans 37,863 2.0
Other long-term investments 91,003 4.8
Short-term investments 275 -
Total $ 1,879,688 100.0 %
(1) Available-for-sale securities fixed maturities are carried at fair value.
As of
investments in subprime mortgages or other credit enhancement vehicles.
40
--------------------------------------------------------------------------------
Table of Contents Credit Quality The table below shows the composition of fixed maturity securities held in our available-for-sale security portfolios by credit rating atMarch 31, 2023 andDecember 31, 2022 . 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, 2023 December 31, 2022 Rating Carrying Value % of Total Carrying Value % of Total AAA$ 551,231 34.6 % $ 540,485 34.8 % AA 486,406 30.6 482,369 31.1 A 239,669 15.1 232,668 15.0 Baa/BBB 300,632 18.9 278,247 17.9 Other/Not Rated 13,231 0.8 17,567 1.1$ 1,591,169 100.0 %$ 1,551,336 100.0 % 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 increased slightly in the three-month period endedMarch 31, 2023 , compared with the same period of 2022 primarily due to the higher yields in the fixed income portfolio offset by the change in the fair value of our investments in limited liability partnerships. Investment Results (unaudited) Three Months Ended March 31, (In Thousands) 2023 2022 Investment income: Interest on fixed maturities$ 13,297 $ 10,891 Dividends on equity securities 1,243
1,268
Income on other long-term investments (1,080) 531 Other 1,860 708 Total investment income$ 15,320 $ 13,398 Less investment expenses 2,598 2,122 Net investment income$ 12,722 $ 11,276 Average yields: Fixed income securities: Pre-tax (1) 3.26 % 2.68 %
(1) Fixed income securities yield excluding net unrealized investment
gains/losses and expenses
41
--------------------------------------------------------------------------------
Table of Contents 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, 2023 , the change in value of our investments in limited liability partnerships resulted in an investment loss of$1.1 million as compared to investment income of$0.5 million in the same period of 2022. We had net investment losses of$1.7 million during the three-month period endedMarch 31, 2023 , as compared to net investment losses of$0.5 million in the same period of 2022. The change in the three-month period endedMarch 31, 2023 as compared to the same period in 2022 was primarily due to the change in the fair value of our equity securities investments driven by equity market losses in 2023. 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 versus amortized cost, investment spreads widening or contracting, rating actions, payment and default history. 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, 2023 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 . 42
--------------------------------------------------------------------------------
Table of Contents 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.
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) 2023
2022
Cash provided by (used in)
Operating activities$ (6,786) $ 1,595 Investing activities (32,501) (20,061) Financing activities (4,133) (4,116) Net change in cash and cash equivalents$ (43,420)
Our cash flows were sufficient to meet our liquidity needs for the three-month periods endedMarch 31, 2023 and 2022 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 outflows of$6.8 million and inflows of$1.6 million for the three-month periods endedMarch 31, 2023 and 2022, respectively. In the three-month period endedMarch 31, 2023 , the net operating cash outflows were driven by loss and expense outflows not being fully offset by premium and reinsurance related cash inflows.
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,$522.1 million , or 32.8 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, 2023 , our cash and cash equivalents included$18.0 million related to these money market accounts, compared to$31.3 million atDecember 31, 2022 . Net cash flows used by investing activities were$32.5 million for the three-month period endedMarch 31, 2023 , compared to net cash flows used by investing activities of$20.1 million for the three-month period endedMarch 31, 2022 . For the three-month periods endedMarch 31, 2023 and 2022, we had cash inflows from scheduled and unscheduled investment maturities, redemptions, prepayments, and sales of investments of$31.3 million and$67.0 million , respectively. Our cash outflows for investment purchases were$61.2 million for the three-month period endedMarch 31, 2023 , compared to$84.5 million for the same period of 2022. 43
--------------------------------------------------------------------------------
Table of Contents Financing Activities Net cash flows used in financing activities was$4.1 million for the three-month period endedMarch 31, 2023 which was flat compared to$4.1 million used in the three-month period endedMarch 31, 2022 .
Credit Facilities
OnMarch 31, 2020 ,United Fire & Casualty Company , as borrower ("Borrower"), wholly owned subsidiary ofUnited Fire Group, Inc. entered into a credit agreement (the "Credit Agreement") withWells Fargo Bank, National 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 million revolving credit facility, which includes a$20 million letter of credit sub-facility and a$5 million 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 million if agreed to by the Lenders providing such incremental facility. As ofMarch 31, 2023 and 2022, there were no balances outstanding under the Credit Agreement. For the three-month period endedMarch 31, 2023 and 2022, 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$4.0 million and$3.8 million in the three-month periods endedMarch 31, 2023 and 2022, 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 of 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, 2023 , UFG's sole direct insurance company subsidiary,United Fire & Casualty Company , is able to make a maximum of$62.8 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 increased to$751.8 million atMarch 31, 2023 , from$740.1 million atDecember 31, 2022 . The Company's book value per share was$29.80 , which is an increase of$0.44 per share, or 1.5 percent, fromDecember 31, 2022 . The increase is primarily attributable to the$14.7 million increase in the net unrealized value from our fixed maturity securities, net of tax, and net income of$0.7 million , offset by shareholder dividends of$4.0 million during the first three months of 2023.
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
44
--------------------------------------------------------------------------------
Table of Contents 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, 2023 was$24.7 million and there are no remaining capital contribution obligations with this investment. 45
--------------------------------------------------------------------------------
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 catastrophe losses, a key measure management uses to evaluate our results. Catastrophe losses is an operational measure which utilizes 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) 2023 2022 ISO catastrophes $ 12,562$ 7,905 Non-ISO catastrophes (1) (898) (1,728) Total catastrophes $ 11,664$ 6,177
(1) This number includes international assumed losses.
46
--------------------------------------------------------------------------------
Table of Contents
Northwestern Mutual Earns Top-Five Spot in InvestmentNews Ranking
A Comprehensive Study Exploring Boiler Insurance Market : Key Players HomeServe, British Gas, CORGI HomePlan
Advisor News
- Midlife planning for women: why it matters and how advisors should adapt
- Tax anxiety is real, although few have a plan to address it
- Trump targets ‘retirement gap’ with new executive order
- Younger investors are engaged and advisors must adapt
- Plugging the hidden budget leaks of retirement
More Advisor NewsAnnuity News
- Corebridge Financial, Equitable Holdings post Q1 earnings as merger looms
- AM Best Assigns Credit Ratings to Calix Re Limited
- Transamerica introduces new RILA with optional income features
- Transamerica introduces RILA with optional income features
- American Life expands into Wyoming and Mississippi markets
More Annuity NewsHealth/Employee Benefits News
- North Dakota small business owners lament rising healthcare costs, credit card swipe fees
- NC's new Medicaid 'compromise' comes at a cruel and frightful cost
- VA to host claims and enrollment clinic in Hutch
- Data from Brown University Provide New Insights into Managed Care (Substantial Variation In Administrative Spending and Profit Across State Insurance Markets, 2023): Managed Care
- Studies from Parth Sheth et al in the Area of Epidemiology Described (Graphical Structure Learning Identifies Hypothesized Mechanisms for Heterogeneous Treatment Effects in Medicaid Population Health Programs): Health and Medicine – Epidemiology
More Health/Employee Benefits NewsLife Insurance News
- Genworth Financial Announces First Quarter 2026 Results
- Transamerica agrees to $57M settlement in cost-of-insurance lawsuit
- The next step for AI in insurance — partnerships to scale
- Your clients are sitting on underused assets
- National Life Group Names Jason Doiron CEO of NLG Capital to Lead the Next Phase of Growth
More Life Insurance News