United Fire Group, Inc.
Consolidated Financial Results – Highlights(1):
Three Months Ended March 31, 2020 | ||
Net income (loss) per diluted share | $(2.90) | |
Adjusted operating income(2) per diluted share | $0.05 | |
Net realized investment gains (losses) per diluted share | $(2.95) | |
GAAP combined ratio | 105.2% | |
Book value per share | $33.30 | |
Return on equity(3) | (33.3)% |
United Fire Group, Inc. today reported consolidated net loss, including net realized investment gains and losses and changes in the fair value of equity securities, of $72.5 million ($2.90 per diluted share) for the three-month period ended March 31, 2020 (the “first quarter of 2020”), compared to consolidated net income of $44.5 million ($1.74 per diluted share) for the same period in 2019.
The Company reported consolidated adjusted operating income of $0.05 per diluted share for the first quarter of 2020, compared to consolidated adjusted operating income of $0.91 per diluted share for the same period in 2019.
“The net loss reported in the first quarter 2020 was driven primarily by the decrease in the value of our investments in equity securities, an increase in severity of catastrophe and non-catastrophe losses and a decrease in net investment income,” stated Randy A. Ramlo, President and Chief Executive Officer. “During the first quarter, our higher catastrophe loss results stemmed from two events: a large explosion in January at a manufacturing business in Houston, Texas, classified as a catastrophe by the Insurance Services Office, and a hail storm in Jefferson City, Missouri, during the last week of March. We also experienced an increase in severity in our other liability, commercial fire and allied and workers’ compensation lines of business. We continue to make progress in our commercial auto line of business, reporting an improvement in our commercial auto loss ratio of 10.1 points with a decrease in the frequency of commercial auto claims and a reduction in commercial auto exposure units for the first quarter of 2020. Although we saw improvement, our loss ratio for commercial auto remains at a higher than acceptable level. The decline in equity markets also drove a decrease in the quarterly net investment income derived from our investments in limited liability partnerships.”
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(1) Per share amounts are after tax.
(2) Adjusted operating income is a non-GAAP financial measure of net income excluding net realized investment
gains and losses, changes in the fair value of equity securities and related federal income taxes. Management evaluates this measure and ratios derived from this measure and the Company provides this information to investors because we believe it better represents the normal, ongoing performance of our business. See Definitions of Non-GAAP Information and Reconciliations to Comparable GAAP Measures for a reconciliation of adjusted operating income to net income.
(3) Return on equity is calculated by dividing annualized net income by average year-to-date stockholders’ equity.
“Much like many of our industry peers have experienced, the COVID-19 pandemic significantly impacted the financial markets, and in turn the value of our investments in equities. However, through the first quarter of 2020, there was not a significant impact to our core insurance operations. Depending on the duration of the suppressed economy in the second quarter and beyond, we anticipate that there could be an adverse impact to our business, including lower premiums and demand for our products. 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 will be affording coverage when appropriate. Based on information we have available at this time, we expect the effect of the COVID-19 pandemic on claims currently under our policy coverage to be manageable. At this time, we cannot determine how any changes in legislation, regulations and interpretations by the courts will impact the Company in the future.”
“With the exception of our essential services employees, UFG has dispatched its staff to work remotely for the safety, health and well-being of our employees and as some of the states in which we have operations have issued “shelter in place” or similar directives. We are fully operational, but have limited travel for non-essential employees and certain routine work completed by our field claims and loss control representatives, such as premium audits and inspections, has been delayed or is being completed remotely to comply with social distancing recommendations. We are and will continue monitoring the state and federal responses to the pandemic and, when appropriate, will adjust our operations in response.”
Financial Highlights
Net loss, including net realized investment gains and losses, totaled $72.5 million ($2.90 per diluted share) for the first quarter of 2020, compared to net income of $44.5 million ($1.74 per diluted share) in the same period in 2019. The decrease in net income was primarily due to a decrease in the fair value of equity securities, an increase in losses and loss settlement expenses and a decrease in net investment income. In the first quarter of 2020, the fair value of equity securities decreased $90.6 million compared to an increase of $24.6 million in the same period in 2019, or a change of $115.2 million. The increase in losses and loss settlement expenses was due to an increase in severity of catastrophe and non-catastrophe losses. The decrease in net investment income is primarily from the change in value of our limited liability partnership investments.
Net premiums earned increased 2.5 percent to $268.8 million in the first quarter of 2020, compared to $262.3 million in the same period in 2019. The increase in the three-month period ended March 31, 2020 was primarily due to rate increases, premium audits and endorsements.
The average renewal pricing change for commercial lines increased 7.6 percent in the first quarter of 2020 compared to 6.6 percent in the fourth quarter of 2019. The renewal pricing increases continue to be driven by commercial auto rate increases. During the first quarter of 2020, the commercial auto effective rate change remained in the low-double digits. Personal lines renewal pricing increases remained in the mid-single digits.
Net investment income was $2.4 million for the first quarter of 2020 as compared to net investment income of $16.5 million for the same period in 2019. The decrease in net investment income was due to a decrease 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 realized investment losses of $93.4 million during the first quarter of 2020, compared to net realized investment gains of $26.7 million for the same period in 2019. The change in the three-month period ended March 31, 2020, as compared to the same period in 2019, was primarily due to the decrease in the fair value of equity securities as mentioned previously.
Consolidated net unrealized investment gains, net of tax, totaled $51.8 million as of March 31, 2020, an increase of $4.5 million from December 31, 2019. The increase in net unrealized investment gains is primarily the result of a decrease in interest rates in the first quarter of 2020.
Total consolidated assets as of March 31, 2020 were $2.9 billion, which included $2.0 billion of invested assets. The Company’s book value per share was $33.30, which is a decrease of $3.10 per share, or 8.5 percent from December 31, 2019. This decrease is primarily attributed to a net loss of $72.5 million, shareholder dividends of $8.2 million and share repurchases of $2.7 million, partially offset by an increase in net unrealized investment gains on fixed maturity securities of $4.5 million, net of tax, during the first three months of 2020.
The annualized return on equity was (33.3) percent year-to-date compared to 19.3 percent for the same period in 2019. The change in the annualized return on equity was primarily driven by the change in the value of equity securities in the first three months of 2020 compared to the same period in 2019.
Reserve Development
We experienced favorable development in our net reserves for prior accident years of $13.7 million in the first quarter of 2020, compared to favorable development of $4.6 million in the same period in 2019. The change in prior year reserve development in the first quarter of 2020 came primarily from favorable development in workers’ compensation and commercial fire and allied lines of business, partially offset by other liability lines of business. Development amounts can vary significantly from quarter-to-quarter depending on a number of factors, including the number of claims settled and the settlement terms. At March 31, 2020, our total reserves were within our actuarial estimates.
GAAP Combined Ratio
The GAAP combined ratio increased by 9.6 percentage points to 105.2 percent for the first quarter of 2020, compared to 95.6 percent in the same period in 2019. The increase in the combined ratio was primarily driven by an increase in the loss ratio due to an increase in severity of losses of both catastrophe and non-catastrophe losses, and an increase in the expense ratio.
Pre-tax catastrophe losses in the first quarter of 2020 were higher when compared to first quarter of 2019, with catastrophe losses adding 5.7 percent percentage points to the combined ratio in 2020 as compared to 1.4 percentage points in 2019. Our 10-year historical average for first quarter catastrophe losses is 2.9 percentage points added to the combined ratio.
Expense Ratio
The expense ratio for the first quarter of 2020 was 35.8 percentage points, compared to 33.0 percentage points for the first quarter in 2019. The increase in the expense ratio during the first quarter of 2020 is primarily due to the acceleration of the amortization of our deferred acquisition costs in our under-performing commercial auto line of business and personal lines of business from lower than expected profitability. The increase in the expense ratio was also driven by our continued investment in our multi-year Oasis project, an upgrade to our technology platform designed to enhance core underwriting decisions, selection of risks and productivity.
Capital Management
During the first quarter of 2020, we declared and paid a $0.33 per share cash dividend to shareholders of record as of March 6, 2020. We have paid a quarterly dividend every quarter since March 1968. During the first quarter of 2020 we repurchased 70,467 shares of our common stock for a total purchase price of approximately $2.7 million.
Earnings Call Access Information
An earnings call will be held at 9:00 a.m. Central Time on May 6, 2020 to allow securities analysts, shareholders and other interested parties the opportunity to hear management discuss the Company’s first quarter 2020 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 May 20, 2020. The replay access information is toll-free 1-877-344-7529; conference ID no. 10141758.
Webcast: An audio webcast of the teleconference can be accessed at the Company’s investor relations page at
http://ir.ufginsurance.com/event or https://services.choruscall.com/links/ufcs200506. The archived audio webcast will be available until May 20, 2020.
Transcript: A transcript of the teleconference will be available on the Company’s website soon after the completion of the teleconference.
About UFG
Founded in 1946 as United Fire & Casualty Company, UFG, through its insurance company subsidiaries, is engaged in the business of writing property and casualty insurance.
Through our subsidiaries, we are licensed as a property and casualty insurer in 46 states, plus the District of Columbia, and we are represented by approximately 1,000 independent agencies. A.M. Best Company assigns a rating of “A” (Excellent) for members of the United Fire & Casualty Group.
For more information about UFG, visit www.ufginsurance.com or contact:
Randy Patten, AVP and Controller, Corporate Finance, 319-286-2537 or IR@unitedfiregroup.com.