United Fire Group, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
United Fire Group (UFG) writes property and casualty insurance through independent agencies; its subsidiaries are licensed in 46 states and the District of Columbia. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018. The life insurance business was sold on March 30, 2018, and is reported as discontinued operations.
Financial and operating results
Amounts below are in millions except per-share data and ratios.
- Revenue: Net premiums earned rose 7.0% to $262.3, which management attributed mainly to rate increases, premium audits, and endorsements. Net investment income increased 22.4% to $16.5. Total revenue rose 21.8% to $305.5, including $26.7 in net realized investment gains versus a $7.9 loss in Q1 2018; the change primarily reflected stronger equity markets.
- Profit: Continuing-operations income increased to $44.5 from $20.4; diluted continuing-operations EPS was $1.74 versus $0.80. Reported net income was $44.5 versus $45.8, as Q1 2018 included a $27.3 after-tax gain on the life-business sale. Comprehensive income was $71.7 versus $6.1.
- Underwriting and margins: The combined ratio was 95.6% versus 93.5% (below 100% generally indicates underwriting profitability). The net loss ratio increased to 62.6% from 59.0%, while the expense ratio improved to 33.0% from 34.5%. Catastrophe losses added 1.4 percentage points to the combined ratio in both periods. Management said the core loss ratio, excluding prior-year development, improved 10.1 percentage points.
- Reserves: Prior-year reserves developed favorably by $4.6, compared with $38.1 favorable development in Q1 2018. Favorable development in workers’ compensation, fidelity and surety, and commercial liability was partly offset by $4.5 of adverse development in commercial fire and allied lines. Management said reserves were within actuarial estimates at quarter-end.
- Cash flow and liquidity: Operating cash flow was $10.7 versus $23.6. Cash and equivalents were $95.5 at March 31, up from $64.5 at year-end. Management said continuing-operations cash flows met current needs and are expected to meet future liquidity needs. The company had no balance outstanding on its $50.0 million revolving credit facility and was in covenant compliance.
- Capital and balance sheet: Total assets were $2,904.0 and stockholders’ equity was $955.2, up from $888.4 at December 31, 2018. Book value per share increased to $37.95 from $35.40. UFG paid $7.8 in dividends and made no share repurchases during the quarter.
- Investments: The portfolio totaled $2,092.1, predominantly fixed maturities. About 80.1% of fixed-maturity holdings were rated AAA or AA. UFG reported no other-than-temporary impairment write-downs in either comparison period.
Material changes, outlook, and risks
- Losses and loss adjustment expenses rose 13.5% year over year. Management cited lower favorable prior-year reserve development and higher paid losses, particularly in commercial automobile and other liability; the Gulf Coast region had reserve strengthening on certain commercial lines.
- Management provided no specific earnings or premium guidance. It described its approach as disciplined underwriting, appropriate pricing, claims management, and matching investments to claim liabilities.
- Key risks include catastrophe frequency and severity, reserve estimation uncertainty, geographic concentration, underwriting and pricing, investment-market and interest-rate changes, reinsurer strength, competition, regulation, and cyber or operational disruption. UFG noted that 47.3% of Q1 property and casualty premiums came from Texas, California, Iowa, Missouri, and Colorado.
- UFG had a $19.0 million remaining contractual commitment to contribute capital to a limited liability partnership through July 2028. Routine legal proceedings were not expected by management to have a material adverse effect. No material subsequent events were reported.
- UFG adopted lease accounting in 2019, recording $19.8 million of right-of-use assets and $20.3 million of lease liabilities at adoption; the adoption was not considered to have a significant effect on financial position or results.
Most important facts for investors to verify
- Whether the weaker reported loss ratio and commercial auto/liability claims trends persist, and how reserve development evolves.
- How much future earnings depend on equity-market gains and variable partnership investment income, rather than underwriting and recurring investment income.
- Whether premium growth and pricing remain adequate to offset claims costs, catastrophe exposure, and competitive pressures.
- The company’s actual statutory capital, subsidiary dividend capacity, and liquidity under severe catastrophe or reinsurance-recovery scenarios.
- The terms and use of the revolving credit facility, upcoming maturity, and the timing or funding of the $19.0 million partnership commitment.