United Fire Group, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018. UFG writes property and casualty insurance through independent agencies and reports continuing operations as one segment. The sale of its life insurance subsidiary, United Life, to Kuvare closed March 30, 2018; life operations are presented as discontinued operations. Unless otherwise indicated, amounts below are in millions.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net premiums earned, continuing operations | $245.2 | $236.4 |
| Investment income, continuing operations | $13.5 | $12.6 |
| Total revenue, continuing operations | $250.8 | $251.3 |
| Income from continuing operations | $20.4 | $18.6 |
| Net income, including discontinued operations and sale gain | $45.8 | $19.9 |
| Diluted EPS, continuing operations / total | $0.80 / $1.80 | $0.72 / $0.77 |
| Operating cash flow, consolidated | $23.6 | $39.2 |
| Cash and cash equivalents, March 31 | $316.9 | $95.6 at Dec. 31, 2017 |
| Stockholders’ equity | $970.7 | $973.4 at Dec. 31, 2017 |
UFG reported a 93.5% combined ratio (96.5% in Q1 2017), comprising a 59.0% net loss ratio (66.2%) and a 34.5% expense ratio (30.3%). Total assets were $2.845 billion and total liabilities $1.875 billion at quarter-end; the large balance-sheet reduction from year-end primarily reflects the United Life sale and related removal of held-for-sale assets and liabilities. Continuing-operation investments totaled $1.905 billion. The $50 million revolving credit facility had no outstanding balance; UFG reported compliance with its covenants.
Changes, outlook, and risks
- Continuing-operation net income increased 9.6%, supported by premium growth, lower catastrophe losses, and $38.1 million of favorable prior-year reserve development. Pre-tax catastrophe losses were $3.4 million versus $9.7 million a year earlier.
- Total net income included a $27.3 million after-tax gain on the United Life sale; discontinued operations otherwise recorded a $1.9 million net loss.
- Adoption of the new equity-security accounting guidance moved $191.2 million of after-tax accumulated unrealized gains/losses into retained earnings at adoption. Subsequent fair-value changes on equity securities are recognized in earnings; UFG reported a $9.2 million continuing-operation realized loss from equity-security value changes for the quarter.
- Expense ratio increased as UFG invested in underwriting technology and accelerated deferred acquisition cost amortization for automobile lines with lower-than-expected profitability. The filing gives no specific earnings or premium guidance. Management expected cash flows from continuing operations to meet future liquidity needs.
- Key exposures include catastrophe and geographic concentration (48.4% of property and casualty premiums came from Texas, Iowa, California, Missouri, and Colorado), reserve-estimation uncertainty, interest-rate and equity-market movements, underwriting and pricing, reinsurance collectability, and regulatory or litigation changes. Management said reserves were within actuarial estimates, but favorable development is variable and not a reliable forecast.
- Management’s accounting for the Tax Act remained provisional at March 31, 2018. The filing also identifies a $1.5 million remaining potential capital contribution commitment to an investment partnership. Pending lease guidance was expected to have no significant financial impact, according to management.
Important facts for investors to verify
- Separate recurring property and casualty earnings from the one-time United Life sale gain and discontinued-operation results.
- Assess sustainability of favorable reserve development, catastrophe experience, and the automobile lines’ profitability and acquisition-cost amortization.
- Review investment portfolio sensitivity: quarterly equity-value changes reduced earnings, while unrealized fixed-maturity losses affected equity and comprehensive income.
- Confirm the final tax accounting, post-sale transition-service obligations, and the effect of the disposed life business on future comparisons.
- Check cash generation excluding sale proceeds: investing cash flow included $276.1 million from the United Life sale, and consolidated operating cash flow was below the prior-year quarter.
- Note that the interim financial statements received an independent accountant’s review, not an audit; the reviewer reported no material modifications needed for GAAP conformity.