United Fire Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company writes property and casualty (P&C) and life insurance and sells annuities through independent agencies. Financial statements are unaudited and were reviewed by Ernst & Young LLP.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net premiums earned | $260.1m | $239.4m | $754.9m | $681.8m |
| Total revenues | $289.5m | $264.6m | $835.0m | $759.0m |
| Income before tax | $15.2m | $26.8m | $44.8m | $78.2m |
| Net income | $12.4m | $19.5m | $37.9m | $58.2m |
| Diluted EPS | $0.48 | $0.77 | $1.47 | $2.31 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $128.1m | $124.4m |
- Premium growth was attributed to organic growth and geographic expansion. Total revenue rose 9.4% in Q3 and 10.0% year to date, while net income fell 36.7% and 34.9%, respectively.
- Q3 P&C premiums earned rose 9.4% to $239.5m; segment pretax income declined to $14.0m from $24.4m. Its combined ratio worsened to 100.9% from 94.1%, indicating an underwriting loss for the quarter. Year-to-date combined ratio was 99.5% versus 93.9%.
- Q3 life segment pretax income was $1.1m versus $2.4m; year-to-date it was $1.2m versus $5.9m. Year-to-date life premiums increased 17.7%, mainly from higher single-premium whole-life sales, while investment income declined amid lower reinvestment yields.
- Q3 net investment income increased 11.0% to $26.7m, primarily from stronger limited-partnership investment results; nine-month investment income declined 1.1% to $73.4m. Realized investment gains were $2.6m in Q3 and $6.2m year to date.
Financial position, liquidity and capital
- At September 30, total assets were $4.107bn, liabilities $3.148bn and stockholders’ equity $959.2m, compared with $3.890bn, $3.011bn and $878.9m at December 31, 2015. Book value per share was $37.83, up from $34.94.
- Cash and cash equivalents were $140.9m, up from $106.4m at year-end. Invested assets totaled $3.253bn. Operating cash flow funded liquidity needs; cash flow from investing was a $20.0m use and financing activities used $73.6m over nine months.
- No borrowings were outstanding under the new $50m unsecured revolving credit facility, due in 2020; the company reported compliance with its covenants. The agreement includes a maximum debt-to-capitalization ratio of 0.35 to 1.0.
- Stockholders’ equity benefited from $37.9m net income and a $51.4m after-tax increase in unrealized investment appreciation, partly offset by $18.2m dividends. The company contributed $16.4m to its pension plan, including an additional $10.0m in September.
Material changes, outlook and risks
- Higher catastrophe, commercial auto and large commercial fire losses drove much of the earnings decline. P&C pretax catastrophe losses were $12.5m in Q3 and $52.4m year to date, versus $7.0m and $27.3m in 2015. Year-to-date net loss ratio rose to 68.7% from 63.7%.
- Prior-year P&C reserves developed favorably by $0.7m in Q3 and $27.1m year to date. Q3 favorable development included workers’ compensation and commercial liability, partly offset by unfavorable commercial auto and commercial fire/allied development. Management said total reserves were within actuarial estimates; reserve estimates remain subject to uncertainty.
- Life annuity deposits declined, consistent with management’s stated strategy to prioritize profitability over market share in a low-interest-rate environment; spreads increased 20 basis points year over year. Net annuity cash outflow was $63.5m year to date, lower than $106.5m in 2015.
- No specific earnings or premium guidance was provided. Management emphasized underwriting discipline, investment-grade holdings, asset-liability matching and use of reinsurance. Risks include catastrophe severity and frequency, reserve adequacy, commercial auto trends, interest rates and investment valuations, geographic concentration, reinsurer performance, competition, regulation and cyber/security events.
- The company had a remaining $9.7m potential capital contribution commitment to a limited-liability partnership through 2023. Routine legal proceedings were not expected by management to have a material adverse effect. No material subsequent events were reported.
Most important facts for investors to verify
- Whether elevated catastrophe, commercial auto and commercial fire losses persist, and how they affect P&C pricing and the combined ratio.
- Whether reserve development remains favorable and whether management’s estimate that reserves are within actuarial ranges holds as claims mature.
- The drivers and durability of life-segment profitability, annuity outflows and investment returns in the low-rate environment.
- Investment portfolio sensitivity to interest rates and market prices, including the sustainability of unrealized gains and partnership income.
- Capital, liquidity and dividend capacity, including insurance-subsidiary regulatory limits, pension contributions and the revolving-credit covenants.