United Fire Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. United Fire writes property and casualty (P&C) and life insurance and sells annuities through independent agencies. The interim statements are unaudited and were reviewed by Ernst & Young LLP; the auditor did not express an audit opinion.
Key financial results
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Net premiums earned | $213.2 million | $193.3 million |
| Total revenue | $238.5 million | $222.9 million |
| Net income | $23.7 million; $0.95 basic EPS, $0.94 diluted | $13.3 million; $0.53 basic EPS, $0.52 diluted |
| Income before income taxes | $31.8 million | $15.9 million |
| Operating cash flow | $13.9 million | $18.5 million |
| Cash and cash equivalents | $111.3 million | $90.6 million at Dec. 31, 2014 |
| Total assets / liabilities / equity | $3,864.3 million / $3,020.0 million / $844.2 million | $3,856.7 million / $3,039.3 million / $817.4 million at Dec. 31, 2014 |
Revenue increased 7.0% and net income increased 77.6% year over year. Net investment income declined 9.0% to $24.4 million, while net realized investment gains fell to $0.9 million from $2.2 million. Comprehensive income was $32.2 million versus $28.5 million.
Segments, underwriting and material changes
- P&C: Pre-tax income was $31.1 million versus $13.7 million. Net premiums earned rose 11.5% to $200.1 million, attributed mainly to rate increases and, to a lesser extent, new business. The combined ratio improved to 89.7% from 99.6%; the net loss ratio was 59.6% versus 66.1%, and the expense ratio was 30.1% versus 33.5%.
- P&C catastrophe losses were $0.2 million versus $3.3 million. Prior-year P&C reserves developed favorably by $16.7 million, compared with $14.5 million of favorable development in Q1 2014. Management cautions reserve development can vary substantially between periods.
- Life: Pre-tax income declined to $0.7 million from $2.2 million. Premiums earned fell 5.9% to $13.0 million, investment income fell 12.7% to $13.6 million, and deferred annuity deposits declined 31.8%. Management linked lower deposits to reductions in credited rates amid the low-rate environment; lower single-premium whole-life sales also reduced premiums.
- Stockholders’ equity increased 3.3% to $844.2 million; book value per share rose to $33.76 from $32.67. The company repurchased 37,637 shares for $1.1 million and paid $5.0 million in dividends ($0.20 per share).
Cash, investments, debt and liquidity
Investing activities provided $44.0 million, while financing activities used $37.1 million, principally reflecting net annuity withdrawals. Net annuity cash outflow was $35.0 million versus $11.1 million a year earlier. The company reported no outstanding balance on its $100 million unsecured revolving credit facility at March 31, 2015 and compliance with its covenants. The facility was scheduled to mature December 22, 2015.
Invested assets totaled $3.14 billion, down from $3.17 billion at year-end; the portfolio was predominantly fixed maturities. Management reported a 4.4-year weighted-average effective duration for fixed maturities. Approximately 76.5% of fixed-maturity holdings were rated AAA through A; the filing reports 22.1% as Baa/BBB. Net unrealized investment appreciation increased $7.3 million after tax during the quarter. The company reported no direct subprime mortgage or credit-enhancement exposure.
Outlook, risks and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management describes continued low interest rates as a headwind to reinvestment income and annuity deposits, and says it continues to favor investment-grade fixed-income securities.
- Key stated risks include catastrophe frequency and severity, reserve adequacy, underwriting and pricing, geographic concentration, investment-market and interest-rate changes, reinsurer strength, competition, litigation and regulation, cyber incidents, and financial-strength ratings.
- Long-tail claims and reserve estimates are subject to uncertainty. Management said reserves were within actuarial estimates and relatively flat versus year-end; the quarter’s earnings included material favorable prior-year reserve development.
- A review of the P&C deferred acquisition cost model increased the DAC asset by $0.7 million and decreased underwriting expense by $0.05 million versus the former model. The filing identifies this as a model update following completion of the Mercer integration.
- A partnership investment carries a remaining potential capital-contribution commitment of $10.3 million through December 31, 2023. Pending litigation was described as ordinary, routine and incidental. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of the earnings improvement reflects sustainable pricing and underwriting performance versus favorable reserve development and lower catastrophe losses.
- Whether the deterioration in commercial automobile claims and the single large fidelity-and-surety claim persist in later periods.
- Whether low interest rates, lower annuity deposits and net annuity withdrawals continue to pressure investment income and life-segment results.
- The status, renewal or replacement of the revolving credit facility approaching its stated December 2015 maturity.
- Future reserve development, realized or other-than-temporary investment losses, and the timing or amount of the partnership capital commitment.