United Fire Group, Inc. — Q3 2013 Form 10-Q
Business context and period: The unaudited filing covers the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods. United Fire writes property-and-casualty and life insurance and sells annuities through independent agencies. Financial statements were reviewed by Ernst & Young, not audited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net premiums earned | $194.2m | $176.5m | $557.4m | $508.1m |
| Total revenues | $223.0m | $206.6m | $648.0m | $599.9m |
| Income before taxes | $14.4m | $10.0m | $64.6m | $54.1m |
| Net income | $11.7m | $8.7m | $49.6m | $42.6m |
| Diluted EPS | $0.45 | $0.34 | $1.94 | $1.67 |
| Cash dividends declared per share | $0.18 | $0.15 | $0.51 | $0.45 |
- Growth and drivers: Nine-month revenue rose 8.0% and net income rose 16.4%. Premium growth reflected rate increases across most commercial and personal lines and new business. Loss and loss-adjustment expenses increased 9.8% year over year for nine months, primarily from business growth and higher severity, including in commercial auto and workers’ compensation.
- Property and casualty: Nine-month premiums earned increased 10.8% to $511.8m; pretax income rose to $56.2m from $46.2m. The combined ratio improved to 96.8% from 97.7% for nine months; Q3 was 100.3% versus 102.5%. A ratio below 100% generally indicates underwriting profit. Favorable prior-year reserve development was $49.0m for nine months, including $8.6m in Q3.
- Catastrophes: Nine-month pretax catastrophe losses were $27.2m, down from $34.5m in 2012; Q3 losses were $8.5m, approximately unchanged. Lower catastrophe losses helped offset deterioration in some lines.
- Life: Nine-month pretax income increased to $8.4m from $7.9m. Premiums earned declined 1.3% to $45.6m and net investment income fell 9.1% to $48.3m, reflecting lower invested assets and reinvestment yields. Annuity business had net cash outflows of $63.2m in the nine-month period, versus $18.8m in 2012.
- Investment income and gains: Consolidated net investment income declined 4.4% to $82.8m for nine months; realized investment gains increased to $7.3m from $4.7m. A $0.1m other-than-temporary impairment charge was recorded in 2013.
Financial position, cash flow, and capital
- At September 30, total assets were $3.724bn, liabilities $2.979bn, and stockholders’ equity $744.2m, up from $729.2m at year-end 2012. Book value per share was $29.30, compared with $28.90.
- Cash and cash equivalents were $86.7m, down from $107.5m at December 31, 2012. Nine-month operating cash flow was $118.0m (versus $125.3m); investing cash outflow was $80.3m (versus $115.9m); financing cash outflow was $58.5m (versus $71.4m). Cash decreased by $20.8m.
- Invested assets were $3.038bn, approximately $6.7m below year-end. The portfolio was predominantly fixed maturities; 31.0% of fixed maturities were rated Baa/BBB and 2.4% were other or unrated. Management attributed a $28.5m after-tax decline in net unrealized investment gains to higher interest rates, partly offset by stronger equity values.
- No credit-facility borrowings were outstanding at September 30. The unsecured revolving facility provides up to $100m, with a conditional option to increase it to $125m, and matures December 22, 2015. The company reported compliance with covenants.
- Dividends paid in the first nine months were $12.9m. Insurance subsidiaries could pay up to $37.8m in dividends without prior regulatory approval. A share-repurchase authorization for 1,126,143 shares remained available, expiring August 2014; 3,577 shares were repurchased in the nine-month period.
Outlook, risks, and unusual items
- The filing gives no quantitative earnings or premium guidance. Management emphasizes disciplined underwriting, agency relationships, claims handling, investment management, and asset-liability matching.
- Key sensitivities include claim frequency and severity, catastrophe events, reserve adequacy, reinsurance recoverability and reinsurer strength, interest rates and investment impairment, competition, regulation, and credit ratings. Management cautions that interim results are not necessarily indicative of full-year results.
- Management said most unrealized fixed-maturity losses reflected interest-rate movements rather than issuer credit concerns and stated it did not intend, and was unlikely to be required, to sell the affected securities before recovery or maturity. Further impairment charges remain possible.
- Other notable exposure: a remaining potential capital contribution commitment of $2.0m through 2017 to a limited liability partnership. Pending litigation was described as ordinary, routine, and incidental. The IRS was conducting a routine examination of the 2011 tax return.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported. The filing identifies no material change in market risk from the 2012 annual report.
Most important facts for investors to verify
- Whether favorable prior-year reserve development continues, and whether current commercial auto and workers’ compensation loss trends worsen.
- How much underwriting results depend on catastrophe experience and reserve releases; Q3’s combined ratio remained above 100%.
- Whether falling investment yields, interest-rate-driven fair-value changes, or annuity withdrawals pressure income, equity, or liquidity.
- Whether the company maintains adequate statutory capital, reinsurance protection, and access to its revolving facility as claims and annuity cash flows fluctuate.
- Whether the reported segment results, cash-flow movements, dividend capacity, and remaining share-repurchase authorization remain consistent with subsequent filings.