United Fire Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. United Fire writes property and casualty (P&C) and life insurance through independent agencies. Figures below are in millions of dollars unless otherwise stated.
Financial results and condition
- Revenue: Total revenue was $205.3 million, up 6.0% year over year. Net premiums earned rose 9.5% to $176.8 million, while net investment income declined 9.2% to $26.5 million and realized investment gains fell to $1.9 million from $2.8 million.
- Profit and margins: Net income increased 16.7% to $22.4 million; diluted EPS was $0.88 versus $0.75. Income before tax was $29.9 million. The approximate net margin was 10.9%, compared with 9.9% a year earlier.
- P&C underwriting: Segment pretax income rose to $27.4 million from $21.1 million. The combined ratio improved to 90.3% from 93.8% (below 100% generally indicates underwriting profitability). The reported net loss ratio was 56.6% including catastrophe losses, versus 59.5%; the expense ratio was 33.7% versus 34.3%.
- Life segment: Pretax income declined to $2.5 million from $3.8 million. Lower immediate-annuity sales and a 51.7% decrease in deferred-annuity deposits were cited; annuity withdrawals contributed to cash outflow from the annuity business.
- Cash flow and liquidity: Operating cash flow was $31.7 million, down from $35.9 million. Investing activities used $13.2 million, compared with $101.2 million; financing activities used $24.1 million, mainly reflecting higher net annuity withdrawals. Cash and cash equivalents were $101.9 million at quarter-end, down from $107.5 million at year-end.
- Capital and investments: Total assets were $3.72 billion and stockholders’ equity was $758.1 million, up from $729.2 million. Book value per share was $30.01 versus $28.90. Invested assets totaled $3.06 billion. Net unrealized investment appreciation was $152.7 million, up $8.6 million after tax during the quarter.
- Debt: No amount was outstanding on the $100 million revolving credit facility at March 31, 2013; the company reported covenant compliance. The facility matures December 22, 2015.
- Dividend: $0.15 per share was declared, totaling $3.8 million in cash dividends.
Changes versus Q1 2012 and management commentary
- Premium growth reflected rate increases across most commercial and personal lines, premium-audit collections, and new business. P&C net premiums earned increased to $162.7 million from $146.8 million.
- Pre-tax catastrophe losses declined to $4.5 million from $14.1 million, supporting improved P&C underwriting results. Favorable prior-year reserve development was $23.7 million; management said total reserves remained relatively flat and within actuarial estimates.
- Life insurance investment income fell, and net premiums earned decreased 4.3%. Management attributed lower annuity deposits in part to reduced credited rates in the low-yield environment and stronger sales of traditional life products.
- Management reported no formal earnings or financial guidance in the filing. It described its investment approach as conservative, focused on investment-grade securities and closer matching of asset and liability duration. Fixed-income portfolio duration was 4.3 years, up from 4.0 years at year-end.
Risks, contingencies, and unusual items
- Results remain exposed to catastrophe severity and frequency, claims estimates and reserve development, reinsurance recoveries and disputes, interest rates, equity-market movements, and persistently low investment yields. Management cautioned that interim results are not necessarily indicative of full-year results.
- The portfolio had $5.3 million of gross unrealized depreciation at quarter-end. Management considered the losses temporary and reported no other-than-temporary impairment charges in either comparison quarter, while noting future impairment charges remain possible.
- The company had a contractual commitment of $4.2 million for requested contributions to a limited-liability partnership through December 31, 2017. It also reported an IRS examination of its 2011 tax return.
- Management characterized pending litigation as ordinary, routine, and incidental. The interim financial statements received an independent accountant’s review, not an audit opinion.
Important facts for investors to verify
- Whether premium growth and the 90.3% P&C combined ratio are sustainable, particularly given reserve development and line-level loss-ratio changes.
- Whether lower investment yields, market-value movements, and annuity withdrawals continue to pressure investment income, life-segment earnings, and cash flows.
- The adequacy of insurance loss reserves and the collectability and timing of reinsurance recoverables.
- Investment-portfolio credit quality, interest-rate sensitivity, and the potential for future impairment charges.
- The status of the IRS examination, partnership contribution commitment, revolving-credit covenants, and the remaining share-repurchase authorization of 1,129,720 shares.