United Fire & Casualty Company — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing is by United Fire & Casualty Company and subsidiaries. The company writes property-and-casualty and life insurance and sells annuities through independent agencies. Mercer Insurance Group was acquired on March 28, 2011; its results are included from that date.
Financial results
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net premiums earned | $152.2 | $117.1 | $266.4 | $231.4 |
| Total revenues | $181.8 | $148.0 | $325.9 | $293.1 |
| Net income (loss) | $(17.9) | $13.9 | $(12.1) | $33.0 |
| Basic and diluted EPS | $(0.69) | $0.53 | $(0.46) | $1.25 |
| P&C combined ratio | 131.7% | 96.3% | 121.0% | 94.3% |
Q2 losses and loss settlement expenses were $135.8 million, versus $72.8 million a year earlier; six-month expenses were $212.0 million, versus $141.1 million. Investment income was $27.7 million in Q2 and $54.8 million year to date, down from $28.3 million and $56.3 million, respectively. Net realized investment gains were $1.1 million for Q2 and $3.8 million year to date. The filing does not present a single consolidated operating-margin measure; the P&C combined ratio captures underwriting performance, with ratios above 100% indicating underwriting losses.
For the six months, operating cash flow was $40.8 million, investing cash flow was $(123.8) million, and financing cash flow was $80.3 million. Cash and cash equivalents were $177.4 million at June 30, versus $180.1 million at year-end 2010. Total assets were $3.62 billion, liabilities $2.92 billion, and stockholders’ equity $704.8 million. Equity was down from $716.4 million at year-end; book value per share was $27.23 versus $27.35.
Debt was $82.9 million at quarter-end, including $50.0 million drawn on a credit line and $29.9 million borrowed from the Federal Home Loan Bank; the balance was $3.0 million. The company also reported $15.6 million of acquired trust preferred securities. The $50.0 million line was due March 2012, with an agreement to prepay on or before the nine-month anniversary of issuance. The company reported compliance with debt covenants. The filing does not provide a consolidated current ratio or similar liquidity ratio.
Changes and drivers versus prior periods
- Premium growth reflects the Mercer acquisition, modest rate increases, and internal growth initiatives. P&C net premiums written rose 35.8% in Q2 and 20.3% year to date.
- Catastrophe losses were the primary earnings pressure: pre-tax catastrophe losses totaled $34.9 million in Q2 and $47.3 million year to date, versus $7.6 million and $10.7 million in the comparable 2010 periods. The filing cites April storms in southern states, May storms including Joplin, and first-quarter New Zealand and Japan earthquake losses.
- Acquisition-related amortization, transaction costs, and the acquired value-of-business asset also increased expenses. Mercer-related costs were $27.5 million for the first six months; DAC amortization related to Mercer is expected to remain above normal through the remainder of 2011 and into Q1 2012.
- Life segment pre-tax income declined to $2.6 million in Q2 from $6.1 million and to $6.3 million year to date from $11.3 million. Management cited lower investment yields and higher annuity and life benefits.
- Net unrealized investment gains increased $12.5 million after tax since year-end; the portfolio’s carrying value rose largely due to Mercer. Fixed maturities were 92.4% of invested assets, and 36.0% of fixed maturities were rated Baa/BBB.
Outlook, risks, and unusual items
The filing gives no formal earnings or revenue guidance. Management said it does not expect the recent increase in deferred annuity sales to be a trend; low interest rates and customer movement to higher-risk alternatives continue to weigh on deferred annuity sales. Management expected Mercer-related DAC amortization to be elevated through early 2012. It also said non-catastrophe claims frequency and severity were relatively flat in Q2 and policy retention was approximately 81%.
- About 69 individual Hurricane Katrina policyholder cases and three class-action cases remained pending at June 30. The company considers recorded reserves adequate but noted that its assessment could change with adverse litigation developments. Katrina-related loss and litigation expenses were $5.8 million for the first half, versus $5.4 million in 2010.
- Mercer acquisition consideration was $191.5 million, funded with cash and short-term debt. Purchase-price allocations were preliminary; valuation adjustments could be made during the one-year measurement period. The company incurred $5.5 million of first-quarter change-in-control expense related to former Mercer executives.
- Key stated risks include catastrophe frequency and severity, reserve adequacy, reinsurance recoverability and reinsurer strength, investment-market changes, deferred acquisition-cost recoverability, pension obligations, and litigation or regulatory outcomes.
- The company had a remaining potential commitment of $10.1 million for capital contributions to a limited-liability partnership. It reported no direct subprime mortgage or credit-default-swap exposure.
Investor facts to verify
- Whether catastrophe claims and assumed reinsurance losses develop adversely, and how they affect reserves and future combined ratios.
- Mercer’s underwriting contribution after acquisition expenses and elevated DAC/VOBA amortization subside; also confirm final purchase-price allocations.
- Debt repayment timing, interest costs, covenant headroom, and liquidity needs in light of catastrophe payments and reinsurance recoveries.
- Reserve adequacy and potential outcomes of the pending Katrina litigation, including any movement in claims or legal expenses.
- Investment portfolio credit quality, duration and unrealized gains, including exposure to low reinvestment yields and potential impairment losses.