United Fire Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are generally in thousands unless stated otherwise. UFG writes property and casualty insurance through independent agencies. Its sale of United Life closed March 30, 2018, leaving property and casualty insurance as its continuing business.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net premiums earned | $256.9 million | $245.2 million | $502.0 million | $481.7 million |
| Investment income, net | $17.2 million | $12.2 million | $30.7 million | $24.8 million |
| Net income from continuing operations | $0.2 million | $0.1 million | $20.5 million | $18.7 million |
| Net income, including discontinued operations and sale gain | $0.2 million | $3.0 million | $45.9 million | $22.9 million |
| Combined ratio | 107.9% | 107.2% | 100.9% | 102.0% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $65.6 million | $112.1 million |
Q2 total revenue rose 6.5% year over year to $275.4 million; six-month revenue increased 3.2% to $526.2 million. Six-month continuing-operations diluted EPS was $0.80, versus $0.73; total diluted EPS was $1.80, versus $0.89, including a $27.3 million after-tax gain on the United Life sale. Q2 continuing-operations income was only $0.2 million despite a pretax loss of $1.8 million, reflecting a $2.0 million tax benefit.
Financial position, liquidity and capital
- At June 30, 2018, total assets were $2.90 billion, liabilities $1.94 billion, and stockholders’ equity $964.6 million. Assets and liabilities fell from year-end largely because United Life was sold and removed from the balance sheet.
- Continuing-operations investments totaled $2.12 billion and cash and cash equivalents were $100.8 million, compared with $1.89 billion and $95.6 million, respectively, at December 31, 2017.
- Operating cash flow was $65.6 million for the first half, versus $112.1 million. The period included $276.1 million of proceeds from the United Life sale; cash from continuing operations at period-end was $100.8 million.
- No balance was outstanding on the $50 million revolving credit facility, and UFG reported compliance with its covenants. The filing does not report other outstanding borrowings.
- Book value per share was $38.52, down from $39.06 at year-end. The six-month equity decline reflected lower unrealized investment gains, dividends and share repurchases, partly offset by net income.
Changes, outlook and risks
- Premium growth reflected organic growth and geographic expansion. Investment income increased, attributed to higher invested assets and improved returns on limited liability partnership investments.
- Catastrophe losses were lower: $15.1 million pretax in Q2 versus $28.3 million, and $18.5 million for six months versus $38.1 million. Six-month prior-year reserve development was favorable by $48.4 million; management said reserves were within actuarial estimates. Reserve estimates remain uncertain and can change materially.
- The six-month combined ratio improved, but remained above 100%; Q2 also remained above 100%. Management cited elevated underwriting expenses, including investment in its multiyear Oasis technology project and accelerated amortization of acquisition costs in underperforming commercial and personal auto lines. Management expects Oasis to add 1.0–2.0 percentage points annually to the expense ratio while the project continues. Commercial auto results remained below expectations; UFG said it would pursue rate increases, review underperforming accounts and implement risk controls.
- Adoption of accounting guidance effective January 1, 2018 requires equity-security fair-value changes to flow through net income. UFG recorded a $6.6 million six-month net realized investment loss from continuing operations; management attributed much of the year-over-year earnings comparison to this accounting change. The adoption also moved $191.2 million after tax from accumulated other comprehensive income to retained earnings.
- On July 24, 2018, the board declared a $3.00-per-share special cash dividend, approximately $75 million, payable August 20, 2018. It was a subsequent event, not a June 30 liability. UFG also paid $14.7 million in regular dividends in the first half.
- Key exposures include catastrophe frequency and severity, reserve adequacy, geographic concentration, underwriting and pricing, market and interest-rate movements, reinsurer strength, litigation and regulation, and cyber risks. UFG reported no material change in market-risk factors and no material adverse effect expected from ordinary, routine legal proceedings. No formal earnings or revenue guidance is provided in the filing.
Important facts for investors to verify
- Whether the special dividend and continuing regular dividends remain consistent with capital needs, subsidiary dividend restrictions and insurance regulatory requirements.
- Whether favorable reserve development and lower catastrophe losses persist, and whether worsening claim severity or long-tail claims could weaken reserve adequacy.
- Whether commercial auto pricing and risk-control actions improve results, and how long Oasis spending and accelerated acquisition-cost amortization weigh on the expense ratio.
- How market movements affect unrealized investment losses, book value and investment income; management said unrealized losses were considered temporary but acknowledged future impairment charges are possible.
- The sustainability of investment income, including returns from limited liability partnerships, whose valuations can vary with equity-market conditions.