United Fire Group, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing reports property and casualty insurance as continuing operations and United Life Insurance as discontinued operations, following the September 2017 agreement to sell the life subsidiary.
Financial results and key metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Continuing-operations revenue | $1.053 billion | $996.4 million |
| Net premiums earned, continuing operations | $997.5 million | $936.1 million |
| Continuing-operations net income | $44.9 million | $49.1 million |
| Discontinued-operations net income | $6.2 million | $0.8 million |
| Consolidated net income | $51.0 million | $49.9 million |
| Diluted EPS, continuing / total | $1.75 / $1.99 | $1.90 / $1.93 |
| Combined ratio, continuing P&C | 104.0% | 100.3% |
| Operating cash flow, consolidated | $170.1 million | $214.4 million |
| Cash and investments, continuing operations | $1.984 billion | $1.861 billion |
| Stockholders’ equity / book value per share | $973.4 million / $39.06 | $941.9 million / $37.04 |
Continuing-operations income before tax fell 72.8% to $15.7 million. The 2017 result included a $29.2 million federal income tax benefit from continuing operations; the Tax Act’s rate reduction contributed a provisional $21.9 million tax benefit. Consolidated net income also reflected $6.2 million from the life business.
Net premiums written rose 5.6% to $1.019 billion, while net premiums earned increased 6.6%. Management said written and earned premium growth were within its 4%–6% expectations. Investment income from continuing operations declined 7.4% to $51.2 million, primarily due to lower values in limited liability partnership investments; total consolidated net investment income was $100.9 million, down from $106.8 million.
Cash from operating activities was $93.4 million for continuing operations and $170.1 million consolidated, including discontinued operations. Cash and cash equivalents in continuing operations were $95.6 million at year-end. The company had no outstanding balance on its $50 million revolving credit facility and reported compliance with its covenants. Its insurance subsidiaries had statutory capital above required levels.
Material changes and notable items
- The P&C combined ratio rose to 104.0%, indicating underwriting losses before investment income. The net loss ratio increased to 72.8% from 69.7%, while the expense ratio increased to 31.2% from 30.6%.
- Pre-tax catastrophe losses were $74.0 million, up from $61.2 million, mainly from Hurricanes Harvey, Irma and Maria and California wildfires. Catastrophes added 7.4 percentage points to the combined ratio. No single event exceeded the $20 million catastrophe reinsurance retention.
- Large commercial-auto losses and deterioration in personal-auto results pressured underwriting. The 2017 net loss ratios were 106.3% for commercial auto and 107.2% for personal auto.
- Prior-year P&C reserves developed favorably by $54.3 million, principally in commercial liability and workers’ compensation. Favorable prior-year development supported earnings, but does not establish that future reserves will develop favorably.
- Commercial premiums earned grew, but construction-defect reserves excluding overall-line IBNR increased to $34.4 million across 1,857 claims, from $22.3 million across 1,382 claims.
- Unrealized investment gains after tax increased to $214.9 million from $133.9 million, benefiting from lower interest rates, higher equity values and the tax-rate change. These gains affect equity and book value, not net income in the same way as realized gains.
- The company repurchased 701,899 shares for $29.8 million and paid $27.3 million in common dividends. The declared annual dividend was $1.09 per share.
Outlook, risks and contingencies
UFG agreed to sell United Life to Kuvare for $280 million in cash, subject to specified adjustments. Closing was expected in the first half of 2018, subject to customary conditions including regulatory approval and operational separation. UFG expected to provide transition services for up to 24 months after closing. The filing provides no formal earnings or profitability guidance beyond management’s premium-growth expectations.
Key risks include catastrophe frequency and severity, reserve estimation uncertainty, geographic concentration, pricing and underwriting adequacy, reinsurance availability and collectability, investment-market and interest-rate exposure, regulation, competition, and cyber or business interruption events. Management identified ordinary-course legal proceedings and did not expect them to materially affect financial position or results. The company also disclosed a $2.2 million commitment for potential partnership capital contributions through 2023.
Important facts for investors to verify
- Whether the United Life sale closed on the stated terms, including final purchase-price adjustments, regulatory approval and separation costs.
- Whether P&C pricing and claims actions improve auto-line results and bring the combined ratio below 100%.
- How catastrophe losses and reinsurance recoveries develop, particularly for 2017 events and assumed reinsurance.
- Whether favorable reserve development persists and whether construction-defect and other long-tail reserves remain adequate.
- The final accounting impact of the Tax Act and the effect of the equity-security accounting standard adopted in 2018.
- Changes in continuing-operations cash generation, investment income, statutory capital, and subsidiary capacity to pay dividends.