United Fire Group, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are included where noted. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
UFG writes property and casualty insurance through approximately 1,100 independent agencies and is licensed in 46 states and the District of Columbia. Its life insurance subsidiary was sold to Kuvare on March 30, 2018; life results are reported as discontinued operations. Continuing operations comprise property and casualty insurance.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net premiums earned, continuing operations | $1,037.5 million | $997.5 million |
| Total revenue, continuing operations | $1,070.2 million | $1,052.7 million |
| Income from continuing operations | $2.3 million | $44.9 million |
| Net income, including discontinued operations and sale gain | $27.7 million | $51.0 million |
| Net cash from operating activities | $110.1 million | $170.1 million |
| Cash and investments, continuing operations, at year-end | $2,138.6 million | $1,984.5 million |
| Total stockholders’ equity at year-end | $888.4 million | $973.4 million |
| Book value per share | $35.40 | $39.06 |
- Net premiums earned grew 4.0%, with management attributing growth to new business, geographic expansion and rate increases. Written and earned premium growth was within management’s stated 3%–5% expectation.
- The combined ratio was 104.0% in both years, indicating underwriting losses. The 2018 net loss ratio improved to 70.5% from 72.8%, but the expense ratio rose to 33.5% from 31.2%.
- Net investment income from continuing operations increased 3.3% to $52.9 million. Net realized investment losses were $20.2 million, primarily reflecting a $22.0 million change in equity-security values.
- Continuing operations reported a pretax loss of $9.2 million and net income of $2.3 million, including an $11.4 million income tax benefit. Total net income included a $27.3 million after-tax gain on the life-business sale; discontinued operations otherwise recorded a $1.9 million net loss.
- Year-end cash and cash equivalents were $64.5 million. UFG had no borrowings under its $50 million revolving credit facility, which may be increased by up to $100 million subject to conditions. The company reported compliance with facility covenants and insurance-company capital requirements.
- Cash dividends paid were $105.4 million, including a $3.00-per-share special dividend totaling $75.2 million. The company repurchased $5.4 million of shares.
Material changes and unusual items
- The life-insurance sale closed March 30, 2018 for approximately $280.0 million gross consideration and produced a $27.3 million after-tax gain. The sale materially changes year-to-year balance-sheet and cash-flow comparisons.
- In 2018, accounting guidance required changes in equity-security fair values to be recognized in earnings rather than accumulated other comprehensive income. UFG recorded a $191.2 million after-tax reclassification within equity at adoption and an after-tax investment loss of $17.4 million from the change in equity-security values during the year.
- Fourth-quarter 2018 continuing operations recorded a $41.5 million pretax loss and a $29.3 million net loss, versus fourth-quarter 2017 net income of $45.3 million. Management linked the annual decline in continuing-operations income in part to volatile equity markets in the fourth quarter.
- Prior-year reserve releases were $54.2 million in 2018, compared with $54.3 million in 2017. The 2018 favorable development was concentrated in workers’ compensation, assumed reinsurance and commercial automobile; commercial liability had $3.7 million of adverse development.
- Catastrophe losses fell to $46.7 million from $74.0 million in 2017; California wildfires were the largest 2018 event at $9.2 million. Catastrophes added 4.5 percentage points to the 2018 combined ratio.
Management commentary, risks and contingencies
- UFG continued investment in its multi-year Oasis technology-platform project; higher other underwriting expenses contributed to the increased expense ratio.
- Management described commercial automobile profitability as below expectations despite improvement, and cited rate increases, loss-control efforts and action on underperforming accounts as ongoing measures. Other liability results faced pressure from auto-related bodily-injury claims and a challenging litigation environment.
- Key risks include catastrophe severity and geographic concentration, reserve-estimation uncertainty, pricing and underwriting adequacy, reinsurance availability and collectability, investment-market volatility and interest-rate exposure, and cyber and operational disruptions. Texas, California, Iowa, Missouri and Colorado represented 48.9% of 2018 direct statutory premiums written.
- Gross loss and loss-settlement reserves were $1.312 billion. Management cautioned that a 10% reserve inadequacy could reduce future pretax earnings by up to $131.2 million. Long-tail liability and construction-defect claims are particularly uncertain; construction-defect reserves excluding overall-line IBNR were $44.5 million.
- At year-end, available capacity from the principal property catastrophe program covered losses above a $20 million per-event retention, subject to stated limits and terms. Reinsurance does not eliminate UFG’s obligations to policyholders if a reinsurer fails to pay.
- Management expected operating cash flows to meet future liquidity needs. Legal proceedings were described as ordinary and routine, with no expected material adverse effect. No specific earnings or combined-ratio guidance for 2019 was provided.
Important facts for investors to verify
- Whether underlying underwriting performance improves: track the combined ratio, expense ratio, core loss trends and premium growth, particularly in commercial auto and other liability.
- Whether favorable reserve development persists and whether long-tail, construction-defect and umbrella auto claims require further reserve strengthening.
- How equity-market performance and the accounting treatment of equity securities affect reported earnings and book value.
- Capital and liquidity after the special dividend, including subsidiary dividend capacity, catastrophe exposure and reinsurance recoverables.
- The actual implementation costs and benefits of the Oasis project, and whether operating expenses moderate.