United Fire Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. United Fire writes property-and-casualty and life insurance through independent agencies. Financial statements are unaudited; the independent accountant performed an interim review, not an audit. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net premiums earned | $186.4m | $170.1m | $363.2m | $331.6m |
| Total revenues | $219.7m | $199.6m | $425.0m | $393.3m |
| Income before tax | $20.3m | $19.2m | $50.2m | $44.1m |
| Net income | $15.5m | $14.7m | $37.9m | $33.9m |
| Diluted EPS | $0.61 | $0.58 | $1.49 | $1.33 |
| Operating cash flow | — | $70.4m | $75.1m |
- Premiums earned rose 9.6% in Q2 and 9.5% in the first half. Management attributed growth mainly to rate increases, premium audit collections and new business.
- Net income increased 5.3% in Q2 and 11.8% in the first half. Six-month net investment income declined 4.2% to $55.5m; realized investment gains increased to $6.1m from $3.4m.
- Property-and-casualty GAAP combined ratio was 99.5% for Q2 versus 96.3% a year earlier, and 95.0% for the first half versus 95.1%. Q2 underwriting gain was $0.8m, compared with $5.7m.
- Pre-tax catastrophe losses were $14.2m in Q2 versus $12.0m, but $18.7m for the first half versus $26.1m. Prior-accident-year net reserve development was favorable by $16.4m in Q2 and $40.5m in the first half.
- At June 30, total assets were $3.70bn, stockholders’ equity $734.4m, and cash and equivalents $80.8m. Book value per share was $29.00. Equity rose from $729.2m at year-end, as earnings were partly offset by lower unrealized investment gains and dividends.
- Net unrealized investment gains fell $27.9m after tax in the first half, largely reflecting lower fixed-maturity values amid rising interest rates. Q2 comprehensive income was a loss of $20.2m despite net income of $15.5m.
- Operating cash flow was $70.4m; investing cash outflow was $54.1m and financing cash outflow $42.9m. Cash declined $26.7m in the first half. Financing outflows reflected net annuity withdrawals and dividends.
Material changes, outlook and risks
- Life insurance pre-tax income was $3.6m in Q2 versus $2.3m, but $6.1m for the first half, approximately flat year over year. Lower annuity sales and low yields weighed on premiums and investment income; annuity-related net cash outflow widened to $46.1m for the first half from $5.6m.
- No credit-facility balance was outstanding at June 30. The company had a $100m unsecured revolving facility, maturing December 2015, and reported compliance with its covenants. The facility’s obligations were transferred to United Fire Group, Inc. from United Fire & Casualty Company in June.
- Management gave no specific earnings or revenue guidance. It said it expected 2013 pension contributions to remain near the previously planned $7.0m; $3.5m had been contributed by June 30.
- Key exposures include catastrophe severity and timing, long-tail claims and reserve-estimation uncertainty, interest-rate and equity-market movements, low investment yields, annuity withdrawals, and reinsurance collectability or disputes. Management said unrealized fixed-income losses were primarily rate-related and it had no intent or expected need to sell the affected securities before recovery or maturity; future impairment charges remain possible.
- Approximately half of P&C premiums were written in five states, and 76% of life premiums in five states. A $2.9m potential capital-contribution commitment to a limited-liability partnership runs through 2017. Pending litigation was described as ordinary and routine. The IRS was examining the 2011 tax year.
Important facts for investors to verify
- Whether premium growth and pricing persist, and whether the Q2 deterioration in the combined ratio—especially catastrophe losses and claims in commercial liability, workers’ compensation and personal fire—continues.
- How much future earnings rely on favorable prior-year reserve development; the filing cautions that development can vary materially between periods.
- Whether falling unrealized investment values, higher rates, reduced investment income or annuity withdrawals affect capital, liquidity and earnings.
- Whether the company maintains reserve adequacy, investment-portfolio credit quality, credit-facility covenant compliance and sufficient liquidity under adverse claim and reinsurance scenarios.
- Shareholder returns: $0.33 per share in first-half dividends, 3,577 shares repurchased, and authorization to repurchase 1,126,143 additional shares through the program’s August 2014 expiration.