Business Context and Reporting Period
Company: United Fire & Casualty Company (United Fire Group Inc)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Operations: The company operates two primary segments: Property and Casualty (P&C) Insurance and Life Insurance. P&C operations are concentrated in Iowa, Texas, Missouri, Louisiana, and Colorado. Life insurance operations are concentrated in Iowa, Nebraska, Minnesota, Wisconsin, and Illinois. The company markets products through independent agents.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2009) | Amount (in thousands) |
|---|---|
| Total Revenues | $423,010 |
| Net Premiums Earned | $358,751 |
| Investment Income (Net) | $78,416 |
| Realized Investment Gains (Losses) | $(14,716) |
| Total Benefits, Losses, and Expenses | $451,468 |
| Net Income (Loss) | $(12,220) |
| Loss Before Income Taxes | $(28,458) |
| Net Cash Provided by Operating Activities | $51,815 |
| Total Assets | $2,970,816 |
| Total Liabilities | $2,290,024 |
| Total Stockholders' Equity | $680,792 |
| Book Value Per Share | $25.60 |
Material Changes vs. Prior Period
- Net Loss: The company reported a net loss of $12.2 million for the nine months ended September 30, 2009, compared to a net income of $1.8 million for the same period in 2008. This represents a significant deterioration in profitability.
- Revenues: Total revenues decreased by 6.3% to $423.0 million, driven by a 4.1% decline in net premiums earned and a 3.3% decline in investment income.
- Investment Performance: Realized investment losses increased significantly to $14.7 million in 2009 compared to $4.4 million in 2008, primarily due to other-than-temporary impairment write-downs. However, unrealized gains on available-for-sale securities increased stockholders' equity by $60.9 million.
- Segment Performance:
- P&C Segment: Reported a net loss of $15.4 million (nine months 2009) compared to a loss of $0.8 million in 2008. The combined ratio was 115.6% (including catastrophes), compared to 110.1% in 2008.
- Life Segment: Reported net income of $3.1 million (nine months 2009) compared to $2.6 million in 2008, helping to offset P&C losses.
- Catastrophe Losses: Catastrophe losses (excluding Hurricane Katrina litigation development) decreased to $19.6 million in 2009 from $53.1 million in 2008, reflecting a less active hurricane season.
Guidance, Outlook, Risks, and Unusual Items
- Hurricane Katrina Litigation: This remains the single largest catastrophe loss in the company's history. Total loss and loss settlement expenses net of reinsurance from Katrina claims reached $289.2 million through September 30, 2009. In the first nine months of 2009, $38.3 million was incurred, including $19.0 million in increased reserves due to an unfavorable legal environment in Louisiana.
- Recent Settlement: In August 2009, the company settled a major commercial policyholder lawsuit for a total of $28.9 million ($6.7 million net of reinsurance incurred in 2009).
- Strategic Shift: The company plans to cease writing business through its Louisiana-domiciled subsidiary, Lafayette Insurance Company, on January 1, 2010, to gain access to the federal court system and reduce exposure to the state court environment.
- Market Conditions: The P&C market remains soft with pricing pressure. The company is implementing modest rate increases on difficult exposures and declining underpriced business. Life insurance sales increased 7.3% and annuity sales increased 35.1% in the first nine months of 2009 as consumers sought guaranteed returns.
- Investment Outlook: Management expects annuity sales to continue increasing. The investment portfolio is conservative, with 93.0% in fixed maturities. Management believes current unrealized losses are temporary.
- Liquidity: The company has a $50.0 million bank line of credit expiring in July 2010, of which $0.2 million was used for letters of credit. Cash and cash equivalents totaled $176.3 million.
Key Facts for Investor Verification
- Hurricane Katrina Reserve Adequacy: Verify the sufficiency of the $289.2 million total incurred loss reserve for Katrina, given the ongoing litigation and the recent $19.0 million increase in Incurred But Not Reported (IBNR) reserves.
- Legal Jurisdiction Strategy: Confirm the timeline and execution of the transition away from the Lafayette Insurance Company subsidiary in Louisiana to mitigate legal risks.
- Investment Impairments: Monitor the $14.7 million in realized investment losses and the potential for future other-than-temporary impairment (OTTI) charges on the $17.2 million of securities currently in an unrealized loss position for over 12 months.
- P&C Underwriting Ratios: Track the P&C combined ratio (115.6% YTD 2009) to ensure rate increases and expense controls are effective in returning the segment to profitability.
- Life Segment Growth: Verify the sustainability of the 35.1% growth in annuity sales and the associated cash inflows ($82.8 million net inflow YTD 2009).