United Fire Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. UFG writes property and casualty insurance through independent agencies and reports one continuing business segment. Its life insurance subsidiary was sold in March 2018 and is reported as discontinued operations.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net premiums earned | $276.5 | $256.9 | $538.8 | $502.0 |
| Net investment income | $14.1 | $17.2 | $30.6 | $30.7 |
| Net realized investment gains (losses) | $13.6 | $1.3 | $40.3 | $(6.6) |
| Net income (loss) | $(4.2) | $0.2 | $40.3 | $45.9 |
| Diluted EPS | $(0.17) | $0.01 | $1.57 | $1.80 |
| Combined ratio | 111.7% | 107.9% | 103.9% | 100.9% |
Q2 pretax loss was $4.6 million; first-half pretax income was $50.1 million. First-half 2018 net income included a $27.3 million after-tax gain from the life-business sale; continuing-operations income was $20.5 million in first-half 2018 versus $40.3 million in first-half 2019.
Balance sheet, cash flow and capital
- At June 30, 2019, total assets were $3.002 billion, liabilities $2.033 billion and stockholders’ equity $968.3 million, up from $888.4 million at year-end 2018. Book value per share was $38.36, compared with $35.40.
- Cash and cash equivalents were $148.8 million, versus $64.5 million at December 31, 2018. Investments totaled $2.088 billion. Loss and loss-adjustment-expense reserves were $1.342 billion.
- For the first half, consolidated operating cash flow was $36.3 million; the cash-flow statement separately reports $4.0 million used by continuing operations. Investing activities provided $62.6 million and financing activities used $14.5 million. Cash increased $84.3 million.
- No borrowings were outstanding under the $50 million unsecured revolving credit facility, which matures February 2, 2020. UFG reported covenant compliance. The filing does not provide a separate total-debt balance.
- First-half shareholder dividends were $16.1 million. UFG repurchased 1,507 shares for $69,000; 2,114,693 shares remained authorized for repurchase at June 30.
Changes versus the prior comparable periods
- Premiums earned rose 7.6% in Q2 and 7.3% in the first half, primarily from rate increases, premium audits and endorsements.
- Q2 moved from $0.2 million income to a $4.2 million loss. First-half net income declined 12.2%, although income from continuing operations increased substantially; the comparison is affected by the 2018 discontinued-business sale gain.
- Underwriting performance weakened: the combined ratio rose 3.8 percentage points in Q2 and 3.0 points year to date. Loss ratios increased, partly offset by lower expense ratios. Ratios above 100% indicate underwriting losses before investment results.
- Catastrophe losses were $22.0 million in Q2 and $25.6 million year to date, versus $15.1 million and $18.5 million, respectively, in 2018. Catastrophes added 8.0 percentage points to Q2’s combined ratio and 4.8 points year to date.
- Prior-year reserve development was unfavorable by $9.4 million in Q2 and $4.7 million for the first half, versus favorable development of $10.3 million and $48.4 million in the comparable 2018 periods. Commercial liability, particularly auto and other liability claims in the Gulf Coast region, was the principal source of adverse development.
- Investment gains improved markedly, primarily from equity securities’ fair-value increases: $12.5 million in Q2 and $37.1 million year to date. These gains are market-sensitive and helped offset underwriting pressure.
Management commentary, outlook and risks
- Management said the core loss ratio, excluding catastrophes and prior-year development, improved 3.5 percentage points in Q2 and 6.8 points year to date. It stated reserves remained within actuarial estimates at June 30; reserve estimates remain inherently uncertain.
- No earnings or premium guidance was provided. Management said continuing-operations cash flows met current liquidity needs and were expected to meet future needs.
- Key exposures include catastrophe frequency and severity, geographic concentration, long-tail liability reserve adequacy, pricing and underwriting execution, reinsurance recoverability, investment-market and interest-rate movements, cyber incidents, litigation and regulation, and financial-strength ratings. About 47.6% of first-half property and casualty premiums came from Texas, California, Iowa, Missouri and Colorado.
- UFG had a remaining potential capital-contribution commitment of $17.8 million to an investment partnership through July 2028. Routine pending legal proceedings were not expected by management to materially affect financial condition or results.
- Adoption of lease accounting added $19.8 million of right-of-use assets and $20.3 million of lease liabilities at January 1, 2019, with no significant reported effect on results. The expected-credit-loss standard was scheduled for adoption January 1, 2020; its impact was still being evaluated.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether adverse commercial liability reserve development persists, especially in Gulf Coast auto and other liability claims, and how it affects later-period loss ratios.
- Underlying underwriting trends after separating catastrophe losses, prior-year reserve changes and the new assumed-reinsurance program’s portfolio transfer.
- How much of earnings and book-value movement depends on volatile equity-security gains and unrealized investment appreciation.
- Cash generation from continuing operations, catastrophe liquidity needs, reinsurance recoveries and compliance with facility covenants as the revolving facility approaches its 2020 maturity.
- The eventual financial impact of the expected-credit-loss accounting standard and the ability to meet partnership funding commitments.