United Fire Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited interim financial statements are presented in U.S. dollars; financial amounts below are in millions unless stated otherwise. United Fire writes property and casualty (P&C) and life insurance through independent agencies. The statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net premiums earned | $259.6 | $253.5 | $513.4 | $494.8 |
| Total revenue | $287.0 | $279.8 | $570.0 | $545.5 |
| Net income | $3.0 | $3.1 | $22.9 | $25.5 |
| Diluted EPS | $0.12 | $0.12 | $0.89 | $1.00 |
| Net investment income | $24.6 | $24.5 | $49.6 | $46.7 |
| Net realized investment gains | $2.7 | $1.6 | $6.6 | $3.7 |
Q2 pretax income was only $0.1 million versus $0.9 million a year earlier; a $2.9 million income tax benefit contributed to net income of $3.0 million. First-half net income declined 10.4% year over year, while revenue grew 4.5%.
Underwriting and segment results
- P&C: Premiums earned grew 5.6% in Q2 and 6.4% in the first half. The combined ratio worsened to 107.2% for Q2 from 104.8%, and to 102.0% for the first half from 98.7%; above 100% generally indicates an underwriting loss. P&C pretax results were a $4.3 million loss in Q2 versus $1.4 million income, and $18.7 million income for the first half versus $29.5 million.
- Losses and catastrophes: The P&C net loss ratio rose to 76.9% in Q2 and 71.7% in the first half, with deterioration in core losses, especially commercial auto frequency and severity. Pre-tax catastrophe losses were $28.3 million in Q2 versus $35.5 million, and $38.1 million for the first half versus $39.9 million.
- Life: Pretax income improved to $4.4 million in Q2 and $6.5 million in the first half. Premiums earned fell 32.4% and 24.9%, respectively, mainly because of lower single-premium whole-life sales following pricing and commission changes intended to prioritize profitability over market share. Net investment income also declined in the segment.
- Prior-year reserves: P&C recorded favorable development of $16.3 million in Q2 and $41.2 million in the first half, primarily from commercial liability and workers’ compensation. This helped offset adverse development in some lines; management cautions that reserve development varies and is not a reliable predictor of future results.
Financial position, cash flow and capital
- At June 30, total assets were $4.197 billion, total liabilities $3.235 billion and stockholders’ equity $962.6 million, compared with equity of $941.9 million at year-end 2016. Book value per share was $38.46, up from $37.04.
- Cash and cash equivalents were $130.4 million; invested assets totaled $3.329 billion. First-half operating cash flow was $112.1 million, compared with $81.1 million in 2016. Investing activities used $24.8 million and financing activities used $67.8 million; ending cash increased $19.6 million.
- P&C loss and loss-adjustment reserves were $1.180 billion gross; life future policy benefit liabilities were $1.330 billion. Insurance reserve adequacy is inherently uncertain.
- No borrowings were outstanding under the $50 million unsecured revolving facility, and the company reported compliance with its covenants. The filing reports no other outstanding debt balance. The facility matures in February 2020.
- Equity benefited from $22.9 million net income and $26.2 million of after-tax net unrealized investment appreciation; it was partly offset by $13.4 million of dividends and $21.2 million of share repurchases. The company repurchased 361,627 shares at an average $42.68 during the first half.
Outlook, risks and other notable items
The filing provides no quantified earnings or premium guidance. Management said it was pursuing commercial-auto pricing increases, tighter underwriting guidelines, new analytical tools and stronger loss-control requirements to improve that line’s profitability. It also described a life-segment strategy focused on targeted annuity spreads and profitability rather than sales growth.
Principal risks include catastrophe frequency and severity, reserve-estimation uncertainty, commercial-auto loss trends, geographic concentration, reinsurance collectability, investment-market and interest-rate exposure, underwriting and pricing execution, competition, regulation, litigation and cybersecurity. The portfolio is primarily investment-grade fixed income; management reported no direct subprime-mortgage exposure and no other-than-temporary investment impairment charges in the periods presented. A remaining potential capital-call commitment to a limited-liability partnership was $5.6 million through 2023. Routine legal proceedings were not expected to materially affect results or financial position. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial-auto frequency and severity improve and the cited pricing and underwriting actions restore P&C profitability.
- Whether favorable reserve development continues, and how prior-year development and adverse line results affect reserve adequacy.
- Whether catastrophe losses, including recoveries under reinsurance, remain within the company’s capacity and expectations.
- How lower life-policy sales and annuity outflows affect segment earnings, investment assets and liquidity.
- How investment returns, interest rates and unrealized gains or losses affect earnings, equity and book value; the filing notes that unrealized changes can affect equity without affecting net income.
- Regulatory limits on subsidiary dividends, the $5.6 million partnership commitment, and the company’s capital and liquidity needs if claims or catastrophe payments rise.