United Fire Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company writes property and casualty (P&C) and life insurance and sells annuities through independent agencies. Financial statements are unaudited; the independent accountant performed an interim review, not an audit. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net premiums earned | $229.2 | $201.8 | $442.4 | $395.2 |
| Total revenue | $255.9 | $232.7 | $494.4 | $455.6 |
| Income before tax | $19.5 | $13.1 | $51.4 | $29.0 |
| Net income | $15.0 | $10.7 | $38.7 | $24.0 |
| Diluted EPS | $0.59 | $0.42 | $1.54 | $0.94 |
| Operating cash flow | — | $91.3 | $55.2 |
- Premium growth reflected new business and rate increases. Total revenue rose 10.0% for Q2 and 8.5% year to date; net income rose 40.6% and 61.1%, respectively.
- P&C underwriting improved: combined ratio was 97.7% for Q2 (101.7% prior year) and 93.8% year to date (100.7%). Below 100% generally indicates underwriting profit. Year-to-date P&C underwriting gain was $25.4 million, compared with a $2.6 million loss.
- Net loss ratios were 68.4% in Q2 and 64.1% year to date, improving 3.7 and 5.1 percentage points. Catastrophe losses were $20.2 million in Q2 and $20.4 million year to date, versus $20.6 million and $23.9 million in 2014.
- Prior-year P&C reserves developed favorably by $6.7 million in Q2 and $23.4 million year to date, compared with $11.3 million and $25.8 million in 2014. Management said reserves were within actuarial estimates at quarter-end.
- Investment income declined 6.6% in Q2 and 7.7% year to date, attributed to low reinvestment yields and a lower asset base as annuity deposits declined. Net realized investment gains also fell to $0.8 million in Q2 and $1.7 million year to date.
- Life segment pretax income increased to $2.7 million in Q2 from $1.8 million, but declined to $3.5 million year to date from $4.0 million. Higher single-premium whole-life sales supported premiums; lower investment income and higher future policy benefit liabilities weighed on results.
Financial position, cash flow, and liquidity
- At June 30, total assets were $3.89 billion, total liabilities $3.06 billion, and stockholders’ equity $831.9 million. Equity increased from $817.4 million at December 31, 2014; book value per share was $33.21, versus $32.67.
- Cash and cash equivalents were $93.4 million. Six-month operating cash flow was $91.3 million; investing activities used $5.1 million and financing activities used $83.4 million, chiefly reflecting net annuity withdrawals, dividends, and share repurchases.
- Net annuity-business cash outflow was $79.3 million year to date, versus $26.8 million in the comparable 2014 period. Deferred annuity deposits fell 49.5% year to date as the company lowered credited rates.
- The company reported no outstanding borrowings under its $100 million unsecured revolving credit facility and was in covenant compliance. The facility was due to mature December 22, 2015.
- Invested assets totaled $3.14 billion. Net unrealized investment gains were $132.7 million, down $16.9 million after tax since year-end, primarily because of rising interest rates. The company reported no direct subprime mortgage or credit-enhancement exposure.
Material changes, outlook, and risks
- Management attributed improved P&C performance to premium growth, pricing actions, better underlying claims experience, and expense improvements, including completion of integration and technology work. Commercial auto loss ratios deteriorated, reflecting greater claim severity.
- No quantified earnings or revenue guidance was provided. Management said pension contributions for 2015 were expected to remain near the previously projected $6.4 million; $3.2 million had been contributed through June.
- Investment and earnings risks include low interest rates, market-price changes, catastrophe frequency and severity, reserve uncertainty—particularly long-tail claims—and the possibility of future investment impairment charges. Management considered current unrealized losses temporary but noted future events could change that assessment.
- Other disclosed exposures include geographic concentration, reinsurer solvency or coverage disputes, underwriting and pricing competition, litigation and regulation, and cyber or operational disruption. Litigation pending at June 30 was described as ordinary and routine.
- The company had a remaining potential capital contribution obligation of $9.4 million to a limited liability partnership through 2023. Its share repurchase program had authority for 1,558,577 additional shares; 49,705 shares were repurchased for $1.4 million during the first half.
Most important facts for investors to verify
- How much of earnings growth depends on continued favorable prior-year reserve development and whether current accident-year loss trends persist.
- Whether P&C premium growth and pricing remain adequate, especially given deterioration in commercial auto claims and geographic concentration.
- Whether declining annuity deposits and continuing withdrawals affect life-segment scale, liquidity, and investment income.
- The effect of interest-rate and market movements on investment income, unrealized gains, equity, and potential impairment recognition.
- Repayment or renewal plans for the revolving facility approaching its December 2015 maturity, and ongoing compliance with covenants.