United Fire Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The company writes property and casualty (P&C) and life insurance through independent agencies. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net premiums earned | $201.8 million | $186.4 million | $395.2 million | $363.2 million |
| Total revenues | $232.7 million | $219.7 million | $455.6 million | $425.0 million |
| Income before tax | $13.1 million | $20.3 million | $29.0 million | $50.2 million |
| Net income | $10.7 million | $15.5 million | $24.0 million | $37.9 million |
| Diluted EPS | $0.42 | $0.61 | $0.94 | $1.49 |
| Net investment income | $27.6 million | $29.0 million | $54.4 million | $55.5 million |
- For the first half, revenue grew 7.2% and premiums earned grew 8.8%, but net income fell 36.6%. Losses and loss settlement expenses rose 23.0% to $268.0 million. Net realized investment gains declined to $4.9 million from $6.1 million.
- P&C premiums earned increased 10.2% in the first half, while the GAAP combined ratio worsened to 100.7% from 95.0% (above 100% generally indicates an underwriting loss). Q2 combined ratio was 101.7%, versus 99.5%.
- Life segment first-half pretax income declined to $4.0 million from $6.1 million. Premiums earned and investment income fell 7.1% and 4.1%, respectively.
- Six-month operating cash flow was $55.2 million, down from $70.4 million. Investing activities used $25.4 million and financing activities used $31.8 million; cash declined $1.9 million to $90.3 million.
- At June 30, total assets were $3.852 billion, liabilities $3.026 billion, and stockholders’ equity $826.3 million. Book value was $32.74 per share. Invested assets totaled $3.145 billion; net unrealized investment gains were $147.9 million, up $31.3 million after tax since year-end.
- No balance was outstanding on the $100 million unsecured revolving credit facility, which matures December 22, 2015; the company reported compliance with its covenants. The filing reports no other material borrowing balance.
Changes, management commentary and outlook
- Management attributed premium growth mainly to rate increases across most commercial and personal lines, and to a lesser extent new business. Profit declined primarily because of higher P&C losses and lower favorable reserve development.
- First-half pretax catastrophe losses were $23.9 million, compared with $18.7 million a year earlier; Q2 catastrophe losses were $20.6 million versus $14.2 million. Other loss drivers included a large explosion claim, a higher annual aggregate reinsurance deductible, harsh-winter claim frequency, and spring storms.
- Prior-year P&C reserves developed favorably by $25.8 million in the first half, compared with $40.5 million in 2013. Management said reserves remained relatively flat from year-end and within actuarial estimates, while noting reserve estimates—particularly for long-tail claims—are uncertain.
- Management expects the P&C expense ratio to improve over time as scale benefits continue and Mercer Insurance integration is completed, but said 2014 expenses are affected by overlapping rent during a branch relocation and higher premium taxes and assessments. No earnings or revenue guidance was provided.
- Life premiums were lower partly because the company chose to maintain pricing discipline on single-premium whole-life policies. Lower reinvestment yields in the continuing low-interest-rate environment weighed on investment income. Deferred annuity deposits increased, but the annuity business still had a $26.8 million net cash outflow for the first half, improved from $46.1 million a year earlier.
- Investments were predominantly fixed maturities; management reported no direct subprime mortgage or credit-enhancement exposure and no recognized other-than-temporary impairment at June 30. Market-rate changes, catastrophe severity, reserve adequacy, reinsurance recoveries, underwriting/pricing, and geographic concentration remain material risks.
- The company repurchased 201,516 shares for $5.6 million in the first half and paid $9.6 million in dividends. The repurchase authorization had 868,601 shares remaining at June 30 and was scheduled to expire in August 2014 unless extended. Pending litigation was described as ordinary and routine; no material control changes were reported.
Important facts for investors to verify
- Whether elevated catastrophe and other claim costs persist, and how they affect the combined ratio and earnings.
- Reserve adequacy and the sustainability of favorable prior-year development, especially for long-tail liability claims.
- Whether P&C rate increases and premium growth can restore underwriting profitability without adverse retention or claims effects.
- Investment yield trends, interest-rate sensitivity, and the effect of unrealized investment gains or losses on equity and book value.
- Life-segment premium trends, annuity deposit and withdrawal patterns, and the impact of low reinvestment rates.
- The status of the share repurchase authorization after its scheduled August 2014 expiration and any future dividend or capital decisions.