United Fire Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial position compared with December 31, 2011. United Fire writes property and casualty and life insurance and sells annuities through independent agencies. The interim financial statements were reviewed by Ernst & Young, not audited.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $193.7 million | $144.1 million |
| Net premiums earned | $161.5 million | $114.2 million |
| Net income | $19.2 million | $5.8 million |
| Basic and diluted EPS | $0.75 | $0.22 |
| Comprehensive income | $26.6 million | $5.4 million |
| Operating cash flow | $35.9 million | $31.3 million |
| Cash and cash equivalents | $74.0 million | $144.5 million at Dec. 31, 2011 |
| Total assets / stockholders’ equity | $3,687.3 million / $719.4 million | $3,618.9 million / $696.1 million at Dec. 31, 2011 |
| Debt / trust preferred securities | $45.0 million / $7.6 million | $45.0 million / $15.6 million at Dec. 31, 2011 |
| Common dividend declared | $0.15 per share | $0.15 per share |
Net income was about 9.9% of revenue, versus 4.0% in Q1 2011. The property and casualty segment reported a 93.8% GAAP combined ratio, compared with 106.5%; its underwriting gain was $9.2 million versus a $6.7 million loss. Total investment income was $29.1 million, and realized investment gains were $2.8 million. Net unrealized investment gains were $131.4 million at quarter-end.
Changes versus the prior comparable period
- Revenue increased 34.4% and net premiums earned increased 41.4%. Mercer Insurance Group, acquired March 28, 2011, contributed $34.9 million of the increase in earned premiums; management reported $10.9 million of organic growth.
- Net income rose 230.2%. Improvement in P&C underwriting was supported by lower loss experience, including workers’ compensation, while the prior-year comparison included $7.9 million of nonrecurring Mercer acquisition transaction costs.
- Q1 2012 catastrophe losses were $14.1 million pretax, versus $16.2 million a year earlier. A late-February Midwest storm caused $11.9 million of P&C losses net of reinsurance.
- Operating cash flow increased to $35.9 million. Investing used $101.2 million, principally reflecting $255.3 million of investment purchases; financing used $5.2 million, including an $8.0 million trust-preferred repayment. Cash fell by $70.5 million during the quarter.
- Stockholders’ equity increased 3.3%, to $719.4 million; book value per share rose to $28.20 from $27.29 at year-end.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management says full-year effects of the revised deferred policy acquisition cost (DAC) accounting depend on premium volume, eligible acquisition costs, underwriting profitability and amortization patterns; Q1’s impact should not be treated as representative of the full year.
- Adopting the DAC guidance prospectively increased Q1 pretax expense by approximately $4.2 million and reduced net income by $2.7 million, or $0.11 per share. The filing describes a $6.5 million increase in other underwriting expenses and a $2.3 million decrease in DAC-related amortization/recoverability expense.
- Management cites claim frequency and severity, catastrophe losses, reserve adequacy, reinsurance recoveries and reinsurer strength, investment-market conditions, interest rates, and DAC recoverability as important risks. Fixed-maturity duration increased to 4.1 years from 3.6 years at year-end; interest-rate and equity-price movements affect portfolio values.
- Management stated operating cash flows met liquidity needs. It had a $100 million unsecured revolving facility, with $45 million drawn at 2.0% and covenant compliance at March 31. The facility matures December 22, 2015.
- The remaining $7.6 million trust preferred issue was redeemed in full on April 2, 2012. United Fire also received a $15.5 million federal tax refund on April 6, 2012, related to carryback of 2009 net operating and net capital losses.
- Potential capital contributions to a partnership fund were $8.7 million at quarter-end. Management reported no direct subprime mortgage or credit-enhancement exposure and no Q1 other-than-temporary investment impairment charges. Pending litigation was described as ordinary and routine; a Florida state tax examination covered 2008–2010.
Important facts for investors to verify
- Whether premium growth and improved loss ratios persist, particularly given the Mercer acquisition’s contribution and line-specific deterioration in commercial auto and other liability.
- The recurring effect of the DAC accounting change on underwriting expenses, earnings and comparability with prior periods.
- Reserve adequacy and the net exposure from catastrophe losses, including reinsurance coverage and recoverability.
- Investment portfolio credit quality, valuation and sensitivity to interest rates; assess the effect of rising unrealized gains and the longer duration.
- Post-quarter repayment of trust preferred securities, receipt of the tax refund, and available borrowing capacity and covenant headroom under the revolving facility.