United Fire Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. UFG writes property and casualty and life insurance through independent agencies. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net premiums earned | $239.4 | $212.0 | $681.8 | $607.2 |
| Total revenue | $264.6 | $235.9 | $759.0 | $691.4 |
| Income before taxes | $26.8 | $(2.8) | $78.2 | $26.1 |
| Net income | $19.5 | $0.3 | $58.2 | $24.3 |
| Diluted EPS | $0.77 | $0.01 | $2.31 | $0.95 |
| Operating cash flow | — | $124.4 | $87.3 |
- Q3 premiums rose 12.9% and nine-month premiums rose 12.3%, which management attributed to new business and rate increases.
- Property and casualty underwriting improved: combined ratio was 94.1% for Q3 and 93.9% year to date, versus 107.4% and 103.0% in the comparable 2014 periods. A ratio below 100% generally indicates underwriting profit.
- Pre-tax catastrophe losses were $7.0 million in Q3 and $27.3 million year to date, down from $23.3 million and $47.2 million in 2014. Management also cited improved underlying results and lower prior-year catastrophe and commercial fire losses.
- Nine-month net investment income fell 3.9% to $74.2 million, reflecting lower reinvestment rates and a smaller life-segment asset base; Q3 investment income increased 5.3% to $24.1 million.
- Life-segment pre-tax income declined to $2.4 million in Q3 and $5.9 million year to date. Higher single-premium whole-life sales lifted premiums, but investment income declined and future policy benefit costs rose. Deferred annuity deposits fell 50.0% year to date; annuity business net cash outflow was $106.5 million.
Financial position, liquidity and capital
- At September 30, total assets were $3.876 billion, liabilities $3.031 billion and stockholders’ equity $845.5 million, compared with equity of $817.4 million at year-end 2014. Book value per share was $33.73.
- Cash and cash equivalents were $124.1 million, up from $90.6 million at December 31, 2014. Nine-month cash flow was $124.4 million from operations, $22.4 million from investing activities and $(113.4) million from financing activities.
- Invested assets totaled $3.096 billion. Fixed maturities were 90.1% of the portfolio; 77.6% of fixed maturities were rated AAA, AA or A. The portfolio’s weighted-average effective duration was 5.0 years.
- No balance was outstanding on the $100 million unsecured revolving credit facility at quarter-end; the agreement was scheduled to mature December 22, 2015. UFG reported compliance with its covenants.
- UFG paid $16.0 million in dividends and repurchased $2.4 million of shares in the first nine months. It had authorization to repurchase a further 1,528,886 shares at September 30.
- Net unrealized investment gains declined $19.4 million after tax from year-end, mainly due to equity-market declines and, to a lesser extent, rising interest rates. Comprehensive income was $42.5 million year to date.
Outlook, risks and notable items
- The filing provides no quantified earnings or premium guidance. Management described continued low interest rates, declining annuity deposits and investment reinvestment yields as pressures on investment income.
- Prior-accident-year P&C reserves developed favorably by $24.1 million in the first nine months, including $13.6 million in workers’ compensation and $8.8 million in long-tail liability. Commercial auto liability had $2.7 million of adverse development year to date; management linked the trend to lower fuel prices and increased commercial vehicle highway use. Management said reserves were within actuarial estimates, while noting reserve development can vary materially.
- Long-tail claims and reserve adequacy, catastrophe severity and frequency, investment-market and interest-rate movements, reinsurer strength, competition, regulation and cyber risks are among the disclosed uncertainties. UFG reported no other-than-temporary investment impairment write-downs in the periods presented, but said future impairments remain possible.
- A remaining $8.5 million potential capital commitment to a limited-liability partnership may be called through 2023. Routine pending legal proceedings were not expected by management to have a material adverse effect.
- The interim financial statements were reviewed by Ernst & Young, not audited; the review report expressed no awareness of material modifications needed for GAAP conformity.
Investor verification priorities
- Track commercial auto loss trends and reserve development, including whether favorable reserve releases persist.
- Assess the sustainability of the improved combined ratio and earnings after adjusting for lower catastrophe losses and prior-year comparisons.
- Monitor annuity deposit and withdrawal trends, life-segment profitability, and the effect of low reinvestment yields.
- Review investment portfolio valuation and credit exposure, including unrealized losses and potential impairment triggers.
- Verify the status or replacement of the revolving credit facility following its stated December 22, 2015 maturity, and the capacity of insurance subsidiaries to fund holding-company dividends.