United Fire Group, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are primarily with FY 2012. United Fire writes property and casualty insurance and life insurance and sells annuities through independent agencies.
Financial results and position
- Revenue: Total revenue was $877.0 million, up 7.8%; net premiums earned were $754.8 million, up 8.6%. Net premiums written were $783.5 million, up 8.7%.
- Profit: Net income was $76.1 million, versus $40.2 million; diluted EPS was $2.98, versus $1.58. Pretax income was $101.9 million. Federal income tax expense was $25.8 million.
- Property and casualty: Segment net income was $67.5 million versus $33.5 million. The GAAP combined ratio improved to 94.8% from 101.2%; below 100% generally indicates underwriting profit. Pretax underwriting gain was $36.0 million, versus a $7.8 million loss.
- Life: Segment net income was $8.7 million versus $6.7 million. Net premiums earned declined 7.5% to $60.7 million, principally reflecting lower single-premium whole-life sales.
- Cash flow and liquidity: Operating cash flow was $161.5 million, compared with $172.1 million. Cash and cash equivalents ended the year at $92.2 million. Cash and investments totaled $3.142 billion. Annuity business net cash outflow was $77.7 million. Management said operating cash flows met liquidity needs.
- Capital and debt: Total assets were $3.721 billion and stockholders’ equity was $782.8 million; book value per share rose to $30.87 from $28.90. No amount was outstanding under the $100 million unsecured revolving credit facility, which could be increased to $125 million subject to conditions and matures December 22, 2015. Insurance subsidiaries’ statutory capital was reported well above required levels.
- Dividends: Cash dividends declared were $0.69 per share, versus $0.60. United Fire & Casualty could pay up to $53.7 million in dividends to the parent without prior regulatory approval at year-end, subject to applicable restrictions.
Material changes and management commentary
- Premium growth reflected rate increases across most commercial and personal lines and new business. Property and casualty net premiums written increased 10.3%.
- Catastrophe losses fell to $30.2 million from $64.7 million. Management cited lower catastrophe losses and premium growth as principal drivers of improved earnings.
- Prior-accident-year reserves developed favorably by $57.5 million, compared with $73.4 million in 2012. Management attributed much of the 2013 benefit to other liability reserves and changing development patterns. This favorable development boosts current-period results but is not a reliable forecast of future reserve releases.
- Investment income was $112.8 million, up 0.8%; the portfolio’s annualized yield remained 3.7%. After-tax net unrealized investment gains declined to $116.6 million from $144.1 million, mainly due to lower fair values of fixed-maturity securities.
- Life segment investment income declined 5.1%, reflecting lower invested assets and low reinvestment yields. Deferred-annuity deposits increased 18.1%, while annuity withdrawals contributed to negative cash flows.
- The company acquired a three-building commercial real estate complex adjacent to its Cedar Rapids headquarters in December 2013. No acquisition of an insurance business occurred in 2013.
Outlook, risks and contingencies
- The filing provides no specific earnings, premium-growth, or combined-ratio guidance. Management described its approach as disciplined underwriting and profitable growth, and said it would continue to monitor catastrophe exposures, underwriting actions, and reinsurance needs.
- Key risks include catastrophe frequency and severity, reserve estimation uncertainty, geographic concentration, pricing and competition, and dependence on independent agents and reinsurers. Reinsurance does not remove the company’s direct obligation to policyholders; recoveries may be disputed or delayed.
- Investment risks include interest-rate, credit, municipal-bond, liquidity, and market-value exposure. Fixed maturities were approximately 90.6% of the portfolio; management noted that rising rates can reduce fair value and low rates can constrain reinvestment income.
- Other material exposures include long-tail liability and construction-defect claims, life-policy assumptions and surrenders, regulatory limits on insurer dividends and rates, cyber and operational disruptions, and potential rating downgrades. A 10% inadequacy in the $960.7 million gross loss reserve could reduce pretax earnings by up to $96.1 million, according to the filing’s sensitivity discussion.
- Construction-defect reserves, excluding the broader other-liability IBNR estimate, were $35.8 million across 2,102 claims. Direct and assumed asbestos and environmental reserves were $4.6 million gross, with $3.5 million ceded.
- The company reported no material legal proceedings. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether premium growth and the 94.8% combined ratio persist without relying on lower catastrophe losses or favorable reserve development.
- Reserve adequacy, especially for long-tail other liability, workers’ compensation, auto liability, and construction-defect claims.
- Reinsurance protection, counterparty quality, and recoverability after multiple or severe catastrophe events.
- Life-annuity withdrawal trends, deposit growth, investment spreads, and the effect of low reinvestment yields on earnings and liquidity.
- Portfolio valuation and sensitivity to interest-rate and credit-market changes, including the decline in unrealized gains during 2013.
- Availability of subsidiary dividends to fund parent-company obligations and the status of the revolving facility and its covenants.