United Fire Group, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. United Fire writes property-and-casualty and life insurance through independent agencies. Interim financial statements were reviewed by Ernst & Young, not audited.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net premiums earned | $176.5M | $158.7M | $508.1M | $425.1M |
| Total revenue | $206.6M | $187.6M | $599.9M | $513.5M |
| Net income (loss) | $8.7M | ($4.8M) | $42.6M | ($16.9M) |
| Diluted EPS | $0.34 | ($0.19) | $1.67 | ($0.65) |
| Operating cash flow | — | — | $125.3M | $54.6M |
- Property-and-casualty GAAP combined ratio improved to 102.5% in Q3 from 115.7%, and to 97.7% for nine months from 119.1%. The nine-month underwriting gain was $10.8M, versus a $73.3M loss in 2011.
- Q3 pretax catastrophe losses were $8.5M, compared with $23.9M; nine-month catastrophe losses were $34.5M, compared with $77.0M. Lower catastrophe losses were a major driver of improved results.
- At September 30, total assets were $3.74B, investments $3.07B, cash and equivalents $82.6M, and stockholders’ equity $753.8M. Equity was up from $696.1M at year-end 2011; book value per share was $29.66.
- Cash declined $62.0M during the nine months. Investing used $115.9M and financing used $71.4M; operating activities provided $125.3M.
- No debt or trust preferred securities remained outstanding at September 30. The company had a $100M unsecured revolving facility, with no balance outstanding, maturing December 2015; it reported covenant compliance.
- Cash dividends declared were $0.15 per share for Q3 and $0.45 for the nine-month period.
Changes and management commentary
- Premium growth reflected rate increases, new business, higher audit premiums, and policy changes. Nine-month premiums also included $34.9M from Mercer Insurance Group, acquired in March 2011; management reported $48.1M of organic growth.
- Effective January 1, 2012, new accounting guidance narrowed which acquisition costs could be deferred. The change reduced nine-month net income by about $6.5M, or $0.25 per share; management cautioned that the interim effect was not representative of the full-year impact.
- Life-segment pretax income fell to $1.8M in Q3 and $7.9M for nine months, as lower investment income and higher future policy benefits and underwriting expenses offset premium growth. Management cited persistently low interest rates and lower deferred-annuity deposits.
- Net unrealized investment gains, net of tax, increased $25.0M from year-end, contributing to higher equity. Management said unrealized losses were considered temporary, while noting future impairment charges remained possible.
Outlook, risks and contingencies
- The filing provides no quantified full-year earnings guidance. It identifies catastrophe frequency and severity, claims-reserve adequacy, investment-market developments, interest rates, reinsurance recovery and counterparty strength, acquisition-cost recoverability, and pension obligations among key uncertainties.
- Subsequent event: Hurricane Sandy made landfall on October 29, after the reporting date. The company estimated combined net after-tax losses of $15.0M–$22.5M, or $0.59–$0.88 per share, expected to affect Q4 results.
- The company had a remaining potential capital contribution commitment of $6.5M to a limited-liability partnership through 2017. Pending litigation was described as ordinary and routine.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Actual Q4 Sandy losses and recoveries versus the preliminary $15.0M–$22.5M after-tax estimate.
- Whether the improved combined ratio persists, particularly given Q3 severity increases in other liability and workers’ compensation claims.
- The ongoing earnings and expense effects of the revised acquisition-cost accounting, including any premium-deficiency charges.
- Investment portfolio valuation, credit quality and sensitivity to low interest rates; 35.4% of fixed-maturity holdings were rated Baa/BBB at September 30.
- Cash and liquidity trends, reinsurance recoverables, reserve adequacy, and compliance with revolving-credit covenants.