United Fire & Casualty Company — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. This filing is for United Fire & Casualty Company and subsidiaries, the insurance company registrant, rather than a filing identified as United Fire Group Inc. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Business context
The company writes property and casualty (P&C) and life insurance and sells annuities through independent agencies. It acquired Mercer Insurance Group on March 28, 2011; Mercer’s results are included from that date. Management cited geographic diversification of catastrophe exposure and expanded distribution as benefits of the acquisition.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net premiums earned | $158.7 million | $119.2 million | $425.1 million | $350.5 million |
| Total revenue | $187.6 million | $147.9 million | $513.5 million | $441.0 million |
| Net investment income | $26.9 million | $27.1 million | $81.7 million | $83.3 million |
| Net income (loss) | $(4.8) million | $2.9 million | $(16.9) million | $36.0 million |
| Diluted earnings (loss) per share | $(0.19) | $0.11 | $(0.65) | $1.36 |
- Underwriting: The P&C combined ratio was 115.7% for Q3 and 119.1% year to date, versus 110.3% and 99.7%, respectively, in 2010. Ratios above 100% indicate underwriting losses. P&C underwriting losses were $22.7 million for Q3 and $73.3 million year to date.
- Catastrophes: Pre-tax catastrophe losses were $23.7 million in Q3 and $71.0 million year to date, compared with $4.7 million and $15.4 million in 2010. Events included severe storms, assumed New Zealand earthquake losses, and Japan earthquake and tsunami losses.
- Cash flow: Operating cash flow was $54.6 million for nine months, compared with $56.3 million. Investing used $148.0 million, including $171.4 million net cash for the Mercer acquisition; financing provided $67.8 million. Cash and cash equivalents ended at $154.5 million, down from $180.1 million at year-end 2010.
Financial position and material changes
- Total assets were $3.60 billion at September 30, 2011, versus $3.01 billion at December 31, 2010. Invested assets were $2.87 billion, up $384.5 million, principally reflecting Mercer’s acquired portfolio.
- Stockholders’ equity was $685.5 million, down from $716.4 million; book value per share was $26.88 versus $27.35. The decline reflected the net loss, $11.7 million of dividends and $12.4 million of share repurchases, partly offset by higher unrealized investment gains.
- Debt was $53.0 million, including a $50.0 million acquisition-related line of credit and $3.0 million of Mercer borrowing. The company also had $15.6 million of acquired trust preferred securities. It reported compliance with credit covenants; the $50 million line had repayment provisions requiring repayment on or before the nine-month anniversary of its March 24, 2011 issuance.
- Available-for-sale fixed maturities were $2.67 billion. Net unrealized investment gains were $109.9 million, up $7.2 million since year-end. Management said unrealized fixed-maturity losses were primarily related to interest rates and reported no direct subprime mortgage exposure.
- The company repurchased 701,140 shares for $12.4 million during the nine months; 471,686 shares remained authorized for repurchase under the program.
Management commentary, outlook and risks
- Management attributed the earnings deterioration mainly to catastrophe and other claims, assumed reinsurance losses, and acquisition-related expenses. It expected Mercer-related deferred acquisition cost amortization to remain higher than normal through the rest of 2011 and into Q1 2012. The filing provides no specific earnings or revenue guidance.
- P&C net premiums written rose 43.5% in Q3 and 27.5% year to date, reflecting Mercer, controlled rate increases and internal growth initiatives. Policy retention was approximately 81%. Management reported improved pricing trends in some commercial and personal lines, while noting competitive pressure in new commercial business.
- Deferred annuity sales increased 56.2% in Q3 and 24.5% year to date, which management attributed to demand for guaranteed returns amid volatile equity markets and a new agency. Life segment pre-tax income declined to $2.9 million in Q3 and $9.2 million year to date, with lower investment income and higher future policy benefits cited as factors.
- Approximately 59 individual policyholder cases related to Hurricane Katrina remained pending. Management considered recorded reserves adequate but cautioned that estimates may change with litigation developments; Katrina-related loss and settlement expenses were $6.0 million year to date. A settlement of two Mercer merger-related suits awaited final court approval and was described as not material.
- Other exposures include catastrophe frequency and severity, reserve adequacy, reinsurance recoverability and counterparty strength, investment-market and interest-rate risk, and estimates for deferred acquisition costs, benefit obligations and goodwill. A partnership investment carried a remaining potential capital contribution commitment of $9.6 million through 2017.
Most important facts for investors to verify
- Whether catastrophe losses, reserve development and the elevated combined ratio persist, and how much reinsurance recovery is ultimately collected.
- Mercer’s ongoing underwriting profitability and the extent and duration of acquisition-related amortization and expenses.
- Repayment or refinancing of the $50 million line of credit under its repayment terms, alongside the acquired trust preferred obligations.
- Developments in the Katrina litigation, reserve adequacy, and final approval of the Mercer merger settlement.
- Investment portfolio valuation and income sensitivity to interest rates, credit conditions and any future impairment assessments.