United Fire Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. The company writes property and casualty (P&C) and life insurance and sells annuities through independent agencies. Figures below are in U.S. dollars; financial-statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2014 | Q1 2013 / prior balance date |
|---|---|---|
| Total revenue | $222.9 million | $205.3 million; up 8.6% |
| Net premiums earned | $193.3 million | $176.8 million; up 9.3% |
| Net investment income | $26.8 million | $26.5 million |
| Net realized investment gains | $2.2 million | $1.9 million |
| Income before taxes | $15.9 million | $29.9 million |
| Net income / diluted EPS | $13.3 million / $0.52 | $22.4 million / $0.88 |
| Comprehensive income | $28.5 million | $31.8 million |
| Operating cash flow | $18.5 million | $31.7 million |
| Cash and cash equivalents | $68.7 million | $92.2 million at Dec. 31, 2013 |
| Total assets / liabilities | $3,769.2 million / $2,961.1 million | $3,720.7 million / $2,937.8 million at Dec. 31, 2013 |
| Stockholders’ equity / book value per share | $808.1 million / $31.82 | $782.8 million / $30.87 at Dec. 31, 2013 |
| Debt and credit availability | No facility balance outstanding; $100 million revolving facility | Facility maturity December 22, 2015 |
Net income was about 6.0% of revenue, compared with about 10.9% in Q1 2013. P&C underwriting produced a $0.7 million gain, versus $15.8 million a year earlier. Its GAAP combined ratio rose to 99.6% from 90.3% (below 100% generally indicates underwriting profitability); the loss ratio rose to 66.1% from 56.6%, while the expense ratio was 33.5% versus 33.7%.
Net cash fell by $23.5 million during the quarter. Investing used $31.7 million and financing used $10.3 million. The company reported cash flows from operations were sufficient for its liquidity needs. Its $3.12 billion investment portfolio was primarily fixed maturities; management says about $1.1 billion, or 39.6% of fixed maturities, is scheduled to mature over the next five years. The company reported no direct subprime-mortgage or credit-enhancement exposure.
Material changes versus the prior comparable quarter
- Revenue grew 8.6%, supported by 9.3% growth in earned premiums, but benefits, losses and expenses increased 18.0% to $207.0 million.
- Losses and loss settlement expenses rose 28.5% to $125.2 million. Management attributed the increase to a single large explosion-related claim, a higher annual aggregate reinsurance deductible, less favorable prior-year reserve development, and more claims associated with severe winter weather. These effects were partly offset by lower catastrophe losses.
- Pre-tax catastrophe losses were $3.3 million, down from $4.5 million. Favorable prior-year P&C reserve development was $14.5 million, compared with $23.7 million in Q1 2013.
- P&C pre-tax income declined to $13.7 million from $27.4 million. Life segment pre-tax income declined to $2.2 million from $2.5 million; life premiums earned and investment income also decreased.
- Operating cash flow decreased to $18.5 million from $31.7 million. Shareholders’ equity increased 3.2%, helped by $13.3 million net income and $14.7 million of after-tax unrealized investment appreciation, partly offset by $4.6 million in dividends.
Management commentary, outlook and risks
Management attributed P&C premium growth to rate increases across most commercial and personal lines and new business writings. It described the increase in losses as the primary cause of lower earnings. P&C commercial auto results improved, while commercial fire and allied, commercial other liability and personal auto loss ratios worsened. Management said it was addressing above-expectation workers’ compensation losses through underwriting, cost-control and staffing measures.
Life premiums earned declined 1.9%, primarily because of lower single-premium whole-life sales as the company maintained pricing discipline. Life investment income declined 2.4% amid low reinvestment rates. Deferred annuity deposits rose 204.1%; net annuity cash outflow was $11.1 million, compared with $25.9 million in Q1 2013. The filing provides no earnings or revenue guidance or specific quantified forward outlook.
The company’s $100 million unsecured revolving credit facility was undrawn, and it reported compliance with its covenants. It paid $4.6 million in dividends and stated that future dividends depend on board declaration, results, capital needs and other conditions. The company could repurchase up to 1,070,117 additional shares under a program scheduled to expire in August 2014; it made no repurchases during the quarter.
Key stated risks include catastrophe and severe-weather losses, reserve adequacy and long-tail claims uncertainty, investment-market and interest-rate changes, reinsurer solvency or coverage disputes, agency relationships, competition, regulation and litigation. Management said unrealized investment losses were temporary based on its analysis and that it had no intent or expected need to sell affected securities before recovery or maturity; future other-than-temporary impairment charges remain possible. The interim financial statements received an independent accountant’s review, not an audit. Management reported effective disclosure controls and no material change in internal control over financial reporting; pending litigation was described as ordinary and routine.
Important facts for investors to verify
- Whether the explosion-related claim, winter-weather losses and higher reinsurance deductible have further effects on claims, reinsurance recoveries or subsequent-period results.
- Whether P&C pricing and underwriting actions can sustain premium growth while improving the combined ratio, and whether prior-year reserve development remains favorable.
- Reserve adequacy, particularly for long-tail liability claims, and the assumptions underlying life policy benefits and deferred policy acquisition costs.
- Investment portfolio credit quality, interest-rate sensitivity, unrealized gains and potential impairment exposure; assess the effect of low reinvestment yields on earnings.
- Liquidity and capital needs, including annuity withdrawals, insurance-subsidiary dividend restrictions, the undrawn credit facility and the planned expiry of the share-repurchase authorization.