Business context and reporting period
United Fire Group, Inc. (formerly United Fire & Casualty Company) filed this Form 10-K for the fiscal year ended December 31, 2011. It writes property and casualty (P&C) and life insurance and sells annuities through independent agencies. The 2011 results include Mercer Insurance Group from its acquisition on March 28, 2011; the holding-company reorganization was completed February 1, 2012. The filing also reports unaudited fourth-quarter results.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $705.0 million | $591.1 million |
| Net income | $11,000 | $47.5 million |
| P&C net premiums earned | $533.8 million | $420.4 million |
| P&C combined ratio | 112.1% | 99.9% |
| Net investment income | $109.5 million | $111.7 million |
| Operating cash flow | $74.4 million | $71.2 million |
| Cash and investments | $3.053 billion | $2.663 billion |
| Total assets | $3.619 billion | $3.007 billion |
| Stockholders’ equity | $696.1 million | $716.4 million |
| Debt and trust preferred securities | $45.0 million and $15.6 million | No balances reported |
Full-year diluted earnings per share were reported as zero after rounding; the fourth-quarter net income was $16.9 million (unaudited). Year-end book value was $27.29 per share. Cash and cash equivalents were $144.5 million; the company also had a $100 million unsecured revolving credit facility, with no amount drawn under that facility reported at year-end.
Material changes versus the prior comparable period
- Revenue rose 19.3%, primarily reflecting the Mercer acquisition; net premiums written increased 30.4% to $604.9 million. P&C direct premiums written rose 33.3%, including $115.3 million attributable to Mercer.
- Net income fell from $47.5 million to $11,000. Catastrophe losses increased to $80.8 million from $19.8 million, while benefits, losses and expenses rose 34.7% to $717.7 million.
- The P&C segment swung from $38.8 million pretax income to a $24.2 million pretax loss. Its combined ratio rose to 112.1%, indicating underwriting losses before investment income. The life segment’s pretax income declined to $11.5 million from $19.5 million, chiefly amid low investment yields and higher benefit costs.
- Prior-year P&C reserve development was favorable by $61.1 million, versus $45.9 million favorable in 2010; this included $6.5 million of adverse development related to Hurricane Katrina litigation.
- Equity declined 2.8%, reflecting dividends, share repurchases and higher employee-benefit-plan underfunding, partly offset by investment appreciation. Net unrealized investment gains after tax increased to $124.4 million from $102.6 million.
Outlook, commentary, risks and unusual items
- Management cited 2011 catastrophe losses as a major drag and said it strengthened underwriting guidelines, including measures informed by updated catastrophe modeling. It planned further exposure management and identified about $1.5 million of expected 2012 savings from consolidating Mercer’s reinsurance programs.
- Management estimated the 2012 adoption of updated insurance acquisition-cost accounting guidance could reduce pretax income by approximately $11 million to $17 million; this was preliminary, and the actual effect could differ.
- Mercer integration remained underway, with system conversions planned during 2012. The acquisition generated $8.3 million of transaction costs in 2011 and accelerated amortization of acquired value of business, with the remaining $1.7 million VOBA asset expected to be fully amortized in first-quarter 2012.
- Key risks include catastrophe frequency and severity, reserve-estimation uncertainty, investment and interest-rate exposure, municipal-bond credit risk, reinsurance availability and collectability, geographic concentration, and execution of Mercer integration. A.M. Best assigned the P&C pooled groups an “A” rating with a negative outlook; the life subsidiary had an “A-” rating with a stable outlook.
- About 49 Hurricane Katrina policyholder cases remained pending at year-end. The company considered its reserves adequate but warned that estimates could change with adverse litigation developments. Other pending litigation was described as ordinary and routine.
- Management and the independent auditor reported effective internal controls; the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of premium growth, earnings and balance-sheet expansion reflects Mercer versus underlying organic performance, and whether integration and projected savings are achieved.
- Whether catastrophe losses and the 112.1% P&C combined ratio improve, including the effects of rate changes, underwriting actions and reinsurance renewals.
- The adequacy of P&C reserves, especially long-tail liability and construction-defect claims, and any further Hurricane Katrina litigation development.
- Investment portfolio credit quality, municipal exposure and sensitivity to interest rates, alongside life-segment investment spreads and annuity behavior.
- Debt repayment, trust-preferred redemption, revolving-credit availability, and the actual 2012 earnings impact of the acquisition-cost accounting change.