United Fire Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise indicated. The interim financial statements were reviewed, not audited.
Business context and reporting period
United Fire Group (UFG) writes property and casualty insurance and life insurance through independent agencies. On September 18, 2017, UFG agreed to sell United Life Insurance Company to Kuvare US Holdings for $280 million in cash, subject to specified adjustments and customary conditions, including regulatory approval. The sale was expected to close in the first half of 2018. UFG accordingly presents life operations as discontinued operations and property and casualty as its continuing business.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Continuing net premiums earned | $255.8m | $239.5m | $737.4m | $692.0m |
| Continuing total revenue | $269.6m | $255.6m | $779.4m | $731.8m |
| Continuing income (loss) before tax | $(32.4)m | $14.0m | $(13.7)m | $43.6m |
| Continuing net income (loss) | $(19.1)m | $11.6m | $(0.4)m | $37.1m |
| Net income from discontinued life operations | $1.2m | $0.7m | $5.4m | $0.8m |
| Consolidated net income (loss) | $(17.9)m | $12.4m | $5.0m | $37.9m |
Premiums earned from continuing operations increased 6.8% in Q3 and 6.6% year to date, but higher claims costs more than offset growth. Net investment income was $13.8 million in Q3, down 1.7%, and $38.6 million for nine months, up 10.1%. Net realized investment gains from continuing operations were $0.1 million and $3.4 million, respectively, versus $2.1 million and $4.8 million in the comparable 2016 periods.
Underwriting: The continuing-operations combined ratio was 118.1% in Q3 versus 100.9% a year earlier, and 107.6% year to date versus 99.5%. The net loss ratio was 87.3% and 77.1%, respectively; the expense ratio was 30.8% and 30.5%. Ratios above 100% indicate underwriting losses. Catastrophe losses were $30.7 million in Q3 and $68.8 million year to date, compared with $12.5 million and $52.4 million in 2016. Management attributed the increase primarily to 2017 hurricanes and worsening underlying claims experience, especially severe commercial auto losses.
Cash flow, liquidity and capital: Nine-month consolidated operating cash flow was $116.3 million, compared with $128.1 million in 2016; continuing-operations operating cash flow was $92.9 million. Continuing-operations cash and cash equivalents were $98.6 million at September 30, 2017. Total assets were $4.19 billion, including $1.59 billion of assets held for sale; stockholders’ equity was $944.0 million. Equity increased from $941.9 million at year-end 2016, reflecting $5.0 million of net income and $38.2 million of after-tax unrealized investment gains, partly offset by $20.4 million in dividends and $29.8 million in share repurchases. Book value per share was $37.99, versus $37.04 at year-end.
UFG had no outstanding balance on its $50 million unsecured revolving credit facility and reported compliance with its covenants. The filing identifies no other outstanding borrowing balance. Dividends paid were $20.4 million for the nine months. UFG’s direct insurance subsidiary could pay up to $27.1 million in dividends without prior regulatory approval at September 30. UFG also had a $3.7 million remaining potential capital contribution commitment to an investment partnership through 2023.
Material changes, outlook and risks
- Continuing-operations losses worsened sharply year over year, despite premium growth. Management cited catastrophe losses and core loss-ratio deterioration, particularly in commercial auto, where severe claims and prior-year reserve strengthening contributed. The company said it was implementing pricing increases, tighter underwriting, analytical tools and stronger loss-control requirements in that line.
- Prior-year property and casualty reserves had $38.0 million of favorable development for the first nine months, chiefly in commercial liability and workers’ compensation, partially offset by adverse development in commercial fire, assumed reinsurance and commercial auto. Q3 alone had $3.2 million of unfavorable development. Management said carried reserves were within actuarial estimates, while cautioning that reserve development can vary and ultimate claims may differ materially from estimates.
- The life subsidiary’s nine-month premiums earned declined to $46.0 million from $62.9 million. Management attributed improved discontinued-operation earnings largely to lower underwriting expenses following pricing and commission changes; reduced sales also lowered future-benefit accruals. The sale remains contingent on closing conditions and regulatory approval, and UFG expected to provide transition services for up to 24 months after closing.
- Investment assets were primarily fixed-income securities; management reported no direct subprime mortgage exposure and no other-than-temporary impairment write-downs in the periods presented. Interest rates and market prices remain key market risks; UFG said it does not use financial hedges or derivatives to manage these risks. Unrealized investment gains increased, benefiting book value, but are exposed to market movements.
- The company contributed $11.4 million to its pension plan through September, including an additional $5.0 million contribution in September; its prior-year-end expectation for 2017 contributions had been $6.4 million. The filing provides no earnings or underwriting guidance.
- Management described pending legal proceedings as ordinary and routine and did not expect them to materially adversely affect financial position or results. Key disclosed uncertainties include catastrophe severity and frequency, reserve adequacy, underwriting and pricing, investment markets, reinsurance recoveries and counterparty strength, regulation, competition, and completion of the life-business sale.
Investor verification points
- Confirm the sale’s final consideration after contractual adjustments, regulatory approvals, closing date and any transition-service costs or obligations.
- Track catastrophe claims and commercial-auto loss trends, pricing actions, and whether the combined ratio returns below 100%.
- Assess reserve development by line and accident year, especially whether favorable liability and workers’ compensation development persists alongside adverse auto and catastrophe-related claims.
- Review cash generation and capital after the life subsidiary is sold, including dividends, repurchases, pension funding and the availability of subsidiary dividends.
- Monitor investment portfolio valuation, interest-rate sensitivity and credit quality, and distinguish changes in unrealized gains from recurring earnings.