United Fire Group, Inc. — Q1 2017 Form 10-Q
Business context and period: Insurance holding company writing property and casualty (P&C) and life insurance, reported for the three months ended March 31, 2017. Comparisons are with Q1 2016 unless stated otherwise. Dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $283.1 | $265.7; up 6.5% |
| Net premiums earned | $253.9 | $241.3; up 5.2% |
| Investment income, net | $25.0 | $22.2; up 12.6% |
| Net realized investment gains | $4.0 | $2.1 |
| Income before tax | $25.1 | $28.8; down 12.8% |
| Net income / diluted EPS | $19.9 / $0.77 | $22.4 / $0.88 |
| Operating cash flow | $39.2 | $35.3 |
| Cash and cash equivalents | $93.7 | $110.9 at Dec. 31, 2016 |
| Total assets | $4,097.0 | $4,054.8 at Dec. 31, 2016 |
| Stockholders’ equity | $960.4 | $941.9 at Dec. 31, 2016 |
| Invested assets | $3,305.5 | $3,265.7 at Dec. 31, 2016 |
P&C reported a 96.5% combined ratio, versus 92.3% in Q1 2016; the net loss ratio rose to 66.2% from 60.5%, while the expense ratio improved to 30.3% from 31.8%. P&C underwriting gain was $8.2 million, down from $17.1 million. Life segment pretax income improved to $2.1 million from $0.6 million.
Cash used in investing activities was $28.2 million, compared with $20.5 million provided in Q1 2016; financing activities used $28.2 million, versus $18.3 million. The company paid $6.4 million in dividends and repurchased $5.7 million of stock. No borrowings were outstanding under its $50 million unsecured revolving credit facility, and the company reported compliance with its covenants. The filing reports no separate total-debt figure.
Material changes versus Q1 2016
- Net income declined 11.1%, despite higher premiums and investment income, principally because of higher P&C losses and catastrophe claims.
- Pre-tax catastrophe losses increased to $9.7 million from $4.3 million, primarily from March hailstorms in the southern United States.
- P&C net premiums earned increased 7.4% to $236.4 million, attributed to organic growth and geographic expansion.
- Life premiums earned decreased 17.3% to $17.4 million, primarily due to lower sales of single-premium whole-life policies following pricing and commission changes.
- Net unrealized investment appreciation, net of tax, increased $7.5 million during the quarter; book value per share rose to $37.90 from $37.04 at year-end.
Outlook, commentary, risks, and unusual items
- Outlook: No quantified earnings or premium guidance is provided. Management said auto pricing increases, tighter underwriting, new analytics, and stronger loss-control measures were being implemented to improve auto profitability, with results expected to take a few quarters. In life and annuities, management prioritized profitability over market share amid low interest rates.
- Reserves: P&C reported $24.9 million of favorable prior-year reserve development, led by commercial liability ($25.7 million) and workers’ compensation ($4.0 million); assumed reinsurance and commercial fire had adverse development of $6.1 million and $2.5 million. Management stated reserves were within actuarial estimates, while noting outcomes may vary materially from estimates.
- Investment risks: The portfolio is principally fixed maturities and is exposed primarily to interest-rate and market-price risk. Management reported no other-than-temporary impairment charges in the quarter and considered unrealized losses temporary, but future impairment remains possible. The company does not use financial hedges or derivatives to manage market risk.
- Liquidity and contingencies: Cash flows from operations met liquidity needs during the quarter. Cash requirements can vary with claims, catastrophes, annuity withdrawals, and reinsurance recoveries. A remaining potential capital contribution commitment to a limited partnership was $6.9 million through 2023. Routine pending legal proceedings were not expected by management to have a material adverse effect.
- Other items: The company adopted share-based payment accounting guidance in 2017, including a $0.1 million tax benefit in the quarter. Its financial statements received an auditor review, not an audit opinion for the interim period.
Most important facts for investors to verify
- Whether deterioration in commercial and personal auto loss experience continues and whether management’s corrective actions improve results.
- Catastrophe frequency and severity, and the adequacy and development of P&C loss reserves, including long-tail claims.
- Sustainability of favorable prior-year reserve releases and investment income, including limited-partnership valuation effects.
- Life and annuity sales, withdrawals, and profitability after the pricing and commission changes.
- Investment portfolio sensitivity to interest rates and credit conditions, along with liquidity needs and reinsurance recoverability.