United Fire Group, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; financial statements are unaudited and were reviewed by Ernst & Young. United Fire writes property and casualty and life insurance and sells annuities through independent agencies. Comparisons are with 2011; the 2011 six-month results include Mercer Insurance Group only from its March 28, 2011 acquisition date.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net premiums earned | $170.1 million | $152.2 million | $331.6 million | $266.4 million |
| Total revenues | $199.6 million | $181.8 million | $393.3 million | $325.9 million |
| Income (loss) before tax | $19.2 million | $(31.0) million | $44.1 million | $(24.1) million |
| Net income (loss) | $14.7 million | $(17.9) million | $33.9 million | $(12.1) million |
| Diluted EPS | $0.58 | $(0.69) | $1.33 | $(0.46) |
| Operating cash flow | Not presented by quarter | $75.1 million | $40.8 million |
- For the first half, losses and loss adjustment expenses were $198.3 million, down 6.5%; total expenses were $349.3 million, essentially flat year over year. Investment income was $57.9 million, up 5.6%, while realized investment gains were $3.4 million, down 11.1%.
- Property and casualty underwriting improved: the GAAP combined ratio was 96.3% for Q2 and 95.1% for the first half, versus 131.7% and 121.0% in 2011. A ratio below 100% generally indicates underwriting profit. First-half P&C underwriting gain was $14.8 million versus a $50.7 million loss.
- Pre-tax catastrophe losses were $12.0 million in Q2 and $26.1 million in the first half, compared with $36.9 million and $53.1 million in 2011. Lower catastrophe losses were the principal driver of the improvement; commercial auto loss experience worsened, attributed to severe West Coast losses.
Financial position, liquidity, and capital
- At June 30, total assets were $3.741 billion, investments $3.031 billion, cash and cash equivalents $102.0 million, total liabilities $3.006 billion, and stockholders’ equity $735.4 million. Equity was $696.1 million at December 31, 2011.
- Cash declined $42.5 million during the first half. Operating activities provided $75.1 million; investing activities used $101.4 million and financing activities used $16.3 million. Investment purchases exceeded maturities and sales.
- Debt was $45.0 million under a $100.0 million unsecured revolving facility, bearing 2.0% at quarter-end and maturing December 22, 2015. The company reported compliance with covenants. It repaid $15.6 million of trust preferred securities during the first half.
- Available-for-sale investments had $136.7 million in net unrealized gains at June 30, up $12.3 million after tax from year-end. Book value per share was $28.91, versus $27.29 at year-end. Dividends declared were $0.15 per share in Q2 and $0.30 for the first half.
- A $7.4 million remaining potential capital contribution to a limited-liability partnership is due only upon request under an agreement extending through 2017.
Changes, outlook, and risks
- Premium growth reflected organic expansion and the prior-year Mercer acquisition. Management attributed organic growth to rate increases, premium audits, and new business; commercial renewal pricing was steady to modestly higher and retention remained strong.
- Adoption of updated acquisition-cost accounting rules on a prospective basis reduced first-half net income by $5.3 million, or $0.21 per share. It added $13.9 million to underwriting expenses and reduced acquisition-cost amortization by $5.8 million. Management cautioned that the interim impact should not be treated as representative of the full-year effect.
- Life segment investment income declined amid historically low interest rates, pressuring investment income and margins. Management said it was emphasizing investment-grade assets, matching asset and liability durations more closely, and reviewing annuity pricing. Deferred annuity deposits fell 13% in Q2 but rose 13% for the first half year over year.
- No specific earnings or revenue guidance was provided. Management noted results are exposed to catastrophe frequency and severity, reserve adequacy, investment markets and interest rates, reinsurance recoveries and counterparty strength, agency relationships, and regulatory or legal changes. More than half of P&C direct premiums were written in five states, creating geographic concentration.
- Management considered pending litigation ordinary and routine. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported. The filing states no direct subprime mortgage or credit-enhancement exposure and no use of financial hedges.
Important facts for investors to verify
- How much of the earnings recovery reflects lower catastrophe losses versus underlying pricing, mix, and reserve development; in particular, monitor commercial auto loss trends.
- The ongoing earnings effect of the acquisition-cost accounting change, including future amortization and any premium deficiency charges.
- Investment portfolio credit quality, interest-rate sensitivity, unrealized gains and potential impairments; 35.8% of fixed maturities were rated Baa/BBB at June 30.
- Liquidity and capital needs under severe catastrophe scenarios, including reinsurance collectability, annuity outflows, the $45 million revolving balance, and the potential $7.4 million investment commitment.
- Underlying growth excluding Mercer’s acquisition contribution and the sustainability of life insurance and annuity economics in a low-rate environment.