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UFCS > SEC Filings for UFCS > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for UNITED FIRE GROUP INC


8-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Part 1, Item 1 "Financial Statements."

FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements about our operations, anticipated performance and other similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward-looking statements. The forward-looking statements are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about the Company, the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s)," "believe(s)," "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "target(s)," "forecast(s)," "project(s)," "predict(s)," "should," "could," "may," "will continue," "might," "hope," "can" and other words and terms of similar meaning or expression in connection with a discussion of future operations, financial performance or financial condition, are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements. See Part I Item 1A "Risk Factors" in the 2012 Annual Report on Form 10-K and Part II Item 1A, "Risk Factors" of this document, for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are representative of significant judgments and uncertainties and that potentially may result in materially different results under different assumptions and conditions. We base our discussion and analysis of our results of operations and financial condition on the amounts reported in our Consolidated Financial Statements, which we have prepared in accordance with GAAP. As we prepare these Consolidated Financial Statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are more fully described in our Management's Discussion and Analysis of Results of Operations and Financial Condition presented in our Annual Report on Form 10-K for the year ended December 31, 2012.

INTRODUCTION

The purpose of the Management's Discussion and Analysis is to provide an understanding of our results of operations and consolidated financial position. Our Management's Discussion and Analysis should be read in conjunction with our consolidated financial statements and related notes, including those in our Annual Report on Form 10-K for the year ended December 31, 2012. When we provide information on a statutory basis, we label it as such, otherwise, all other data is presented in accordance with GAAP.

OUR BUSINESS

Founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc. ("United Fire", "Registrant", the "Company", "we", "us", "our") and its consolidated insurance subsidiaries provide insurance protection for


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individuals and businesses through several regional companies. We are licensed as a property and casualty insurer in 43 states plus the District of Columbia and are represented by approximately 1,200 independent agencies. Our life insurance subsidiary is licensed in 36 states and is represented by more than 900 independent agencies.

Segments

We operate two business segments, each with a wide range of products:

property and casualty insurance, which includes commercial insurance, personal insurance, surety bonds and assumed insurance; and

life insurance, which includes deferred and immediate annuities, universal life products and traditional life (primarily single premium whole life) insurance products.

We manage these business segments separately, as they generally do not share the same customer base, and each has different products, pricing, and expense structures.

For the three-month period ended March 31, 2013, property and casualty insurance business accounted for approximately 90.0 percent of our net premiums earned, of which 90.3 percent was generated from commercial lines. Life insurance business accounted for approximately 10.0 percent of our net premiums earned, of which 73.3 percent was generated from traditional life insurance products.

Pooling Arrangement

All of our property and casualty insurance subsidiaries, with the exception of Texas General Indemnity Company, which is in runoff, are members of an intercompany reinsurance pooling arrangement. Pooling arrangements permit the participating companies to rely on the capacity of the entire pool's capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant's own surplus level.

Geographic Concentration

For the three-month period ended March 31, 2013, approximately 50.0 percent of our property and casualty premiums were written in Iowa, Texas, California, New Jersey, and Missouri; approximately 78.0 percent of our life insurance premiums were written in Iowa, Minnesota, Wisconsin, Illinois, and Nebraska.

Segment Revenue and Expense

We evaluate segment profit or loss based upon operating and investment results. Segment profit or loss described in the following sections of the Management's Discussion and Analysis is reported on a pre-tax basis. Additional segment information is presented in Part I, Item 1, Note 6 "Segment Information" to the unaudited Consolidated Financial Statements.
Our primary sources of revenue are premiums and investment income. Major categories of expenses include losses and loss settlement expenses, future policy benefits, underwriting and other operating expenses and interest on policyholders' accounts.
Profit Factors
Our profitability is influenced by many factors, including price, competition, economic conditions, interest rates, catastrophic events and other natural disasters, man-made disasters, state regulations, court decisions, and changes in the law. To manage these risks and uncertainties, we seek to achieve consistent profitability through strong agency relationships, exceptional customer service, fair and prompt claims handling, disciplined underwriting, superior loss control services, and effective and efficient use of technology.


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CONSOLIDATED FINANCIAL HIGHLIGHTS
                                                       Three Months Ended March 31,
(In Thousands)                                         2013            2012         %
Revenues
Net premiums earned                               $   176,817       $ 161,503      9.5  %
Investment income, net of investment expenses          26,464          29,146     (9.2 )
Net realized investment gains                           1,909           2,794    (31.7 )
Other income                                              115             256    (55.1 )
Total revenues                                    $   205,305       $ 193,699      6.0  %

Benefits, Losses and Expenses
Losses and loss settlement expenses               $    97,470       $  91,484      6.5  %
Future policy benefits                                  8,236          10,138    (18.8 )
Amortization of deferred policy acquisition costs      38,081          34,551     10.2
Other underwriting expenses                            22,348          21,994      1.6
Interest on policyholders' accounts                     9,320          10,656    (12.5 )
Total benefits, losses and expenses               $   175,455       $ 168,823      3.9  %

Income before income taxes                        $    29,850       $  24,876     20.0  %
Federal income tax expense                              7,457           5,692     31.0
Net income                                        $    22,393       $  19,184     16.7  %

The following is a summary of our financial performance for the three-month periods ended March 31, 2013 and 2012:

Consolidated Results of Operations

For the three-month period ended March 31, 2013, net income was $22.4 million compared to $19.2 million for the same period of 2012, driven primarily by growth in property and casualty premium revenue. Consolidated net premiums earned increased to $176.8 million, compared to $161.5 million for the same period of 2012. This increase represents organic growth and is the result of a combination of rate increases across most commercial and personal lines, growth in premium audit collections, and new business writings.

Losses and loss settlement expenses increased by $6.0 million during the first quarter of 2013 compared to the first quarter of 2012, primarily due to the overall growth in our business, partially offset by a decrease in catastrophe loss experience. Pre-tax catastrophe losses totaled $4.5 million compared to $14.1 million in the first quarter of 2012, which was impacted by losses from severe storms in the Midwest.

Consolidated Financial Condition

At March 31, 2013, the book value per share of our common stock was $30.01. We did not repurchase any shares of our common stock in the three-month period ended March 31, 2013. Under our share repurchase program, which expires in August 2014, we are authorized to repurchase an additional 1,129,720 shares of our common stock.

Net unrealized investment gains totaled $152.7 million as of March 31, 2013, an increase of $8.6 million, net of tax, or 6.0 percent, since December 31, 2012. The increase in net unrealized gains resulted from an increase in the fair value of our equity portfolios, offset slightly by a decrease in our fixed maturity portfolios.

Our stockholders' equity increased to $758.1 million at March 31, 2013, from $729.2 million at December 31, 2012. The increase was primarily attributable to net income of $22.4 million and net unrealized investment gains of $8.6 million, net of tax, which was partially offset by stockholder dividends of $3.8 million.


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RESULTS OF OPERATIONS

Property and Casualty Insurance Segment Results
                                                          Three Months Ended March 31,
(In Thousands)                                              2013                 2012
Net premiums written (1)                              $      177,119       $      164,633
Net premiums earned                                   $      162,701       $      146,756
Losses and loss settlement expenses                          (92,093 )            (87,310 )
Amortization of deferred policy acquisition costs            (36,355 )            (32,413 )
Other underwriting expenses                                  (18,415 )            (17,868 )
Underwriting gain (1)                                 $       15,838       $        9,165

Investment income, net of investment expenses                 10,485               10,638
Net realized investment gains                                  1,029                1,180
Other income                                                      12                  100
Income before income taxes                            $       27,364       $       21,083

GAAP Ratios:
Net loss ratio                                                  53.8 %               49.9 %
Catastrophes - effect on net loss ratio                          2.8                  9.6
Net loss ratio                                                  56.6 %               59.5 %
Expense ratio (2)                                               33.7                 34.3
Combined ratio                                                  90.3 %               93.8 %

(1) The Measurement of Results section of this report defines data prepared in accordance with statutory accounting practices, which is a comprehensive basis of accounting other than U.S. GAAP.
(2) Includes policyholder dividends.

For the three months ended March 31, 2013, our property and casualty segment reported income before taxes of $27.4 million or an increase of $6.3 million compared to the same period in 2012, primarily due to an increase in the underwriting gain.

The property and casualty insurance segment experienced $23.7 million of favorable development in our net reserves for prior accident years during the three months ended March 31, 2013. These results are consistent with results from first quarter 2012. Development amounts can vary significantly from quarter-to-quarter and year-to-year depending on a number of factors, including the number of claims settled and the settlement terms, and are subject to reallocation between accident years and lines of business. In the first quarter 2013, our total reserves remained relatively flat and within our actuarial estimates.

The net loss ratio, a component of the combined ratio, decreased by 2.9 percentage points to 53.8 percentage points in the three-month period ended March 31, 2013, as compared to the same period in 2012. The decrease is due primarily to reduced catastrophe loss experience. Pre-tax catastrophe losses totaled $4.5 million for the three-month period ended March 31, 2013, as compared to $14.1 million for the same period of 2012.

The expense ratio, a component of the combined ratio, of 33.7 percentage points for the quarter ended March 31, 2013 decreased 0.6 percentage points compared with the same period in 2012.

For a detailed discussion of our consolidated investment results, refer to the "Investment Portfolio" section of this item.


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The following tables display our premiums earned, losses and loss settlement expenses and loss ratio by line of business:

Three Months Ended
March 31,                                2013                                        2012
                                        Losses                                      Losses
                                       and Loss                                    and Loss
                           Net        Settlement                       Net        Settlement
(In Thousands)          Premiums       Expenses         Loss        Premiums       Expenses         Loss
Unaudited                Earned        Incurred         Ratio        Earned        Incurred         Ratio
Commercial lines
Other liability        $  45,329     $    20,697         45.7  %   $  46,120     $    22,348         48.5  %
Fire and allied lines     40,974          18,601         45.4         31,546          25,842         81.9
Automobile                34,958          26,173         74.9         31,609          23,269         73.6
Workers' compensation     19,108          16,363         85.6         15,609           5,492         35.2
Fidelity and surety        4,759             294          6.2          4,297             (44 )       (1.0 )
Miscellaneous                 45             614           NM            232               1          0.4
Total commercial lines $ 145,173     $    82,742         57.0  %   $ 129,413     $    76,908         59.4  %

Personal lines
Fire and allied lines  $  10,436     $     6,201         59.4  %   $  10,153     $     3,618         35.6  %
Automobile                 5,346           3,195         59.8          5,129           3,136         61.1
Miscellaneous                 53             234           NM            222             185         83.3
Total personal lines   $  15,835     $     9,630         60.8  %   $  15,504     $     6,939         44.8  %
Reinsurance assumed    $   1,693     $      (279 )      (16.5 )%   $   1,839     $     3,463        188.3  %
Total                  $ 162,701     $    92,093         56.6  %   $ 146,756     $    87,310         59.5  %

NM=Not meaningful

Commercial fire and allied lines - The loss ratio improved 37.7 percentage points in the three-month period ended March 31, 2013, compared to the same period of 2012. The improvement was due to incurred losses from severe storms in the Midwest in the three-month period ended March 31, 2012.

Workers' compensation - The loss ratio deteriorated by 50.4 percentage points in the three-month period ended March 31, 2013 compared to the same period of 2012 when we experienced particularly low losses and loss settlement expenses.

Personal fire and allied lines - The loss ratio deteriorated 31.2 percentage points in the three-month period ended March 31, 2013, compared to the same period of 2012 primarily due to unfavorable development in the three-month period ending March 31, 2013 on prior year claims.


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Life Insurance Segment Results
                                                          Three Months Ended March 31,
(In Thousands)                                              2013                 2012
Revenues
Net premiums earned                                   $        14,116        $    14,747
Investment income, net                                         15,979             18,508
Net realized investment gains                                     880              1,614
Other income                                                      103                156
Total revenues                                        $        31,078        $    35,025

Benefits, Losses and Expenses
Losses and loss settlement expenses                   $         5,377        $     4,174
Future policy benefits                                          8,236             10,138
Amortization of deferred policy acquisition costs               1,726              2,138
Other underwriting expenses                                     3,933              4,126
Interest on policyholders' accounts                             9,320             10,656
Total benefits, losses and expenses                   $        28,592        $    31,232

Income before income taxes                            $         2,486        $     3,793

Income before income taxes decreased by $1.3 million in the three-month period ended March 31, 2013, as compared to the same period of 2012. Net premiums earned decreased 4.3 percent in the three-month period ended March 31, 2013, as compared to the same period of 2012, primarily due to decreased sales of immediate annuities.

Loss and loss settlement expenses increased 28.8 percent in the three-month period ended March 31, 2013, as compared to the same period of 2012, due to an increase in policy claims. Future policy benefits decreased 18.8 percent in the three-month period ended March 31, 2013, as compared to the same period of 2012, primarily due to an increase in net withdrawals of deferred annuity products in the three-month period ended March 31, 2013.

Deferred annuity deposits decreased 51.7 percent for the three-month period ended March 31, 2013, as compared with the same periods in 2012. It has been prudent to lower the credited rate we have offered during the low investment return environment, thus affecting current deposits. Sales of single premium deferred annuities have also decreased in regard to overall portfolio production, due to strong sales of traditional life products. While deferred annuity deposits are not recorded as a component of net premiums written or net premiums earned, they do generate investment income.

Net cash outflow related to our annuity business was $25.9 million in the three-month period ended March 31, 2013, compared to a net cash outflow of $0.3 million in the same periods of 2012. We attribute this to the activity described in the prior paragraph.

For a detailed discussion of our consolidated investment results, refer to the "Investment Portfolio" section of this item.

Investment Portfolio

Our invested assets totaled $3.1 billion at March 31, 2013, compared to $3.0 billion at December 31, 2012, an increase of $19.0 million. At March 31, 2013, fixed maturity securities and equity securities made up 92.2 percent and 6.5 percent of the value of our investment portfolio, respectively. Because the primary purpose of our investment portfolio is to fund future claims payments, we use a conservative investment philosophy, investing in a diversified portfolio of high-quality, intermediate-term taxable corporate bonds, taxable U.S. government bonds and tax-exempt U.S. municipal bonds. Our overall investment strategy is to keep our cash on hand low in the current interest rate environment. If extra cash is needed, we can borrow funds available under our revolving credit facility.


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Composition
We develop our investment strategies based on a number of factors, including
estimated duration of reserve liabilities, short- and long-term liquidity needs,
projected tax status, general economic conditions, expected rates of inflation
and regulatory requirements. We administer our investment portfolio based on
investment guidelines approved by management and the investment committee of our
Board of Directors that comply with applicable statutory regulations.

The composition of our investment portfolio at March 31, 2013, is presented at
carrying value in the following table:
                         Property & Casualty
                          Insurance Segment               Life Insurance Segment                   Total
                                        Percent                              Percent                      Percent
(In Thousands)                          of Total                             of Total                     of Total
Fixed maturities (1)
Held-to-maturity     $       1,128          0.1 %   $           510                - %   $     1,638          0.1 %
Available-for-sale       1,160,023         84.2           1,647,559             97.8       2,807,582         91.7
Trading securities          13,738          1.0                   -                -          13,738          0.4
Equity securities
Available-for-sale         175,158         12.6              20,519              1.2         195,677          6.4
Trading securities           2,131          0.2                   -                -           2,131          0.1
Mortgage loans                   -            -               4,581              0.3           4,581          0.1
Policy loans                     -            -               6,566              0.4           6,566          0.2
Other long-term
investments                 25,210          1.8               5,436              0.3          30,646          1.0
Short-term
investments                    800          0.1                   -                -             800            -
Total                $   1,378,188        100.0 %   $     1,685,171            100.0 %   $ 3,063,359        100.0 %

(1) Available-for-sale and trading fixed maturities are carried at fair value. Held-to-maturity fixed maturities are carried at amortized cost.

At March 31, 2013, we classified $2.8 billion, or 99.5 percent, of our fixed maturities portfolio as available-for-sale, compared to $2.8 billion, or 99.5 percent, at December 31, 2012. We classify our remaining fixed maturities as held-to-maturity or trading. We record held-to-maturity securities at amortized cost. We record trading securities, primarily convertible redeemable preferred debt securities, at fair value, with any changes in fair value recognized in earnings.

As of March 31, 2013 and December 31, 2012, we did not have direct exposure to investments in subprime mortgages or other credit enhancement vehicles.

Credit Quality

The following table shows the composition of fixed maturity securities held in
our available-for-sale, held-to-maturity and trading security portfolios, by
credit rating at March 31, 2013 and December 31, 2012. Information contained in
the table is generally based upon the issue credit ratings provided by Moody's,
unless the rating is unavailable, in which case we obtain it from Standard &
Poor's.
(In Thousands)          March 31, 2013                   December 31, 2012
Rating           Carrying Value     % of Total     Carrying Value     % of Total
AAA             $        571,755         20.3 %   $        481,754         17.1 %
AA                       598,325         21.2              646,516         22.9
A                        647,283         22.9              632,962         22.4
Baa/BBB                  946,695         33.5              998,818         35.4
Other/Not Rated           58,900          2.1               63,036          2.2
                $      2,822,958        100.0 %   $      2,823,086        100.0 %


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Duration
Our investment portfolio is invested primarily in fixed maturity securities whose fair value is susceptible to market risk, specifically interest rate changes. Duration is a measurement used to quantify our inherent interest rate risk and analyze our ability to match our invested assets to our reserve liabilities. If our invested assets and reserve liabilities have similar durations, then any change in interest rates will have an equal effect on these accounts. The primary purpose for matching invested assets and reserve liabilities is liquidity. With appropriate matching, our investments will mature when cash is needed, preventing the need to liquidate other assets prematurely. Mismatches in the duration of assets and liabilities can cause significant fluctuations in our results of operations.

Group

The weighted average effective duration of our portfolio of fixed maturity securities, at March 31, 2013, is 4.3 years compared to 4.0 years at December 31, 2012.

Property and Casualty Insurance Segment

The weighted average effective duration of our portfolio of fixed maturity . . .

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