Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
UFCS > SEC Filings for UFCS > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for UNITED FIRE GROUP INC

Form 10-Q for UNITED FIRE GROUP INC


6-Aug-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", or "our") and its consolidated insurance subsidiaries provide insurance protection for


Table of Contents

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 six-month period ended June 30, 2013, property and casualty insurance business accounted for approximately 92.0 percent of our net premiums earned, of which 90.3 percent was generated from commercial lines. Life insurance business accounted for approximately 8.0 percent of our net premiums earned, of which 66.4 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 six-month period ended June 30, 2013, approximately 50.0 percent of our property and casualty premiums were written in Texas, Iowa, California, New Jersey, and Missouri; approximately 76.0 percent of our life insurance premiums were written in Iowa, Wisconsin, Minnesota, Nebraska and Illinois.

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.


Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS
                              Three Months Ended June 30,               Six Months Ended June 30,
(In Thousands)              2013          2012           %           2013          2012           %
Revenues
Net premiums earned      $ 186,367     $ 170,090         9.6  %   $ 363,184     $ 331,593         9.5  %
Investment income, net
of investment expenses      29,019        28,749         0.9         55,483        57,895        (4.2 )
Net realized investment
gains
Other-than-temporary
impairment charges               -            (4 )    (100.0 )            -            (4 )    (100.0 )
All other net realized
gains                        4,151           568          NM          6,060         3,362        80.2
Net realized investment
gains                        4,151           564          NM          6,060         3,358        80.5
Other income                   182           243       (25.1 )          297           499       (40.5 )
Total revenues           $ 219,719     $ 199,646        10.1  %   $ 425,024     $ 393,345         8.1  %

Benefits, Losses and
Expenses
Losses and loss
settlement expenses      $ 120,435     $ 106,766        12.8  %   $ 217,905     $ 198,250         9.9  %
Future policy benefits       9,869         8,356        18.1         18,105        18,494        (2.1 )
Amortization of deferred
policy acquisition costs    36,708        34,179         7.4         74,789        68,730         8.8
Other underwriting
expenses                    23,308        20,541        13.5         45,656        42,535         7.3
Interest on
policyholders' accounts      9,081        10,627       (14.5 )       18,401        21,283       (13.5 )
Total benefits, losses
and expenses             $ 199,401     $ 180,469        10.5  %   $ 374,856     $ 349,292         7.3  %

Income before income
taxes                    $  20,318     $  19,177         5.9  %   $  50,168     $  44,053        13.9  %
Federal income tax
expense                      4,822         4,461         8.1         12,279        10,153        20.9  %
Net income               $  15,496     $  14,716         5.3  %   $  37,889     $  33,900        11.8  %

NM=Not meaningful

The following is a summary of our financial performance for the three- and six-month periods ended June 30, 2013:

Consolidated Results of Operations

For the three-month period ended June 30, 2013, net income was $15.5 million compared to $14.7 million for the same period of 2012, driven primarily by growth in property and casualty premium revenue and net realized investment gains, which was partially offset by an increase in loss and loss settlement expenses. Consolidated net premiums earned increased to $186.4 million, compared to $170.1 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 $13.7 million during the second quarter of 2013 compared to the same period of 2012, primarily due to growth in our overall business and an increase in catastrophe loss experience. Pre-tax catastrophe losses totaled $14.2 million compared to $12.0 million for the same period of 2012.

For the six-month period ended June 30, 2013, net income was $37.9 million compared to $33.9 million for the same period of 2012, driven primarily by growth in property and casualty premium revenue and net realized investment gains,which was partially offset by an increase in loss and loss settlement expenses. Consolidated net premiums earned increased to $363.2 million, compared to $331.6 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 $19.7 million during the first half of 2013 compared to the same period of 2012, primarily due to the overall growth in our business, partially offset by a decrease in catastrophe loss


Table of Contents

experience. Pre-tax catastrophe losses totaled $18.7 million compared to $26.1 million in the same period of 2012, which was impacted by losses from storms in the Midwest and Alabama.

Consolidated Financial Condition

At June 30, 2013, the book value per share of our common stock was $29.00. We repurchased 3,577 shares of our common stock in the six-month period ended June 30, 2013. Under our share repurchase program, which expires in August 2014, we are authorized to repurchase an additional 1,126,143 shares of our common stock.

Net unrealized investment gains totaled $116.2 million as of June 30, 2013, a decrease of $27.9 million, net of tax, or 19.4 percent, since December 31, 2012. The decrease in net unrealized gains resulted from a decrease in our fixed maturity portfolio due to rising interest rates, partially offset by an increase in the fair value of our equity portfolio.

Our stockholders' equity increased to $734.4 million at June 30, 2013, from $729.2 million at December 31, 2012. The increase was primarily attributable to net income of $37.9 million, which was offset by a decrease in net unrealized investment gains of $27.9 million, net of tax, and stockholder dividends of $8.3 million.

RESULTS OF OPERATIONS

Property and Casualty Insurance Segment Results
                                     Three Months Ended June 30,          Six Months Ended June 30,
(In Thousands)                         2013               2012               2013              2012
Net premiums written (1)         $     198,363       $     180,237     $     375,482       $  344,870
Net premiums earned              $     170,527       $     153,914     $     333,228       $  300,670
Losses and loss settlement
expenses                              (115,528 )          (100,220 )        (207,621 )       (187,530 )
Amortization of deferred policy
acquisition costs                      (34,993 )           (31,882 )         (71,349 )        (64,295 )
Other underwriting expenses            (19,220 )           (16,153 )         (37,635 )        (34,021 )
Underwriting gain (1)            $         786       $       5,659     $      16,623       $   14,824

Investment income, net of
investment expenses                     12,288              11,720            22,773           22,358
Net realized investment gains
(losses)                                 3,560                (629 )           4,589              551
Other income                                72                  96                84              196
Income before income taxes       $      16,706       $      16,846     $      44,069       $   37,929

GAAP Ratios:
Net loss ratio                            59.4 %              57.3 %            56.7 %           53.7 %
Catastrophes - effect on net
loss ratio                                 8.3                 7.8               5.6              8.7
Net loss ratio                            67.7 %              65.1 %            62.3 %           62.4 %
Expense ratio (2)                         31.8                31.2              32.7             32.7
Combined ratio                            99.5 %              96.3 %            95.0 %           95.1 %

(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- and six-month periods ended June 30, 2013, our property and casualty segment reported income before taxes of $16.7 million and $44.1 million, respectively, or an increase (decrease) of $(0.1) million and $6.1 million, respectively, compared to the same periods of 2012. The increase in the six months ended June 30, 2013 is primarily due to an increase in net premiums earned.

Net premiums earned increased 10.8 percent to $170.5 million in the three-month period ended June 30, 2013, compared to $153.9 million in the same period of 2012. In the six months ended June 30, 2013, net premiums earned also increased 10.8 percent to $333.2 million, compared to $300.7 million in the same period of 2012.


Table of Contents

The GAAP combined ratio increased 3.2 percentage points to 99.5 percent for the three-month period ended June 30, 2013, compared to 96.3 percent for the same period of 2012. For the six-month period ended June 30, 2013, the GAAP combined ratio was 95.0 percent, which is consistent with 95.1 percent for the same period of 2012.

The net loss ratio, a component of the combined ratio, increased by 2.6 percentage points to 67.7 percentage points in the three-month period ended June 30, 2013, as compared to the same period in 2012. The increase is due primarily to an increase in loss and loss settlement expenses along with an increase in catastrophe loss experience. Pre-tax catastrophe losses totaled $14.2 million for the three-month period ended June 30, 2013, as compared to $12.0 million for the same period of 2012.

The net loss ratio in the six-month period ended June 30, 2013 decreased slightly compared with the same period of 2012.

The expense ratio, a component of the combined ratio, of 31.8 percentage points for the quarter ended June 30, 2013 increased by 0.6 percentage points as compared with the same period of 2012 primarily due to an increase in employee benefit plan expenses.

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

Reserve Development

For many liability claims, significant periods of time, ranging up to several years and for certain construction defect claims more than a decade, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability. Reserves for these long-tail coverages represent a significant portion of our overall carried reserves.

When establishing reserves and monitoring reserve adequacy, we analyze historical data and consider the potential impact of various loss development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However there is no precise method for evaluating the specific dollar impact of any individual factor on the development of reserves.

Our reserving philosophy is to reserve claims to their ultimate expected loss amount as soon as possible after information about a claim becomes available. This approach tends to produce, on average, prudently conservative case reserves, which we expect to result in some level of favorable development over the course of settlement.

2013 Development

The property and casualty insurance segment experienced $16.4 million of favorable development in our net reserves for prior accident years during the three-month period ended June 30, 2013 and $40.5 million for the six months ended June 30, 2013. The three-month period ended June 30, 2013 results are slightly less than the results experienced in the three month period ended June 30, 2012, but our experience in the six months ended June 30, 2013 are consistent with our experience in the six month period ended June 30, 2012.


Table of Contents

The favorable development in 2013 was primarily related to our long-tail lines of commercial business including other liability, workers compensation and auto liability. The favorable development is generally caused by changes in loss development patterns due to many factors discussed previously. Specifically, we observed a continuation of a trend, started in 2011, reducing the overall number of reported new construction defect claims and lower than expected emergence on known claims. In addition, in 2009 management began an initiative to control legal defense costs. As these costs are a significant component of the carried reserves for the other liability line, management believes this initiative is also contributing to the favorable development trends.

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 three-month period ended June 30, 2013, our total reserves remained relatively flat.

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

Three Months Ended June 30,                   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             $  49,175     $   28,618         58.2  %   $  48,597     $   19,866         40.9  %
Fire and allied lines          39,416         26,093         66.2         32,245         31,489         97.7
Automobile                     36,025         28,777         79.9         33,089         27,919         84.4
Workers' compensation          20,159         14,477         71.8         16,853          7,835         46.5
Fidelity and surety             4,048           (974 )      (24.1 )        4,118           (311 )       (7.6 )
Miscellaneous                     517             45          8.7            245             63         25.7
Total commercial lines      $ 149,340     $   97,036         65.0  %   $ 135,147     $   86,861         64.3  %

Personal lines
Fire and allied lines       $  10,689     $   10,765        100.7  %   $  10,079     $    7,257         72.0  %
Automobile                      5,515          4,367         79.2          5,056          4,301         85.1
Miscellaneous                     235            667           NM            234            (69 )      (29.5 )
Total personal lines        $  16,439     $   15,799         96.1  %   $  15,369     $   11,489         74.8  %
Reinsurance assumed         $   4,748     $    2,693         56.7  %   $   3,398     $    1,870         55.0  %
Total                       $ 170,527     $  115,528         67.7  %   $ 153,914     $  100,220         65.1  %

NM=Not meaningful


Table of Contents

Six Months Ended June 30,                   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           $  94,504     $   49,315         52.2  %   $  94,717     $   42,214         44.6  %
Fire and allied lines        80,390         44,694         55.6         63,791         57,331         89.9
Automobile                   70,983         54,950         77.4         64,698         51,188         79.1
Workers' compensation        39,267         30,840         78.5         32,462         13,327         41.1
Fidelity and surety           8,807           (680 )       (7.7 )        8,415           (355 )       (4.2 )
Miscellaneous                   562            659        117.3            477             64         13.4
Total commercial lines    $ 294,513     $  179,778         61.0  %   $ 264,560     $  163,769         61.9  %

Personal lines
Fire and allied lines     $  21,125     $   16,966         80.3  %   $  20,232     $   10,875         53.8  %
Automobile                   10,861          7,562         69.6         10,185          7,437         73.0
Miscellaneous                   288            901           NM            456            116         25.4
Total personal lines      $  32,274     $   25,429         78.8  %   $  30,873     $   18,428         59.7  %
Reinsurance assumed       $   6,441     $    2,414         37.5  %   $   5,237     $    5,333        101.8  %
Total                     $ 333,228     $  207,621         62.3  %   $ 300,670     $  187,530         62.4  %

NM=Not meaningful

Commercial other liability lines - The loss ratio deteriorated 17.3 percentage points and 7.6 percentage points in the three- and six-month periods ended June 30, 2013, respectively, compared to the same periods of 2012. The change was primarily due to an increase in large claims, which increased overall average claim severity.

Commercial fire and allied lines - The loss ratio improved 31.5 percentage points and 34.3 percentage points in the three- and six-month periods ended June 30, 2013, respectively, compared to the same periods of 2012. The loss ratio improvement was due to the combination of a reduction in our catastrophe loss experience, premium growth, and favorable development on prior year reserves.

Workers' compensation - The loss ratio deteriorated by 25.3 percentage points and 37.4 percentage points in the three- and six-month periods ended June 30, 2013, respectively, compared to the same periods of 2012. The change was primarily due to a few large claims and generally increased claim activity in 2013, especially when compared to the same period in 2012 when we experienced particularly low loss ratios.

Personal fire and allied lines - The loss ratio deteriorated 28.7 percentage points and 26.5 percentage points in the three- and six-month periods ended June 30, 2013, respectively, compared to the same periods of 2012. The change was primarily due to unfavorable development in the three-month period ending June 30, 2013 on prior year claims.


Table of Contents

. . .

  Add UFCS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for UFCS - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.