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UFCS > SEC Filings for UFCS > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for UNITED FIRE GROUP INC

Form 10-Q for UNITED FIRE GROUP INC


5-Nov-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 I, Item 1 "Financial Statements."

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. There have been no changes in our critical accounting policies from 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", the "Registrant", the "Company", "we", "us", or "our") and its consolidated insurance subsidiaries provide insurance protection for individuals and businesses through several regional offices. Our property and casualty insurance company subsidiaries are licensed in 43 states plus the District of Columbia and are represented by approximately 1,200 independent agencies. Our life insurance subsidiary is licensed in 37 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 reinsurance; 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 nine-month period ended September 30, 2013, property and casualty insurance business accounted for approximately 92.0 percent of our net premiums earned, of which 90.4 percent was generated from commercial


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lines. Life insurance business accounted for approximately 8.0 percent of our net premiums earned, of which 69.4 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 nine-month period ended September 30, 2013, approximately 50.0 percent of our property and casualty premiums were written in Texas, Iowa, California, New Jersey, and Missouri; approximately 84.0 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, investment returns, 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, prudent management of our investments, appropriate matching of assets and liabilities and effective and efficient use of technology.


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CONSOLIDATED FINANCIAL HIGHLIGHTS
                               Three Months Ended September 30,              Nine Months Ended September 30,
(In Thousands)                2013              2012           %             2013            2012           %
Revenues
Net premiums earned      $    194,219       $  176,531        10.0  %   $    557,403      $ 508,124         9.7  %
Investment income, net
of investment expenses         27,278           28,665        (4.8 )          82,761         86,560        (4.4 )
Net realized investment
gains (losses)
Other-than-temporary
impairment charges               (139 )              -          NM              (139 )           (4 )        NM
All other net realized
gains                           1,329            1,300         2.2             7,389          4,662        58.5
Net realized investment
gains                           1,190            1,300        (8.5 )           7,250          4,658        55.6
Other income                      337               85          NM               634            584         8.6
Total revenues           $    223,024       $  206,581         8.0  %   $    648,048      $ 599,926         8.0  %

Benefits, Losses and
Expenses
Losses and loss
settlement expenses      $    131,168       $  119,756         9.5  %   $    349,073      $ 318,006         9.8  %
Increase in liability
for future policy
benefits                        8,415            9,815       (14.3 )          26,520         28,309        (6.3 )
Amortization of deferred
policy acquisition costs       38,767           36,167         7.2           113,556        104,897         8.3
Other underwriting
expenses                       21,654           20,496         5.6            67,310         63,031         6.8
Interest on
policyholders' accounts         8,625           10,327       (16.5 )          27,026         31,610       (14.5 )
Total benefits, losses
and expenses             $    208,629       $  196,561         6.1  %   $    583,485      $ 545,853         6.9  %

Income before income
taxes                    $     14,395       $   10,020        43.7  %   $     64,563      $  54,073        19.4  %
Federal income tax
expense                         2,670            1,290       107.0            14,949         11,443        30.6  %
Net income               $     11,725       $    8,730        34.3  %   $     49,614      $  42,630        16.4  %

NM=Not meaningful

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

Consolidated Results of Operations

For the three-month period ended September 30, 2013, net income was $11.7 million compared to $8.7 million for the same period of 2012, driven primarily by growth in property and casualty premium revenue, which was partially offset by an increase in loss and loss settlement expenses. Consolidated net premiums earned increased to $194.2 million, compared to $176.5 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 and new business writings.

Losses and loss settlement expenses increased by $11.4 million during the third quarter of 2013 compared to the same period of 2012, primarily due to growth in our overall business and an increase in loss severity.

For the nine-month period ended September 30, 2013, net income was $49.6 million compared to $42.6 million for the same period of 2012, driven primarily by growth in property and casualty premium revenue, which was partially offset by an increase in loss and loss settlement expenses. Consolidated net premiums earned increased to $557.4 million, compared to $508.1 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 and new business writings.

Losses and loss settlement expenses increased by $31.1 million during the first nine months of 2013 compared to the same period of 2012, primarily due to the overall growth in our business and an increase in loss severity in the


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commercial automobile and workers compensation lines of business, partially offset by a decrease in catastrophe loss experience. Pre-tax catastrophe losses totaled $27.2 million compared to $34.5 million in the same period of 2012, which was impacted by losses from storms in the Midwest.

Consolidated Financial Condition

At September 30, 2013, the book value per share of our common stock was $29.30. We repurchased 3,577 shares of our common stock in the nine-month period ended September 30, 2013. Under our share repurchase program, which is scheduled to expire in August 2014, we are authorized to repurchase an additional 1,126,143 shares of our common stock.

Net unrealized investment gains totaled $115.6 million as of September 30, 2013, a decrease of $28.5 million, net of tax, or 19.8 percent, since December 31, 2012. The decrease in net unrealized gains resulted from a decrease in our fair value of the fixed maturity investment portfolio due to rising interest rates, partially offset by an increase in the fair value of our equity investment portfolio.

Our stockholders' equity increased to $744.2 million at September 30, 2013, from $729.2 million at December 31, 2012. The increase was primarily attributable to net income of $49.6 million, which was offset by a decrease in net unrealized investment gains of $28.5 million, net of tax, and stockholder dividends of $12.9 million.


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RESULTS OF OPERATIONS

Property and Casualty Insurance Segment Results
                                 Three Months Ended September 30,           Nine Months Ended September 30,
(In Thousands Except Ratios)         2013                 2012                 2013                 2012
Net premiums written          $       178,313       $       155,433     $       553,795       $       500,303
Net premiums earned           $       178,553       $       161,232     $       511,781       $       461,902
Losses and loss settlement
expenses                             (124,643 )            (114,846 )          (332,264 )            (302,376 )
Amortization of deferred
policy acquisition costs              (37,243 )             (34,060 )          (108,591 )             (98,355 )
Other underwriting expenses           (17,219 )             (16,332 )           (54,854 )             (50,353 )
Underwriting gain (loss)      $          (552 )     $        (4,006 )   $        16,072       $        10,818

Investment income, net of
investment expenses                    11,691                11,051              34,464                33,409
Net realized investment gains
(losses)
Other-than-temporary
impairment charges                       (139 )                   -                (139 )                   -
All other net realized gains              955                 1,214               5,544                 1,765
Net realized investment gains             816                 1,214               5,405                 1,765
Other income (loss)                       145                   (19 )               229                   177
Income before income taxes    $        12,100       $         8,240     $        56,170       $        46,169

GAAP Ratios:
Net loss ratio                           65.1 %                65.9 %              59.6 %                58.0 %
Catastrophes - effect on net
loss ratio                                4.7                   5.3                 5.3                   7.5
Net loss ratio (1)                       69.8 %                71.2 %              64.9 %                65.5 %
Expense ratio (2)                        30.5                  31.3                31.9                  32.2
Combined ratio (3)                      100.3 %               102.5 %              96.8 %                97.7 %

(1) The net loss ratio is calculated by dividing the sum of losses and loss settlement expenses by net premiums earned. We use the net loss ratio as a measure of the overall underwriting profitability of the insurance business we write and to assess the adequacy of our pricing. Our net loss ratio is meaningful in evaluating our financial results as reported in our unaudited Consolidated Financial Statements.
(2) The expense ratio is calculated by dividing nondeferred underwriting expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting and administering its insurance business.
(3) The combined ratio is a commonly used financial measure of property and casualty underwriting performance. A combined ratio below 100.0 percent generally indicates a profitable book of business. The combined ratio is the sum of two separately calculated ratios, the loss and loss settlement expense ratio (the "net loss ratio") and the underwriting expense ratio (the "expense ratio").

For the three- and nine-month periods ended September 30, 2013, our property and casualty segment reported income before taxes of $12.1 million and $56.2 million, respectively, or an increase of $3.9 million and $10.0 million, respectively, compared to the same periods of 2012. The increase in the nine months ended September 30, 2013 is primarily due to an increase in net premiums earned partially offset by an increase in loss and loss settlement expenses.

Net premiums earned increased 10.7 percent to $178.6 million in the three-month period ended September 30, 2013, compared to $161.2 million in the same period of 2012. In the nine months ended September 30, 2013, net premiums earned also increased 10.8 percent to $511.8 million, compared to $461.9 million in the same period of 2012.

The GAAP combined ratio decreased 2.2 percentage points to 100.3 percent for the three-month period ended September 30, 2013, compared to 102.5 percent for the same period of 2012. For the nine-month period ended September 30, 2013, the GAAP combined ratio was 96.8 percent, compared to 97.7 percent for the same period of 2012.


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The net loss ratio, a component of the combined ratio, decreased by 1.4 percentage points to 69.8 percentage points in the three-month period ended September 30, 2013, as compared to the same period in 2012. The decrease is primarily due to increased premiums and improvement in underwriting results. Pre-tax catastrophe losses totaled $8.5 million for the three-month period ended September 30, 2013, which is consistent with the same period of 2012.

The net loss ratio in the nine-month period ended September 30, 2013 decreased 0.6 percentage points as compared with the same period of 2012. The decrease is due to increased premiums and lower catastrophe losses in 2013 as compared with the same period of 2012.

The expense ratio, a component of the combined ratio, of 30.5 percentage points for the quarter ended September 30, 2013 decreased by 0.8 percentage points as compared with the same period of 2012, due to an increase in net earned premiums.

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 or other disposition 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 practicable after information about a claim becomes available.

2013 Development

The property and casualty insurance segment experienced $8.6 million of favorable development in our net reserves for prior accident years during the three-month period ended September 30, 2013 and $49.0 million for the nine months ended September 30, 2013. Year-to-date, favorable development remains consistent with our 2012 nine-month experience.

The favorable development on prior year reserves 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,


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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. At September 30, 2013, our total reserves remained relatively flat compared to June 30, 2013.

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

Three Months Ended
September 30,                            2013                                       2012
                                      Net Losses                                  Net Losses
                                       and Loss                                    and Loss
                           Net        Settlement        Net           Net         Settlement        Net
(In Thousands)          Premiums       Expenses        Loss        Premiums        Expenses         Loss
Unaudited                Earned        Incurred        Ratio        Earned         Incurred        Ratio
Commercial lines
Other liability        $  52,251     $   28,406         54.4  %   $  50,887     $     28,579         56.2 %
Fire and allied lines     41,717         27,260         65.3         33,574           24,637         73.4
Automobile                37,646         36,140         96.0         34,087           24,703         72.5
Workers' compensation     21,519         20,524         95.4         17,606           16,933         96.2
Fidelity and surety        4,877           (163 )       (3.3 )        4,365            1,962         44.9
Miscellaneous                628           (104 )      (16.6 )          258              214         82.9
Total commercial lines $ 158,638     $  112,063         70.6  %   $ 140,777     $     97,028         68.9 %

Personal lines
Fire and allied lines  $  10,786     $    8,307         77.0  %   $  10,247     $     11,758        114.7 %
Automobile                 5,624          3,615         64.3          5,711            3,562         62.4
Miscellaneous                240          1,068           NM            235               42         17.9
Total personal lines   $  16,650     $   12,990         78.0  %   $  16,193     $     15,362         94.9 %
Reinsurance assumed    $   3,265     $     (410 )      (12.6 )%   $   4,262     $      2,456         57.6 %
Total                  $ 178,553     $  124,643         69.8  %   $ 161,232     $    114,846         71.2 %

NM=Not meaningful


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Nine Months Ended
September 30,                            2013                                       2012
                                      Net Losses                                  Net Losses
                                       and Loss                                    and Loss
                           Net        Settlement        Net           Net         Settlement        Net
(In Thousands)          Premiums       Expenses        Loss        Premiums        Expenses         Loss
Unaudited                Earned        Incurred        Ratio        Earned         Incurred        Ratio
Commercial lines
Other liability        $ 146,755     $   77,721         53.0  %   $ 145,604     $     70,793         48.6 %
Fire and allied lines    122,107         71,954         58.9         97,365           81,968         84.2
Automobile               108,629         91,090         83.9         98,785           75,891         76.8
Workers' compensation     60,786         51,364         84.5         50,068           30,260         60.4
Fidelity and surety       13,684           (843 )       (6.2 )       12,780            1,607         12.6
Miscellaneous              1,190            555         46.6            735              278         37.8
Total commercial lines $ 453,151     $  291,841         64.4  %   $ 405,337     $    260,797         64.3 %

Personal lines
Fire and allied lines  $  31,911     $   25,273         79.2  %   $  30,479     $     22,633         74.3 %
Automobile                16,485         11,177         67.8         15,896           10,999         69.2
Miscellaneous                528          1,969           NM            691              158         22.9
Total personal lines   $  48,924     $   38,419         78.5  %   $  47,066     $     33,790         71.8 %
Reinsurance assumed    $   9,706     $    2,004         20.6  %   $   9,499     $      7,789         82.0 %
Total                  $ 511,781     $  332,264         64.9  %   $ 461,902     $    302,376         65.5 %

NM=Not meaningful

Commercial fire and allied lines - The net loss ratio improved 8.1 percentage points and 25.3 percentage points in the three- and nine-month periods ended September 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 and premium growth.

Commercial automobile - The net loss ratio deteriorated 23.5 percentage points and 7.1 percentage points in the three- and nine-month periods ended September 30, 2013, respectively, compared to the same periods of 2012. The change was primarily due to an increase in claim activity and loss severity in 2013.

Workers' compensation - The net loss ratio improved 0.8 percentage points and deteriorated 24.1 percentage points in the three- and nine-month periods ended September 30, 2013, respectively, compared to the same periods of 2012. The change was primarily due to increased loss severity and generally increased claim activity in 2013, especially when compared to the same period in 2012 when we experienced particularly low net loss ratios.

Fidelity and surety - The net loss ratio improved 48.2 percentage points and 18.8 percentage points in the three- and nine-month periods ended September 30, 2013, respectively, compared to the same periods of 2012 primarily due to an increase in salvage and subrogation and low claim activity in 2013.

Personal fire and allied lines - The net loss ratio improved 37.7 percentage points and deteriorated 4.9 percentage points in the three- and nine-month periods ended September 30, 2013, respectively, compared to the same periods of 2012. The improvement in the three-month period ended September 30, 2013 was primarily due to lower claim activity in 2013 compared to the same period in 2012. For the nine-month period ended September 30, 2013, the deterioration was due to unfavorable development on prior year claims.


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Life Insurance Segment Results
                              Three Months Ended September 30,      Nine Months Ended September 30,
(In Thousands)                     2013                2012              2013              2012
. . .
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