United Fire Group, Inc. Reports Third Quarter 2014 Results

CEDAR RAPIDS, Iowa, Nov. 4, 2014 (GLOBE NEWSWIRE) -- United Fire Group, Inc. UFCS

Consolidated Financial Results - Highlights:

United Fire Group, Inc. (the "Company") UFCS today reported consolidated operating loss⁽¹⁾ of $0.01 per diluted share for the three-month period ended September 30, 2014 (the "third quarter") and operating income⁽¹⁾ of $0.81 per diluted share for the nine-month period ended September 30, 2014 ("year-to-date"), compared to operating income of $0.42 and $1.76 per diluted share, respectively, for the same periods in 2013.

The Company reported consolidated net income, including net realized investment gains and losses, of $0.3 million ($0.01 per diluted share) for the third quarter and consolidated net income of $24.3 million ($0.95 per diluted share) year-to-date, compared to consolidated net income of $11.7 million ($0.45 per diluted share) and $49.6 million ($1.94 per diluted share), respectively, for the same periods in 2013.

"Year-to-date results were driven by significant large losses; catastrophe losses; and to a lesser extent, deterioration in our personal lines," stated Randy A. Ramlo, President and Chief Executive Officer. "I think it is safe to say that so far, 2014 has been disappointing."

"Entering 2014, we had recorded improved core underwriting results for the previous four consecutive years and we have received overall rate increases for 12 consecutive quarters," continued Ramlo. "We continue to diversify our book of business by writing more property coverage outside the Midwest and Gulf Coast regions. We continue to see improvement in all major lines of business except our commercial property line and our personal lines. Even so, the significant increase in both frequency and severity in 2014 due to a higher number of large losses and wide-spread convective storms throughout the U.S. during the first half of the year has been enough to hurt our results. It is important to note, however, that frequency was flat or slightly improved when catastrophe losses were excluded."

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The Company recognized consolidated net realized investment gains of $0.9 million during the third quarter and $5.8 million year-to-date, compared to consolidated net realized investment gains of $1.2 million and $7.3 million, respectively, for the same periods in 2013. 

Consolidated net investment income was $22.8 million for the third quarter, a decrease of 16.3 percent, as compared to net investment income of $27.3 million for the same period in 2013. Year-to-date, consolidated net investment income was $77.2 million, a decrease of 6.7 percent, as compared to net investment income of $82.8 million for the same period in 2013. The quarterly and year-to-date decreases are primarily due to changes in the value of our investments in limited liability partnerships, which are recorded on the equity method of accounting. Because the equity method of accounting is based on changing market conditions, the results can be volatile from period to period. Secondarily, these decreases are the result of the decline in the reinvestment interest rates from the continued low interest rate environment.

Consolidated net unrealized investment gains, net of tax, totaled $139.2 million as of September 30, 2014, an increase of $22.6 million or 19.3 percent from December 31, 2013. The increase in net unrealized investment gains resulted from an increase in the fair value of the fixed maturity investment portfolio as a result of interest rate declines at September 30, 2014 and, to a lesser extent, an increase in the fair value of our equity investment portfolio due to overall equity market improvement.

Total consolidated assets as of September 30, 2014 were $3.8 billion, which included $3.1 billion of invested assets. The Company's book value per share was $32.26, which is an increase of $1.39 per share or 4.5 percent from December 31, 2013 and is primarily attributed to net income of $24.3 million and an increase in net unrealized investment gains of $22.6 million, net of tax, during the nine months of 2014 offset by stockholder dividends of $14.7 million and share repurchases of $11.2 million.

The annualized return on equity was 4.1 percent as of September 30, 2014. 

P&C Segment

Net losses for the property and casualty insurance segment, including net realized investment gains and losses, totaled $1.9 million ($0.07 per diluted share) for the third quarter and net income of $19.5 million ($0.76 per diluted share) year-to-date, compared to net income of $10.3 million ($0.40 per diluted share) and $44.2 million ($1.73 per diluted share), respectively, in the same periods in 2013.

Net premiums earned increased 9.3 percent to $195.2 million in the third quarter, compared to $178.6 million in the same period in 2013. Year-to-date, net premiums earned increased 9.9 percent to $562.5 million, compared to $511.8 million in 2013.

"Modest rate increases still obtainable."

"Commercial lines renewal pricing increased during the quarter with average percentage increases in the low- to mid-single digits on most small and mid-market accounts," stated Ramlo, "but larger accounts have become more competitive."

"Our workers' compensation line of business continues to improve and has benefited from past rate increases, the elimination of poor performing accounts, and the initiation of various other measures identified earlier," continued Ramlo.

"Personal auto lines renewal pricing increases during the quarter decelerated to low-single digits," stated Ramlo, "While homeowners pricing experienced average percentage increases in the mid- to high-single digits, especially in areas affected by large convective storms. Competitive market conditions persisted on new business during the quarter."

"Premiums written from new business remained strong and exceeded the prior quarter and the same quarter in 2013," stated Ramlo. "Our success ratio on quoted accounts was down slightly due to increased competition and our willingness to walk away from business inappropriately priced, especially in personal lines."

Catastrophe losses totaled $23.3 million ($0.60 per share after tax) for the third quarter, compared to $8.5 million ($0.21 per share after tax) for the same period in 2013. Year-to-date, catastrophe losses totaled $47.2 million ($1.20 per share after tax), compared to $27.2 million ($0.69 per share after tax) in 2013.

"Late second quarter storms impacted third quarter catastrophe losses."

"Catastrophe losses for the third quarter added 11.9 percentage points to the combined ratio and impacted earnings by $0.60 per diluted share," stated Ramlo. "Although third quarter was a rather benign quarter for catastrophic events, the quarter was affected by carryover losses associated with late second quarter convective storms. The storms were wide-spread throughout the U.S. and involved high winds, very large hail, and to a lesser extent tornadoes. Both commercial and personal property lines were significantly impacted, but commercial roofs were especially difficult and time-consuming to assess. In addition, no one storm produced significant losses; however, in the aggregate, the amount of losses was significant."

"Our expectations for catastrophe losses in any given year is six percentage points of the combined ratio," continued Ramlo. "Year-to-date, catastrophe losses have added 8.4 percentage points to the combined ratio; traditionally, however, the fourth quarter of any given year is generally less impacted by catastrophe losses so our expectation for 2014 is that our catastrophe losses for the year will likely more closely reflect our expectations."

"Large losses significantly impacted third quarter."

"The impact to earnings from large losses, which we define as losses greater than $500,000 net of reinsurance recoveries, was $24.5 million or $0.63 per diluted share," stated Ramlo. "Year-to-date, the impact was $67.1 million or $1.71 per diluted share. It is not unusual in any given quarter to receive a multi-million dollar fire claim; however, during third quarter, we experienced eight such events. A total of 28 large loss claims were processed during third quarter primarily affecting our commercial property business, and to a lesser extent, our commercial auto and general liability lines of business."

"At first glance," continued Ramlo, "The large losses, especially the fire losses, are not showing any patterns due to commonality by branch, state, class of business, or line of business and we did not experience a disproportionate amount of losses from new accounts. Our analysis is ongoing, however."

The property and casualty insurance segment experienced $6.8 million of favorable development in our net reserves for prior accident years during the third quarter, compared to $8.6 million of favorable reserve development in the same period in 2013. Year-to-date, the segment experienced $32.5 million of favorable reserve development, compared to $49.0 million in 2013. 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. During the third quarter, the decrease in favorable reserve development is attributable to the timing of paid claims; however, year-to-date the decline in favorable reserve development also reflects adverse development of large claims from prior accident years. At September 30, 2014, our total reserves remained relatively flat and within our actuarial estimates.

The GAAP combined ratio increased 7.1 percentage points to 107.4 percent for the third quarter, compared to 100.3 percent for the same period of 2013. Year-to-date, the GAAP combined ratio increased 6.2 percentage points to 103.0 percent, compared to 96.8 percent for the same period in 2013.

Expense Levels

The expense ratio for the third quarter was 31.1 percentage points, compared to 30.5 percentage points for the third quarter of 2013. Year-to-date, the expense ratio was 31.4 percentage points compared to 31.9 percentage points in 2013.

"In 2014, the expense ratio will continue to be adversely impacted by an increase in premium taxes and assessments due to premium growth in specific lines of business," stated Ramlo. "An additional third quarter factor is the deterioration in the profitability of certain lines of business caused by an increase in claims severity that limits the amount of underwriting expenses eligible for deferral. Therefore, our current expectation is a gradual return to a more favorable expense ratio consistent with our history as we continue to reap the benefit of economies of scale and the ultimate completion of the integration of the Mercer Insurance Group acquisition. In the short-term, our year-to-date 31.4 percentage point underwriting expense ratio remains higher than our long-term expectations."

Life Segment

Net income for the life insurance segment totaled $2.2 million ($0.09 per share) for the third quarter, compared to $1.4 million ($0.05 per share) for the third quarter of 2013. Year-to-date, net income for the life insurance segment totaled $4.9 million, as compared to $5.4 million for the same period in 2013. The increase in net income for the quarter is primarily due to an increase in net premiums earned from higher sales of single premium whole life policies and a decrease in interest on policyholders' accounts. Year-to-date, however, sales of single premium whole life policies have lagged behind annuity sales due to our efforts to maintain price diligence on our single premium whole life product to achieve adequate rate spreads.

Net premiums earned increased 7.4 percent to $16.8 million for the third quarter, compared to $15.7 million for the third quarter of 2013. Year-to-date, net premiums earned decreased 2.1 percent to $44.7 million, compared to $45.6 million in the same period of 2013. Year-to-date, the decrease in net premiums earned was primarily due to prudent rate increases that negatively impacted the sales of single premium whole life policies; however, some improvement was experienced during third quarter 2014.

Net investment income decreased 6.0 percent to $14.6 million for the third quarter, compared to $15.6 million for the third quarter of 2013. Year-to-date, net investment income decreased 4.7 percent to $46.0 million, compared to $48.3 million in the same period of 2013. The decrease is due to a continuation of the low interest rate environment and a lower asset base due to declining annuity deposits.

Losses and loss settlement expenses decreased $1.0 million for the third quarter and increased $2.5 million year-to-date due to corresponding fluctuations in death benefits paid. Fluctuations in the timing of death benefits occur from quarter-to-quarter and year-to-year.

The increase in liability for future policy benefits deteriorated in the three-month period ended September 30, compared to the same period in 2013 due to an increase in sales of life insurance products partially offset by net withdrawals of deferred annuities.

Deferred annuity deposits decreased 28.5 percent and increased 62.2 percent for the three- and nine-month periods ended September 30, 2014, respectively, compared with the same periods of 2013. Guaranteed interest rates of our products increased in the second half of 2013 and in the first three months of 2014, resulting in more favorable retention of maturing deferred annuity deposits as opposed to lapse of policies due to maturity, as well as increased deposits due to additional annuity sales for the nine-month period ended September 30, 2014. Since the beginning of the second quarter, guaranteed interest rates of our products have periodically declined resulting in a decrease in deferred annuity deposits for the third quarter as compared with the same period of 2013.

Net cash outflow related to our annuity business was $23.8 million for the third quarter and $50.6 million year-to-date compared to a net cash outflow of $17.1 million and $63.2 million in the same periods in 2013. We attribute this to the interest rate activity previously described.

Capital Management

During the third quarter, we declared and paid a $0.20 per share cash dividend to stockholders of record on September 2, 2014. Year-to-date, we have paid dividends amounting to $0.58 per share. We have paid a quarterly dividend every quarter since March 1968.

Under our share repurchase program, we may purchase United Fire common stock from time to time on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at management's discretion and will depend upon a number of factors, including the share price, general economic and market conditions, and corporate and regulatory requirements. We are authorized by the Board of Directors to purchase an additional 1,668,598 shares of common stock under our share repurchase program, which expires in August 2016. During the third quarter, 200,003 shares were repurchased under the program at a total cost of $5.7 million and an average share price of $28.41.

Earnings Call Access Information

An earnings call will be held at 9:00 am Central Standard Time on November 4, 2014 to allow securities analysts, stockholders and other interested parties the opportunity to hear management discuss the Company's 2014 third quarter results and its expectations for 2014.

Teleconference: Dial-in information for the call is toll-free 1-877-407-8291. The event will be archived and available for digital replay through November 19, 2014. The replay access information is toll-free 1-877-660-6853; conference ID no. 13591680.

Webcast: An audio webcast of the teleconference can be accessed at the Company's investor relations page at http://ir.unitedfiregroup.com/events.cfm. The archived audio webcast will be available until November 19, 2014.

Transcript: A transcript of the teleconference will be available on the Company's website soon after the completion of the teleconference.

About United Fire Group, Inc.

Founded in 1946 as United Fire & Casualty Company, United Fire Group, Inc., through its insurance company subsidiaries, is engaged in the business of writing property and casualty insurance and life insurance and selling annuities.

Through our subsidiaries, we are licensed as a property and casualty insurer in 43 states, plus the District of Columbia, and we are represented by approximately 1,200 independent agencies. The United Fire pooled group is rated an "A" (Excellent) by A.M. Best Company.

Our subsidiary, United Life Insurance Company, is licensed in 37 states, represented by approximately 1,000 independent life agencies and rated an "A-" (Excellent) by A.M. Best Company.

For more information about United Fire Group, Inc. visit www.unitedfiregroup.com or contact:

Anita Novak, Director of Investor Relations, 319-399-5251 or alnovak@unitedfiregroup.com

Disclosure of Forward-Looking Statements

This release 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 from those expected and/or projected. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about our company, the industry in which we operate, and beliefs and assumptions made by management. Words such as "expect(s)," "anticipate(s)," "intends(s)," "plan(s)," "believe(s)" "continue(s)," "seek(s)," "estimate(s)," "goal(s)," "remain optimistic," "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. Information concerning factors that could cause actual outcomes and results to differ materially from those expressed in the forward-looking statements is contained in Part I, Item IA "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission ("SEC") on March 5, 2014. The risks identified in our Form 10-K are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release or as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the SEC, 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.

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