Document

(State of Incorporation)

(IRS Employer Identification No.)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-34257

________________________

UNITED FIRE GROUP, INC.

(Exact name of registrant as specified in its charter)

____________________________

118 Second Avenue, S.E., Cedar Rapids, Iowa 52401

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (319) 399-5700

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☒NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐

NO ☒

As of November 5, 2018, 25,071,751 shares of common stock were outstanding.

Table of Contents

United Fire Group, Inc.

Index to Quarterly Report on Form 10-Q

September 30, 2018



	Page
Forward-Looking Information	1

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017	2

Consolidated Statements of Income and Comprehensive Income (unaudited) for the three- and nine-month periods ended September 30, 2018 and 2017	3

Consolidated Statement of Stockholders’ Equity (unaudited) for the nine-month period ended September 30, 2018	4

Consolidated Statements of Cash Flows (unaudited) for the nine-month periods ended September 30, 2018 and 2017	5

Notes to Unaudited Consolidated Financial Statements	6

Review Report of Independent Registered Public Accounting Firm	41

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3. Quantitative and Qualitative Disclosures About Market Risk	57

Item 4. Controls and Procedures	57

Part II. Other Information

Item 1. Legal Proceedings	58

Item 1A. Risk Factors	58

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3. Defaults Upon Senior Securities	58

Item 4. Mine Safety Disclosures	58

Item 5. Other Information	58

Item 6. Exhibits	59

Signatures	60

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FORWARD-LOOKING INFORMATION

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 (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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 United Fire Group, Inc. ("UFG," the "Registrant," the "Company," "we," "us," or "our"), 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," "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. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017 and Part II, Item 1A "Risk Factors" of this report for more information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.

Risks and uncertainties that may affect the actual financial condition and results of the Company include, but are not limited to, the following:


•	The frequency and severity of claims, including those related to catastrophe losses and the impact those claims have on our loss reserve adequacy; the occurrence of catastrophic events, including international events, significant severe weather conditions, climate change, acts of terrorism, acts of war and pandemics;


•	The adequacy of our reserves for property and casualty insurance losses and loss settlement expenses;


•	Geographic concentration risk in the property and casualty insurance business;


•	The potential disruption of our operations and reputation due to unauthorized data access, cyber-attacks or cyber-terrorism and other security breaches;


•	Developments in general economic conditions, domestic and global financial markets, interest rates and other-than-temporary impairment losses that could affect the performance of our investment portfolio;


•	Our ability to effectively underwrite and adequately price insured risks;


•	Changes in industry trends, an increase in competition and significant industry developments;


•	Litigation or regulatory actions that could require us to pay significant damages, fines or penalties or change the way we do business;


•	Lowering of one or more of the financial strength ratings of our operating subsidiaries or our issuer credit ratings and the adverse impact such action may have on our premium writings, policy retention, profitability and liquidity;


•	Governmental actions, policies and regulations, including, but not limited to, domestic health care reform, financial services regulatory reform, corporate governance, new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions; changes in laws, regulations and stock exchange requirements relating to corporate governance and the cost of compliance;


•	Our relationship with and the financial strength of our reinsurers; and


•	Competitive, legal, regulatory or tax changes that affect the distribution cost or demand for our products through our independent agent/agency distribution network.

These are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed in 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 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 ("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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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

United Fire Group, Inc. Consolidated Balance Sheets

(In Thousands, Except Share Data)	September 30, 2018			December 31, 2017
	(unaudited)
ASSETS
Investments
Fixed maturities
Held-to-maturity, at amortized cost (fair value $0 in 2018 and $150 in 2017)	$	—		$	150
Available-for-sale, at fair value (amortized cost $1,764,380 in 2018 and $1,516,610 in 2017)	1,730,031			1,535,070
Trading securities, at fair value (amortized cost $12,047 in 2018 and $14,582 in 2017)	14,399			16,842
Equity securities at fair value (cost $65,458 in 2018 and $63,275 in 2017)	276,253			287,344
Mortgage loans	14,896			—
Other long-term investments	40,432			49,352
Short-term investments	175			175
	2,076,186			1,888,933
Cash and cash equivalents	52,252			95,562
Accrued investment income	16,873			13,841
Premiums receivable (net of allowance for doubtful accounts of $968 in 2018 and $1,255 in 2017)	379,293			328,513
Deferred policy acquisition costs	95,140			88,102
Property and equipment (primarily land and buildings, at cost, less accumulated depreciation of $50,431 in 2018 and $51,603 in 2017)	88,882			68,992
Reinsurance receivables and recoverables	66,148			63,194
Prepaid reinsurance premiums	5,856			3,749
Income taxes receivable	10,269			6,031
Goodwill and intangible assets	23,429			23,971
Other assets	16,632			16,409
Assets held for sale	—			1,586,134
TOTAL ASSETS	$	2,830,960		$	4,183,431
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Losses and loss settlement expenses	$	1,278,077		$	1,224,183
Unearned premiums	508,850			465,391
Accrued expenses and other liabilities	158,761			167,396
Deferred income taxes	1,056			5,953
Liabilities held for sale	—			1,347,135
TOTAL LIABILITIES	$	1,946,744		$	3,210,058
Stockholders’ Equity
Common stock, $0.001 par value; authorized 75,000,000 shares; 25,066,384 and 24,916,806 shares issued and outstanding in 2018 and 2017, respectively	$	25		$	25
Additional paid-in capital	201,361			196,334
Retained earnings	752,581			608,700
Accumulated other comprehensive income (loss), net of tax	(69,751		)	168,314
TOTAL STOCKHOLDERS’ EQUITY	$	884,216		$	973,373
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,830,960		$	4,183,431

The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.

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United Fire Group, Inc.

Consolidated Statements of Income and Comprehensive Income (Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands, Except Share Data)	2018			2017			2018			2017
Revenues
Net premiums earned	$	264,747		$	255,758		$	766,767		$	737,424
Investment income, net of investment expenses	13,192			13,792			43,933			38,561
Net realized investment gains (includes reclassifications for net unrealized investment gains/(losses) on available-for-sale securities of ($496) and ($655) in 2018 and $419 and $5,799 in 2017; previously included in accumulated other comprehensive income)	13,971			67			7,404			3,397
Total revenues	$	291,910		$	269,617		$	818,104		$	779,382
Benefits, Losses and Expenses
Losses and loss settlement expenses	$	193,667		$	223,208		$	527,541		$	568,356
Amortization of deferred policy acquisition costs	51,758			52,986			152,207			154,845
Other underwriting expenses (includes reclassifications for employee benefit costs of $1,661 and $4,982 in 2018 and $1,352 and $4,056 in 2017; previously included in accumulated other comprehensive income)	33,887			25,817			105,994			69,900
Total benefits, losses and expenses	$	279,312		$	302,011		$	785,742		$	793,101
Income (loss) from continuing operations before income taxes	$	12,598		$	(32,394	)	$	32,362		$	(13,719	)
Federal income tax expense (benefit) (includes reclassifications of $453 and $1,184 in 2018 and $327 and ($610) in 2017; previously included in accumulated other comprehensive income)	1,528			(13,312		)	771			(13,330		)
Income (loss) from continuing operations	$	11,070		$	(19,082	)	$	31,591		$	(389	)
Income (loss) from discontinued operations, net of taxes	—			1,218			(1,912		)	5,419
Gain on sale of discontinued operations, net of taxes	—			—			27,307			—
Net income (loss)	$	11,070		$	(17,864	)	$	56,986		$	5,030
Other comprehensive income (loss)
Change in net unrealized appreciation on investments	$	(15,389	)	$	18,995		$	(73,402	)	$	64,614
Change in liability for underfunded employee benefit plans	—			—			—			—
Other comprehensive income (loss), before tax and reclassification adjustments	$	(15,389	)	$	18,995		$	(73,402	)	$	64,614
Income tax effect	3,232			(6,648		)	15,414			(22,615		)
Other comprehensive income (loss), after tax, before reclassification adjustments	$	(12,157	)	$	12,347		$	(57,988	)	$	41,999
Reclassification adjustment for net realized investment (gains) losses included in income	$	496		$	(419	)	$	655		$	(5,799	)
Reclassification adjustment for employee benefit costs included in expense	1,661			1,352			4,982			4,056
Total reclassification adjustments, before tax	$	2,157		$	933		$	5,637		$	(1,743	)
Income tax effect	(453		)	(327		)	(1,184		)	610
Total reclassification adjustments, after tax	$	1,704		$	606		$	4,453		$	(1,133	)
Comprehensive income (loss)	$	617		$	(4,911	)	$	3,451		$	45,896
Diluted weighted average common shares outstanding	25,626,951			24,960,086			25,607,305			25,666,405
Earnings (loss) per common share from continuing operations:
Basic	$	0.44		$	(0.77	)	$	1.26		$	(0.01	)
Diluted	0.43			(0.77		)	1.23			(0.01		)
Earnings (loss) per common share:
Basic	$	0.44		$	(0.72	)	$	2.28		$	0.20
Diluted	0.43			(0.72		)	2.23			0.20

The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.

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United Fire Group, Inc.

Consolidated Statement of Stockholders’ Equity (Unaudited)



(In Thousands, Except Share Data)	Nine Months Ended September 30, 2018

Common stock
Balance, beginning of year	$	25
Shares repurchased (120,372 shares)	—
Shares issued for stock-based awards (269,950 shares)	—
Balance, end of period	$	25

Additional paid-in capital
Balance, beginning of year	$	196,334
Compensation expense and related tax benefit for stock-based award grants	4,040
Shares repurchased	(5,404		)
Shares issued for stock-based awards	6,391
Balance, end of period	$	201,361

Retained earnings
Balance, beginning of year	$	608,700
Cumulative effect of change in accounting principle	191,244
Net unrealized investment depreciation of discontinued operations, sold	(6,714		)
Net income	56,986
Dividends on common stock ($3.90 per share)	(97,635		)
Balance, end of period	$	752,581

Accumulated other comprehensive income (loss), net of tax
Balance, beginning of year	$	168,314
Cumulative effect of change in accounting principle	(191,244		)
Change in net unrealized investment appreciation⁽¹⁾	(50,756		)
Change in liability for underfunded employee benefit plans⁽²⁾	3,935
Balance, end of period	$	(69,751	)

Summary of changes
Balance, beginning of year	$	973,373
Net income	56,986
All other changes in stockholders’ equity accounts	(146,143		)
Balance, end of period	$	884,216


(1)	The change in net unrealized appreciation is net of reclassification adjustments and income taxes.


(2)	The change in liability for underfunded employee benefit plans is net of reclassification adjustments and income taxes.

The Notes to unaudited Consolidated Financial Statements are an integral part of these statements.

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United Fire Group, Inc.

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
(In Thousands)	2018			2017
Cash Flows From Operating Activities
Net income	$	56,986		$	5,030
Less net income (loss) from discontinued operations, net of taxes	(1,912		)	5,419
Adjustments to reconcile net income to net cash provided by operating activities
Net accretion of bond premium	6,518			6,663
Depreciation and amortization	4,015			3,501
Stock-based compensation expense	4,040			3,456
Net realized investment gains	(7,404		)	(3,397		)
Net cash flows from equity and trading investments	21,253			816
Deferred income tax benefit	(6,259		)	(4,979		)
Changes in:
Accrued investment income	(3,032		)	(1,294		)
Premiums receivable	(50,780		)	(45,208		)
Deferred policy acquisition costs	(7,038		)	(4,115		)
Reinsurance receivables	(2,954		)	(5,409		)
Prepaid reinsurance premiums	(2,107		)	(39		)
Income taxes receivable	(4,238		)	(7,075		)
Other assets	(223		)	(1,358		)
Losses and loss settlement expenses	53,894			113,384
Unearned premiums	43,459			46,641
Accrued expenses and other liabilities	(3,654		)	(12,430		)
Deferred income taxes	(8,298		)	1,794
Other, net	3,951			1,920
Cash from operating activities - continuing operations	41,143			92,871
Cash from operating activities - discontinued operations	4,024			23,814
Cash from operating activities - gain on sale of discontinued operations	(34,851		)	—
Total adjustments	$	10,316		$	116,685
Net cash provided by operating activities	$	69,214		$	116,296
Cash Flows From Investing Activities
Proceeds from sale of available-for-sale investments	$	129,865		$	3,388
Proceeds from call and maturity of available-for-sale investments	101,837			134,503
Proceeds from short-term and other investments	8,527			4,846
Proceeds from the sale of discontinued operations	276,055			—
Purchase of available-for-sale investments	(485,656		)	(162,121		)
Purchase of mortgage loans	(14,896		)	—
Purchase of short-term and other investments	(3,824		)	(4,864		)
Net purchases and sales of property and equipment	(23,760		)	(11,630		)
Cash from investing activities - continuing operations	(11,852		)	(35,878		)
Cash from investing activities - discontinued operations	14,343			31,517
Net cash provided by (used in) investing activities	$	2,491		$	(4,361	)
Cash Flows From Financing Activities
Payment of cash dividends	$	(97,635	)	$	(20,364	)
Repurchase of common stock	(5,404		)	(29,784		)
Issuance of common stock	6,391			2,960
Cash from financing activities - continuing operations	(96,648		)	(47,188		)
Cash from financing activities - discontinued operations	(11,547		)	(46,239		)
Net cash used in financing activities	$	(108,195	)	$	(93,427	)
Net Change in Cash and Cash Equivalents	$	(36,490	)	$