United Fire 1st-quarter profit soars, reducing earthquake exposure

CEDAR RAPIDS -- The acquisition of Mercer Insurance Group and solid premium growth helped United Fire Group post sharply higher first-quarter net income and revenues.

The Cedar Rapids-based insurer on Monday reported net income of $19.2 million, or 75 cents per share, up 230.2 percent from $5.8 million, or 22 cents per share, in the same quarter of 2011. Revenues rose 34.4 percent to $193.7 million in the quarter that ended March 31 from $144.1 million in the same period a year ago.

Net premiums earned rose 41.4 percent to $146.8 million in the first quarter of 2012 from $101.8 million in the first quarter of 2011. The majority of the increase was due to the acquisition of Mercer Insurance Group on March 28, 2011.

Excluding the Mercer Insurance Group business, United Fire Group's organic growth rate would have been 9.9 percent.

Randy Ramlo, United Fire Group president and chief executive officer, said the company built on the solid growth its experienced in the final quarter of 2011.

"Throughout 2011, United Fire Group focused on leveraging our disciplined underwriting culture, local market knowledge and strong agent relationships to grow, and we are seeing the results of that effort," Ramlo said in a statement accompanying the first-quarter financial results.

"The integration of Mercer Insurance Group continues to progress steadily, as we begin the conversion of the West Coast business to United Fire Group's systems in the second quarter," Ramlo said. "We repaid $8 million in trust preferred securities in the first quarter, reducing our debt-to-equity ratio to 7.3 percent as of March 31. On April 2, the final $7.5 million of trust preferred securities was repaid, leaving a revolving credit line of $45 million as our only remaining debt."

Ramlo said challenges remain, including the loss of customers whose business failed due to the economy. He said interest rates likely will continue to remain low through 2014, reducing the amount of investment income available to the company.

United Fire Group sustained $11.9 million of catastrophic losses after reinsurance in the firs quarter due to several powerful storms that spawned multiple tornadoes in the Midwest in the last week of February. Ramlo said the significant losses -- roughly a third of an average year's catatrophic losses -- were offset by solid operating results from other areas of the country.

Ramlo said United Fire Group is taking steps to substantially reduce potential losses from earthquakes around the New Madrid Fault.

"While our earthquake exposure has modeled very favorably, past lessons have taught us not to rely solely on the models," he said. "Various other methods that we have used to evaluate our earthquake exposure including realistic disaster scenarios, damageability factors based on fault proximity and soil type as well as reinsurer input have indicated a level of earthquake exposure in the New Madrid zone not supported by current pricing and capital requirements.

"Therefore, we are in the process of reducing our New Madrid Fault earthquake exposure by 50 percent. We expect to achieve this goal by the end of 2012."