United Fire Group, Inc.
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Greetings and welcome to the United Fire Group Second Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Anita Novak, Director of Investor Relations for United Fire Group. Thank you. Ms. Novak, you may now begin.

[Anita Novak:]

Thank you, Jessie. Good morning, everyone, and thank you for joining this call. Earlier today, we issued a news release on our results. To find a copy of this document please visit our website at www.unitedfiregroup.com. Press releases will be located under the Investor Relations tab. Our speakers today are Randy Ramlo, President and Chief Executive Officer; Mike Wilkins, Executive Vice President; and Dianne Lyons, Vice President and Chief Financial Officer. Other members of our executive team are also available for the question-and-answer session that will follow our prepared remarks. Please note that our presentation today may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not a guarantee of future performance. These forward-looking statements are based on management’s current expectations and we assume no obligation to update them. The actual results may differ materially due to a variety of factors, which are described in our press release and subsequent SEC filings. Please also note that in our discussion today, we may use some non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP measures are available in our press release and subsequent SEC filings. At this time, I’m pleased to present Mr. Randy Ramlo, President and Chief Executive Officer of United Fire Group.

[Randy Ramlo:]

Thank you, Anita. Good morning, everyone, and welcome to United Fire’s second quarter conference call. I’m pleased to report another strong quarter and that United Fire's results remain well within our expectations for 2013. Operating income was $0.50 per share and net income was $0.60 per share. Our combined ratio was 99.5%. year-to-date operating income was $1.34, net income was $1.49 per share and our combined ratio was 95%. Net investment income was $55.5 million or $1.42 per share. Like many of our peers, our book value declined somewhat from first quarter however, at $29 per share. It will still exceed our December 31, 2012 book value of $28.90 per share. Our annualized return on equity at June 30 was 10.4%. We continue to get rate increases in most lines of business. Policy retention remained strong and within our comfort range and we're seeing a fair amount of new business opportunities. Net written premiums in the Property and Casualty segment increased 10.1% during the quarter and 8.9% year-to-date. Earned premium increased 10.8% for both the quarter and year-to-date. Commercial lines renewal pricing increased slightly in some and decreased slightly in other regions. With average percentage increases in the mid-single-digits on most small and mid-market accounts, we continue to see double-digit increases in underperforming accounts. Our personal lines pricing environment remains unchanged. Personal lines renewal rates are in the mid to high single-digits especially in catastrophe exposed areas of the country. We continue to evaluate the terms and conditions of both new business and renewal policies in an effort to appropriately match the degree of risk assumed with premiums. Competitive market conditions were somewhat sporadic on renewals, but persistent on new business during the quarter. Nonetheless, premium written from new business remain strong, up slightly from the prior quarter and the same quarter a year ago. Our success ratio on audit accounts remain strong. The economy continues to strengthen slowly. Premium from policy changes and premium audits continue their positive trends, although both are down slightly from the prior quarter. Policy retention remained strong for both personal and commercial lines of business with over 82% of our policies renewing. This is up slightly from the prior quarter. As we've mentioned before, we monitor our policy retention closely since we believe we can continue to achieve mid to upper single-digit as long as this metric is not declining. Our expense ratio for the second quarter was 31.8 percentage points, which was an improvement of 1.9 percentage points as compared to the last quarter but up slightly when compared to the second quarter of 2012. year-to-date, our expense ratio was 32.7 percentage points. We expect additional improvement in expense ratio for 2013 as we continue to minimize expenses incurred as a result of the Mercer Insurance acquisition. In the Life segment, we continue to concentrate on our single-premium whole life product. Premiums earned were down for the quarter and year-to-date due to a drop in our income annuity premium with life contingencies. We analyzed our investment opportunities and set our crediting rates so that we’re able to meet our required spreads. Right now, those rates are less attractive and as a result there is less demand for our fixed annuity product. However, we would rather have less sales than inappropriately price our products. Loss and loss settlement expenses decreased $1.6 million in the quarter and $400,000 year-to-date compared to the same periods in 2012, due primarily to a decline in death claim benefits. For those of you who were on our last conference call last quarter you may recall that loss and loss settlement expenses actually increased. So, as a reminder, claims from quarter-to-quarter and year-to-year can be volatile. Our position on that is that unless we see a trend over multiple quarters, we’re not overly concerned about the natural rise and fall of loss and loss settlement expenses in the Life segment. Net investments income for the Life segment continues to decline due to continuing lower interest rates. We do believe, however, that as interest rates rise investment income within our investment portfolio will also improve. Just a quick update regarding our initiative to increase agency representation. As many of you know, we've felt for some time that we were under represented in a variety of geographic locations. As a result, and in tandem with our integration of Mercer Insurance we have a corporate objective to evaluate and identify locations and appoint qualified independent agents to represent United Fire. I'm happy to report that we are well ahead of our objective. Bottom-line, second quarter was a good on and year-to-date. We are well within our expectations. We grew 10%. We see a lot of opportunities for new business and by the way we feel that's the best use of our capital. With that, I’d like to turn the discussion over to our Mike Wilkins, our Executive Vice President.

[Mike Wilkins:]

Thanks, Randy. Net written premiums in our commercial lines increased 9.5% during the second quarter and 9.0% year-to-date. The lines experiencing the greatest amount of increase were worker's compensation and fire and allied lines, which includes commercial multi-peril and inland marine. Net written premiums in our personal line segment increased 9.5% during the quarter and 4.6% year-to-date. The year-to-date growth reflects freight adjustments initiated as a result of predictive analytics evaluations, fire and allied lines, and personal auto lines, oil increased 9.5% for the quarter. Year-to-date, fire and allied lines increased 4.4% and personal auto lines 5.0% Written in the assumed reinsurance line of business increased 39.3% for the quarter and 26.4% year-to-date. We believe rate increases continue to exceed lost cost trends overall, and we believe average loss trend for the industry is currently approximately 3%. Organic growth recognized in the second quarter consisted of 81% rate increases, 14% new business and 5% net premiums from audits and endorsements. Frequency trended upward in the second quarter compared to the second quarter of 2012, due to numerous minor catastrophe events, the most numerous occurring in Texas. Severity was down significantly in the second quarter of 2013. We attribute that to the impactful number of large property claims in the 2012 due to the Branson, Missouri tornado. Overall, we do not believe frequency or severity trends are of major concern at this time. With that, I will turn the financial discussion over to Dianne Lyons.

[Dianne Lyons:]

Thank you, Mike. Consolidated net income was $15.5 million for second quarter and $37.9 million year-to-date, compared to net income of $14.7 million and $33.9 million for the same periods of 2012. The increases were driven primarily by growth in property and casualty premiums written which increased 10.8% both for the quarter and year-to-date when compared to the same periods of 2012. Catastrophe losses for the second quarter totaled $14.2 million which is a slight increase compared to $12 million for the second quarter of 2012. As Mike had mentioned, second quarter 2013 experienced numerous smaller catastrophe losses which were somewhat spread out across United States. Second quarter catastrophe losses generally averaged 8.9 percentage points of our combined ratio, which is just slightly higher than our second quarter 2013 result of 8.3 percentage points. Year-to-date, catastrophe losses contributed 5.6 percentage points to c combined ratio. Our annual catastrophe load is 6 percentage points. So, we are currently well within our expectations for the year so far. During second quarter 2013, we experienced favorable reserve development of $16.4 million or $0.42 per share. These results are slightly less than second quarter 2012 due to reserving philosophy differences addressed during the Mercer Insurance integration. Year-to-date, we experienced $40.5 million, which is consistent with the same period in 2012. I would like to remind investors that there is a great deal of volatility from quarter-to-quarter and year-to-year in the reported amount of prior year reserve development due to the fact that reserve development occurs and is affected by the timing associated with the settlement of claims. In second quarter 2013, our total reserves remained relatively flat and within our actuarial estimates. Losses and loss settlement expenses increased $13.7 million or 12.8% compared to second quarter 2012, partially due to the added exposure from increased premium volume. Year-to-date, losses and loss settlement expenses increased $19.7 million or 9.9%. Consolidated investment income was $29 million, which is an increase of slightly less than 1% compared to $28.7 million a year ago. Year-to-date, consolidated investment income was $55.5 million which is a decline of 4.2% compared to 2012. The year-to-date decline is attributable to continuing low interest rates and we don't this condition to change any time soon. The weighted average effective duration of our fixed maturity securities portfolio at June 30 was 4.53 years, compared to 4.0 years at December 31. Year-to-date, total return for the equity portfolio was 14.75%, compared to 12.05% for the S&P 500. Net realized investment gains for the quarter totaled $6.1 million, compared to $3.4 million in 2012. Net unrealized investment gains totaled $116.2 million as of June 30, which is an decrease of $27.9 million net of tax since year end. This is due to unrealized investment losses in the fixed maturity portfolio as a result of rising interest rate which were somewhat offset by market value increases in our equity portfolio. Regarding capital management, during the second quarter of 2013, we raised our dividend 20% to $0.18 per share to shareholders of record on May 31, 2013. we believe that the consistent payment of dividends remain the most respective way of returning capital to shareholders. We have paid a dividend every quarter since March of 1968. Our stockholders equity increased 0.7% to $734.4 million at June 30, from $729.2 million at December 31. Book value at the end of the first quarter of 2013 $30.01, so we actually experienced decline in book value from quarter to quarter due to the increasing interest rates. This decline in book value was small, expected and temporary since rising interest rates will also have a direct long term impact of increasing net investment income as well as improving earnings per share and return on equity. As I mentioned, book value at March 31 was $30.01. during second quarter book value was reduced by $1.48 per share due to the decline in our bond portfolio and by $0.18 per share due to payment of stockholder dividend. During second quarter book vale increased $0.04 per share due to an increase in our equity portfolio and $0.61 per share due to earnings With that, I'll open the line for questions.

[Operator:]

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question comes from Vincent DeAugustino with KBW. Please proceed with your question.

[Vincent DeAugustino:]

If I remember correctly, one of the things that you guys have talked about in the past was recently expanded or increased [BOP] appetite. I think the reason behind that was that you kind of felt that since you wanted that big on BOP you weren't getting some of the quote volume from agents since BOP tends to be a little bit higher frequency which meant that maybe you weren't in frontline with agents when it came to larger ticket accounts. And so, I'm just curious with the commercial fire and allied top-line performance in quarter, if kind of that increased BOP appetite? Was it a driver of the top-line growth in 2Q '13?

[Randy Ramlo:]

This is Randy. Not yet. We've made some inroads in our BOP line but the project from an automation standpoint is not quite complete yet. So, our BOP line did grow a little bit but it wasn’t really a major contributor to our overall growth.

[Vincent DeAugustino:]

And just kind of on that topic with the automation, just kind of BOP just being more of a straight through processing type of a product I'm just curious with some of the carriers that are ramping up commercial property [inspections], just how you're kind of handling that? Just again with it being more of a straight through type processing product if you have a situation where some accounts was maybe poor property reviews are getting kicked out by competitors, can you talk about how in the coding process or in the review process you're kind of making sure that you might not end up being the destination for some of those products that point in time when you’re maybe ramping up your BOP appetite?

[Mike Wilkins:]

This is Mike Wilkins; I'll take a stab at this one. As I think we've talked before, we feel that one of our competitive advantages is our good loss control department and we still even though a piece of business may go through an automated process and get issued without a lot of touches you still have 60 days post issuing of that policy or post the effective date to make an underwriting decision. So, if you do an inspection after you write it, which we tend to do especially if there's higher values or more hazards class, we still have that 60-day window to make an underwriting decision on that account. So, we feel quite comfortable that our inspections procedures are solid. We feel that our loss control staff is better than average and we're not concerned about that. Just a little bit of a follow up to what Randy said about growth in that line The premiums are up slightly more than 10% for the fire and allied lines, our policy account is up less than 2%, so it is really still mostly rate. And we are writing a few new accounts, but it is not being driven by a huge policy account growth.

[Vincent DeAugustino:]

Okay. That colors actually really excellent. In your prepared remarks in the press release you mentioned with commercial lines pricing, there was some pockets of strength and some pockets of softening, or may be softening is too hard or a word. But would be able to color on where you are seeing strengths and just a little bit of decline in pricing trajectory?

[Mike Wilkins:]

Yeah, this is Mike again, I will try to address on. So, generally, the regions where we write work comp tend to have little stronger pricing performance since that is the line where we still see to be able to push price pretty aggressively. So, our Midwest region, Great Lakes region areas where we write comp are really at the bigger increases and heavy and accelerated the increases from first quarter to second quarter. Regions where we do not work comp and, especially where -- like our West Coast region it's pronominally a casualty book without work comp, that is little softer in our southern region where we do not do work comps. So, overall, I thought that kind of may be was a little confusing. We still did get rate increases in every region, it is just in some of the regions they were down slightly from first quarter and in other regions they were up slightly from first quarter.

[Vincent DeAugustino:]

Okay. Perfect. The comment on the rate increases in all regions I think is helpful just because it tends to be up little bit too much focus more recently on like you said comments like that that may not give you the whole picture. So, on the Mercer reserve, just to make sure I have the numbers down right. It was four points on the aggregate loss ratio impact not just Mercer's book, is that correct?

[Mike Wilkins:]

That is correct.

[Vincent DeAugustino:]

Okay. Perfect. And then, would you be out of kind of call out just in the terms you observe review what lines and accident years that that would be coming from?

[Dianne Lyons:]

We do not have the details here but certainly can send it to you (inaudible).

[Operator:]

Thank you. (Operator Instructions). Our next question is coming from the line of Craig Rothman with Millennium Partners. Please proceed with your question.

[Craig Rothman:]

Can you talk a bit about the accident year margin ex cap progression year, where you see that going forward? What -- I guess we did not see much improvement in the quarter, so why that might have been ex the Mercer movement?

[Mike Wilkins:]

Well, this is Mike Wilkins again. I think from our perspective we still feel like our rate increases are exceeding the loss cost growth that we see. As we've said before, Craig, we do not get too hung up on one quarter, so we fluctuations from quarter-to-quarter. I think the general trend is good and we do not think anything has changed there and we continue to look -- continue to be positive about things going forward.

[Craig Rothman:]

Okay. When you talked about the smaller cats, were those in the cat number you talked about or did they fall below the spectrum of what would be considered as cat and so there were may be a higher weather losses in the quarter?

[Mike Wilkins:]

Not believe those would be in the cat number that --

[Dianne Lyons:]

We know fell within the cat, yeah.

[Mike Wilkins:]

Yeah. Diane confirmed they all fell within the cat number we gave.

[Craig Rothman:]

Okay. Can you give us a better sense on the overall loss trend that you are seeing? You mentioned the frequency up a bit but severity down. Where is that coming out to an aggregate?

[Mike Wilkins:]

Well, I think that we said in the press release. Again, just the normal volatility we see quarter-to-quarter, we have not seen anything over a period of quarters that give us any concern at this point.

[Randy Ramlo:]

Craig, this is Randy. Our peer loss ratios, we are really quite pleased with that. Unfortunately, we gave a little bit of that back on the loss adjustment side which we think we can get squared away but our peer loss experience for just about all lines is looking pretty good.

[Craig Rothman:]

Got you. Okay. So, I'm just trying to get a sense on -- it seems like you have a nice margin there between the earned premium rate increases that are getting earned through and the loss trend that you are seeing, is that safe to say?

[Randy Ramlo:]

Yes, that I would agree.

[Operator:]

Thank you. Our next question is a follow-up question coming from the line of Vincent DeAugustino with KVW. Please proceed with your question.

[Vincent DeAugustino:]

Thanks for taking my follow-up, just on two quick ones. I was curious just with 71 renewal pricing on the reinsurance side being kind of favorable for the industry, if you guys had decided to take advantage of that with any sort of changes to the reinsurance program, even understand there would be early. (inaudible) what note to that, I would guess that's not the case but just wanted to ask to be sure.

[Mike Wilkins:]

Vincent, this is Michael Wilkins. We have been -- I do not know if doing some shopping is the right term, but we have been evaluating that situation and working with our brokers on presenting some thoughts. And we did a pretty thorough review of our reinsurance program mid-year this year and we may do some things either mid-year or at the end of the year to take advantage of that pricing.

[Vincent DeAugustino:]

Okay, great. And then, just one other one, just kind of just more general in nature. If I recall, you guys have a newer head of marketing and just always curious, would those type of change, if there is anything new from the message standpoint to the agency force or just any changes that you guys may do from a distribution standpoint as a result?

[Randy Ramlo:]

Vincent, this is Randy. We actually just filled that position July 1, so I do not anticipate any big changes probably for the remainder of 2013. And one of the goals we have is kind of a more of consistent message, but I doubt we will probably see a lot of change in our overall message. That's kind of two early to call on that position so far.

[Operator:]

Thank you. It appears there are no further questions in queue at this time. I would now like to turn the call back over to Ms. Novak for any concluding remarks.

[Anita Novak:]

Thank you, Jessie. This now concludes this conference call. As a reminder, a transcript of this call will be available on the company's website at www.unitedfiregroup.com. On behalf of the management of United Fire Group, I wish all of you a pleasant day.

[Operator:]

Thank you. Ladies and gentleman, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.