United Fire Group Inc (UFCS) 2013 Q1 法說會逐字稿

Good morning. My name is Stacy, and I will be your conference operator today. At this time I would like to welcome everyone to the United Fire Group first quarter 2013 financial results conference call.

I would now like to turn the call over to Anita Novak, Director of Investor Relations.

Thank you, Stacy. 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.unitediregroup.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 the 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 am pleased to present Mr. Randy Ramlo, President and Chief Executive Officer of United Fire Group.

Thank you, Anita. Good morning, everyone, and welcome to United Fire's first quarter conference call.

I'm pleased to report another solid quarter for United Fire. Operating income was $0.84 per share. Net income was $0.88 per share. And our combined ratio was 90.3%, a more than three percentage point improvement from the same quarter last year.

Book value at the end of the quarter improved by $1.11 or 3.8% and our annualized return on equity was 12%. Net written premiums in the Property & Casualty segment increased 7.6% during the quarter, while earned premium increased 10.9%. Commercial line's pricing increased slightly in most regions of the country with average increases in the mid single digits on most small and midmarket accounts, and double digit increases on underperforming accounts. This is the sixth consecutive quarter of Commercial lines pricing increases.

Our Personal lines' pricing environment has seen consistent mid single digit increases for homeowners. In our Personal Auto lines we have implemented additional predictive analytics, which we anticipate will improve the long-term profitability in this line of business.

Competitive market conditions to ease on on renewals, but persistent on new business during the quarter, nonetheless, premium written from new business remains strong, up slightly from the prior quarter at the same quarter a year ago. Our success ratio on quoted accounts also remained strong as new business pricing edged slightly higher.

The economy continues to strengthen slightly. Premium from policy changes and premium audits continue their positive trends, although both are down slightly from the prior quarter. Policy retention remains strong for both Personal and Commercial lines business, with over 82% of our policies renewing. This is up slightly from the prior quarter.

In the Life segment it's business as usual, we continue to concentrate on our single premium whole life product. Premiums earned were down due to a drop in our income annuity premium. We analyze our investment opportunities and set our crediting rates so that we were able to make our required spreads. Right now those rates are less competitive and, as a result, there is less demand for our fixed annuity product. We're okay with this, we would rather have less sales than inappropriately priced products. Income from the sale of single premium whole life and other traditional life products was not sufficient enough to offset the loss of annuity premium during the quarter.

Loss and loss settlement expenses increased $1.2 million in the quarter due primarily to death claim benefits. Claims from quarter to quarter and year to year can be volatile, so unless we see a trend developing over multiple quarters we are not overly concerned.

Investment income for the Life segment continues to decline due to a continuing low interest rate environment. We do not see the trend improving anytime soon.

Getting back to the property casual operation, our expense ratio for the quarter was 33.7%, which is an improvement of 0.6 percentage points as compared to the first quarter of 2012. However, we anticipate our expense ratio will decrease somewhat by yearend. This quarter is directly affected by an increase in our accrual for contingent commissions, an increase in deferred commissions and an increase in our retirement benefits. We continue to actively and persistently monitor this metric for improvement.

Mercer Insurance Group conversion continues as we enter the last phase of the integration process. We believe the process is going quite well, and we are not expecting any issues to arise from that venture.

As a side note, we're pleased to announce that we were again chosen by Forbes Magazine as one of their 100 most trustworthy companies.

Before turning the discussion over to Mike Wilkins, I'd like to address the topic of capital management. During the first quarter of 2013 we declared and paid a $0.15 per share dividend to shareholders of record on March 1st, 2013. We have paid a quarterly dividend every quarter since March of 1968.

In the three-month period ended March 31st, 2013 we did not repurchase any shares of our common stock. We are authorized by the Board of Directors to purchase an additional 1,129,720 shares of common stock under our share repurchase program, which expires in August of 2014. However, at this time we believe the best use of our excess capital is further expansion of profitable growth opportunities.

With that, I'd like to turn the discussion over to our Executive Vice President, Mike Wilkins.

Thanks, Randy.

I'd like to expand on Randy's discussion just a bit. Net written premiums in our Commercial lines increased 8.5% during the first quarter. The lines experiencing the greatest amount of increase were the Fire and Allied Lines, which would include Commercial Multiperil and Inland Marine and Workers Compensation. Fire and Allied Lines' business increased by 16.6% and Workers Compensation increased by 18.6%. Our net written premiums in our Personal lines actually declined slightly, 0.8%, due to rate adjustments as a result of predictive analytics evaluations. Fire and Allied lines declined 1.4% and Personal Auto increased slightly at 0.5%. Net written premiums in the Assumed Reinsurance line of business increased 2.7% and overall net written premiums increased 7.6% during the quarter.

We believe rate increases continued to exceed loss cost trends overall. We believe average loss trends for the industry are currently approximately 3%. The organic growth recognized in the first quarter consisted of 77% rate increases, 14% new business, and 9% net premiums from audits and endorsements.

We continue to retain approximately 82% of our policies, premium retention, however, has increased to approximately 85% for the quarter due to rate increases initiated in 2012. Frequency trended downward in the first quarter of 2013 compared to the first quarter of 2012 and severity was down significantly in the first quarter, but we attribute that to the impactful number of large property claims in the first quarter of 2012 due to the Branson tornado. Overall we do not believe frequency or severity trends are of major concern at this time.

Super storm Sandy had an impact on the fourth quarter of 2012 results, however, 91% of the 2,750 claims incurred have been settled and closed. There will be no impact from super storm Sandy in 2013.

With that, I'll turn the financial discussion over to Dianne Lyons.

Thank you, Mike.

Consolidated net income was $22.4 million compared to net income of $19.2 million in the first quarter of 2012. The increase was driven primarily by growth in Property & Casualty premium revenue and less catastrophe activity in the quarter. As you may recall, last year at this time we were reporting the results of the EF5 tornado that struck Branson, Missouri in February.

Catastrophe losses for the quarter totaled $4.5 million compared to $14.1 million for this quarter in 2012. Again, the contributing factor was the Branson, Missouri tornado in 2012. First quarter catastrophes generally average approximately 2.9 percentage points of our combined ratio, which is consistent with our first quarter 2013 results of 2.8 percentage points.

In the past we have not reported prior year reserve development, however, we will be presenting this information in total on a quarterly basis going forward. For the first quarter of 2013 we reported favorable reserve development of $23.7 million or $0.61 per share. These results are consistent with results from first quarter 2012.

I'd like to remind investors that there's 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 first quarter 2013 our total reserves remained relatively flat and within our actuarial estimates. Loss and loss settlement expenses increased $6 million or 6.5% compared to first quarter 2012 due to the added exposure from increased premium volume. Consolidated investment income was $26.5 million or a decline of 9.2% as compared to $29.1 million a year ago. The decline is attributable to continuing weakness in the economic environments and, as Randy said, we don't expect this condition to change anytime soon.

The weighted average effective duration of our fixed maturity securities portfolio at March 31st was 4.3 years compared to four years at December 31st. Total return for the equity portfolio was 11.36% compared to 10.58% for the S&P 500. Net realized investment gains for the quarter totaled $1.9 million compared to $2.8 million in 2012. Net unrealized investment gains totaled $152.7 million as of March 31st, which is an increase of $8.6 million net of tax since December 31st. This is the result of an increase in the fair value of our equity portfolio. Fixed maturity portfolio experienced unrealized investment losses for the quarter.

Our stockholders equity increased 4% to $758.1 million at March 31st from $729.1 million at December 31st. Our book value per share increased $1.11 per share or 3.8% to $30.01 at March 31st from $28.90 at December 31st.

And, with that, I'd like to open the lines for questions.

(Operator Instructions)

Our first question comes from Neil Cybart with KBW. Please proceed with your question.

Good morning, everyone.

Good morning.

Good morning.

Thank you for having this call, I think it's a great decision going forward. I'll start with expenses, can you quantify what level of year-over-year expense savings you are seeing from the Mercer synergies?

Neil, this is Dianne, and I don't have that information with me. I can tell you as far as the increase in the expenses that $1.4 million of that came from pension and post-retirement benefit expenses and the remainder came from amortization of expenses that we deferred last year, but I will get the information for you as far as what the savings was on the Mercer transaction.

Thank you. And you're still expecting year-over-year improvement in the expense ratio, correct?

Yes, we are.

Okay, switching over to reserve development, I know you prefer to look at the data more in a longer term basis versus these quarter to quarter swings, but I do think net net the new disclosure is a good decision. Would you also happen to have the first quarter 2012 development dollar basis?

We do not, we did take a look at that and calculated it based on this method of splitting the [IB&R] between accident year and it was very similar to what we reported. We did not -- we chose not to go ahead and report that as we had not used that method back in the first quarter of 2012.

Okay, understand.

But going forward this year we'll only be reporting 2013 quarterly development.

Okay, the Workers Comp loss ratio seemed to be elevated, very similar to the end of 2012, is that just really the continued trend of increased severity in that line? Is there any change to frequency in Workers Comp?

Neil, this is Randy. One of the big reasons the two quarters changed as much as they did was last year 2012 we had an [omenistically] great first quarter, we probably had some reserve takedowns in the first quarter, so if you look at the pure loss ratio for 2013 it's 50 something, which is right in line with where we like to see it. Severity is not an enormous issue into 2013, frequency has been about similar.

We are writing some additional Workers Compensation, which is actually one of our growth strategies. We've identified a dozen or so Workers Compensation classes to write more of, classes traditionally that we've done very well on that are receptive to loss control and that we have a lot of experience with and that we want to write the rest of the packages with. So far that's been very successful and so far we're pleased with where the loss ratio has been in the first quarter.

Mike, do you have any additional comments you want to make on that?

No, the only additional comment I would make is if you looked at our first quarter loss ratio for Work Comp it was better than our full year loss ratio for 2012, so we didn't have any concerns about where the first quarter came in. We also tracked pretty closely, one of the things we look at is the ratio of the number of claims compared to written premium, and that ratio continues to go down, so we feel pretty good about Work Comp right now, it's certainly not a line we're concerned about.

Okay, thank you. My final question has to do with competition. You had mentioned you are seeing continued competition on new business, are you seeing a significant difference between rate you're able to get for renewals and new business accounts? I'm thinking especially for your more attractive accounts?

We used to about, going back a year or two, we tracked that difference and then at one time the market was softer, there was a sizable gap between what the pricing that was required for new business versus renewals, and that gap as of about a year ago had really come to a close and we didn't look at that this year, but we're just getting kind of a feeling from all of our regions that it's getting a little bit harder to write new business, but I'd be surprised if the difference between renewal pricing and new businesses is very large right now.

Okay, that's it for me. Thank you for the call.

Thank you, Neil.

Thank you. Our next question comes from Paul Newsome with Sandler O'Neill. Please proceed with your question.

Good morning, everyone.

Hi, Paul.

Good morning, Paul.

Good morning.

I was hoping you could expand upon the comment related to the use of excess capital, and maybe kind of walk me through how you think about the numbers? And I want to give some context to it, obviously, if you're growing about 10%, which is what it looked like, that would suggest given where your ROE is about half of that should be self-funding, and then if I look at your premiums to equity type ratios just the simple stuff it looks like you're still sitting on a fairly substantial amount of excess capital. I recognize a fair amount of that is tied up in the Life business that doesn't have much of an ROE, but it would seem like you've got plenty of excess capital to do buybacks and it would also look like that it's still fairly accretive, at least to the ROE. So how do you think about that, yourself, and how do you think about the hurdle rates there? And let me know if I'm wrong?

Well, I don't know about -- you know, we -- I think we've mentioned to you we're starting to pay more attention or develop an in-house capital model and looking at where Best sees us and trying to analyze what is an adequate amount of capital. We're always going to be very conservative, obviously, we don't think we can ever have another Katrina event, but after having lived through something like that we'll probably always error on the side of being conservative on the amount of capital that we have.

You know, buying back shares of stock I think is kind of somewhat the last resort for capital use. I think dividends are a better use of excess capital and then certainly, obviously, writing new businesses we think is the best. But our stock prices appreciated pretty nicely, we were pretty actively buying when it was $20 and below, and that has rebounded considerably now. So it's probably a lot less accretive than it was before and at least for right now we see a lot of opportunities for organic growth, and we just think that's the best use of our -- the excess capital that we have.

Mike or Dianne, you have any additional comments?

No further comment.

No.

Do you have a particular hurdle rate other than just accretive to book that you're looking at?

We don't disclose that, Paul.

Do you have it internally?

Yes.

Yes.

Thanks, that's it for me today.

All right, thanks, Paul.

Thank you. Our next question comes from [Gerald Bove], Private Investor. Please proceed with your question.

Yes, hi. I was looking through your proxy and I saw your bonus targets, your upper level bonus target is 16% ROE, which based on your beginning year book would be over $4.50 a share for this year, which more than doubles the two analysts that you guys have, their expectations for the year. How realistic is that number, achievable for you guys?

Well, I think it kind of depends on the market cycle. I think that 16% if you look traditionally that is probably the most attainable in fairly hard market environments in the property and casualty business, so we don't make many adjustments to our bonus plan, it's kind of set-up to be useful in both soft market and hard market times. So, obviously, the market, we talked a little bit about pricing, the pricing environment is pretty good right now, and we hope it will last throughout the rest of the season, but I think that upper end ROE would probably come at a time where we would consider it a hard market and we're not quite there yet.

Okay. Thank you.

Thank you, thanks for the question.

Thank you. Our next question comes from [Jim Agoff] with Millennium Partners. Please proceed.

Good morning, guys. Thanks for hosting the conference call and for taking my questions.

Certainly.

Can you speak about the commentary referred to in the press release about predictive analytics and the use thereof and how that might be impacting, I think it's the automobile lines?

Yes, I think I'm going to -- Mike Wilkins handles our Personal lines area, maybe I'll turn that question over to him.

Yes, Jim what we've done with predictive analytics, this is kind of our next generation, we've had predictive analytics in use for probably 10 years in the Personal line space, but what the new -- what we're implementing now, what we've done is we've added a few more data items. We feel like we can significantly improve our risk segmentation. The impact of that is your better risks the prices are going down, and your worst risks the prices are going up, and sometimes substantially, so some of that business is leaving, going to competitors that don't have the level of sophistication in the predictive analytics. We think that's a good thing, but in the short term it can impact your written premium, your top line.

So over the long term we think it'll be good. We've already seen in some areas where we've implemented this we've seen some pick-up in submissions for those quality risks, but we are losing some of the stuff that we have segmented as lower quality out the back door.

Good. So if you look year-over-year for the first quarter net premiums earned were still up in Personal Auto, you would expect that that growth, if you will, to sort of roll-over a bit then?

Correct.

All other things being equal?

Yes.

Okay, okay, and so what was the average rate increase in that line?

On average, we implemented it at rate neutral, so overall it was rate neutral, but the --

Okay.

-- as I mentioned, the better risks the price went down, and we're retaining those, and then some of the ones that we increased the rates and especially the ones we increased substantially we have lost those at renewal, they've gone to competitors, but we think that's good for us.

Good, good. And then if you compare the year-over-year loss ratios, Randy talked a little bit about Workers Comp and how Q1 '12 was abnormally low and how I guess there's a couple individual losses which are kicking up the loss ratios for Workers Comp this year's first quarter, but in general Commercial lines were -- loss ratios were down a couple points versus last year. There's some difference in the line items again, like Fire and Allied I think you talked about the strength in underwriting there, that loss ratio was greatly improved, and on the Personal line side it was much higher this quarter. Any further color on those?

Well, on the Fire and Allied lines last year we had much more Cat activity versus this year. On the Personal line side we have had a couple storms this spring -- Branson last year, it impacted the Commercial and Fire and Allied lines, but that was almost all Commercial business in Branson that had the losses. This year we've had a couple Cats in particularly Louisiana and Texas that have impacted the Personal lines but not so much the Commercial. So it's just more fortuitous events. I'd say the same thing with Work Comp, it's just one quarter, when people get hurt it tends to be a bit random and last year we had a stellar first quarter, this year we had a good first quarter, but not as good as last year.

Okay, and then how about on the investment portfolio, what are you seeing in terms of new money yields and where are you allocating dollars right now?

Yes, this Barrie Ernst, Chief Investment Officer. The new money is -- we allocated about $113 million in the first quarter and -- about $130 million in the first quarter and about $105 million went into CMOs and structured products, so we're not taking a lot of risk on the credit side. As a matter of fact, we're probably upping our credit a little bit and maybe increased our duration a quarter of a year. So we're just not going to make any mistakes on the credit side of the portfolio right now. So that's basically what we did the first quarter.

Where does the duration stand now on the fixed income side of the portfolio?

4.27 for the combined life and the P&C.

Okay.

Broken down the duration on the P&C is 4.39 years, on the Life it's 4.18 years.

Great. Thank you, guys, I'll get back in queue.

Thanks, Jim.

(Operator Instructions)

It doesn't look like there are any further questions at this time. I would like to turn the floor back over to Management.

Thank you, Stacy. This now concludes this conference call. As a reminder, a transcript of this call will be available on the Company website at www.unitedfiregroup.com. On behalf of the Management of United Fire Group I wish all of you a joyous day.

This concludes today's teleconference. You may disconnect your lines at this time.