United Fire Group Inc (UFCS) 2013 Q2 法說會逐字稿

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.

Thanks, 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 by 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 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 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 for the quarter was $0.50 per share and net income was $0.61 per share. Our combined ratio was 99.5%.

Year-to-date operating income was $1.34 per share. 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 are seeing a fair amount of new business opportunities. Net written premiums in the Property & 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 regions and decreased slightly in other regions, with average percentage increases in the mid-single digits on most small and mid market accounts. We continued 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, premiums written for new business remained strong, up slightly from prior quarter and the same quarter a year ago. Our success ratio on quoted accounts remained strong.

The economy continues to strengthen slowly. Premium from policy changes in 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 have mentioned before, we monitor our policy retention closely, since we believe we can continue to achieve mid- to upper-single-digit rate increases 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 our expense ratio in 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 analyze our investment opportunities and set our crediting rates so that we are able to make our required spreads. Right now those spreads are less attractive and, as a result, there is much less demand for our fixed annuity product. However, we would rather experience a decline in 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 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 is that, unless we see a trend over multiple quarters, we are not overly concerned about the natural rise and fall of loss and loss settlement expenses in the Life segment.

Net investment income for the Life segment continues to decline due to low interest rates. We do believe, however, that as interest rates rise investment income within our investment portfolios will also improve.

Just a quick update regarding our initiative to increase agency representation. As many of you know, we have felt for some time that we were underrepresented 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 one 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 Mike Wilkins, our Executive Vice President.

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 the workers' 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 rate adjustments initiated as a result of predictive analytics evaluations.

Fire and allied lines and personal auto lines all increased 9.5% for the quarter. Year to date fire and allied lines increased 4.4% and personal auto lines increased 5.0%. Written premium 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 loss cost trends overall and we believe the average loss trend for the industry is currently approximately 3%. Organic growth recognized in the second quarter consisted of 81% renewal increases, 14% new business, and 5% net premium from audits and endorsements.

Frequency trended upward in the second quarter compared to 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 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'll turn the financial discussion over to Dianne Lyons.

Thank you, Mike.

Consolidated net income was $15.5 million for the second quarter and $37.9 million year to date, compared to a 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 & 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 the 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 results of 8.3 percentage points.

Year-to-date catastrophe losses contributed 5.6 percentage points to the 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 volumes. Year to date, losses and loss settlement expenses increased $19.7 million, or 9.9%.

Consolidated investment income was $29 million for the quarter, which was 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 attributed to continuing low interest rates, and we don't expect this condition to change anytime soon.

The weighted average expected 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 second quarter totaled $4.2 million compared to $0.6 million in 2012. Year to date, net realized investment gains 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 a 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 rates, 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 effective 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 2013 was $30.01, so we actually experienced a decline in book value from quarter to quarter due to the increasing interest rate. 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 value -- excuse me, bond portfolio, and by $0.18 per share due to payment of stockholder dividends. During second quarter book value 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 lines for questions.

Thank you. (Operator Instructions) Vincent DeAugustino; KBW.

If I'm remembering correctly, one of the things that you guys have talked about in the past was a recently expanded or increased BOP appetite. And I think the reason behind that was you kind of felt that since you weren't 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 front of mind 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 the quarter, if kind of that increased BOP appetite was a driver of the top-line growth in 2Q '13.

Vincent, this is Randy. Not yet. We've made some -- a little bit of 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.

Okay. Good. And just kind of on that topic with the automation, just kind of with BOP just being more on a straight through processing type of 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 being more a straight through type processing product, if you have a situation where some accounts with maybe poor property reviews are getting kicked out by competitors. Can you talk about how, in the quoting 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 at a point in time when you're maybe ramping up your BOP appetite?

Vincent, 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 intend to do, especially if there's higher values or a more hazardous class, we still have that 60-day window to make an underwriting decision on that account. So we feel quite comfortable that our inspection 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 the growth in that line -- the premiums are up slightly more than 10% for the fire and allied lines, but our policy count's up less than 2%. So it's really still mostly rate. We are writing a few new accounts, but it's not being driven by a huge policy count growth.

Okay. That color is actually really excellent. In your prepared remarks in the press release you mentioned with commercial lines pricing there were some pockets of strength and some pockets of softening -- or maybe softening is too hard of a word. But would you be able to call out kind of where you're seeing strengths and just a little bit of decline in pricing trajectory?

Yes. This is Mike again. I'll try to address that one. So generally the regions where we write work comp tend to have a little stronger pricing performance, as that is the line where we still seem to be able to push price pretty aggressively. So our Midwest region, Great Lakes region, areas where we write comp really have had the bigger increases and have even accelerated the increases from first quarter to second quarter.

Regions where we don't do work comp and especially -- like our West Coast region, it's predominantly a casualty book without work comp. That is a little softer. A little softer in our Southern region, where we don't do work comp.

So overall -- I thought that comment maybe was a little confusing. We still did get rate increases in every region. It's just in some of the regions they were down slightly from first quarter and in other regions they were up slightly from first quarter.

Okay, perfect. The comment on the rate increases in all regions I think is helpful, just because there tends to be a little bit too much focus more recently on, like you said, just comments like that that may not give you the whole picture.

So on the Mercer reserve add, just to make sure I have the numbers down right, it was 4 points on the aggregate loss ratio impact, not just Mercer's book. Is that correct?

That's correct.

Okay, perfect. And then, would you be able to call out just in the terms of your reserve review what lines and accident years that that would be coming from?

We don't have that detail here, but certainly can send it to you, Vincent.

Okay, great, and thanks for the answers. I'll re-queue. Thank you.

(Operator Instructions) Craig Rothman; Millennium Partners.

Can you talk a bit about the accident year margin ex-cat progression year, where you see that going forward? I guess we didn't see much improvement in the quarter, so why that might have been -- ex the Mercer movement.

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 don't get too hung up on one quarter. So we see fluctuations from quarter to quarter. I think the general trend is good and we don't think anything's changed there. And we continue to look -- we continue to be positive about things going forward.

Okay. And 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 at cat and so there were maybe higher weather losses in the quarter?

I believe those would be in the cat number w- --

They all fell within cat, yes.

Yes. Dianne confirmed they all fell with the cat number we gave you.

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

Well, I think, as we said in the press release, again, just the normal volatility we see quarter to quarter -- we haven't seen anything over a period of quarters that gives us any concern at this point.

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

Got you. Okay. So I was just trying to get a sense on -- 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're seeing. Is that safe to say?

Yes. I would agree.

Okay, great. All right, guys. Thanks a lot. Appreciate it.

Vincent DeAugustino; KBW.

Just two quick ones. I was curious just with 7/1 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 that it would be early. Just since it wasn't noted, I would guess that's not the case, but just wanted to ask to be sure.

Vincent, this is Mike Wilkins. We have been -- I don't 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. We did a pretty thorough review of our reinsurance program midyear this year and we may do some things, either midyear or at the end of the year to take advantage of that pricing.

Okay, great. And then one other one, just more general in nature. If I recall, you guys have a newer head of marketing. And just always curious if, with those type of changes, if there's 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?

Vincent, this is Randy. We actually just filled that position July 1 so I don't anticipate any big changes probably for the remainder of 2013. One of the goals we have is kind of a more consistent message, but I doubt we'll probably see a lot of change in our overall message. It's kind of too early to call on that position so far.

Right. Perfect. Thank you for all the answers.

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

Thank you, Jessie. This now concludes this conference call. As a reminder, a transcript of this 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.

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