United Fire Group Inc (UFCS) 2014 Q1 法說會逐字稿

Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the United Fire Group first quarter 2014 financial results conference 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.

Thank you. I will now turn the call over to Anita Novak, Director of Investor Relations.

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 and slides are 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 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 also available in our press release and SEC filings.

At this time, it is my pleasure 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. Earlier this morning, we reported operating earnings per share of $0.47, net income per diluted share of $0.52, a GAAP combined ratio of 99.6%, book value of $31.82 per share and an annualized return on equity of 6.7%.

When we compare our results in the first quarter to one year ago, we can easily see that there are two significant factors driving the variance. A single large claim and a reduction in the amount of favorable reserve development reported. To a lesser degree, we also experienced an increase in the frequency of non-catastrophe weather-related storm losses due to harsh winter weather conditions during the quarter.

The large claim was a gas explosion in a suburban townhome community. The incurred loss was $5.4 million, which added 3 percentage points to our combined ratio. A portion of that loss is attributable to the increase in our annual aggregate ceded reinsurance deductible, which increased from $3 million to $4 million effective January 1.

As I mentioned, we also experienced a decrease in the favorable development between the first quarters of 2014 and 2013, due partially to development of large claims from prior accident years. The impact to the combined ratio from changes in favorable reserve development was 5.1 percentage points. The increase in the frequency of non-catastrophe weather-related storm losses was due to the harsh winter weather conditions during the quarter, especially in the Upper Midwest and Northeastern United States during the quarter.

As you can see from the reconciliation on our slide number four, the Life Company contributed $0.04 per share to our operating earnings in the first quarter, which did not have an impact on our combined ratio. Now that we've reconciled the differences in results between the first quarter of 2013 and first quarter of 2014, I would like to spend a little more time talking about some of the other issues affecting this quarter.

Competitive market conditions were unchanged on most renewals. However, we experienced some increased competitiveness on large commercial accounts and competitive market conditions persisted on new business during the quarter. Commercial lines renewal pricing increased in most regions with average percentage increases in the mid-single digits on most small and mid-market accounts. Personal lines renewal pricing increases decelerated slightly with average percentage increases in the mid-single digits. The homeowners line is experiencing average percentage increases in the high-single digits.

Policy retention was up at the end of the first quarter to 84%, which renews our optimism about our ability to get rate increases for the next two or three quarters, although we believe rates will show signs of moderate deceleration as the year progresses.

Premiums written from new business remained strong and up from both the last quarter and the same quarter a year ago. Our success ratio on quoted accounts increased slightly and remains strong as new business pricing held steady. Overall, our P&C premium increases from organic growth totaled 11.5%. We attribute 7.3% to rate increases, 4.0% to new business and 0.2% to exposure increases. We believe loss cost trends remain at approximately 3.5%.

Catastrophe losses from the quarter were well within our expectations at 1.8 percentage points of the combined ratio. Our annual catastrophe load is 6 percentage points of the combined ratio. Historically, our first quarter is generally around 3 percentage points.

First quarter results were impacted by losses due to an increase in the frequency of non-catastrophe weather-related storm losses. Overall claim counts increased 12.2% compared to a year ago. Most of the relevant claims involved frozen pipes, fires related to falling frozen pipes, slip and falls from icy conditions, collapses from heavy snow accumulations and weather-related auto accidents. Many of these losses occurred as a result of harsh winter weather conditions, especially in the Upper Midwest and Northern United States.

For a while now, we have had an initiative in the Life segment to more equally balance the ratio between our whole life products and our annuity products. However, we are also well aware of the importance of maintaining price diligence.

During the first quarter, first year life sales were impacted by pricing increases. Severe weather conditions also hampered life product sales. However, spreads on annuity renewals have been improving due to lower credited interest rates than originally written. Accordingly, our annuity sales opportunities outweighed our life product opportunities.

Annuity deposits for the quarter increased more than 200% compared to last year, and net cash outflow related to our annuity business decreased by more than 50%. That in no way diminishes our desire to pursue life product sales.

A second initiative for the Life segment is geographic expansion. In tandem with our purchase of Mercer Insurance Group, the Life segment has expanded its footprint into five additional states. The intent is to increase that number to nine states by the end of 2014. We currently do not have much overlap in our P&C agency force and our Life agency force. So this commitment will include additional agency relationships.

Our new strategic plan known as 2020 vision was launched during the first quarter and was the refreshing of our corporate logo. 2014 marks a new look and feel for the United Fire Group of companies. Our 2020 vision objectives are to improve ROE, so that we are consistently exceeding the majority of our peers, increase written premiums through profitable organic growth, provide best-in-class service to our agency force and our policyholders, and be the best place to work, so as to recruit and retain the best employees.

During the quarter, Forbes Magazine released its list of the Top 15 Most Trustworthy Financial Companies, and I'm happy to report that United Fire was on that list.

With that, I'll turn the discussion over to Mike Wilkins.

Thanks, Randy. We are frequently asked about the Mercer integration. So, we felt the summary on slide 7 would be helpful. We consider the risk associated with the remaining integration to be very small at this point in time. As of the end of the first quarter, we have essentially completed the West Coast conversion with the exception of a non-material number of policies that will be converted as they renew. For the East Coast, we are in the process of transferring the customer service center from our East Coast office to our home office in Cedar Rapids. That transition will be completed by the end of the second quarter. Additionally, the remaining East Coast premium conversion will occur throughout 2014 and into the first half of 2015 as policies renew and as policy forms are approved and regulatory actions are taken.

Slide 7 is a succinct summary of that conversion process. As a reminder, the West Coast operation and the East Coast operations of Mercer Insurance were essentially two separate operations. So, the overall process has been treated as two separate conversions, which lengthened the process. As we've mentioned numerous times, we do not write standalone workers compensation. All of our workers compensation risk is associated with package policies. Nonetheless, we do strive for profitability in all of our coverages. The net loss ratio for our workers' compensation line remains higher than we would like.

At 86%, the net loss ratio is consistent with one year ago, but not where we would like it to be. For that reason, we have several initiatives underway to improve that loss ratio. Slide number eight contains a summary of the actions we have initiated to help counteract some of the severity in that line. They include greater emphasis on our loss control program, more focus on appropriate rate for each hazard class, additional and/or advanced underwriting training on severity exposures and an increased focus on underperforming agents and re-underwriting accounts with large losses.

We have also mentioned numerous times, one of our long-term objectives is to grow our workers' compensation. I think it is important to note that our growth aspirations for workers' compensation line is concentrated on very specific types of insureds that we know well and have had success writing profitably. We believe that by increasing these less risky writings, we will improve our entire workers' compensation experience.

One of our long-term goals has been to enter the excess and surplus lines business. Late last year, we reported an opportunity to interview and ultimately hire a complete E&S underwriting team. This is a well-established underwriting team and I might add, highly recommended. A new branch office has been established in Los Angeles, California and the first policies have already been issued. Our expectations for 2014 for this line are not material from an earned premium perspective, but we should be able to give interested parties more details once the program has had sufficient time to gain momentum.

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

Thanks, Mike. Consolidated net income, including net realized investment gains and losses, was $13.3 million or $0.52 per share for the quarter, compared to $0.88 per share last year. As we have emphasized throughout our presentation this morning, the contributing factors were a single large claim, a decrease in the amount of favorable reserve development reported and the increase in frequency due to harsh winter storms in areas of higher concentration for us. The impact of the single large claim was $0.14 per share.

Favorable reserve development for the first quarter was $14.5 million or $0.37 per share, compared to $23.7 million or $0.60 per share in the first quarter of 2013. The impact on net income from the decrease in favorable reserve development was $0.23 per share and was due to a number of factors.

First quarter reserve development was impacted by adverse development of large claims from prior accident years, primarily relevant to fourth quarter 2013 large losses that further developed due to additional information received in the first quarter of 2014. As we have stated on many occasions, reserve development will vary from quarter to quarter and year-to-year due to the timing of the payment of claims. We have historically reserved on a conservative basis and continue to do so. Our overall reserves remain consistent with prior years.

Losses and loss settlement expenses increased by $27.8 million during the first quarter compared to the first quarter of 2013. As we have mentioned throughout our commentary today, the increase is primarily attributable to losses from a large explosion in a suburban townhome community, an increase in our annual aggregate reinsurance deductible and an increase in the frequency of claims associated with the harsh winter weather experienced in the United States, especially the Upper Midwest and Northeast.

Pre-tax catastrophe losses totaled $3.3 million compared to $4.5 million last year, which is well within our expectations for a typical first quarter. Consolidated net investment income was $26.8 million for the quarter, which was an increase of 1.1% compared to the first quarter of 2013. The increase is due to holdings of certain investments and limited liability partnerships that are recorded on the equity method of accounting. We continue to feel the impact of lower investment yields on the majority of our investment portfolio, however. We continue to expect a continuation of low interest rates during 2014.

The weighted average effective duration of our fixed maturity securities portfolio at March 31, 2014 was 4.8 years compared to 5 years at December 31, 2013. Our overall portfolio yield was 3.9%.

Consolidated net realized investment gains for the quarter were $2.2 million compared to net realized investment gains of $1.9 million in 2013. Consolidated net unrealized investment gains, net of tax, totaled $131.3 million as of March 31, 2014, which is an increase of 12.6% from December 31, 2013. The increase in net unrealized gains is a result of an increase in the fair value of our fixed maturity investments portfolio due to interest rates declining during the first quarter, and to a lesser extent, an increase in the fair value of our equity investment portfolio, which was impacted by overall equity market improvement.

The expense ratio for the first quarter was 33.5 percentage points, compared to 33.7 percentage points in the first quarter of 2013. The ratio is elevated compared to historic levels due to an increase in non-deferred acquisition costs and continued elevated expenses in pension and postretirement benefits costs. In 2014, the expense ratio will be impacted by a dual rent obligation associated with a relocation of our Galveston, Texas branch facility and an increase in premium taxes and assessments due to premium growth in specific lines of business. Therefore, our expectation for 2014 is a gradual return to a more favorable expense ratio consistent with our history, as we continue to reap the benefit of the economies of scale and the ultimate completion of the Mercer Insurance transaction.

Our stockholders' equity increased 3.2% to $808.1 million at March 31, 2014 from $782.8 million at December 31, 2013. The increase was primarily attributable to net income of $13.3 million and an increase in net unrealized investment gains of $14.7 million net of tax during the quarter. These increases were offset by shareholder dividends of $4.6 million. At March 31, 2014, the book value per share of our common stock was $31.82 compared to $30.87 at December 31, 2013.

During the first quarter, we declared and paid an $0.18 per share cash dividend to shareholders of record on March 3, 2014. We believe that a consistent and fair dividend is our best opportunity to reward investors. As you can see from slide 10, we have returned more than $68.6 million in quarterly cash dividend to shareholders since 2010.

When excess capital is not being used for acquisitions or the expansion of organic growth, we do have the option of utilizing our share repurchase program. Under the program, we may purchase United Fire common stock on the open market or through privately negotiated transactions. The amount and timing of any purchases will be at management's discretion and will depend upon a number of factors, including the share price, general economic and market conditions and corporate and regulatory requirements. We are authorized by our Board of Directors to purchase an additional 1.1 million shares of common stock under the program, which expires August 2014. During the first quarter, no shares were repurchased under the program.

And with that I will open the lines for questions.

(Operator Instructions) Vincent DeAugustino, Keefe, Bruyette & Woods.

Hi, good morning everyone.

Good morning.

If we look at slide 4, I was hoping we might be able to get a breakdown of the 2.2% impact that's between the higher attrition, winter weather losses and then kind of the other buckets, if you might have that available.

Vincent, are you asking about the 2.2% piece of that specifically?

Specifically, yes.

I don't have a definite breakdown as far as what's winter weather and what's not. We don't have real great data for tracking those non-cat weather-related losses, but I can tell you that if you looked at [extra year] results in the first quarter, the property line is really the only line that showed significant increase from 2013. So, the property line would include both the winter storm losses, the non-cat losses and the explosion that we mentioned.

Okay. So, I mean, would it be safe to say that just for, I guess, comparison purposes that if I were to say almost all of it was winter weather that would be too aggressive or let me just try to ballpark it?

Well, I just don't think we have that data to validate that. I think our feeling is that it's mostly weather-related stuff, the explosion and weather-related stuff, but we don't have a good way to track that. Our claims manager is here. I'll refer to him if he has any more details.

Now I'd have to agree in general. I think -- can you hear me okay? Dave Conner. I'd have to agree with what Mike said. However, I would add that the majority of those, in my estimation, are due to the non-cat weather related, the majority of the increase. We did -- I did look at increased claim counts by line of business and by coverage amount, and as Randy mentioned in his narrative, we had some healthy increases in claim counts for those items that you could attribute to the severe weather. The slip and falls, the fires due to frozen pipes and those types of things. But the part I agree with Mike on is unfortunately we don't have that detail sufficient enough to be able to track exact numbers.

Okay. So I guess continuing with the reconciliation then, if we kind of look back over 2013, we're kind of looking at mid to upper single-digit rate increases on average and then some double-digit rate increases on some of the underperforming business. So, if we compare that to the 350 basis point loss cost sort of range that we've talked about here and then in the past, you kind of think about that as you're generating around 300 basis points of margin expansion. I'm just kind of trying to again reconcile that kind of expectation for 300 basis points of margin expansion into the reconciliation on slide four and maybe try to get to any other type of loss activity that may have been offsetting that here in 1Q 2014?

If you're looking for any specific areas that we saw underperformance or we didn't see performance the way we would have liked, other than weather, I don't think -- there is nothing else that has raised red flags from our perspective. It's really the impact on our results was the decrease in reserve development on prior year losses and the winter weather; we think that that really explains the changes.

Okay. And then just a last one and I'll re-queue. In the press release you mentioned that you're confident that you're going to be able to keep getting rate increases for the next two to three quarters. I just wanted to maybe [even] benefit to find that a little bit better in terms of whether two to three quarters is your kind of horizon or if you conversely expect the competitive environment to continue to ramp up and maybe there is some question as to what the rate dynamic will look like if we're thinking a year out?

This is Randy, Vincent. I think we've kind of mentioned in the past that we started getting rate increases in the fourth quarter of 2011. Just so from that standpoint, the fourth quarter of 2013 was kind of the third consecutive time that group of policyholders tolerated, I guess, you would say a rate increase. So with that logic, we hope that policyholders in the first, second and third quarters would also do that. I think the big driver of rate increases still remains the interest rate environment and I haven't heard anything that predicts that situation to be changing any.

So I think with the continued low interest rate environment and our success so far with raising rates on certain groups of policyholders for three straight years, hopefully our logic would be that we'll continue to see those increases, at least through the third quarter of this year. We do think that the fourth quarter of 2013 may be kind of the apex of rate increases and we might see those increases decelerate a little bit, but we still think we're at least a couple basis points ahead of what our loss cost escalation continues to be.

This is Mike. I was just going to add that the retention remaining solid also gives us optimism that increases can continue for the next few quarters.

Okay, great. Thank you very much for the call.

Thank you.

(Operator Instructions) Paul Newsome, Sandler O'Neill.

Can you hear me folks?

Yes, we can hear you Paul.

Sorry about that. I was hoping you could step back a little bit from a strategic perspective. You grew in the quarter more than what a typical insurer is doing. Retention went up and rates were positive, but not probably in magnitude as great as the others. At the same time, you had a deterioration in the underlying profitability of your firm from an underwriting perspective. Are you not raising rate enough?

I think there is a possibility of that. I kind of look at this, it's still -- it is a single quarter and we had some, I think, bordering on historical winter weather activity, especially in the Northeast. So, will we have some opportunities in those areas to raise rates on property? Quite honestly, we probably will. I think the good part of any -- when you have losses that maybe you can look to raise rates, but I think as Mike kind of reiterated earlier, if you look at an accident year perspective, we're doing pretty well in most lines. I think we still have some opportunities to raise rates more aggressively on workers' compensation in some areas, and then certainly, as we've said before, there have been opportunities in cat-exposed property areas. And as I said earlier, when you have some storm losses like this, you can kind of sometimes sell the fact that more areas are cat-exposed than you thought.

So, I guess, to summarize, I think we will have a few opportunities in a couple of lines, but in several other lines, one could argue that our rates they are pretty adequate. So, we will be always as usual looking for all the opportunities that we can.

That's my only question for today. Thank you folks.

Thanks, Paul.

Craig Rothman, Millennium Partners.

Hey guys. Can you just talk about why you didn't buy back any stock in the first quarter, and just given where the stock is here and the valuation what the outlook is going forward on the buybacks?

Well, our stock price has been pretty good through the first quarter. And so that's really the reason why we didn't buy any back. Going forward, as I think Dianne mentioned in the transcript, we look at where the stock price ends up, but we always look to buy some additional so far. Our stock price slips going forward, we'll be ready to buy some more back. But really we thought we had a lot of good opportunities in the first quarter just to write new business. So we didn't focus on the stock buybacks. But going forward that could change.

If you think $0.84 is a reasonable sort of run rate, then your stock is -- might be the cheapest one in this space. So just -- I think it's pretty attractive for a buyback.

Good advice. Thank you.

Okay.

Vincent DeAugustino, Keefe, Bruyette.

Hi, again, and thanks for taking my follow-up. I was just curious on the large explosion. If this pipe [happen chance], potentially it stemmed from the explosion in March that happened. I guess it was maybe about 15 minutes [south of you] guys' New Jersey office?

So accurate, yes.

Okay. So, I guess -- I mean, maybe the gross loss was just $5.4 million, but I just wanted to make sure that if that was the case that I had that right. And then in terms of -- just with that event, if there is any opportunity -- it's reading a couple of quick news articles this morning, if there's any ability to have some -- I guess liability assigned to either the contractor or maybe you guys were insuring the contractor. So I am just wondering if there was any subrogation opportunity here down the road.

Well, it was a utility explosion and I'm not a claims expert. But we'll be pursuing subrogation very aggressively. My untrained thought is I think we should have some subrogation possibilities. Dave Conner, do you want to add anything to that?

Yes, absolutely. And, Vincent, if you've been reading about it, you probably may the appropriate assumptions and that is that we look at our -- the probability of a recovery is very high. It's going to be as they usually are in these cases with utility companies involved a bit of a protracted process, but just based on the liability picture of the at-fault parties, we are looking very favorably towards a pretty decent recovery.

Okay, very good to know. Thank guys.

Thank you Vincent.

(Operator Instructions) Thank you. At this time, I'll turn the floor back to Anita Novak for any closing or additional comments.

Thanks, Rob. This now concludes our conference call. As a reminder, a transcript of this call will be available on our Company 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 concludes today's program. You may disconnect your lines at this time.