United Fire Group Inc (UFCS) 2014 Q2 法說會逐字稿

Good morning. My name is Jessie and I'll be your conference operator today. At this time, I would like to welcome everyone to the United Fire Group's second quarter 2014 financial results conference call. (Operator Instructions) And as a reminder, this conference is being recorded.

I will now turn the call over to Anita Novak, Director of Investor Relations. Please go ahead.

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 Chief Operating Officer; and Dianne Lyons, Senior 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 responsibility 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, 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. Earlier this morning, we reported second quarter operating earnings per share of $0.35, net income per diluted share of $0.42 and a GAAP combined ratio of 101.7%.

Year-to-date, we reported operating earnings per share of $0.82 per share, net income per diluted share of $0.94 and a combined ratio of 100.7%. Our current book value is $32.74 per share and our annualized return on equity is 6%. All of these details can be seen on slide number three of our webcast.

Despite the impact of 11 catastrophe events as well as an increase in additional non-catastrophe storm losses during the quarter, our results are still consistent with our expectations. Our underlying book of business is sold and market conditions continue to be favorable.

The overall economy is slowly improving, although that has had an extremely minimal effect on our growth. Even so, we are not yet seeing the margin expansion we expected to see by mid-year in order to produce our expected return on equity. Mike Wilkins will expand upon this discussion as part of his prepared remarks.

Competitive market conditions were unchanged on most renewals but slightly more competitive on some. We continued to experience some increased competitiveness on more profitable large commercial accounts and competitive market conditions persisted on new business during the quarter.

Commercial lines renewal pricing increased at a slightly slower pace in most regions with average percentage increases in the low to mid-single digits on most small and mid-market accounts. Personal auto 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 down slightly at the end of the second quarter to 83% but remained above 82%, which is the metric we use as an acceptable level of policy retention.

We remain optimistic about our ability to get rate increases for the next quarter or two, although we believe rates will show signs of moderate deceleration as the year progresses.

Premiums written from new business remain strong but down somewhat from both the last quarter and the same quarter a year ago. Our success ratio on quoted accounts increased slightly and remain strong as new business pricing held steady.

Overall, our P&C premium increases from organic growth totaled 11.9%. We attribute 9.9% to rate increases, 1.6% to new business and 0.4% to exposure increases. We believe lost cost trends remain at approximately 3.5%.

Wind, large hail and, to a lesser extent, tornados dominated during the second quarter. We experienced adverse results from 11 catastrophe events, mostly as a result of convective storms.

There was no specific geographic pattern to the storms and no one storm system had a material impact on our operations. However, the sheer number of storms was significant.

We expect to process approximately 1,800 claims from the second quarter events primarily from our commercial property, personal auto and homeowners lines of business.

If I had to describe one event that might be somewhat unusual, it would have to be the June 12 through 13 hailstorm in Abilene, Texas. We had a number of commercial insured roofs damaged by extremely large hail and wind with average claim losses of $35,000. Typically, average losses from convective storms are about $4,000.

The impact to earnings of catastrophe losses during the quarter was $0.53 per share and they added 11 percentage points to our combined ratio. For the year, the impact to earnings was $0.61 per share and added 6.5 percentage points to the combined ratio, which is slightly higher than we expect catastrophe losses to be at this point in the year.

We did experience increased frequency in a number of non-catastrophe related storm losses as a result of extremely active weather patterns in the US throughout the quarter, as well as an increase in the number of large fires. Frequency was up during the quarter and year-to-date, again as a result of catastrophe events. However, frequency remained flat if catastrophe events are excluded.

The story is similar with regard to severity. We did see an uptick in severity as a result of the types of claims associated with individual catastrophic events, but underlying severity remained flat.

As I mentioned earlier, we saw deterioration in our commercial property, personal auto and homeowners lines of business during the quarter due to catastrophe events. We also experienced net loss ratio of improvement in commercial other liability and commercial auto.

The workers' compensation line deteriorated somewhat during the quarter and year-to-date. Our specialty operation continued to grow during the quarter and the loss experience has been very good. I remind our listeners that we do not consider this business material during the first year of operations since premiums earned are not significant.

Net income in the life segment decreased in both the second quarter and year-to-date due to decreases in the net investment income and net premiums earned and an increase in losses and loss settlement expenses. The segment continues to be hampered by the low interest rate environment.

The increases in loss and loss settlement expenses was due to an unusually large number of death benefit claims during the second quarter. This does not appear to be a trend. Nonetheless, we will continue to monitor the situation.

Deferred annuity deposits increased significantly in both the quarter and year-to-date. As we mentioned in the press release earlier, guaranteed interest rates periodically increased over the course of the last year, resulting in more favorable retention of maturing differed annuity deposits as opposed to lapse of policies due to maturity, as well as increased deposits due to additional annuity sales.

We continue to focus on properly pricing products in the low interest rate environments. In the meantime, higher guaranteed interest credited to policyholders is rolling off, allowing margins to improve.

With that, I'll turn the discussion over to Mike Wilkins, our Executive Vice President and Chief Operating Officer.

Thanks, Randy. I'd like to expand just a little bit on Randy's discussion of the current rating environment. It's important to convey that even though we are seeing pockets of increased competitiveness, we are still seeing numerous opportunities for rate increases, especially in geographic locations experiencing significant weather-related events throughout the US and within our workers' compensation line of business.

Randy mentioned in his comments that we are not seeing the margin expansion we expected midway through the year. I'd like to stress the improvement over the last several years of our core book of business.

As you can see from slide number six, our core loss ratio has improved each year since 2009. We attribute this trend to solid and disciplined underwriting and an improved pricing environment.

As investment opportunities began to deteriorate during the recent financial crisis, we refocused our underwriting efforts and established revised underwriting targets that would allow us to achieve our target ROE. We think this slide successfully demonstrates that our underwriting initiatives have been effective.

However, our current core loss ratio is running approximately 6 percentage points higher than one year ago, which is disappointing for us. The drivers of this increase include the explosion in the urban townhome community that we discussed during our first quarter call, increased non-cat weather-related losses and an increase in the frequency of large fires in our property lines of business.

We are confident that our underwriting remains solid and that our pricing increases continue to exceed loss cost inflation and our expectation is for a return to the favorable trends we have seen since 2009 in the core loss ratio.

The specialty operation is performing very well and, as expected, future expansion into additional states is being explored. This operation currently operates in the states of California, Oregon, Nevada and Arizona.

Randy mentioned the deterioration in workers' compensation line earlier. Despite focused efforts at improving the quality of the workers' compensation book, as well as improved pricing in this line, loss ratios have remained stubbornly high. We are encouraged that our six-month loss ratio in 2014 is below our full-year loss ratio for 2013 on both the calendar year and an accident year basis.

As a reminder, we do not have a standalone workers' compensation line of business. All of our workers' compensation policies are part of our commercial packages. Nevertheless, we strive for profitability in all of our offered products, although workers' compensation is more challenging to write profitably.

Year-to-date, we have seen some deterioration due to increased severity. Our current analysis suggests that the issue is an overall increase in the average incurred per claim.

Currently, we continue to re-underwrite policies as they renew, increase rates when possible and expand our loss control efforts in this line. We've identified specific types of situations that we write profitably and we continue to pursue those opportunities, as well.

With regard to our [voluntary assume] book of business, rates continue to deteriorate by approximately 10%. Historically, the book of business has been very lucrative and remains so despite diminished rates. We are, however, evaluating future performance and risk factors associated with the premium rate deterioration.

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 $10.7 million or $0.42 per share for the quarter compared to $15.5 million or $0.61 per share last year.

Year-to-date, consolidated net income including net realized investment gains and losses was $24 million or $0.94 per share compared to $37.9 million or $1.49 per share in 2013. Favorable reserve development for the second quarter was $11.3 million compared to $16.4 million in the second quarter of 2013.

The positive impact on net income for the quarter was $0.29 per share compared to $0.42 per share in 2013. The decline for the quarter is due to the timing of the paid claims.

Year-to-date, favorable reserve development was $25.8 million or $0.65 per share compared to $40.5 million or $1.04 per share. Our year-to-date favorable development reflects both the timing of paid claims from the second quarter and adverse development of large claims from prior accident years, primarily relevant to 2013 large losses that further developed in the first quarter of this year.

As we have stated on many occasions, reserve development will vary from quarter to quarter and year to year due to the timing of payment of claims and we'll remind our audience that we have historically reserved on a conservative basis and continue to do so.

At June 30, 2014, our total reserves remained relatively flat and within our actuarial estimates. Losses and loss settlement expenses increased by $20 million or 17.3% during the second quarter compared to the second quarter of 2013 and $46.5 million or 22.4% year-to-date.

For the quarter, loss and loss settlement expenses were impacted by a significant increase in both catastrophe losses and non-catastrophe weather-related events, as well as four large commercial fires. The year-to-date losses and loss settlement expenses also included the large loss due to a townhome complex fire discussed last quarter.

Consistent with our preannouncement on June 24, 2014, pretax catastrophe losses for the quarter totaled $20.6 million or $0.53 per share after tax compared to $14.2 million or $0.36 per share after tax. As Randy mentioned earlier, these losses added 11 percentage points to our combined ratio.

Year-to-date, catastrophe losses totaled $23.9 million or $0.61 per share after tax and added 6.5 percentage points to the combined ratio, which is fairly consistent with our annual catastrophe load of 6 percentage points.

Consolidated net investment income was $27.6 million for the second quarter, which was a decrease of 4.9% compared to $29 million in the second quarter of 2013. Year-to-date, consolidated net investment income was $54.4 million, a decrease of 2% as compared to net investment income of $55.5 million for the same period in 2013.

We continue to feel the impact of lower investment yields on the majority of our investment portfolio and we continue to expect a continuation of low interest rates during 2014. The weighted average effective duration of our fixed maturity securities portfolio at June 30, 2014 was 4.7 years compared to 5 years at December 31, 2013. Our overall portfolio yields was 3.9%.

Consolidated net realized investment gains for the quarter were $2.7 million compared to net realized investment gains of $4.2 million in 2013. Year-to-date, consolidated net realized investment gains were $4.9 million compared to $6.1 million in 2013.

Consolidated net unrealized investment gains net of tax totaled $147.9 million as of June 30, 2014, which is an increase of $31.3 million or 26.8% from December 31, 2013.

The increase in net unrealized gains is a result of an increase in the fair value of the fixed maturity investment portfolio due to interest rate declines during the second 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 second quarter was 29.6 percentage points compared to 31.8 percentage points for the second quarter of 2013. Year-to-date, the expense ratio was 31.5 percentage points compared to 32.7 percentage points in 2013.

Underwriting expenses for the quarter benefited from the deferment of additional acquisition expenses due to improved loss experience and continued premium growth.

Year-to-date, however, the expense ratio will continue to be adversely impacted by a dual rent obligation associated with the relocation of our Galveston, Texas ranch facility and an increase in premium taxes and assessments due to premium growth in specific lines of business. Therefore, we expect a gradual return to a more favorable expense ratio consistent with our history. Our current year-to-date underwriting expense ratio of 31.5 percentage points remains higher than our long-term expectations.

Our stockholders equity increased 5.6% to $826.3 million at June 30, 2014 from $782.8 million at December 31, 2013. The increase was primarily attributable to net income of $24 million and an increase in net unrealized investments gains of $31.3 million net of tax during the first half of 2014. These increases were offset by shareholder dividends of $9.6 million.

At June 30, 2014, the book value per share of our common stock was $32.74 compared to $30.87 at December 31, 2013.

During the second quarter, we declared we paid a $0.20 per share cash dividend to shareholders of record on June 2, 2014. This dividend was an 11% increase over the previous quarterly dividend. In addition, we repurchased 201,516 shares of United Fire common stock at an average price of $27.63.

As you can see from slide number seven, we have returned more than $15 million this quarter to shareholders and nearly $107 million since 2010 in cash dividends and share repurchases.

As a reminder, under our current share repurchase 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 the Board of Directors to purchase an additional 869,000 shares of common stock under the current program, which expires August 31, 2014.

With that, I'll open the line for questions.

(Operator Instructions)

Our first question is coming from the line of Vincent DeAugustino with KBW. Please proceed with your question.

Hi, good morning everyone.

Morning, Vincent.

Just to start off on the pricing front, since it's just a pretty important topic this quarter, if I'm interpreting the kind of low to mid-single digit terminology being used as something in the 4% range -- if that's ballpark accurate, then that would sort of imply that there's not a lot of excess rate above loss cost trend.

And so, with what appears to be a backdrop of deteriorating rate increases, into your guys' point on you're not seeing as much margin expansion as you'd like, I'd kind of like to see if we could discuss and put some numeric parameters around your goals for non-rate-driven margin expansion, particularly some of the initiatives that you're deploying in workers' comp. And then again, within the context of if you're margin neutral from a rate increase standpoint, what we might be able to expect from a margin improvement standpoint in this environment.

Vincent, this is Randy. A couple of the areas that you probably heard us mention -- workers' compensation; and I think in past discussions, we've noted that we've kind of identified some of our higher severity classes of workers' compensation and either retired from those or tried to get the pricing up.

We're also big users of our loss control services. We're trying to focus more on loss control to try to improve some of the accounts that we do write.

Work comp, we're still able to get decent rate increases. Across the board, we've tried to identify kind of the 5% worst performing accounts that we have and either getting significant rate increases on those accounts or getting off them if that's necessary.

Property we're really pushing, especially property located in the Midwest that's subject to the cat storm activity the last couple of years. We're continuing to push to make sure that we get more rate increases on some of those areas. So, those are kind of some of the things.

Mike, do you have anything to add there?

Just maybe a couple of comments. On the pricing side, on the rate increase side, maybe a little better than what you had assumed it would be around 4%. Actually, our average was a little about 5.5%. So, we still have a little bit of a cushion there for margin expansion.

A couple other areas that I think will help with non-rate-driven improvement to our profitability -- our specialty division, which we mentioned a couple times in the press release, is a segment of the business that we think has a little higher margins than maybe our traditional business that we've written. And we expect that segment to grow substantially over the next few years.

And then also, we've done quite a bit more with program business over the last couple of years and we continue to focus on that, as well as our small commercial segment, which are both segments that we think have a little better return than maybe our overall book of business.

Okay. And then Mike, you just mentioned it was small commercials to take the other side -- on the large side. One of the initiatives that you guys had talked about in the past -- it was in the context of being balanced, but it was on initiative for the larger accounts. And just to there being a little bit more competition on the large side, does that change your guys' appetite for those larger accounts here more recently?

Well, we continue to be a market for large accounts. Those have become a little more competitive. We're definitely seeing more pricing pressure there. So, when we compete on accounts, we expect them to be adequately priced if we'll write them. So, we'll continue to try to compete on those accounts. And if we think we can write them at an adequate price, we will. And if we can't get the price we need, we won't write those.

We do think our agents put value in companies that can write larger accounts. So, we want to be a market for our agents for those type of accounts, but only if we can do it adequately priced.

Okay, good to hear. And then, sorry, one more rate question. On the premium growth reconciliation slide that you guys have -- I think it's slide four -- this quarter it says a 9.9% contribution from rate increases. And that's up about 260 basis points from last quarter. And I guess I was just a little bit surprised, given that the aggregate deceleration kind of is going the other direction. So, I was just kind of hoping to maybe reconcile the underlying numbers that are kind of moving that up on the premium slide.

Can we get back to you on that? Our head of Corporate Underwriting, Al Sorensen, he does that analysis and we can get some more detail for you and get back to you. I just don't have that information available right now.

Okay, sounds good. And then just one last quick one -- you guys had mentioned this quarter with the large townhome explosion. I just wanted to see if there was any update on your thoughts on subrogation for that.

Maybe we'll let Dave Conner, our head of Claims, comment on that one.

Hi, Vincent. This is Dave. Not much of an update from what we reported last quarter. We still view this as an opportunity for recovery on subrogation, but a long, drawn-out battle because of the defendants that are involved.

Okay. All right, thanks, guys. We'll talk to you soon.

Thank you.

(Operator Instructions)

We do have a follow-up question coming from the line of Vincent DeAugustino with KBW. Please proceed with your question.

Didn't expect to get back in so quick, but just one follow-up. Just on commercial auto, I think you guys deserve a lot of credit for the loss ratio there moving in the right direction. And I was just kind of hoping we might comment on, in your opinion, do some of the things that United Fire is doing right, just because that line has been such a trouble spot for a lot of your peers -- I just wanted to see how you guys are managing that so well.

Vincent, this is Randy. Well, I don't want to give away any of our secrets. But I think it's probably just a matter of focus. I think sometimes it's easy to maybe underwrite the liability of the property of an account and to just take whatever auto comes along with it. But we've utilized our loss control services and been very diligent on keeping drivers lists updated and keeping current motor vehicle reports on commercial auto, being careful on large limits with large and extra-heavy truck vehicles.

Basically, I think it's just a matter of diligence. We've always been pretty good commercial auto underwriters and you have to not be afraid to walk away from a large account just because it doesn't have very good auto.

Okay. And just one last one -- on the share repurchase front, I guess externally, for me, I just don't really see the environment as that much different than the first quarter and your shares have actually held up pretty decent to some of your peers. So, I just wanted to see if there was anything in particular that drove kind of the greater repurchase appetite this quarter.

This is Randy. Not necessarily. I think we've kind of done some -- we've talked a little bit about some capital modeling that we've done. I think we are more convinced than ever that we have some excess capital. We're really not looking at any M&A activity right now and we're having good success with organic growth, but we just feel that we have some additional capital.

We feel that our shares are priced at a discount, especially knowing some of the positive things that we have going on. So, I think we've just decided that additional share repurchases make a lot of sense right now.

Okay, thanks for all the color and certainly hope the weather in Iowa is a bit better.

We agree with you there. Thank you.

Thank you. It appears there are no further questions at this time. I would now like to turn the floor back over to Miss Novak for any additional concluding comments.

Thanks, Jessie. 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 pleasant day.

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