UFCS
#Thanks, <UNK>.
Good morning, everyone and welcome to UFG insurance first quarter 2016 conference call.
This morning, we reported another quarter with solid performance.
First quarter 2016 is off to a good start with operating income of $0.83 per share and a GAAP combined ratio of 92.3%.
This compares with operating income of $0.92 per share and a GAAP combined ratio of 89.7% in the first quarter of 2015.
Also in the first quarter of 2016, our book value per share increased to $36.69 from $34.94 at December 31, 2015, and our return on equity was 9.9%.
In the property and casualty segment, net premiums earned increased 10% and is the result of organic growth and geographic expansion.
Rate increases on commercial lines were flat to slightly higher on renewal business and rate increases on personal lines were in the mid-single digits, primarily in our homeowners and personal auto lines of business.
I'll let <UNK> to address more specifics with respect to P&C market conditions and performance in a few moments.
Catastrophe losses in the first quarter of 2016 at 2 percentage points of the combined ratio were slightly better than we would normally expect in the first quarter of any given year.
Our historical average in the first quarter is 2.4 percentage points to the combined ratio.
Our expectations for catastrophe losses in any given year is 6 percentage points to the combined ratio was second and third quarters being the most significant quarters with storms and catastrophe events in geographic areas where we conduct much of our business due to spring and summer convective storms and hurricanes.
The first quarter of 2016 expense ratio was higher by 1.7 percentage points compared to the first quarter of 2015.
The increase in the expense ratio was due to several non-reoccurring employee-related expenses and accruals along with an increase in deferred acquisition costs, amortization from continued organic growth, both partially offset by a decrease in the post-retirement benefit expenses.
Strategically, our approach in 2016 remains unchanged from year-end.
We are focusing on executing our initiatives, which include expanding our geographic footprint and the agency plant and penetration, growing our specialty business, leveraging expansion of our product portfolio while maintaining true to our core underwriting discipline in a flat to diminishing rate environment and growing our book of business profitably.
We are also pursuing additional opportunities in growing small business products, including expanding our service center Moving onto our life segment; for the first quarter we reported net income of $400,000 or $0.02 per diluted share as compared to $600,000 or $0.02 per diluted share for the first quarter in 2015.
Sales of single premium whole life policies remained strong this quarter as we continue to focus on executing our strategy of selling traditional life products, and expanding geographically.
Net premiums earned increased 62% in the first quarter of 2016 as compared to the first quarter of 2015.
Deferred annuity deposits decreased 38% in the first quarter of 2016 as compared to the same period of 2015.
We continue to execute our strategy to maintain profitability rather than market share as spreads increased 32 basis points as compared to the same period of 2015.
With that, I'll turn the discussion over to <UNK> <UNK>, our Chief Operating Officer.
Thanks, <UNK> and good morning.
For the first quarter of 2016, we reported consolidated net income of $22.4 million or $0.88 per diluted share compared to $23.7 million or $0.94 per diluted share in the first quarter of 2015, representing a decrease of $1.3 million and $0.06 per diluted share.
Our shareholders' equity increased 6% to $929 million at March 31, 2016 from $879 million at December 31, 2015.
Book value increased to $36.69, an increase of the $1.75 from $34.94 at December 31, 2015.
The increases in shareholders' equity and book value are primarily due to net income of $22.4 million and an increase in unrealized investment gains, which increased $27.4 million to $155.8 million at March 31, 2016.
Return on equity was 9.9% in the first quarter of 2016 as compared to 11.4% in the first quarter of 2015.
Further adjusting ROE to exclude the impact of unrealized gains, adjusted ROE was 11.8% in the first quarter of 2016 as compared to 14% in the first quarter of 2015.
The decrease in ROE as compared to same quarter last year was primarily due to a combination of decreases in net income and increases in shareholder equity.
As <UNK> mentioned, the combined ratio in the first quarter 2016 was 92.3% as compared to 89.7% in the same period of 2015.
Removing the impact of catastrophes at 2 percentage points for 2016 and 0.1 percentage points for 2015 along with removing the impact of favorable reserve development of 10.9 percentage points for 2016 an 8.4 percentage points for 2015, the quarterly loss ratio would be 69.4% versus 67.9%, resulting in a quarter-over-quarter increase of 1.5 percentage points.
We attribute this increase in the loss ratio to an increase in claim frequency in our commercial auto and commercial property lines business.
Commercial property line was impacted by weather-related activity in our Gulf Coast region and in particular, as we have discussed earlier, the State of Texas.
Losses and loss settlement expenses increased by $15.7 million or 12.4% during the first quarter of 2016 compared to the first quarter of 2015.
As has been historically consistent reserving practice for UFG, we're conservative in setting initial reserves.
As a result, we often have favorable reserve adjustments that vary from year-to-year across our book of business.
Favorable reserve development for the first quarter of 2016 was $23.9 million compared to $16.7 million in the first quarter of 2015.
The impact on net income for the quarter in 2016 was [$0.51] per share compared to $0.43 per share in 2015.
Two lines combined, provided the majority of the favorable development.
The largest single contributor was commercial liability with $19.8 million of favorable development, followed by workers' compensation with $5.4 million of favorable development.
Both of these lines benefited from successful claims management and continued successful management of litigation expenses.
The favorable development is also attributable to reductions in reserves for reported claims as well as reductions in required reserves for incurred, but not reported claims.
Loss reserve reductions were more than sufficient to offset claim payments.
These lines were slightly offset by $6.9 million of adverse development in the commercial fire line of business, which experienced an increase in paid claims.
Following <UNK>'s comments, with respect to catastrophe, our book of business remains primarily in regions of the country that are susceptible to seasonal weather, including winter and spring convective storms.
As a result, I caution our listeners that we may experience volatility in our results from quarter-to-quarter and year-to-year.
On March 31, 2016, our total reserves remained relatively flat and within our actuarial estimate.
Moving on to investments, consolidated net investment income was $22.2 million for the first quarter of 2016, which was a 9% decrease as compared to $24.4 million in first quarter of 2015.
The decrease in net investment income for the quarter was primarily driven by the change in value of our investments and limited liability partnerships as compared to the same period in 2015 and the low interest rate environment.
The impact of low investment yields continues to impact the majority of our investment portfolio, and we expect a continuation of low interest rates for the remainder of 2016.
During the first quarter, we declared and paid a $0.22 per share cash dividend to stockholders of record on March 1, 2016.
We have paid a quarterly dividend every quarter since March 1968.
Under our share repurchase program, we may purchase United Fire common stock from time to time 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 requirement.
During the first quarter, we did not repurchase any shares of our common stock.
We are authorized by the Board of Directors to purchase an additional 1,528,886 shares of common stock under our share repurchase program, which expires in August 2016.
And with that, I'll open the line for questions.
Operator.
This is <UNK>, Paul.
I think we've shown a pretty good track record of reserving.
So what I always caution people (inaudible) our accident year loss ratio should be little bit redundant from the reserving that we've done.
So, is it a good run rate.
We expect that usually to come down a little bit as those claims end up being settled.
So, that's ---+ if you look at our historic reserve redundancy maybe, if you are looking for a run rate, you might take that off of that accident year loss ratio that would be one way to look at it.
We don't think we've changed anything in our reserving practices and it's a couple of quarters, but I would personally look at it as, we just had some good results.
This is <UNK> again.
I think it's pretty early to tell, but the second quarter is probably starting off for the most part the way we expect it.
We don't ---+ more of our losses are going to come from the San Antonio area.
Do I anticipate ---+ obviously if the April storms are a big deal, we would do a press release, I don't anticipate doing that.
So it is too early to tell, but I don't think it's going to be anything material.
In the Dallas area, we do write a more commercial lines than personal lines.
That is a known hail area that we are very careful from ---+ on a personal line standpoint.
We do write more personal lines in the San Antonio area.
So, our guess is probably going to come more from the San Antonio areas, but our strategy in Texas is like many states, the key is to really use a lot of spread of risk and we try to manage our ---+ where we are write from San Antonio to Houston to Dallas and into West Texas.
It's too early to tell, but we're not anticipating anything alarming.
