IPCC
#Good morning.
Thanks for joining us for our conference call.
I'm pleased to be joined by <UNK> <UNK>, our CFO, who is on the call as well.
I want to start things off with a quick overview on slide 3.
Net earnings per diluted share were $0.99, down from $1.18 in the second quarter of 2015.
Operating earnings per diluted share were $1 compared with $1.16 last year.
Earnings were down primarily due to an increase in the accident year combined ratio, partially offset by an increase in favorable development on prior accident year loss and LAE reserves.
On a year-over-year basis, we continue to see claim trends rise as higher gas consumption and miles driven have persisted.
We are determined to get ahead of the adverse trends and continue to pursue rate, underwriting and agency actions.
In addition to the rising claim trends, we've incurred $6.3 million in catastrophe losses this year.
That's significantly more than $1.1 million through six months of last year.
With the increasing loss cost in second quarter cats, Our GAAP accident year combined ratio increased to 99.5% from 97.7% last year.
Excluding cats, our 2016 GAAP accident year combined ratio was 98.6%.
The unfavorable [current] year trends were partially offset during the quarter by $12.2 million of favorable loss reserve development from prior years.
This development was primarily a result of decreases in severity estimates in our Florida personal injury protection and bodily injury coverages and a decrease in California bodily injury loss adjustment expenses.
All of these adjustments were related to accident years 2014 and prior.
The favorable development was partially offset by unfavorable development from accident year 2015 in California property damage, driven by an increase in severity.
As expected, in terms of the top line, gross written premiums were down 4.4% during the quarter and 4.1% through the first six months.
Premium growth in Texas in our commercial vehicle program was more than offset by declines in our other states.
Our rate increases in California and Florida continued to affect premium during the second quarter.
However, the premium decline should moderate in the second half of the year due in part to an improving competitive position as we continued to see other companies take necessary rate actions to address their rising loss ratios.
So, let's get into the details behind the highlights on slide 4.
In California, premiums declined 8.3% during the second quarter and 6% during the first six months.
Slowdown was driven primarily by reduction in new application counts as we continued to address the rising loss cost in this state.
Our accident year combined ratio of 99% increased from the prior year driven by higher frequency in severity and collision and to a lesser extent bodily injury.
Average written premium continues to grow with increases in written premium outpacing earned premium changes by about 3 points.
This is fueled by the 5.3% rate increase we implemented in February of this year.
We followed up our February revision with two additional rate (inaudible) filings that are currently pending approval with the Department of Insurance.
We expect our visions to be approved and implemented late this year or in early 2017.
In the meantime, we anticipate some improvement in the loss ratio in the second half of this year from the rate adjustments we've already implemented.
We'll also take other actions as necessary, such as terminating poor-performing producers and reducing commissions where appropriate.
Moving on to Florida, overall, gross written premiums declined 6.2% during the second quarter and 6.9% on a year-to-date basis.
Business was down during the quarter, primarily as a result of a decline in our renewal book.
The drop was expected since we've raised rates nearly 15% over the preceding 12 months.
Accident years 2015 and 2016 have both developed favorably since March of this year.
However, the 98.4% combined ratio for 2016 remains elevated given the unusually high claim trends in Florida.
We continued to see our loss cost increase driven by increased frequency across most coverages, as well as severity in collision and PIP.
Our rate revision of 7% implemented in March of this year along with our planned rate revision in September should help moderate the impact of these loss costs increases throughout the remainder of 2016 and into 2017.
Switching to Texas, gross written premiums in this state grew 35.6% and 28.9% during the second quarter and first six months of this year, primarily due to new business growth.
Our growth has been driven by our target urban zone of Houston.
You may remember that we talked about Houston being a cornerstone in our strategy to reach the Hispanic market.
As for the bottom line, the increase in our 2016 accident year combined ratio was due primarily to catastrophe losses, principally flood and hail claims.
Excluding cat losses, our accident year combined ratio in Texas is 89.2%.
Beyond the cats, we are seeing some positive signs in our data including favorable trends in the property damage and collision coverages.
As for pricing, rate actions taken in the first and second quarter of this year totaling nearly 6% should keep us ahead of the loss trends.
Touching briefly on Arizona, gross written premiums declined 1.7% during the second quarter of this year, but are up 1.3% for the year.
New business slowed during the second quarter following our 8.3% rate increase that was effective in late February.
The 2016 accident year combined ratio has improved given our rate actions and due to a decline in the new business combined ratio.
As for our commercial vehicle product, gross written premium growth continues to be strong with an increase of 16.1% during the second quarter and 14.4% year-to-date.
We are very pleased to see our commercial book playing a bigger and bigger role in our overall premium writings and believe it will be very important to our long-term success.
Our current growth is primarily due to renewal policy growth and higher average premiums given our rate actions.
We expect this growth to continue in the second half of 2016, albeit at a somewhat slower pace.
We have seen a slight improvement in our commercial vehicle accident year combined ratio, primarily due to a decrease in the renewal business loss ratio.
We have implemented nearly 12 points of rate over the last 12 months, which should continue to offset the increase in loss cost trends.
I'll now turn the presentation over to <UNK> to review our financial performance for the second quarter.
Thank you, <UNK>, and good morning, everyone.
Slide 5 provides a summary of Infinity's financial performance for the quarter.
I'll cover this performance in further detail on slide 6 through 8.
So, let's turn to slide 6.
Revenues were relatively flat compared with the second quarter of 2015.
Operating earnings declined primarily due to a decrease in underwriting income from the increase in the accident year combined ratio as <UNK> discussed earlier on the call.
Overall, while there was not much improvement in our accident year combined ratio during the second quarter, we believe we will see some improvement in the second half of the year as our rate increases from the last 12 months earning and as our other actions continue to reduce the impact on poor performing business.
For the full year, we expect gross written premiums to decline between 1% and 3% and the accident year combined ratio to be between 98.5% and 99.5%.
Moving onto investment results on slide 7.
At the end of the second quarter, cash and invested assets were $1.6 billion with fixed income securities and cash representing 94% of the total.
Roughly 92% of our fixed income securities were investment grade and the average duration of the portfolio was 2.8 years.
Our quarterly net investment income decreased 3% or $0.3 million, principally as a result of a 4.6% decline in average quarterly invested assets.
From a total return perspective, our investment portfolio, which is a AA- average credit quality and a pre-tax total gain in the second quarter of 130 basis points, with 59 basis points from current income and 71 basis points from investment gains.
These returns are not annualized.
Lower fixed income new money yields have continued to impact our returns during the second quarter.
At June 2016, the book yield on our fixed income portfolio was 2.5% flat compared with June 2015.
Wrapping up on slide 8, I'll finish with a few comments on our financial position.
We ended the second quarter with $978 million in total capital and a debt-to-capital ratio of 28.1%.
Our book value per share at June 30, 2016, was $63.54, a 3.3% increase from the prior year.
Excluding unrealized gains, our book value per share has increased 2.6% since June of last year.
Finally, regarding capital actions during the quarter, we repurchased 2,800 shares for an average per-share price excluding commissions, of $78.32.
As of the end of June, we had approximately $36.7 million of capacity left on the share repurchase program, which is set to expire at the end of this year.
Looking ahead to the remainder of 2016 and into 2017, we will continue to be opportunistic in buying back shares and returning capital to shareholders through a mixture of share repurchases and dividends as we have done throughout our history as a public Company.
This concludes our formal presentation.
So, at this time, we'd like to open it up for questions.
Thanks, <UNK>.
This is <UNK>.
I'll start out with Florida.
I mentioned at the last quarter conference call that there was a pretty wide gap between what competitors were following and what they were implementing given the rate level indications and what they selected.
When we looked at the updated filings through the second quarter of this year, that gap has narrowed and it looked to me like companies are now taking around 70% of [what their] indicated need, reflects in the filings themselves.
So, that's a good sign and I made comments during the last quarter that I couldn't understand why companies or how companies could not at least stay closer to what their indicated need was and I think the trends are having a lot to do with that change.
The result is going to be a very hard market, I believe, with a turn of consumer shopping over the next 12, 15 months.
As far as trends are concerned, our trends or high year-over-year, but when we look at trends on a sequential basis, when we look at the second quarter versus the first quarter of this year or the first quarter of this year versus the fourth quarter of last year, we are seeing these trends normalize.
They are flattening somewhat which leads us to believe that we're moving into a period of the new normal, which is good news.
As far as PCI fastrack trends, we look at those too, and from a Florida standpoint, their trends for the first quarter of 2016 compared with the first quarter of 2015.
And if you look at it on a year-over-year basis, that way, regardless of whether it's individual quarter or the trailing 12 months, the PCI fastrack trends to me look like a train wreck, especially on PD, PIP, comp and collision, BI is really the only bright spot that we see there.
So, I think there have been some comments and reports from analysts that the PCI trends are normalizing a little bit too, but I don't think in my opinion.
They look quite as favorable as ours at this point in time.
I will mention one other thing that I thought was interesting ---+ PCI also recently issued a research bulletin in which they were tracking nationwide claim frequencies and they have noted that from 2013 to 2015 there had been a remarkable increase in frequencies over that current time frame, and Florida was one of the states that they singled out as being in the top five states that had the biggest increase.
And PCI did some nice work where they associated much of that increase certainly to miles driven, but also to just sheer traffic congestion; in other words, just the number of vehicles on the road themselves, there is little correlation with smartphone usage, distracted driving added to it, I guess, and they came to the conclusion that the greater exposure of the cars, the greater chances of getting into a collision especially when you have distracted driving to that.
In other words, when you operate in large urban zones, there are going to be heavier traffic jams and when there are more cars on the road, likely they get more.
Also, they came out with a second research bulletin that talk about the average precipitation in Florida in 2015, 2016 being up as well that contributed to the frequency.
So, you hear a lot of companies talk about trends, but they never talk about them at the state level and at the level we talk about.
And until you dig into it on that basis, you really can't understand what's going on.
So, I said a lot about Florida, but I will just sum it up by saying, we are seeing the trends normalize sequentially quarter-over-quarter and that's good news.
Again, if that's a new normal growth (inaudible) problem.
From a California standpoint, I'll say this as far as rate activity is concerned, competition, a lot of filings with 6.9% increases, pending with the Department or that recently got approved.
I think California is not like Florida and the competition is still behind implementing enough rate and getting [in with] claim trends in California.
I think Florida companies are catching up a little bit faster.
The regulatory environment in California certainly could have some impact on that.
Again, from our trends, there is high year-over-year, again, when you're looking at the second quarter of this year versus the second quarter of last year on most coverages, but much like Florida, they appear to be normalizing when you look at the second quarter sequentially versus the first quarter of this year, and again, if you look at the first quarter versus the fourth quarter.
That's what we are looking at, I mean the year-over-year trends are nice and they tell you what's happening year-over-year, but they don't tell you when things have normalized and fallen into that normal range, if you will, and we think we're kind of getting there, which again is good news, I believe.
So, I said a lot, <UNK>, on Florida and California.
Any other follow-up questions where you think you want to ask.
Well, I think there is plenty of capital from reinsurance companies available, it's only for non-standard MGA like companies that operate on that basis where they see most of the premium and losses to a reinsurer.
So I don't think that has abated whatsoever.
I'm not sure that reinsurers are too excited about lot of these days when you look at the results and you look at some of the filings are being made by competitors and in particular competitors that we go head-to-head with quite frankly.
I think there's still quite a gap there in what they're taking and what their indicated need may be, but I think there's still plenty of reinsurance availability out there to offer these guys.
So, they're not going away, they are going to be ---+ (inaudible) but they've been around for many, many years or decades.
So, that's nothing new.
I know there's been some talk about proposing some legislation to effectively eliminate PIP and adding BI, I guess, to PD in terms of those coverages being mandatory.
If they do something like that, I would anticipate that they would raise the BI limit from the current $10,000/$20,000 minimum to something more like $25,000/$50,000 perhaps or $15,000/$30,000 which is the limit in California.
(inaudible) it wouldn't hurt our feelings if they did just to that, if they raise the BI limit, it would certainly offset some of the premium revenue in PIP, but the PIP numbers just aren't getting any better.
They've made an attempt to correct the issues in PIP in Florida and it has failed.
I mean that's ---+ I don't think anyone can argue with that, and when you look at the trend numbers today regardless of whether they are our numbers or the PCI numbers, the PIP trends still look high, regardless of whether it's severity or frequency for that matter, they are still up there.
So, I think it's going to get to a point where consumers just aren't going to be able to afford the premiums, as they are escalating to cover these loss costs on that coverage and there is going to be enough complaining to legislators in their district about this, while I think they'll do something.
Now, having said that, I said that what happened last year, you got to keep in mind, there are lot of interested parties in keeping PIP in place.
We have a lot of influence in the Legislature.
So, if it happens, we're okay either way.
We're going to get the rate to cover the PIP trends one way or the other, but I think from a consumer standpoint, it wouldn't be a bad thing if they change the laws currently staying in.
Yes.
I would just like to make a couple comments in that, the second half of the year as far as opportunities are concerned, I got into some details regarding Florida and California as far as competition, rate changes, and trends.
And we are seeing competitors catching up to our rate levels.
We were early on with many of our rate changes and we are starting to see some signs with competitions catching up and we're seeing some good signs of businesses starting to come back our way.
We talked about that in the last quarter that we were expecting that to happen in the second half and the early on signs are that, that is happening.
Our average premiums are still rising, that's always good news.
Our CV program, I talked, about is still growing, we're very proud of that program and the results.
And finally, our direct to consumer business is growing nicely as well.
We talked about building that business into something for the future that will sustain us regardless how consumers choose to purchase their policies and we're very pleased as to how that has grown.
So having said all that, we are looking forward to the second half of this year and in particular the third quarter conference call.
Thank you, all.
