UFCS
#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 unitedfiregroup.com.
Press releases and slides are located under the Investor Relations tab.
Our speakers today are Chief Executive Officer, <UNK> <UNK>; Michael <UNK>, our Chief Operating Officer; and <UNK> <UNK>, Chief Financial Officer.
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, I'm pleased to present Mr.
<UNK> <UNK>, Chief Executive Officer of United Fire Group.
Thanks, <UNK>.
Good morning, everyone, and welcome to UFG Insurance second-quarter 2016 conference call.
Earlier this morning, we reported net income of $0.12 per diluted share, operating income of $0.08 per diluted share, and a GAAP combined ratio of 104.8% for the second quarter.
This compares with net income of $0.59 per diluted share, operating income of $0.57 per diluted share, and a GAAP combined ratio of 97.7% in the second quarter of 2015.
Our second-quarter 2016 results were impacted by catastrophe losses from hail and windstorms in Texas and the Midwest.
During the second quarter, we were affected by over a dozen catastrophe-designated storms for a total of $35.5 million of catastrophe losses.
These losses added 15.3 percentage points to the combined ratio, which is five percentage points above our 10-year historical average for the second-quarter catastrophe losses of 10.3 percentage points.
<UNK> and <UNK> will go into more detail on our catastrophe losses and the impact on our loss ratio in a few moments.
Our expectations for catastrophe losses in any given year is six percentage points of the combined ratio, with second and third quarters being the most significant quarters, with storms and catastrophe events in geographic areas where we conduct much of our business.
In the property and casualty segment, net premiums earned increased 11% and are the result of continued organic growth and geographic expansion.
Rate increases on commercial lines were in the low single digits in the second quarter in our commercial auto and commercial property lines of business.
Rate increases on personal lines were in the low single digits, primarily in our homeowners and personal auto lines of business.
I'll let <UNK> address more specifics with respect to P&C market conditions and performance in a few moments.
Moving on to our life segment, the current interest-rate environment has presented challenges during 2016.
For the remainder of this year, our expectation is for profitability to be difficult in this segment.
We are continually working on making adjustments to our strategy to adapt to the persistent low-rate environment.
These include changes to life product pricing and marketing changes that will result in reductions in operating expenses and an increase in life insurance interest spreads.
Our sales of our single-premium whole life product remained strong in the second quarter of 2016, and we continue to execute our strategy to maintain profitability rather than market share on our deferred annuity deposits by increasing our spreads by 42 basis points as compared to the same period of 2015.
By design, this has led to a decrease in the size of our annuity book and consequently has also resulted in a decrease in invested assets which, in combination with the low-interest yield environment, has also resulted in a decline in the net investment income.
The second quarter of 2016 expense ratio was higher by one percentage point compared to the second quarter of 2015, but within our expectations, at 30.3%.
The increase in the expense ratio was due to an increase in deferred acquisition cost amortization from our continued organic growth, partially offset by a decrease in post-retirement benefit expenses.
Strategically, our approach for the remaining half of 2016 remains unchanged.
We are focusing on executing our initiatives, which we have shared over the last few quarters, which include continuing to focus on our expanding geographic footprint and agency plant and penetration, growing our specialty business, expanding our program and association business, leveraging the expansion of our product portfolio while maintaining to our core underwriting discipline in a flat to diminishing rate environment, while growing our book of business profitably.
We are also pursuing additional opportunities in growing small business products, including expanding our service center.
To summarize our thoughts on profitability, while the loss ratio for the second quarter did not meet our expectations due to the 15.3 points of catastrophe storm losses, we are encouraged by the continued improvement in severe losses greater than $500,000, which <UNK> will discuss shortly, and also by the improvement in our core loss ratio when you exclude the impact of catastrophe losses and reserve development.
With that, I'll turn the discussion over to our Chief Operating Officer, <UNK> <UNK>.
Thanks, <UNK>, and good morning.
For the second quarter of 2016, we reported consolidated net income of $3.1 million, or $0.12 per diluted share compared to $15 million, or $0.59 per diluted share, in the second quarter 2015.
Through six months, 2016 year-to-date consolidated net income was $25.5 million and $1.00 per diluted share as compared to $38.7 million and $1.54 per diluted share in 2015.
The decrease in net income in the second quarter and year to date as compared to 2015 is primarily due to the catastrophe losses previously discussed by <UNK> and <UNK>.
Our shareholders' equity increased 9% to $961 million at June 30, 2016, from $879 million at December 31, 2015.
Book value increased $2.91 to $37.85 at June 30, 2016, from $34.94 at December 31, 2015.
The increases in shareholders' equity and book value are primarily due to net income of $25.5 million and an increase in unrealized investment gains of $59 million.
Consolidated unrealized investment gains are $187.4 million at June 30, 2016.
Return on equity was 5.6% in the first half of 2016 compared to 9.4% in the first half of 2015.
Further adjusting ROE to exclude the impact of unrealized gains, our adjusted ROE was 6.7% in the first half of 2016 as compared to 11.3% in the first half of 2015.
The decrease in ROE as compared to the same quarter last year was primarily due to a combination of a decrease in net income and an increase in shareholders' equity.
Losses and loss settlement expenses increased by $30 million, or 20%, during the second quarter 2016 as compared the second quarter of 2015.
On a year-to-date basis, losses and loss settlement expenses increased by $45.8 million, or 16.5%, compared to the same period of 2015.
The primary driver of the increase in second quarter is catastrophe losses, as we previously discussed.
As has been historical reserving practice at UFG, we set initial reserves conservatively.
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 second quarter 2016 was $2.5 million compared to $6.7 million in the second quarter of 2015.
The impact on net income for the second quarter in 2016 was $0.06 per share compared to $0.17 per share in 2015.
On a year-to-date basis, favorable reserve development for 2016 totaled $26.4 million compared to $23.4 million in 2015.
The impact on net income in 2016 was $0.67 per share compared to $0.61 per share in 2015.
Three lines together provided the majority of the favorable reserve development in the first half of 2016.
The largest contributors to our favorable development were commercial liability, with $13.8 million, followed by worker's compensation with $7.2 million, and commercial auto with $6.2 million.
All of these lines benefited from successful claims management and continued successful management of litigation expenses.
The favorable development is attributable to reductions in reserves for reported claims as well as reductions in required reserves from incurred but not reported claims, along with continued successful management of litigation expenses.
These lines were slightly offset by $4.4 million of adverse development in the commercial fire line of business, which experienced an increase in paid claims.
As <UNK> mentioned, the combined ratio in the second quarter 2016 was 104.8% and 98.7% year to date.
2015 comparatives were 97.7% for the second quarter and 93.8% year to date.
Removing the impact of catastrophe losses and reserve development, our core loss ratio improved 1.7 percentage points in second quarter and 0.1 percentage points year to date when compared with 2015 results.
Referring to slide 10 in our slide deck on our website, we've provided a detailed reconciliation of the impact of catastrophes and development on the combined ratio.
In summary, the adjusted loss and loss settlement expense ratio, removing the impact of catastrophes and favorable developments for the quarter, would be 60.3% versus 62% and 64.7% versus 64.8% for the year-to-date comparative.
Moving on to investments, consolidated net investment income was $24.5 million for the second quarter 2016, or a 5% decrease as compared to $25.8 million in the second quarter of 2015.
Year to date 2016, consolidated net investment income was $46.7 million, which represents a 7% decrease when compared to 2015.
The decrease in net investment income for the quarter and year to date was primarily driven by the change in the value of investments and limited liability partnerships as compared to the same periods in 2015, along with 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.
With respect to capital management, during the second quarter we declared and paid a $0.25-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 on a number of factors, including the share price, general economic and market conditions, and corporate and regulatory requirements.
During the second 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 will now open the line for questions.
William.
Yes, they were.
I'd probably characterize those as ongoing, but we look at our capital structure from two different, separate sources, and we do have excess capital, but we don't disclose the amount we have.
So yes, we continually monitor that from year to year.
Not really, no.
This now concludes our conference call.
As a reminder, a transcript of this call will be available on the Company website at unitedfiregroup.com.
On behalf of the management of United Fire Group, I wish all of you a pleasant day.
Thank you.
