IPCC
#Well, good morning, everyone, and thanks for joining us for our conference call.
I'm pleased to be joined by <UNK> <UNK>, our CFO, who's on the call this morning, as well.
And I want to start things off with a quick overview on slide three.
As you read in our earnings release this morning, we had another quarter of solid earnings.
Our overall GAAP combined ratio for the third quarter was 94.2%, which included $11.3 million of favorable loss reserve development from prior years.
The 2015 GAAP accident year combined ratio was relatively unchanged at 97.6% compared with 97.7% as reported last quarter.
Florida's accident year combined ratio improved during the quarter, as we'd hoped, but we had increases primarily in commercial vehicle, and to a lesser extent in California, offsetting the Florida improvement.
Gross written premiums were down as expected during the quarter, with an overall decline of 3.8%.
However, we continued to see premium growth in California, as well as our commercial vehicle product.
Our year-to-date growth in our four focus states and CV was just under 5%.
And our return on equity for the quarter was 9%.
So, let's get into the details behind the highlights on slide four.
For the third quarter of 2015, net earnings per diluted share were $1.38, up from $1.29 in the same quarter of last year.
Operating earnings in the quarter were $1.41 compared with $1.23 in the third quarter of 2014.
Operating earnings were up primarily from the increase in favorable loss reserve development I mentioned earlier.
Our 2015 GAAP accident year combined ratio was 97.6% compared with our 2014 combined ratio of 97.1% as reported in September of last year.
The $11.3 million of favorable loss reserve development we experienced in the third quarter of this year compares with $5.4 million of favorable development in the third quarter of last year.
The favorable development this quarter was primarily a result of decreases in severity related to Florida bodily injury coverages, as well as decreases in loss adjustment expenses related to California bodily injury coverages in accident years 2013 and 2014.
In terms of the top line, gross written premium declined 3.8% during the third quarter.
Premium growth in California and our commercial vehicle program was more than offset by declines in our other states.
Our book value per share at September 30, 2015 was $61.71, a 4.2% increase from the prior year.
Excluding unrealized gains, our book value per share has increased 5.9% since September of last year.
Regarding capital management actions during the quarter, we repurchased 121,378 shares at an average per-share price, excluding commissions, of $77.91.
Turning to slide five, we'll move on to a more detailed update by state.
Let's start with California.
Their premiums grew 9/10 of 1% during the third quarter but are up 10.2% on a year-to-date basis.
Premium growth slowed during the third quarter as expected, as underwriting actions to address increasing loss cost trends and improved margins slowed our new business applications.
While our accident year combined ratio in California is still solid at 94.6%, we have seen our loss costs increasing during the year as a result of the improving economy as people are buying more new cars and driving more miles.
In the second quarter, industry claim trends in California for all coverages, excluding comp, continued to rise.
Overall loss cost was up 18.5% in the second quarter of this year versus last year, and up 11.1% on a trailing 12-month basis.
And while the industry claims data is showing a double-digit increase in bodily injury loss cost, we are not seeing that same trend in our book on an accident year basis.
The increase in our accident year loss cost is driven primarily by property damage and collision, and is a mix of both frequency and severity.
We have additional rate filings for our programs currently pending with the Department of Insurance that we hope to get approved soon, which should help address some of these issues.
Moving on to Florida, overall gross written premiums in this state declined 5% during the third quarter and 1.8% on a year-to-date basis.
Premiums continue to grow in our Miami urban zone, up 10.6% during the quarter, with declining premium in the remainder of the state.
Our overall accident year combined ratio has improved to 99.4%, down from 101% in the second quarter.
This lower combined ratio has been driven primarily from improvement in Orlando, Sarasota, and Tampa, where we have been pulling back on new business and focusing on improving profitability.
The decline in the combined ratio in the third quarter in these urban zones is partially offset by an increase in Miami of less than a point.
Our accident year loss costs in Florida are driven by increases in frequency and, to a lesser extent, severity in property damage, PIP, and collision coverages.
The good news about our Miami and Florida business in general is that we implemented an additional rate increase of 7.7% effective August 10th, which followed a 6% rate increase that was effective in March of this year.
The rate increases we took in August on PIP, property damage, and collision were double-digit.
These were the coverages with the most significant increases in loss cost.
Industry second quarter calendar year trends in Florida are up, as well, with loss cost inflation, excluding comp of 9.3% on a quarter-over-quarter basis, and up 7% on a trailing 12-month look.
These trends are driven primarily by frequency, and to no surprise, we continue to see competitors aggressively taking rate this quarter, especially in PIP, since loss costs are outpacing increases in average earned premium.
Switching to Texas, gross written premiums in this state declined 15.8% during the third quarter of 2015 and 15.9% year-to-date.
The decline in premium during the third quarter was primarily driven by a 9.1% rate increase we implemented in December of last year.
This proactive rate revision impacted new business production during the first quarter of this year, and renewals during the third quarter.
Our overall accident year combined ratio in Texas of 95.1% was relatively flat compared with the second quarter of 2015, and has improved nearly six points from a year ago.
The primary drivers of the improvement are higher averaged earned premium, a lower new business combined ratio, and a shift in our mix to more renewal business.
And with an average increase in written premium of 7.2% compared with an average increase in earned premium of 5.2%, we still have more rate to earn in, which should further help our combined ratio.
Our accident year loss cost trends are modest and increases during the year from severity on collision.
As for the industry, loss costs are up across most coverages.
The increases in average earned premium for the industry are starting to fall behind loss cost inflation, so the industry loss ratio may begin to rise.
Touching briefly on Arizona, gross written premiums declined 8.7% during the third quarter of this year and 9.4% year-to-date as growth in new business was more than offset by a decline in our renewal book.
The overall combined ratio in Arizona increased slightly during the third quarter.
However, a 1.5% rate increase we implemented in August should help improve the profitability.
We will continue to evaluate the state and begin growing as market conditions improve.
As for our commercial vehicle product, gross written premium growth continues to be strong, with an increase of 12.6% during the third quarter and 15.9% on a year-to-date basis.
This growth is primarily due to renewal policy growth and higher average premiums in Florida, California, and Texas.
In the third quarter, we did see an increase in our commercial vehicle accident year combined ratio, primarily due to increases in both frequency and severity.
The rising trends impacted our new business loss ratio, especially in Florida.
Through rate revisions, we implemented over two points of rate in the second quarter and an additional 3.7 points in the third quarter.
These rate increases will help address the same higher trends that we recognized in our personal auto book.
I'll wrap up my comments with our outlook for 2015 on slide six.
We continue to anticipate our top line to be flat to up 2.5% this year.
And while we continue to take steps to improve profitability, we would expect our 2015 GAAP accident year combined ratio to be around 97.5%.
Bottom line, we expect 2015 operating earnings per share to be between $4.20 and $4.50.
This guidance does not include any additional reserve development during the fourth quarter of the year.
I will now turn the presentation over to [<UNK>] to review our financial performance for the third quarter.
Thank you, <UNK>, and good morning, everyone.
I'll be discussing the financial results for the third quarter of 2015.
Slide seven provides a summary of Infinity's financial performance for the quarter.
I'll cover this performance in further detail on slides eight through 10.
So, let's turn to slide eight.
Revenues for the third quarter of 2015 increased 1.7% compared with the third quarter of 2014, primarily from an increase in earned premium.
Net investment income increased 13.9%, or $1.2 million, during the quarter as compared with the third quarter of 2014, principally as a result of bond prepayments in the current year quarter.
Average quarterly investments at cost decreased .
5% during the third quarter of 2015 as compared with the same quarter of 2014.
Investment income as a percentage of average investments at cost for the third quarter increased 32 basis points compared with the third quarter of 2014.
From a total return perspective, our investment portfolio, which has a double-A-minus average credit quality, had a pretax total loss in the third quarter of 2015 of eight basis points, but 63 basis points from current income more than offset by 71 basis points from realized losses and a decrease in unrealized gains.
These returns are not annualized.
At September 2015, book and market yields on the fixed income portfolio were 2.5% and 2.1% respectively.
This compares with book and market yields on fixed income portfolio at September 2014 of 2.6% and 2%, respectively.
Duration on the fixed income portfolio was 3.2 years for September 30, 2015 compared with 3.5 years at September 30, 2014.
In order to assist you in your analysis, as we have done in the past, this morning we posted to our website a list by QSIP of our entire consolidated portfolio.
Turning to slide nine, operating earnings and underwriting income increased in the third quarter of 2015 compared with the third quarter of 2014, primarily due to an increase in the favorable development on prior accident year loss and LAE reserves.
$11.3 million of favorable reserve development during the quarter was primarily due to decreases in severity related to Florida bodily injury coverages, as well as decreases in loss adjustment expenses related to California bodily injury coverages in accident years 2013 and 2014.
The 2015 GAAP accident year combined ratio through September was 97.6% compared with 97.1% as of September 2014.
Wrapping up on slide 10, the effective operating tax rate for the quarter was 31.1%.
We would expect the effective tax rate on operating earnings for 2015 to be around 31%, given our expectation of greater underwriting profits in 2015, which are taxed at the corporate statutory rate of 35%.
Finally, as <UNK> mentioned, we repurchased 121,378 shares for an average price, excluding commissions, of $77.91 during the third quarter of 2015.
As of the end of September, we had approximately $58 million of capacity left on the share repurchase program, which is set to expire at the end of 2016.
This concludes our formal presentation, so at this time we would like to open it up for questions.
Yes.
Well, we've been, needless to say, <UNK>, very aggressive in terms of our rate actions certainly over the past nine, 12 months, even going back 18 months.
I think we recognized these trends going back to the fourth quarter of last year, and I think we're a little bit ahead of the pack, given what we've done rate-wise here in the more recent past, I guess.
The fourth quarter, again, we gave you guidance for the year, again, flat to up maybe 2.5%.
We haven't given guidance or talked about 2016 at this point in time, although I will say this.
When we see what competitors are filing today, and see their indications, they're not taking nearly enough rate, in our opinion.
So, I think they're going to have to take more rate actions, and in particular in California and Florida, which should open some opportunities up for us in 2016.
I think we have been ahead of the curve, and that's always a good thing when you're taking rates aggressively in times like this.
So, I think we may have some big opportunities in California, and possibly Florida, again in 2016.
So, we're pretty optimistic, going forward, in terms of our ability to grow.
And again, if you think about our four targets states and CV, we're growing almost 5% through nine months of this year.
So, we've been impacted a little bit ---+ well, more than a little bit, I guess you could say, with the runoff states, Nevada, Georgia, Pennsylvania, where we stopped writing new business in January of this year, and the renewal book is [attriting], as you would expect.
So, that hurt us a little bit in terms of top line.
But again, a lot of that will be behind us for next year, and we're pretty optimistic.
Well, typically in CV, sometimes the lumpiness is one or two big claims in a given quarter, and that tends to make it a little bit more of a roller coaster ride.
So, I wouldn't place a lot of credibility or emphasis on that quarter.
I think if you take a good look at the CV program at year-end when we announce the fourth quarter earnings, you'll have a much better gauge in terms of how that program's doing.
By the way, it's doing quite well.
We're very pleased.
When you consider the type of growth that we've had in that program over the past three years, and given the combined ratios that we've been able to generate, it has done quite well versus the industry ---+ trucking industry, I guess, at large, which seems to be struggling somewhat.
So, we're pretty optimistic about CV, too, certainly going forward.
Thank you.
Wow, we're impressed.
Yes, it's, again, a very, very strong competitive advantage for us, <UNK>.
I think the GAAP underwriting expense ratio for the third quarter was 18.5%.
I think that's probably improved from last year close to a point.
We did some restructuring last year.
We refocused our resources.
Again, we got out of the three states, or we're not writing new business in three states that we felt like weren't great opportunities for us in the near-term, at least, and we've been able to focus on four states that have higher average premiums, which help.
But, it's just a total focus by the Company to improve, given our expense structure.
I've talked about this before.
I think the companies that have the lowest expense structures and do the best job in terms of pricing and claims handling will be the winners, going forward.
And we've done a pretty good job at that.
And we've got other opportunities, quite frankly, in terms of effecting that expense ratio, as well.
But, when you think about a company that operates primarily through an independent agency system, having that type of expense structure is pretty impressive.
See, I know you didn't ask this, <UNK>, but I want to comment about the claim trends, because it seems like everyone's asking.
And I just want to make this comment, that you cannot compare company-wide claim trends among companies without analyzing where they write business, in other words, in what states and the amount of business they write in each state, for that matter.
So, for example, in California and Florida, the loss cost trends are rising faster than most other states, significantly faster, for that matter.
So, if a company has a sizable market share in those states, their country-wide trends will look higher than the company that doesn't.
But, I don't know.
I guess I get a little bit, I don't know, frustrated or something when I see all the comparisons among companies when it's really an apples-to-oranges comparison, and it shouldn't be done that way.
But, they are going up in California and Florida, for sure.
And again, the good news for us is we've been ahead of the trends in terms of taking great action.
So, I probably answered more than you asked, but anyway, I had to get that in.
Yes.
I just want to close with a couple of key points.
Again, I just want to state that we are looking to grow where we're good, where we have our core strengths.
That's our focus.
I think sometimes when companies go in too many different directions, they get distracted.
And without a doubt, we are completely focused on where we want to write and how we want to do it.
<UNK> asked about the expense ratio.
That is a big advantage, but we also have a heck of a team and infrastructure in claims.
And I will say this also.
We've identified some unique opportunities in our data in terms of how we're going to be able to target certain territories, [refine] them so we can reach our customers more effectively.
So, again, I'll just restate the fact that we think we've got a big opportunity in California in 2016, again in Florida quite possibly, as well.
And again, so we're looking forward to it.
So, having said that, thank you all for listening in and asking the questions.
And we look forward to seeing you, or hearing from you next quarter, rather.
