IPCC
#Thank you.
Good morning, and thank you for joining us for Infinity's first quarter earnings conference call.
The live event link on our website contains the slide presentation for this morning's call if you'd like to follow along.
We also have an Excel spreadsheet on our Investor Relations website on the annual and quarterly reports page that provides more detailed quarterly financial data, and page 10 of this report contains the definition and reconciliation of any non-GAAP items we discuss this morning.
As noted on slide 2 of this morning's presentation, certain statements made during this call could be considered forward-looking statements which anticipate results based on our estimates, assumptions, and plans that are subject to uncertainty.
For a discussion of the primary events or circumstances that could cause actual results to differ materially from those suggested by such forward-looking statements, please refer to Infinity's filings with the SEC.
Now, let me turn the call over to <UNK> <UNK>, Chairman, President, and CEO of Infinity.
Good morning, 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 as well.
I'll start things off with a quick overview on slide 3.
Net earnings per diluted share were $0.69, down from $0.97 in the first quarter of 2015.
Operating earnings per diluted share were $0.68 compared with $0.90 last year.
Earnings were down primarily due to the increase in the GAAP calendar year combined ratio from 96.3% in the first quarter of 2015 to 97.7% this year.
The claims trends that we experienced in 2015 continued into the first quarter of this year as gas consumption and miles driven continued to increase.
The rising claim frequency was a bit of a surprise as most of us thought that miles traveled would slow down after the huge spike in 2015.
Just the same, we're not pleased with our results and continue to focus on what we can control including further rate increases, selected underwriting actions, claims management, and expenses.
We also experienced $1.2 million in losses from catastrophes in the first quarter, a trend that is continuing into the second quarter with the severe floods in Houston.
As a result of the claims trends and first quarter cats, the GAAP accident year combined ratio increased to 99.4% from 97% last year.
The unfavorable current year trends were partially offset by $5.9 million of favorable lost reserve development from prior years.
This development was primarily a result of decreases in severity estimates and loss adjustment expenses related to Florida and California bodily injury coverages as well as a decrease in severity estimates in Florida personal injury protection.
The favorable development was all related to accident years 2014 and prior.
This was partially offset by unfavorable development from accident year 2015 in California material damage coverages, which was driven by an increase in severity.
In terms of the top line, gross written premiums were down as expected during the quarter with an overall decline of 3.8%.
Premium growth in Texas and our commercial vehicle program was more than offset by declines in our other states.
Our rate increases in California and Florida are affecting premium growth and we expect that impact to continue through at least the first half of 2016.
So let's get into the details behind the highlights on slide 4.
In California, our accident year combined ratio of 97.9% increased from the prior year driven by higher collision frequency and severity.
We continue to see the same industry-wide trends that we experienced in the fourth quarter of 2015.
Written premium increases are outpacing earned premium changes by about 2 points, helped by a rate increase of 5.3% implemented this year on February 8th.
That revision should improve profitability through the remainder of 2016, but we're still taking additional measures.
To further offset the unfavorable trends, we filed for another rate increase and additional class plan changes and are taking rate and underwriting actions on the most unprofitable parts of our book to improve the combined ratio.
In California, premiums declined 3.9% during the first quarter, driven primarily by a reduction in new business application counts as the rate increases are affecting new business production.
Moving onto Florida, overall gross written premiums declined 7.5% during the first quarter, primarily as a result of rate increases implemented during 2015 totaling nearly 14%.
Given the unusually high claim trends in Florida, our overall accident year combined ratio is relatively unchanged at 99% compared with the first quarter of last year.
We continued to see our loss cost increase double digits, driven by increased PIP frequency as well as increases in property damage and collision.
These unfavorable trends are consistent with what we in the industry experienced in 2015.
In order to offset these trends, we implemented a rate revision on March 14th.
While the overall impact was 7%, we implemented double-digit rate increases on PIP, property damage, and collision coverages.
Switching to Texas, gross written premiums in this state grew 23% during the first quarter of 2016, primarily due to new business growth.
The increase in our 2016 accident year combined ratio is primarily due to catastrophe losses in the first quarter.
In terms of second quarter cats, which have been primarily in Texas, we've had approximately $3 million in losses so far.
We expect that number to grow as additional claims are reported and further development occurs.
As for pricing, in early April we implemented rate increases on both our renewal business and a portion of our new business, with an overall impact of 3.4% in the state.
This rate action along with additional actions to improve rates and risk selection should help improve our combined ratio.
Touching briefly on Arizona, gross written premiums grew 3.9% during the first quarter of this year, primarily as a result of new business growth.
The 2016 accident year combined ratio has improved due to a decline in the new business combined ratio.
However, much like our other states, we continue to make rate filings to address the increasing trends.
Our latest increase of 8.3% was effective February 22nd.
As for our commercial vehicle product, gross written premium growth continues to be strong with an increase of 12.7% during the first quarter.
This growth is primarily due to renewal policy growth and higher average premiums in California and Florida.
We did see a slight increase in our commercial vehicle accident year combined ratio, primarily due to an increase in new business in the first quarter.
So, much like personal auto, we're increasing rates across our commercial vehicle book to improve our profitability.
I'll now turn the presentation over to <UNK> to review our financial performance.
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 slides 6 through 8.
So let's turn to slide 6.
Revenues increased 0.9% compared with the first quarter of 2015, primarily from an increase in earned premium.
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.
Effective operating tax rate for the quarter was 28.4%.
Moving on to investment results on slide 7, at the end of the first quarter cash and invested assets were $1.5 billion with fixed income securities in cash representing 94.2% of the total.
Roughly 92% of our fixed income securities were investment grade and the average duration of the portfolio was 3 years.
Our quarterly net investment income decreased 7.7% or $0.7 million principally as a result of a 4.6% decline in average quarterly invested assets.
From a total return perspective, our investment portfolio, which has a AA- average credit quality, had a pretax total gain in the first quarter of 155 basis points, with 53 basis points from current income and 102 basis points from investment gains.
These returns are not annualized.
Lower fixed income new money yields have continued to impact our returns during the first quarter.
At March, 2016, the book yield on the fixed income portfolio was 2.5%, unchanged from March of 2015.
Wrapping up on slide 8, I'll finish with a few comments on our financial position.
We ended the first quarter with $966 million in total capital and a debt-to-capital ratio of 28.5%.
Our book value per share at March 31st, 2016, was $62.60, a 1.4% increase from the prior year.
Excluding unrealized gains, our book value per share has increased 3% since March of last year.
Finally, regarding capital actions during the quarter.
We repurchased 106,766 shares for an average per-share price, excluding commissions, of $78.59.
As of the end of March, we had approximately $37 million of capacity left on the share repurchase program, which is set to expire at the end of this year.
As a reminder, we also increased our annual dividend by nearly 21% in February.
Looking ahead to the remainder of 2016, we believe our capital is best deployed to support the business operations.
However, we will continue to be opportunistic when considering returning capital to shareholders.
This concludes our formal presentation.
So at this time, we'd like to open it up for questions.
Yes, <UNK>, this is <UNK>.
It was a bit of a surprise I don't think just for me, but I think most of the pundits in our industry were predicting a bit of slowdown in the first quarter in terms of gas consumption and miles traveled and certainly along with that fewer claims.
It just hasn't happened.
I think it will happen.
I think it has to happen.
It can't keep continuing at the rate it's currently going.
But for us and the industry based on what I'm seeing and again our numbers are the first quarter of 2016 of data and the industry, what we have, is the fourth quarter of last year.
It continues to rise.
Let me give you a good case in point.
If you take a look at the PIP loss cost, pure premium and again it's primarily and this is the state of Florida, primarily driven by frequency.
If you look at our number, first quarter 2016 versus first quarter of 2015 and this is the trailing 12-month number, loss costs are up 24%.
I mean that's, you know, that's hefty.
If you look at the industry, this is fast tracked through the fourth quarter of last year, again compared with the fourth quarter of 2014, trailing 12 months, the industry is up 30.6%, 31 points.
I mean that is surprising.
I mean again it's one state and it's the state of Florida and I think Florida probably looks worse than other states, certainly worse than California, but it speaks to the fact that you know there's rate that needs to be taken.
We have been very aggressive with our rate structure.
We've taken 32 points of rate ---+ 32.2 points of rate as a matter of fact in Florida, in PIP, over the past 12 months.
So what that tells you is we're ahead of our trends in PIP.
We're looking pretty good.
But what it also tells you is that the industry is behind.
When we look at the rate filings in the state and look at practically any cover, but PIP, in particular, we're seeing a widening of the gap between rate indicated and what they are implementing.
It's just befuddling to me how that gap continues to widen.
Now, having said that, I will say that a top five writer in the state of Florida, top five, this is a big company did implement or they are implementing in May an increase in PIP and let me see if I can pull up the number here.
I've got it handy.
They're pulling up an increase of 28% in PIP.
So, when you look at this particular filing and look at previous filings from this company, you can see that they postponed it, postponed it and postponed it until the gap got so wide.
They're indication with, by the way was for 32 points and they're taking 28.
They postponed it until the point where you can't postpone it any longer and you have to take rate up.
That's what they've done.
But when we look at the numbers and the trends and I know they vary by company, but you got to keep in mind, you've got to look at the detail by state.
You just can't look at a company's numbers when they're writing in 40 or 50 states, when you narrow it down to California and Florida, that's how you look at it.
Those are the questions that you all should be asking these other companies.
What do your trends look like in California and Florida and what are you doing there.
Because those are our primary states, obviously and we're keenly focused on them.
But I don't have a crystal ball.
I wish I did, <UNK>, to say hey, in the second quarter they're going to slow down and become more normal.
I think they might.
I think you're seeing gasoline prices go up and I don't think that the trend can continue.
But doggone it, when you look at the Conning and you look at 2015 and the Conning report that just came out in the miles traveled from 2014 to 2015, it is staggering.
Look at that chart.
I mean the upward spike is amazing to me and I think when they extend that out through the first quarter, it's going to be even higher.
I do expect it will, you know, modify a little bit and slow down.
But I'm not willing at this point to say it's going to be in the second quarter.
So that's a very long-winded answer to your question, but I wanted to make those points because they're important.
It may be delayed a little bit.
It hasn't changed my thoughts whatsoever.
The company I just mentioned, the top five company, you know companies like that are going to start taking actions much more aggressively than they have in the past.
I think I mentioned a company in the fourth quarter that's a number one writer in Florida that and this was on a BI coverage I believe that had an indication of about 18 and they were taking 3.
You can't keep doing that.
I mean you can do that to a certain degree to try to maintain your renewal book, but at some point you have to pay for ---+ pay the piper so to speak and do something about it.
I believe we're going to see more and more rate actions in the second half of this year and much more aggressive rate actions.
We're seeing some actions now in terms of some underwriting restrictions that I said would be inevitable in the fourth quarter call.
Let me give you an example of that.
Nationwide non-standard auto just announced in Texas that they've stop writing new business.
Well to me that's alarming quite frankly.
It's saying that we can't get rate fast enough to keep up with the trends and the option that we have is to shut it down until we can.
This is in a state, Texas, which is pretty easy, relatively easy to get your filings approved.
So I think we're still going to benefit from all of this.
I am positive about it.
I know you know it seems like things are kind of dark right now, with the first quarter, but doggone it I've been through many cycles in my career and cycles like this typically come out in our favor.
I still believe that's going to happen.
Now, it may be postponed a little bit.
I'll tell you the floods in Houston aren't helping.
You know we had hail storms in the first quarter and now we've got floods in Houston.
I'll tell, when you have flood claims, a lot of them are totaled.
You don't go out and knock a dent out and get it back on the road.
They are total losses.
So that certainly is not helping us in the second quarter.
But again, those are one-off type cat events and that's why people buy insurance for those type events when that happens.
But I'm still a believer and still feel positive that we're going to benefit from the cycle that we're experiencing right now.
So that hasn't changed.
We're not ready to change anything yet.
It's three months.
You know we've got nine months left and we've got a lot of rate to earn in.
When you look at our average written premium and how much it has gone up relative to what we've earned in at this point, there's still a gap between those two measures.
Because of that, we've got more rate to earn in, in 2016 and 2017, I think that's going to benefit us.
So we're not ready to change anything at this point.
I would usually use ---+ <UNK>, this is <UNK>.
What you've seen in the first quarter is because with the earnings being a bit lower, the impact of the tax, you know the tax exempt muni's is a little bit higher.
So I would ---+ you know I wouldn't use that as a full-year run rate.
I'd use what you typically used.
Well, thanks everyone for listening in on the conference call.
Looking forward to the second quarter.
Thank you.
