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#Good morning, and thank you for joining us for Infinity's Third Quarter Earnings Conference Call.
The live event link on our website contains a 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 & Quarterly Reports page that provides more detailed quarterly financial data, and Page 10 of this report contains a 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.
And now, let me turn the call over to <UNK> <UNK>, CEO of Infinity.
Good morning, everyone, and thank you for joining us today.
Rob <UNK>, our CFO, is on the call this morning as well.
Before we get into the slides, I'd like to give you some perspective on my first 90 days in office, so to speak, since taking on the CEO role August 1.
During the last call, I outlined my vision in remaining committed to our strategy in being a leading provider of personal and commercial auto products to urban Hispanic markets.
In executing that strategy, I spoke about diversification on 3 fronts as we build on our well-established insurance brand: first, in terms of geography; a second was our products; and third, distribution.
Let me update you on some of last quarter's accomplishments and initiatives to further our strategic reach.
Organizationally, I expanded Rob <UNK>'s operational role to include responsibility in our commercial lines and pricing actuarial.
In addition, our President, Sam Simon, added Information Technology to his responsibility, which also encompasses General Counsel, Claims and HR.
Reporting to Sam, we appointed a new technology leader and CIO, Matt Varagona.
Matt has been with Infinity 11 years in various product, data and technology roles.
Matt's an engineer with a passion for analytics, who has proven very capable of leading our technology group and building on our progress in modernizing our architecture, software development and operations.
In addition, we reorganized our product management area, which resulted in the selection of individuals for leadership positions at a state and regional level who have track records of P&L growth and profitability.
I am happy to report that the new leadership emerged driven to get things done and make a difference by helping our organization reach its potential.
Related to geography, we have worked hard to expand our footprint in the state of Texas beyond our traditional Houston and Dallas-Fort Worth urban zones.
Much progress has been made in San Antonio and Austin to include the rapidly growing corridor between those 2 cities.
In addition, we've made the decision to expand our private passenger auto programs to the Atlanta urban zone.
New program development is underway, and we expect approval and implementation of that program in the first quarter of '18.
That decision has really excited the company and team as it marks a significant expansion into another large and meaningful urban market.
On the new product front, we launched a third Texas program designed to further segment and serve the Hispanic market.
In Florida, our new program was delayed by the Department of Insurance industry-wide actions to protect consumers after Hurricane Irma.
Restrictions have been lifted, and we now have an effective date in the fourth quarter.
Recent rate and underwriting actions should enable us to grow with confidence that profitability goals will be achievable.
Now is the time to leverage our low-cost structure, both operating and loss adjustment expense, and continue to build both scale and our brand in the markets we choose to write business.
Finally on the distribution front.
I am pleased with our business development team's work in expanding our agency plan in both California and Texas, where new business loss ratios are at or below target.
One notable relationship we executed last quarter was partnering with Liberty Mutual to write their nonstandard auto for their customers who do not meet current Liberty underwriting standards.
So it's been a busy 90 days.
And as I mentioned last August, given my prior experience here, I was eager to step in and make several meaningful moves that will help us achieve our objectives this year and better prepare us for the premium and PIP growth next year.
Now let's turn to an overview of this quarter's results on Slides 3 and 4.
Overall, we had a strong quarter despite experiencing the 2 largest catastrophes in the company's history.
Net earnings per diluted share were $1.35, up from $0.25 in the third quarter of 2016.
Operating earnings per diluted share were $1.38 compared to $0.17 last year.
Our GAAP accident year combined ratio as of September 2017 was 98.6% compared to 99.8% for the same period last year.
Net losses incurred from Hurricane Harvey and Irma were $11.5 million and $3.4 million, respectively, including the cost of reinstatement premium.
I'm exceedingly proud of our claims teams in both Texas and Florida, who responded to the disasters and worked quickly to service claimants.
Our GAAP accident year combined ratio, excluding the first and second quarter premium adjustments and catastrophes, improved to 95.6% in the third quarter and 95.2% year-to-date, compared to 98.7% and 99.2%, respectively, for the same periods last year.
Overall, our gross written premium was up 0.8% during the quarter driven by growth in Texas, Commercial Auto and Arizona.
This growth was mostly offset by a reduction in new business in Florida and California.
With the adequate combined ratios in nearly all of our focus states in commercial auto, we're well positioned to grow in 2018.
So let's go over the details behind the highlights, starting on Slide 5.
In California, premiums declined 6.4% during the third quarter and 9.4% during the first 9 months.
Premium was down during the quarter due to a decline in new business applications.
Our accident year combined ratio of 97.7% includes 3.4 points from the premium adjustments booked during the first 6 months of the year.
Excluding the adjustments, our accident year combined ratio improved to 94.3% from 99.2% in 2016, driven by lower loss cost trends in bodily injury, property damage and collision.
Our rate filings that had been pending approval with the Department of Insurance for over a year were approved in September and implemented in October.
We still have 2 class plans pending before the Department.
We expect those to be approved by early 2018.
While revenue-neutral, these plans will enhance our tactical approach to pricing and will be key to our 2018 growth and profitability.
Moving on to Florida.
A decline in new business applications as well as a shift to more 6-month policies resulted in a reduction in gross written premiums of 11% during the third quarter and 14.8% on a year-to-date basis.
The improvement in the combined ratio from 99.2% for 2016 to 96.6% for 2017 was driven by favorable trends in property damage and collision as well as lower commissions and bad debt.
We implemented a rate increase with an overall impact of 7.1% in March of this year.
We're planning for an additional 7% rate increase during the third quarter.
However, as I mentioned earlier, following Hurricane Irma, implementation of rate increases was suspended by the Florida Office of Insurance Regulation until December 4, and we now expect the increase to go into effect then.
We're also introducing a new business program in November of this year.
The rate increase and new program should help us continue to lower the combined ratio and grow as the new program will improve segmentation and overall risk selection.
Switching to Texas.
Gross written premiums grew 86.5% during the third quarter and 108% during the first 9 months of the year, primarily due to new and renewal business growth and higher average premiums.
Total catastrophes in the third quarter of 2017 were $12.5 million compared with $5.1 million during the same period of 2016.
Excluding catastrophe losses, the combined ratio increased from 88.4% to 94.2% driven by higher bodily injury and property damage frequency.
We are watching ex-cat loss ratios closely and continue to file for rate increases to keep our combined ratio adequate.
We're excited about the growth in Texas, particularly in Houston, as adding another major urban zone is a significant part of our strategy.
Touching briefly on Arizona.
Gross written premiums grew 102.6% during the third quarter and 86.8% year-to-date as a result of an increase in new business applications and higher average premium.
The 2017 accident year combined ratio has increased from last year driven by higher loss costs in bodily injury, property damage and collision.
These increases were partially offset by a lower expense ratio as a result of the growth in new business.
We continue to file for rate changes in Arizona as needed and have implemented increases of approximately 16% through the third quarter of 2017.
As for our Commercial Auto product, gross written premium growth during the third quarter and first 9 months was 9.3% and 14.1%, respectively, driven by renewal policy growth and higher average premiums.
We have seen an improvement in our Commercial Auto accident year combined ratio, primarily as a result of the significant rate increases we've taken over the last 12 months.
These increases have helped offset loss cost trends, which are similar to those experienced in Personal Auto.
As a result, our Commercial Auto loss ratio through the first 9 months of 2017 has improved 2 points compared to 2016.
In addition, the expense ratio has decreased more than 1 point with a larger premium base over which to spread fixed costs.
We really like our Commercial Auto business and expect it to grow double-digits with a solid combined ratio again in 2018.
I'll now turn the presentation over to Rob to review our financial performance for the quarter.
Thank you, <UNK>, and good morning, everyone.
Slide 6 provides a summary of Infinity's financial performance for the quarter.
I'll cover this performance in further detail on Slides 7 through 9.
So let's turn to Slide 7.
Revenues and earned premium were relatively flat compared to the third quarter of 2016.
Operating earnings increased due to improvement in the accident year combined ratio, as <UNK> discussed earlier on the call.
The 2017 calendar year combined ratio includes favorable development from prior accident years of $4.1 million during the quarter and $17.2 million year-to-date.
In addition, during the third quarter of 2017, we had $14.4 million of favorable development from the first 2 quarters of this year driven by improving trends in bodily injury, property damage and collision.
Moving onto investment results on Slide 8.
At the end of the third quarter, cash and invested assets were $1.7 billion with fixed income securities and cash representing 94% of the total.
Roughly 90% of our fixed income securities were investment grade and the average duration of the portfolio was 3.3 years.
Our quarterly net investment income increased 20.3% or $1.6 million, primarily due to lower premium amortization on mortgage-backed securities and an increase in both make whole interest and bond issuer tender offers.
From a total return perspective, our investment portfolio, which has a double AA- average credit quality, had a pretax total gain in the third quarter of 100 basis points with 61 basis points from current income and 39 basis points from investment gains.
At September 2017, the book yield on the fixed income portfolio was 2.5% compared to a 2.4% at September 2016.
Our new money yield in the quarter was 2.2%.
Turning to Slide 9, I'll make a few comments on our financial position.
Our balance sheet and liquidity remain strong.
We ended the third quarter with $994 million in total capital and a debt-to-capital ratio of 27.7%.
We have $164 million of cash and investments at the holding company, which provides us plenty of flexibility going forward.
Our book value per share at September 30, 2017 was $65.52, a 3.1% increase from the prior year.
Excluding unrealized gains, our book value per share has increased 3.7% since September of last year.
Regarding capital actions during the quarter, we repurchased 58,449 shares for an average per share price, excluding commissions, of $91.
At the end of September, we had approximately $27.1 million of capacity left on the share repurchase program, which has been extended and will expire at the end of 2018.
We expect to return approximately $45 million to shareholders this year through a combination of our dividend and share repurchases.
Finally, we continue to project our GAAP accident year combined ratio for 2017 to be between 96% and 98%, excluding premium adjustments.
We will provide further guidance for 2018 on our fourth quarter call.
This concludes our formal presentation.
So at this time, we would like to open it up for questions.
Sure, Marcos, this is <UNK>, and thanks for calling in.
Yes, let's take California first.
That was a rate increase we did need.
We waited over a year for it, because of the regulatory issues we faced there.
It ---+ we feel like it's substantial.
Our new business combined ratios are adequate there.
However, given that regulatory environment, we have filed for another 6.9%.
You just simply don't know how long that's going to take to get approved, and we just felt like that was a prudent thing to do.
But again, currently in California, we do feel like our new business combined is adequate, and we're aggressively trying to grow that business.
Switching to Florida, a little different story there.
We have taken rate in Florida.
It continues to be somewhat of a problem.
We've got more rate slated to go in there, another 7%.
When we get that rate into the market, we're going to feel a lot better.
In addition, we've got a new program, a completely new program, going into Florida in the fourth quarter.
That's significant because that particular program is, in a sense, our latest product model, which has a higher level of sophistication, greater segmentation, kind of best-of-breed for us.
It's a model that's been proven in Texas.
And so with that, we're really eager to get that into the market, see if that can perform as it has done for us in other states, and get in a position where our comfort level in growing new business in Florida, just simply get comfortable with that.
Switching to Texas.
The regulatory environment there is a little bit easier to work with.
While we're definitely adequate on rate there, our new business combined ratio is actually exceeding the target.
That's why you see the aggressive premium growth there, which has been going on for the entire year, of over 100%.
So we're feeling really good there.
We're aggressively expanding territory there, expanding agency plan, that type of thing, because of that comfort level.
Well, the implementation is for the fourth quarter of this year.
So we'll have that up and running before year-end.
And excited about that, because that will kind of get us going for next year through the buying season.
And again, we're hopeful that, that new product model, which is quite a bit more sophisticated, is going to show the results that it has in both Texas and Arizona, where it is rolled out.
So Chris, this is Rob.
I'll just give you a brief overview of that.
If you look at what we've seen over the course of the year.
If you look at how we do our reserving, we actually look at our reserves and our combined ratio every quarter.
We have an outside consultant look at it all quarters as well.
We look at both the current accident year and the prior accident years.
Each quarter, we'll make adjustments based on the trends that we're seeing at that particular time, particularly the undeveloped trends for both frequency and severity across all of our different coverages.
So what we saw this year was, if you looked at December of last year, 2016 over 2015, our undeveloped trend was about ---+ just over 8%.
For the first 6 months of this year, that same undeveloped trend was about 4%.
And then at September, it was 2.5%.
Principally what we've seen is, we've seen improvements in BI, PIP and collision frequencies over the course of the year as well as some of our property damage severities.
If you look at the combination of those improvements, that's what drove the $14.4 million over the course of the first half of the year.
It really depends by jurisdiction.
On our PPA program we're seeing pretty ---+ we're seeing especially low single-digit trends on the severity side.
On Commercial Vehicle, it's a little bit different depending on by states.
It's more mid-single digits.
Okay, Chris.
Yes, we have been doing business in Georgia with our Commercial Vehicle program, Commercial Auto for quite some time.
It's been very successful, smaller base, but it's one of our fastest growing states for Commercial Vehicle.
And we have a long history in the state of Georgia with ---+ in the past.
We just have not been active in private passenger auto there for, say, the last 3 to 4 years.
So re-entering that state with private passenger auto is the current plan for Q1.
And making that consistent with our strategy, in that it would be an urban zone focus around the metro Atlanta area, and that certainly has a lot of potential.
I believe that marketplace in Georgia ---+ total state is close to $8 billion market, over $7 billion, and that's a nice sized urban zone for us to expand into.
Well, it's certainly a significant relationship.
We will start, of course, in our current footprint ---+ of California, Florida, Texas, Arizona.
We will look to expand that into Georgia, when Georgia becomes available.
We will try to leverage that to the best of our ability as Liberty continues to kind of tighten underwriting, thus spinning off more nonstandard auto.
It's difficult to kind of give you a number on the premium expectation there.
But in their call centers alone, they have about 400 active agents.
And of course, they've got some state-level field agents in representation also.
So just excited about that ---+ adding that to our national account list of distribution points that we have.
And I tell you, an account that large will also give us some data and interest over time that might help us direct our future expansion opportunities.
So with an account like that, you could actually work with them to target new geography as you go forward, which, again, would be added footprint for us.
That is correct.
We would be reunderwriting that business completely on our rates, and of course, that would be written on an Infinity policy with their agency organization being the agent of record.
Thank you, operator.
And yes, before we sign off, I would like to say that this quarter's strong results show our progress in improving our underlying business.
You've heard me talk about the new business combined ratio and the requirement that it had to be at a level where the cohort of business would ultimately project a 96% target combined ratio.
Given current new business combined ratios, my confidence is growing that we can aggressively seek to grow premium and policies in force throughout our markets.
I'm eager to see California and Florida join Texas, Arizona and Commercial Auto, where we're already achieving significant growth.
Thank you for joining us today, and we look forward to speaking with you again in the next quarter.
