Infinity Property and Casualty Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Infinity Property (IPCC)
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Infinity Property and Casualty (NASDAQ:IPCC) Q4 2013 Earnings Call February 27, 2014 11:00 AM ET


Amy K. Jordan - Vice President and Controller

James R. Gober - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Roger Smith - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer


Vincent M. DeAugustino - Keefe, Bruyette, & Woods, Inc., Research Division


Good day, and welcome to the Infinity Property and Casualty Corporation Fourth Quarter Earnings Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Amy Jordan, Vice President. Please go ahead.

Amy K. Jordan

Thank you. Good morning, and thank you for joining us for Infinity's fourth 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 website under the Quarterly Reports tab that provides more detailed quarterly financial data. And Page 10 of this report contains the definition and reconciliation of any non-GAAP items that 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 adjusted by such forward-looking statements, please refer to Infinity's filings with the SEC.

And now, let me turn the call over to Jim Gober, Chairman, President and CEO of Infinity.

James R. Gober

Well, good morning, and welcome to our conference call and webcast for the fourth quarter of 2013. Roger Smith, our CFO, is also with us this morning. And as usual, we'll open the lines for questions after our comments.

Let's begin with the highlights on Slide 3. For the fourth quarter of 2013, net earnings per diluted share were $0.81, up from $0.67 in the same quarter of 2012. Operating earnings in the quarter were $0.70 compared with a loss of $0.31 in the fourth quarter of 2012. Operating earnings were up primarily from the improvement in our underwriting results.

Our accident year combined ratio improved during the fourth quarter of 2013 to 97.7%. This is a 6-point -- a 1.6 point improvement over accident year 2012, as reported at the end of 2012, and a 2.1 point improvement over 2012 developed through December of last year. The improvement was primarily due to decreases in the accident year combined ratios in the Needs Work States. I'll discuss these states in more detail a little later.

With regards to premium, we continue to grow during the fourth quarter, with gross written premium up 6.6%. Our average written premium per exposure increased 6.1%, as compared to the fourth quarter of 2012, while our policies in force have declined 4% since December of that same year. The majority of the growth in premium in the fourth quarter came from California and Florida, our 2 most profitable states, along with our very profitable Commercial Vehicle book of business. These 3 targeted growth areas grew 14% during the fourth quarter, and 14% for all of 2013. Recall that these businesses, in total, generate a very good combined ratio, so growth here is very desirable.

Our remaining Focus States made up about 14% of our total book, and written premium in those states declined 18% during the quarter. The decline in premium was from all the remaining states other than Texas. In the State of Texas, premiums grew approximately 16% during the fourth quarter. The decline in the states other than Texas was by design, as we've raised rates and increased underwriting restrictions to improve profitability. We'll discuss the growth in Texas and the decline in the remaining states in more detail when we cover our state-by-state results.

Regarding capital management actions during the quarter, we purchased 16,000 shares for an average price per share, excluding commissions, of $68.52. Our book value per share at December 31, 2013, was $57.09, a 1% increase from December 31, 2012. Excluding unrealized gains, our book value per share has increased 3.2% since December 2012.

And finally, A.M. Best affirmed our A financial strength rating about 2 weeks ago, on February 12.

Turning to Slide 4. We've shown this exhibit before where we decompose our accident year combined ratio between new and renewal, given the fact that new business tends to run a combined ratio that is considerably higher than that with the renewal book. If we remove the growth penalty, in other words, have we not grown our business, our combined ratio would be around 96.8%. The rate increases we've taken since 2012 have resulted in some improvement in the new business combined ratio, and that's certainly good news. But our renewal combined ratio of 92% is still too high. So overall, the 96.8% combined ratio remains above what we must have to achieve our return on capital target.

Turning to Slide 5. In the fourth quarter, the overall 2013 accident year combined ratio for our profitable segments, which include our Personal Auto business in California and Florida, as well as our Commercial Vehicle program, was 95.1%, about 40 basis points higher than last quarter. We experienced a 2.6-point improvement in our Commercial Vehicles accident year combined ratio from last quarter. However, California and Florida's combined ratios increased each to a small extent. So the overall combined ratio for our 3 target areas increased slightly.

In our Needs Work States, our combined ratios have improved from around 109% collectively at year-end 2012, to around 100% at December 2013. Compared to 2012, developed through December 2013, the accident year in each of the Needs Work States improved. Our focus in 2014 will remain consistent with that of last year, grow the profitable segments and improve the profitability of the nonperforming states. Once change you will see, however, is that given the improvement in the combined ratio in Texas, we are moving it into the performing states category in 2014.

Now turning to Slide 6, let's look at the performing segments. Our goal for these performing segments in 2013 was to grow them aggressively while maintaining profitability. As you can see here, we did just that. Growth in the fourth quarter was 14.1%, and our annual growth was 14.4%. Our accident year combined ratio improved from 96% for 2012 to 95% for 2013. And without the growth penalty, the 2013 accident year combined ratio would have been around 93%. By the way, even in today's low interest rate environment, a 93% combined ratio generates for us returns on invested capital in excess of 10%.

Slide 7 shows the details on the Needs Work States. Note that the mix of new business has fallen to the extent that the renewal book now dominates the overall combined ratio. For the Needs Work States, our 2013 goal was to improve our underwriting profitability, and we made tremendous progress last year in doing so. During the quarter, the accident year combined ratio improved to 100% from 101%. And since 2012, the accident year combined ratio of 109% has fallen 9 full points.

For each of the Needs Work States, our goal is to first return it to underwriting profitability and then and only then begin to grow the business. The accident year combined ratio for both Texas and Arizona are above now below 100%. And in Pennsylvania, Georgia and Nevada, we are well on our way there too. So that's very good news. In fact, in Texas, we are now comfortable with our pricing, so we grew the business in this state in the fourth quarter by 15.8%. As I mentioned earlier, Texas will now join California, Florida and Commercial Vehicle as states we will plan to grow in 2014.

Lastly, I want to say a few words about our runoff states, including Alabama, South Carolina and Tennessee. In 2013, we continued to shrink this business. Nevertheless, at an accident year combined ratio of 113%, the business, which makes up only 2% of our total gross written premiums, added approximately 0.4% our countrywide combined ratio. So in 2014, we will look to accelerate the runoff of this business, which will provide a little headwind regarding overall growth, which should help improve our overall combined ratio.

Now let's move onto Slide 8 for a more detailed update by state. The exhibit on this slide displays premium and premium growth, or shrinkage, by state for the fourth quarter of 2013 versus the same period of 2012. The fourth column on this exhibit is a comparison of our developed 2013 accident year combined ratio to the 2012 accident year combined ratio developed through the fourth quarter of 2013. As we said in the past, the accident year combined ratio remains a very important measure of how we're doing from an underwriting and pricing side point.

The next 2 columns on the exhibit reflect trends and calendar quarter loss cost versus the same period of 2012, net of increases in the average earned premium per car year. Our information is for the fourth quarter of 2013 versus the fourth quarter of 2012. The industry's information is for the third quarter of 2013 compared with the same quarter of 2012. The last column is our take on the overall market conditions in the particular state, whether the market is hard, soft, flattening, or if the overall market conditions are improving.

Now let's move to our state-level discussion; first with California, followed by Florida and our Commercial Vehicle product, our 3 areas of growth in 2013. In California, our premiums grew 5% during the fourth quarter and 5.2% for the year. And average written premiums per exposure were up 3.9% during the quarter while exposures were down 1.3% compared with December 2012.

From a profitability perspective, our accident year combined ratio was down about 0.5 point compared with accident year 2012 developed through December of 2013, due primarily to a decrease in the expense ratio. As I mentioned last quarter, we implemented a 6.99% rate increase on our low-cost product in California that was effective last September. Our low-cost product currently generates about 51% of our new application volume in the state, so this approved rate increase should help bolster underwriting profitability going forward.

In terms of industry trends, overall loss cost rose 3.8% in the third quarter of 2013 as compared with the third quarter of 2012 due to frequency and severity on collision, as well as a 5.4% increase in bodily injury severity. And average earned premium continues to lag loss cost trends, so the number would indicate continued pressure on the industry combined ratio.

Now let's move on to Florida. Premium in this state increased to 26.4% compared with the fourth quarter of 2012, and grew 30.9% for the year. Average written premium per exposures grew 8.8% during the fourth quarter of 2013, compared with the same period of 2012. Calendar year loss cost trends continue to moderate for the industry, both on an overall basis and on PIP. Overall loss cost trends declined 4.3%, and PIP trends were down 25.1%. For our book, we've seen a decline in accident year PIP loss cost, but our overall loss costs are up in most other coverages. From a competitive standpoint, while we still see some competitors taking over rate increases, we are observing more negative overall indications in rate actions than we've seen in some time. So we would characterize the market currently as flattening out.

As for our Commercial Vehicle product, we had an outstanding 2013. Gross written premiums increased 14.5% during the fourth quarter and have increased 11.3% for the year. This growth is primarily due to a strong renewal base and higher average premiums from rate actions implemented over the past 2 years. Even with this strong growth, our 2013 accident year combined ratio improved 2.6 points compared with the third quarter of 2013, and is currently running 4.5 points lower than the 2012 accident year combined ratio developed through December of last year.

Now let's turn to the states we are focusing on improving the profitability. As I mentioned earlier, we've significantly pulled back on premium in most of these states during 2013 in order to improve our results. While we still have work to do, we are making very good progress with the accident year combined ratio declining from 109% at year-end 2012 to 100% at December 2013.

On an individual basis, let's start with Texas. Gross written premiums increased 15.8% during the fourth quarter, but decline 12.7% for the year. Our exposures are down 10.1% compared to December 2012, but are up 10.5% compared to September 2013. And we are enjoying the benefit of the substantial rate increases we implemented in 2013. For example, our earned premiums per exposure during 2013 were up 12%. As expected, we've seen improvement in the combined ratio, given our rate actions, and the significant decline in the book of business during most of 2013.

The overall combined ratio has improved nearly 14 points compared with accident year 2012, developed through year end 2013. And compared with accident year 2012, the new business combined ratio has improved over 20 points, and the renewal combined ratio has improved over 10 points. In 2014, we expect the rate increases we've taken that have yet to earn in to further improve the new and renewal combined ratios. As a result, we believe the overall combined ratio in 2014 will be in a level that will support our required return objectives, so we'll continue to grow this book of business.

As for trends, industry loss costs were up primarily from an increase in bodily injury severity. Our accident year loss cost trends are declining from improving frequencies. So with rising average premium and falling loss costs, our loss ratio in Texas has improved.

Turning to Pennsylvania, premiums declined 21.8% during the fourth quarter and 13.3% for the year. Exposures are down 25.2% compared with the fourth quarter of 2012. And we are starting to see the impact of our rate increases earned through. Average earned premiums per exposure have increased each of the last 4 quarters, and increased 4.6% during the fourth quarter of 2013. As for our results, our accident year combined ratio has improved over 7 points compared with 2012, developed through year end 2013.

This improvement is due in part to the decline in new business, along with a modest improvement in our new and renewal combined ratios. But at year end, the overall combined ratios remain above 100%, so our remediation work in this state continues. Our accident year loss cost trends in the fourth quarter were down primarily from a decrease in frequencies across most coverages. Our earned premium per car year is up from rate increases we've taken, which also helps.

To wrap up the discussion -- excuse me, let me finish Pennsylvania, one more comment. Also, in Pennsylvania, the third quarter industry loss cost trends were relatively flat with a modest increase in severity, offset by decrease in frequency.

So to wrap up the discussion of our Focus States, I just want to make a few general comments about the remaining states of Arizona, Georgia and Nevada. We have seen improvement in the 2013 accident year combined ratio in all 3 states, compared with 2012 developed through December of 2013. The improvement is due primarily to the fall off of new business, as well as improvement in the new and renewal combined ratios. As usual, we'll continue to keep you update on our progress in these states.

Turning to Slide 9. I just like to wrap up by giving you our outlook on 2014. During 2013, we made a lot of progress toward achieving our long-term goals. For example, our gross written premiums growth of 6.8% was well ahead of the industry. Our accident year combined ratio improved to 97.7%. Our reserve development was dramatically reduced. And our operating return on equity increased to 4.5%. We've seen significant -- we see significant opportunity to grow our profitable business in 2014, especially in Texas and Commercial Vehicle, into a lesser extent, Florida. We plan to do just that while maintaining our underwriting margins. In the Needs Work States, we will continue to take rate increases and other actions to improve the underwriting results.

Lastly, we will substantially discontinue the runoff business. While this creates a 2-point drag on growth, it should help us improve our combined ratio this year and in 2015. Overall, for 2014, we believe that our annual premium growth will be in the 2% to 4% range. As a result of rate increases taken and planned, as well as the continued reduction in new business in our Needs Work States, we expect to generate an accident year combined ratio in the 95.5% to 96.5% range for 2014. Based on all of this, we would expect an operating EPS of $3.40 to $4.20 for 2014. We expect to generate an ROE of 6% to 7.5%, one step closer to the 10% goal. We would assume no reserve development in our operating earnings guidance.

I'll now turn the presentation over to Roger to review of our financial performance for the fourth quarter.

Roger Smith

Thank you, Jim and good morning. I'm going to discuss the financial results for the fourth quarter 2013. Slide 10 summarizes Infinity's financial performance for the quarter. My discussion of the results is summarized on Slide 11 and 12. So let's first turn to Slide 11.

Revenues for the fourth quarter of 2013 declined 1.2% compared with the fourth quarter of 2012, primarily from a decrease in net realized gains on investments. Earned premium increased 4.6% during the quarter, primarily from the gross written premium growth we've experienced during the last 12 months.

Net investment income increased 13.4% during the quarter, as compared with the fourth quarter of 2012. Net investment income in the fourth quarter includes a one-time increase of $1.7 million related to a change in estimate on prepayment speeds for mortgage-backed securities. Until October 2013, we were using an estimate that was based on the past 3 months of actual prepayments. Beginning in October 2013, the new estimate takes into consideration both current and expected market conditions.

Average quarterly investments at cost increased 11.6% for the fourth quarter of 2013 as compared with the same quarter in 2012. This increase in investments is a result of cash from operations, given our double-digit growth in written premium over the past several quarters. Investment income as a percentage of average investments at cost for the fourth quarter increased an annualized 3 basis points compared to December 31, 2012.

From total return perspective, our investment portfolio, which has a AA- average credit quality, had a pretax total gain in the fourth quarter of 2013 of 83 basis points, with 69 basis points from current income and 14 basis points from realized, and a decrease in unrealized gains. These returns are not annualized. On an annual basis, our pretax total return was 1.3% with 237 basis points recurring income and a loss of 102 basis points from realized, and a decrease unrealized gains.

At December 31, 2013, book and market yields on the fixed income portfolio were 2.7% and 2.2%, respectively. This compares with book and market yields on the fixed income portfolio at December 31, 2012 of 2.8% and 1.6%, respectively. The duration on a fixed income portfolio is 3.6 years for December 31, 2013, compared with 3.0 years for December 31, 2012. In order to assist in your analysis, as we have done in the past, this morning, we posted to our IR website a list by CUSIP of our entire consolidated portfolio.

Let's next turn to Slide 12. Operating earnings and underwriting income have both improved compared with the fourth quarter 2012. As Jim has discussed, operating earnings and underwriting income increased in the fourth quarter of 2013 due to the improvement in the accident year combined ratio as well as a significant reduction in unfavorable loss reserve development.

The accident year combined ratio as of December 31, 2013 was 97.7% compared with 99.3% as of December 2012. A big driver of the reduction in our accident year combined ratio was a 1.2 point improvement in our underwriting expense ratio.

The GAAP underwriting expense ratio for 2013 was 19.9% as compared with 21.1% in 2012. Part of the reduction is due to the benefit of earned premium growth, such that we are able to spread our fixed costs over a bigger premium base. In addition, we have seen a reduction in our overall commission rates, as we have written more renewal business and less new business during 2013. Also, we have been successful at negotiating lower commission rates with many of our agents in our Focus States. For all of 2014, we would expect the GAAP underwriting expense ratio to be between 20% and 20.5%.

In the fourth quarter of 2013, in addition to an improvement in the accident year combined ratio, we also saw a marked improvement in prior period reserve development. Specifically, we had $800,000 of unfavorable development in the fourth quarter of 2013 compared to $9.1 million of unfavorable development in the fourth quarter of 2012. We also had approximately $800,000 of unfavorable development from the first 9 months of 2013 and the fourth quarter of 2013 compared to $10.7 million of unfavorable development from the first 9 months of 2012 recognized in the fourth quarter of 2012.

The $800,000 of unfavorable development from the first 9 months of 2013 was primarily from bodily injury, and primarily from an increase in severity. We track our results by accident quarter. We interpret the current accident year-to-date and quarterly results with caution given the fact that these results are still immature.

Turning to Slide 13. The effective operating tax rate for the quarter was 28% and 27% for the year. I would expect the effective tax rate on operating earnings for 2014 to be between 29% and 31%, given our expectation of greater underwriting profits in 2014, which are taxed at the corporate statutory rate of 35%.

As Jim mentioned earlier, we purchased 16,000 shares for an average price, excluding commissions, of $68.52 during the fourth quarter of 2013. At the end of December, 2013, we had approximately $43.8 million of capacity left on our share repurchase program, which expires at the end of this year. We will continue to repurchase shares opportunistically during 2014.

This concludes our formal presentation. So at this time, we'd like to open it up for questions.

Question-and-Answer Session


[Operator Instructions] And our first question comes from this Vincent DeAugustino at KBW.

Vincent M. DeAugustino - Keefe, Bruyette, & Woods, Inc., Research Division

One of the things we've kind of noticed this quarter is that it seems there were some additional driving activity going on in California and Florida. So I'm wondering if you happen to see any of those trends in your frequency results for those 2 states in the fourth quarter.

James R. Gober

Vincent, we really haven't. With, I guess, the weather in California, in particular from a personal automobile standpoint, has been pretty favorable. We are all aware of the drought that's been taking place there. That's always good news when the weather is dry and we seem to have fewer accidents. But even taking that out of the equation, we really haven't seen an increase or a spike in the frequencies at all. Most of the trend -- upper trend movement that we see is primarily still driven by bodily injury.

Vincent M. DeAugustino - Keefe, Bruyette, & Woods, Inc., Research Division

And then, Jim, with your comment on the pricing environment, I'm just curious if your guidance already reflects that just the pricing environment as it stands today or if we should be thinking about any sort of adjustments of that?

James R. Gober

I mean, we've been certainly very aggressive in terms of rate changes over the past 2.5 years. As a matter of fact, if you think about our growth segments that we've added Texas too, by the way, so we now have California, Florida, CV and Texas, we've raised rates a little over 6% last year in those segments and they've been very profitable. So I think that speaks to our commitment to make certain that we maintain profitability and grow where we can make money. We have a couple of rate filings pending. They're already been through acceptance in the Compliance Division with California to make certain that we continue on with that profitability in that state. If you think about our Needs Work States, which now include Arizona, Georgia and Nevada, and Pennsylvania, we raised rates a little over 12% in 2013. There, our combined ratio has improved significantly. Again, Texas was part of the mix, but, I mean, a 9-point improvement still, year-over-year, is that pretty darn impressive, and our average premiums continue to rise. So -- I mean, we have not been shy about taking rates up to make certain that we hit profitability goals in 2014. Now we believe that we can still grow significantly in these areas, even taking the rates up. But for the combined ratio type states where we've had some issues, the Needs Work States, really this year is going to be sort of a remediation process, continuing on with hopes that, by the end of 2014, those states will be in good shape where we can grow in 2015. So -- but the marketplace, that's what -- those are the top actions we've been taking. But the marketplace, we are still seeing rates go up. I mean, companies that were responsive, I would put Infinity in that category, certainly Progressive as in that category as well. If you look at the rate changes that they took in 2013, 2012 and what we've done, I think we are in much better positioned this year, and certainly, next year than other competitors. We've got a lot of competitors out there. When we look at our rate filings, they still have rate need yet to be taken. So hopefully, that will take place. But again, we're very optimistic about our positioning. I'll make another comment. I'm digressing a little bit, Vincent. I'm kind of getting off a little bit. But we rolled out our 2.5 MyChoice rating plan in Texas in July of last year. That particular rating plan includes a number of our new innovations. We've got our own credit model. We've got our vehicle history rating factors in place in that state, the VIN rating package, better segmentation on prior insurance risk, better territory segmentation. And again, we believe the Texas results speak for themselves in terms of year-over-year. From 2013 to 2014, that state is now in a growth category. And that's good news again, because we want to be the provider of choice for the Hispanic market, and you really can't make that claim without having Texas moving forward. So we feel like we're making great strides in that respect in doing just that. So we're pleased with that from a pricing standpoint. I will add a couple of other things. We are making some good strides also in terms of claims. That's the critical component. If you're going to meet expectations or exceed them, perhaps, we got to continue lowering our LAE, our loss adjustment expense, and we're also making some great headway with material damage and bodily injury process improvements. And our fraud team -- again, when you look at where we're growing, and Florida as a case in point, in Miami, specifically, when you look at where we're growing, you better have the best fraud teams in the field, making sure that all of these fraudsters are addressed. And our fraud team -- I saw the other day, we just busted a clinic in Miami, and I think there were about 8 arrests made there, and we were one of the lead companies that we're a part of that, so. And we feel good about that. And last, I would just say that -- Roger mentioned this, our underwriting expenses. I mean, when you look at our underwriting expenses, our cost structure and what we're able to do, that is really important. Our technology improvements, we're finally getting off our mainframe computer. And I can tell you the freedom from doing that is very, very positive in terms of what we'll be able to do in terms of cost structure, plus meeting our consumers' needs. So anyway, I kind of -- I elaborated more, Vincent, regarding the question you asked, but I wanted to kind of set the tone a little in terms of my optimism and my expectations of where we're at today, and how we see the future. So I hope, that helps.

Vincent M. DeAugustino - Keefe, Bruyette, & Woods, Inc., Research Division

And then just kind of building on that with your Hispanic focus, I'm curious if you'd attribute any predictive power to seeing an improvement in, let's call it flattening out of sort of payrolls for Hispanic and Latinos in the U.S. and flattening out towards a more normal level. Would you attribute any predictive power to that kind of indicating maybe your headwinds in the loss cost side specific to Infinity would be kind of moderating?

James R. Gober

In terms of -- as Hispanics become more acculturated?

Vincent M. DeAugustino - Keefe, Bruyette, & Woods, Inc., Research Division

Sorry. So just one of the things that we've kind of tracked that within improvement in Hispanic employment, it would seem to me that that would imply more of your policyholders would on the road, and that would be kind of pressuring your frequency loss cost trends. So it's kind of we hit normalcy. You would see less pressure from kind of a bounce back from the recession, and therefore, kind of as that normalizes. Your rates would potentially have the ability to deliver more margin improvement to the bottom line without that headwind.

James R. Gober

Yes. I mean, we -- I wouldn't attribute anything to that, off the top of my head. Roger. I'm not sure if you look at the reserve detail. I will say this. In terms of economy improvement, however, more specific our Commercial Vehicle product, when you look at our market focus, in terms of Hispanics, the construction trade is a big part of that, and we do see some upside in terms of the economy improvement with construction kind of getting back on track and being able to write more Commercial Vehicle risk. That's a good upside for us in terms of our margins. I mentioned the growth that we had in 2013 in CV, and how good the experience has been, and again, also reference the fact that we want to grow that particular product aggressively this year. And any time the economy improves and the construction trade is a little bit more in the upswing, I think that's a plus. And you have to look at where we write business today also. I mean, when you think about Texas, the business environment in Texas and the economy in particular has been pretty darn good for some time, and again, that's a big focus for us. So hope that helps.

Vincent M. DeAugustino - Keefe, Bruyette, & Woods, Inc., Research Division

It does, and just one really quick last one. Just with Atlantic -- Atlanta being one of your focus metro cities in the travel conditions, they are making headlines earlier this quarter. I'm just curious if you should be thinking about that having some impact on the first quarter results.

James R. Gober

We track that. We actually put it into a kind of a category when we track claims. When there's an event like that, we haven't seen anything in terms of any material uptick. I used to live in Atlanta. When they had the snowstorm, of course, and all the cars were stuck on 285 and 75 and 85, it couldn't go anywhere. I thought that our profit would improve because people weren't moving. But no, we really haven't been. Since we had kind of the same conditions here in Birmingham, Alabama, not a big book force here in this state anyway, but we just haven't seen a big uptick as a result of the snow and ice.


[Operator Instructions] And our next question comes from [indiscernible] at Sentinel Investments.

Unknown Analyst

The increase in NII that you had in Q4 really kind of stands out in a positive way. Obviously, that's helped by the portfolio growth that Roger mentioned. I think the reinvestment environment was probably a little bit less challenging in Q4 than it was in the first half of the year. But 2 other things that clearly stand out are that your duration and allocation to high-yield increased considerably over the course of the year. I guess, I have two questions about that. Number one, are those the major items that kind of drove the increase in NII in Q4, or was there something else in the numbers? And then number two, if the rate environment kind of remains where it is right now, should we expect the duration and the allocation to high yield to keep increasing? Or do you think you can kind of grow investment income relative to prior periods at this point where the portfolio the way it is right now?

Roger Smith

Good question. The increase in the net investment income in the fourth quarter was primarily driven off of that one-time item that I mentioned. We were using -- our mortgage-backed securities are being purchased at premiums typically, just given the rate environment. And of course, you have to amortize that premium over time based on your estimate of prepayment speeds. We were using a prepayment speed model that looked backwards in time only, and in the fourth quarter, with rates ticking up and a lot of folks, everybody having refinanced, prepayment speeds slowed, therefore, the amortization of net premiums should be slowing, but our models looking backwards, and none anticipated that. So when we moved to a more robust forward-looking model, we were able to essentially amortize a lot less premium on amortization for that quarter. It's kind of a one-time cash up, if you will. So the other way I would like to think of it is, we were probably understating investment income probably a couple of quarters and we've caught it up in the fourth quarter. That was really the biggest reason for the increase.

We have shifted more, I would say, normally to a high-yield portfolio. I don't know if I would anticipate a dramatic shift toward more high-yield as a percentage of total portfolio. When you have an investment community that actually looks at strategic and allocations, at least once a year, and we're not -- don't shift that dramatically from year-to-year. But we did move allocation up a little bit, as we do with equities; or because we saw some opportunity there, particularly early in the year. But I wouldn't anticipate huge shifts by sector, certainly, not from quarter-to-quarter and even from year-to-year. We're fairly steady Eddy as you go and we certainly are mindful of the rating agencies and they keep an eye on that too. There is a really nice schedule on Page 27 and its 10-K what actually shows, that is not really a prediction of investment income, but it actually shows our current portfolio. And as it matures, as we expected to works with prepayments and just normally scheduled, principal payments, it actually shows the maturing book yield. So in 2014, for example, the securities maturing or prepaying had a book -- have a book yield about 2.2%. Our overall book yield is 2.7%. So if we don't sell any securities or our estimates of prepayments are in the ballpark, the portfolio rolling off next year ought to be yielding a fairly low book yield. So we're not expecting an enormous impact from just the maturing book. We'll keep our fingers crossed, of course, and we do expect a long-term investment interest rates to rise, which should help up because our portfolio matures $200 million, $300 million, $400 million a year, depending on the year. In terms of the duration, that was in a conscious shift from 2012 to 2013, with the uptick in rates on our mortgage-backed portfolio, as you I'm sure you understand, you have a basically extension risk on the mortgage back and they primarily pass-through. So with the interest rate increasing, you had extension risk, if you will, coming into play. So the duration on those mortgage-backed popped up a little bit. Rest of the portfolio behave as expected, and consistent with history. So that was, I think, just a phenomenon of the pop up of rates. And again, as the book -- as that mortgage-backed portfolio matures, and we'd reinvest it.

Unknown Analyst

And then one other thing. The pace of your share repurchasing seems to really have slowed the last couple of quarters as your stock price has climbed. Is there any chance that share repurchases could accelerate as you kind of head towards the expiration of the repurchases at the end of this year even if price-to-book remains where it is, or is the some run rate over the last couple of quarters kind of what we should be thinking about there?

Roger Smith

We revisit share repurchases each quarter and just capital management in general with our board every quarter, and it's a valuable, robust discussion. And of course, we'd rather buy shares back at a lower price than a higher price. It helps the ROE that way. But we really don't forecast share repurchases. We've bought back opportunistically over time, and we'll probably continue that. But again, we rethink with the board that every, keep in mind. As our share repurchase have declined, we've certainly, over the last several years, and even just recently, 2014 is no exception, we are robustly growing our dividend to the point where I think our dividend yield, even on the higher stock prices is close to 2%, which certainly rivals the S&P 500 and certainly rivals many of our competitors. So, again, we're mindful of that and we are also mindful that something we consider at looking at capital management. We look at prospects and move forward and you heard the optimism in Jim's voice in several of our states, particularly Texas and CV. But even Florida, to the extent that competitors don't go nuts and start slashing rates, we certainly haven't seen any indications of that. We'll keep our fingers crossed. But as we look at the incremental performance of new business that we could put on the books compared to the passive rate that expelling excess capital would yield, we keep an eye on that calculus also.


At this time, we show no further questions. And I would like to turn the conference back over to Jim Gober for closing remarks.

James R. Gober

Okay. I just want to thank everyone for participating, listening in and the questions, and we certainly look forward to our first quarter earnings conference call later this year. Have a good day.


The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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