United Fire Group, Inc

Good morning. My name is Chuck, and I'll be your conference operator today. At this time, I would like to welcome everyone to the UFG Insurance Second Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Randy Patton, Assistant Vice President and Controller. Please go ahead, sir.

Good morning, everyone, and thank you for joining this call. Earlier today, we issued a news release on our results. To find a copy of this document, please visit our website at UFGinsurance.com. Press releases and slides are located under the Investor Relations tab. Our speakers today are Chief Executive Officer Randy Ramlo, Mike Wilkins, Chief Operating Officer, and Don Jaffrey, Chief Financial Officer. Please note that our presentation today may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not a guarantee of future performance. These forward-looking statements are based on management's current expectations. The actual results may differ materially due to a variety of factors, which are described in our press release and SEC filings. Please also note that in our discussion today, we may use some non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP measures are also available in our press release and SEC filings. At this time, I'm pleased to present Mr. Randy Ramo, CEO of UofG Insurance.

Thanks, Randy. Good morning, everyone, and welcome to our second quarter 2021 conference call. We are very pleased to report our most profitable second quarter in six years with net income of 54 cents and adjusted operating income of 35 cents per diluted share. The improvement in profitability is primarily due to a decrease in frequency and severity of commercial auto liability losses and below average catastrophe losses. During the second quarter of 2021, we reported a commercial auto net loss ratio of 67%, an improvement of 11.7 percentage points compared to the second quarter of 2020. We are pleased with this improvement and believe it is a direct result of our strategic initiatives. Throughout 2020 and the first half of 2021, our focus has been on reducing the size of our commercial auto portfolio by non-renewing underperforming accounts and reducing the number of exposure units. Slide six in our presentation on our website highlights the progress we are making with our strategic initiative of portfolio diversification through rebalancing our mix of business. Commercial Auto now makes up only 21% of our new business premium for the first half of 2021 as compared to 33% in 2019. Also, we are achieving growth in our more profitable lines of business, with general liability increasing from 21% to 24%, commercial property increasing from 11% to over 18%, and inland marine growing from 9% to 15% from 2019 to 2021. We are also seeing growth in our surety, specialty, and assumed reinsurance lines of business, which contributed to our improved profitability in the second quarter of 2021. The decline of new commercial auto business, especially in targeted classes and jurisdictions, coupled with the growth of our more profitable lines, will allow us to continue to achieve greater diversification, reducing our vulnerability to commercial auto claims. Also contributing to the improvement in profitability in the second quarter of 2021 were below average catastrophe losses. Catastrophe losses added 9.6 points to the combined ratio in the second quarter of 2021 compared to 19.2 percentage points in the second quarter of 2020. Our 10-year historical average for the second quarter is 10.6 points. The largest catastrophic event in the second quarter of 2021 was a $4 million convective storm in early April in the state of Texas. During the second quarter of 2021, we also saw improvement in our core loss ratio. This improvement occurred while we also strategically established reserves earlier in the claim cycle with greater pessimism. Slide 12 in our presentation shows that our core loss ratio improved 3.5 percentage points in the second quarter of 2021 as compared to the same period in 2020. If we take into consideration the recovery of $15.4 million in the second quarter of 2020 under our all lines aggregate reinsurance program, our core loss ratio improved 9.3 percentage points in the second quarter of 2021 as compared to the second quarter of 2020. While we are encouraged by the improvement in our core loss ratio, we remain cautiously optimistic heading into the third quarter which is historically our second highest order for catastrophe losses. Before I turn the call over to Mike, I am pleased to report that our new online quoting platform, which we began piloting in mid-April, has now been rolled out in select states. The amount of premium written on the platform as of today is not material, but we believe this platform will propel our growth in the small commercial market, delivering straight-through processing and policies and growth in our profitable BOP line of business. I will now turn the call over to Mike Wilkins. Mike?

Thanks, Randy, and good morning, everyone. As Randy mentioned, we are pleased with progress shown in our second quarter results. We believe that we are on the correct course to improving our profitability. Now more than ever, we remain focused on executing the three pillars of our OneUFG Boldly Forward strategic plan, long-term profitability, diversified growth, and continuous innovation. Our focus on reducing the size of our commercial auto portfolio by non-renewing underperforming accounts and reducing the number of exposure units continued to show progress in the second quarter of 2021. Through our strategic efforts, I'm pleased to report that exposure units decreased 23% over the past 12 months from 247,000 units in June of 2020 to approximately 190,000 units in June of 2021. Commercial auto claims frequency expressed in claims for insured units also continues to decrease, with the 12-month moving average declining again in the second quarter of 2021 down to 4.48% from 5.01% in the second quarter of 2020. This decline is summarized on slide 7 in our earnings call presentation on our website. It is important to note that the decline in frequency began prior to the pandemic and continues to decline despite an increase in miles driven in the second quarter of 2021. We believe this continued decline is the direct result of our strategic underwriting actions. Slides 9 and 10 provide a three-year view of our claims counts by major commercial casualty lines of business. For example, our commercial auto bodily injury and property damage claim counts are down 22% in the first half of 2021 as compared to the same period in 2020. We have also provided commercial general liability, BOP liability, and workers' compensation claims counts on these slides, as all are down in the first half of 2021, which is a positive sign of our strategic efforts. We remain disciplined in our pricing and focused on pricing adequacy in our commercial auto, property, and umbrella books of business. Year-to-date, the overall renewal pricing increase was 6.4%. Including workers' compensation line of business, the overall average renewal pricing increase was 7.8%. The increase in pricing was driven by our commercial auto and commercial property lines of business. Year-to-date, the commercial auto average renewal rate increase was 9.9%. The commercial property average renewal rate increase was 8.4%. We continue to believe there is an opportunity with our commercial property book to be more aggressive with rate increases and reducing undesirable exposures. Before I turn the call over to Don, I'll wrap up my portion of the call today with a reminder of our claims initiatives, which also remain a focus and key to improving profitability for UFG. Similar to the first quarter of 2021, in the second quarter, our claims metrics trended positively with improvements in litigation expenses. This is a result of declining claims frequency, as well as our strategic initiatives to embed analytics into our claims triage process, set reserves early in the claim cycle, and shorten the length of the claim cycle. With that, I'll turn the discussion over to Dawn Jeffery. Dawn?

Thanks, Mike, and good morning, everyone. In the second quarter, we reported consolidated net income of $13.8 million compared to net income of $6 million in the same period of 2020. Year-to-date, we reported consolidated net income of $32.5 million compared to a net loss of $66.6 million year-to-date 2020. As Randy mentioned, the improvement in profitability in the second quarter of 2021 was driven by a decrease in frequency and severity of commercial auto liability losses, along with below average catastrophe losses. Also contributing to net income reported in the second quarter and year-to-date 2021 was an increase in investment income and net realized investment gains. Net investment income was $13.8 million, and $30.9 million in the second quarter and year to date 2021 as compared to $12.7 million and $15.1 million in the same periods of 2020. The increase in both periods was primarily due to the change in the fair value of our bank fund LLPs. These bank funds increased in value by $2.5 million in the second quarter and $9.5 million year to date 2021 compared to an increase of $1 million and a decrease of $9.1 million in the same period of 2020. We reported net realized investment gains of $6 million in the second quarter 2021 compared to $15.8 million in the second quarter 2020 and $30.5 million 2021 year-to-date versus net investment losses of $77.6 million in the comparable 2020 six months year-to-date. The majority of the change between the two periods was driven by a change in the fair value of our equity security investments, what I refer to as phantom gains. The remaining change was primarily driven by actual sales of equity holdings. Moving on to operating metrics for the quarter, we reported a combined ratio of 100.8% compared to 111.4% last year. Year-to-date, we reported a combined ratio of 104.3% compared to 108.2% last year. Favorable prior accident year reserve development contributed about 1 point and 3.1 points during the second quarter and year-to-date 2021, as compared to 3.8 points and 4.5 points in the same periods of 2020. As mentioned during last quarter's call, we expect improvement in the expense ratio in 2021 because of previously announced changes to our retiree medical plan in managing long-term escalating personnel expenses. A majority of the benefit impacted both expense and loss adjustment expense ratios in the first quarter of 2021, with a smaller ongoing benefit recognized throughout 2021 and into 2022. For the second quarter of 2021, we reported an expense ratio of 33.1% as compared to 33.6% in the same period of 2020. Year to date, we reported an expense ratio of 30.2% in 2021 compared to 34.7% year to date of 2020. We still anticipate the resulting impact for the 2021 year will be approximately two points of improvement on the expense ratio associated with this change. Also benefiting the expense ratio in the second quarter and year to date 2021 was a decrease in the acceleration of the amortization of our deferred acquisition costs due to improved profitability in our commercial auto line of business. At June 30, 2021, as a result of having year-to-date net income of $33 million for GAAP and $54 million for statutory reporting, both our GAAP equity and statutory surplus continue to support our strong balance sheet. During the second quarter, we declared and paid a $0.15 per share cash dividend to shareholders of record as of June 4, 2021, marking our 213th consecutive quarter of consistently paying dividends, dating back to March of 1968. And lastly, during the quarter, we repurchased just over 31,000 shares of our common stock. As a reminder, we remain authorized by our Board of Directors to purchase an additional 1.8 million shares under our share repurchase program, which will expire at the end of August 2022. And with the closing of our prepared remarks, I will now open the line for questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Marla Backer with Sidoti. Please go ahead.

Thank you. Your strategy to reduce commercial auto is obviously showing strong results. What do you think, if you could step back and just take a look at what you're seeing industry-wide, are you still seeing the same kind of social inflation pressures that you've talked about in prior quarters, but not affecting you as much because of your proactive strategy?

Marla, this is Randy. We're certainly not declaring victory yet on commercial auto. We mentioned we saw a continued decrease in frequency, which is a big plus, especially since some of the other carriers saw frequency go upward as the economy started to open up. That tells us that our reduction in units and reducing the most problematic units have paid off with our continued lower frequency. We've also seen severity get more in line, which is a positive, and our difference in the way we're handling claims with trying our best to stay out of court and settle claims quickly, I think all have helped. But there really hasn't been, we're still seeing traumatic brain injuries, post-traumatic stress syndrome, and so many more claims than we ever did in the past. We can try our best to stay out of court, the plaintiff's bar have found ways even on low impact accidents to continue to bolster the claims of the people that were in some of these accidents. We think absolutely we want to write less auto going forward. We can't avoid the line obviously completely, but we can kind of manage what we offer. We're also kind of tempering the limits that we're able to offer, umbrellas we've cut back on considerably, trying to avoid some of the big severity losses. But I don't know, I think the term social inflation, which I don't think we actually used any word in our transcript, which is a miracle from the past several quarters, but we're still seeing a lot of evidence of it, unfortunately. There's been a little bit of legislative changes. Texas has for sure passed a law that could help a little bit. But really, we're doing everything on our end with rate and cutting back with exposure and limits. But it's too early to really say anything that we're seeing a lot less with regards to the core things that are making commercial auto a tough line of business.

Okay. And then in terms of, again, staying with the commercial auto category, you've taken a lot of exposure out of your overall book. Where do you think you are in that process in terms of eliminating the riskiest policies from that category?

This is Randy again. Where we ultimately need to be I think we said we're getting closer to 25% of our overall book. I would say that probably needs to go to 20% long-term and possibly lower than that. That would still make us a little bit higher percentage than a lot of our peer companies have in commercial auto. You've heard us talk about diversifying the book of business overall. And commercial auto, without a doubt, is still an area that we want to decrease versus some of the other areas that we want to increase.

Okay, thanks. And then just last question, switching topics. The online quoting system, the platform, can you give us just in general terms what the roadmap or timeline is for rolling that out?

I'll maybe turn a little bit over to Mike. We kind of mentioned that the premium volume was kind of insignificant so far, and we're only offering it in a select number of states so far, but what I really like is we get high marks for the experience that agents go through in quoting business. The system is fast. I think our average quote time is under eight minutes, which is terrific. What we have found is we still have work to do on our rates, and that's very correctable. I'm thrilled with the program. It hasn't translated into a lot of premium yet, and that is solely because of competitiveness. We can get that fixed in a fairly short period of time. Mike, do you have more on the timeline?

Just on the timeline, no specifics that we would share, but we will be rolling out additional states on a regular basis every quarter or so. We'll be rolling out another state or a few states as we build momentum for that process of rolling out the states. Maybe one addition to the comments Randy made on how excited we are about the system is One of the other key things that we've seen is a pretty high percentage of our risks are able to go through the process straight to the issue without involving an underwriter on our side. So our analytics is able to make the call on acceptability and pricing without underwriter involvement. And that's part of what's speeding up the process. Now, as Randy said, we're disappointed with the bind rate. And that's based on just our rates not being where they need to be. implemented a lot of new analytics into our pricing process, and that's difficult to get right out of the gate. So, we have some adjusting to do there in some states in particular, but with the system itself and the process, we're very excited about how that's gone so far.

Okay, thank you.

Again, if you have a question, please press star, then 1. Our next question will come from Paul Newsome with Piper Sandler. Please go ahead.

Good morning. Hey, Paul. Could you talk a little bit about the property lines, the fire and alley lines, and what you're doing there as well? It looks like it's growing. Maybe that's mostly rate, but the loss ratio there is still a little bit – rough. So in fact, it looks like it's been at least year to date rougher than the auto business. So maybe you could just talk about what you're doing there. Yeah, Paul, this is Mike.

I'll take a shot at that one. So first comment, our Our property loss ratio is a little rough, and that's being driven year to date primarily by the Texas winter storm that we had earlier in the year. So that's having a big impact. But that being said, over the past few years, storms have had an outsized impact on our property line of business, and that's something that we're aggressively trying to address. So I would say our focus has been on auto. and our focus, while it'll continue to be on auto, right now our efforts are really aimed at improving that property line substantially because that is our second line that we're not happy with the results in. We've seen, we just went through an RFP process looking at some maybe different reinsurance solutions for our cat and one of the conclusions from that based on presentations from a lot of different industry experts as some of the storm patterns have changed and have shifted in some areas where UFG tends to be heavily exposed. We'll probably be making some strategic plans to reduce exposure in some areas. We're pushing very hard on rate. You've probably seen our rate quarter to quarter continue to go up in the property line. We think there's an additional opportunity to push rates, especially in some states and jurisdictions. We're also getting a lot tougher on the underwriting process, a lot more risk control involvement. We're reviewing existing accounts on the books with risk control and really trying to improve the quality of that book as we go forward.

Is the thought that the last couple years of cat losses are kind of normal, and you'll price for that, or am I thinking that I should be thinking about it differently?

Well, maybe not normal, but I think we feel like the models that we use in the industry underestimate the impact from severe convective storms. If you look at our portfolio over the last decade, we've done a good job of reducing our exposure to hurricanes on the coast. but we've grown in the Midwest where you're more susceptible to severe convective storm. So while we've seen fewer big hits, and of course we just had the ratio, so we do have a big hit from time to time, but we've generally seen fewer big hits to our bottom line, but we are seeing more frequency of smaller CAT events. So the aggregation of severe convective storm losses has increased. created some volatility in our results, and that's something we're trying to address.

Great. Thanks, folks. Appreciate it.

Thank you, Paul. This concludes our question and answer session. I would like to turn the conference back over to Randy Patton for any closing remarks. Please go ahead, sir.

This now concludes our conference call. Thank you for joining us, and have a great day.

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