Q3 2019 Earnings Call

Good morning, My name is key and I'll be your conference operator today.

At this time I would like to welcome everyone to U.S.G. insurance third quarter 2019 financial results Conference call.

You will be in listen only mode.

The presentation, there will be an opportunity to ask questions.

The question session, but again you asked a question by pressing Star then one on your Touchtone phone.

Try your question. Please press Star then too.

Q.

I would not have over to Randy pen Assistant Vice President Controller. Please go ahead Sir.

Good morning, everyone and thank you for joining this call.

Earlier today, we issued a news really kind of result.

Find a copy of this document please visit our website at UGI insurance Dot com.

That's what he says implied well located under the Investor Relations tab.

Speaking today, our Chief Executive Officer, Randy Ramlo been Dawn Jaffray, Chief Financial Officer.

Please note that our presentation today may include forward looking statements.

Fine in the private Securities Litigation Reform Act of 1995.

The company cautions investors, but any forward looking statements include risks and uncertainties and they're not a guarantee of future performance.

Forward looking statements are based on management's current expectations and we see no obligation to update them.

The actual results may differ materially gift variety of factors, which are described in our press release and happy to filing.

Please also note that our discussion today, you may be some non-GAAP financial measures.

Reconciliations of these measures to most comparable GAAP measures, but also they are well not press release NFC filings.

At this time I'm pleased to present Mr., Randy Ramlo CEO of UGI insurance.

Thanks, Randy Good morning, everyone and welcome to our third quarter Conference call.

Earlier this morning, we reported or third quarter 2019 results, including a consolidated net loss of nine cents per diluted share and adjusted operating loss of 40 cents per diluted share at a gap combined ratio of 110%.

This compares with net income of 43 cents adjusted operating income of less than a one cents.

No 105.5% for the GAAP combined ratio in the third quarter of 2018.

Catastrophe losses.

Increasing severity of losses.

Current accident your reserve additions in our commercial auto and liability lines of business or the primary drivers for the net loss reported in the third quarter of 2009 Gi.

Increased catastrophe losses, or not uncommon for third quarters, which along with second quarters Arkon starkly, our most volatile quarters.

In the third quarter of 2019, we incurred $19.3 million catastrophe losses, compared with 12.3 million in the same period of 2018 Dawn will discuss catastrophe losses in more detail on a few minutes.

In the third quarter, we also incurred an increase in severity of losses and added additional reserves in the current accident year in our commercial auto liability lines of business.

This reserve strengthening is due to an increase in losses from a continuation of the challenging litigious environment, particularly in commercial auto liability lines of business in the states of Texas and Florida.

As a reminder, commercial auto is our largest why the business with Texas being the state with our highest concentration of commercial auto business.

Similar to our peers and as mentioned on prior conference calls, we continue to experience the impact of what our industry does termed social inflation.

Higher than expected legal settlements associated with bodily injury claims in our umbrella commercial auto and liability lines.

With respect to claims we continue to implement new initiatives aimed at shortening cycle time, and reducing claims costs and the impact of litigation on our auto liability book.

These enhancements will allow us to speed up the process of establishing reserves.

Improve our response time and handling claims and efficiently assigned adjusters two claims.

On the subjects of analytics, our enterprise analytics team has delivered an improved commercial auto predictive model, which was first used with the June of 2019 renewals.

We continue to closely monitored the effectiveness of the model in our underwriting decisions.

The team will implement a commercial property analytical model in the fourth quarter of this year to help improve technical pricing in that line.

The schedule for developing an updated workers compensation model and small commercial model has been accelerated with plans to begin use in the first half of 2020.

Although the reported results do not yet reflect our strategic initiatives to improve profitability.

Remains our primary focus and we are encouraged by the continued improvement we are experiencing and our underlying operations.

However, these positives in our operations come with a word of caution as commercial auto remains an industry wide challenge.

With the social inflation of jury awards higher annual miles driven.

Higher repair costs distracted driving and skilled driver shortages.

The key metrics, we focused on that are showing operating improvement include declining frequency of auto claims.

The decrease in claim counts despite the increase in catastrophe claims strong commercial pricing increases that are outpacing the industry and improvement in the core loss ratio of 3.1 points year to date.

Although we have seen an increase in severity of losses, we are pleased with the decline in frequency, but losses, especially in our commercial auto one.

The third quarter marks the fourth consecutive quarter of flat or declining frequency of auto claims. In addition, we have had a decrease in the claim costs. Despite a 25% increase in catastrophe claims year to date in 2019.

Another key metric for us GE is pricing increases.

Last quarter, we mentioned that our average renewal pricing change for commercial lines was the highest we have seen in over two years at 6.6%.

In the third quarter of 2019, our average renewal pricing change for commercial lines topped this mark rising to 7%.

Renewal pricing increases continue to be driven by commercial auto pricing.

The effective rate change for commercial auto was 12.2% in the third quarter of 2019 compared with 10.9%.

The second quarter of 2019, and 9.5% in the third quarter of 2018.

These pricing increases in the third quarter are significantly outpacing the industry average of 4%, which was recently reported by markets go.

This increase in rates is attributable to the aggressive initiatives, we have put in place at the end of 2018 as we continue to focus on reviewing the bottom 30% of our commercial auto book non renewing underperforming accounts.

Advocating for and verifying stronger insured vehicle use policies and declining new business opportunities that do not aligned with U.S. jeez risk appetite.

Over the past year, the number of commercial auto exposure units has been flat, but premiums earned has been increasing.

This increase is being driven by or aggressive rate increases.

I'll wrap up my portion of our prepared remarks with dimension of our surety operations, although we rarely discuss our surety operations. This line of business continues to provide strong and steady performance year after year.

This is an area of our business that we plan to expand in the future given surety is continued outstanding performance.

With that ill turn the discussion over to Dawn Jaffray Don.

Thanks, Randy and good morning, everyone.

In the third quarter of 2019, we reported a consolidated net loss of 2.3 million compared to net income of 11.1 million in the third quarter 2018 year to date consolidated net income was 38 million compared to 57 million in 2018 as Randy mentioned, the net losses of.

2019 was driven by catastrophe losses, an increase in severity of losses and current accident year reserve additions in our commercial auto and liability lines of business.

Benefiting the third quarter and year to date 2019 with continued strong equity market performance. This increased the value of our investment in equity security, resulting in an after tax gain of 7.7 million in the quarter 37 million year to date.

Also positively impacting results were higher net premiums earned with the quarter increase of 3.9% and 6.1% for the nine month period of 2019.

Premium growth has been primarily driven by an increase in rate.

The largest rate increases occurring in our commercial auto line of business.

2019, net investment income was basically flat at 13.3 million for the third quarter and 43.9 million year to date compared with 2018 in the third quarter 2019, we recognize favorable reserve development of 5.5 million compared to unfavorable reserve development of seven.

Hundred thousand third quarter of 2018.

Year to date in 2019, we experienced favorable development of 800000 compared to favorable development of 47.7 million in the same period for 2018.

Year to date changes in prior year Reserve development are primarily from reserve strengthening in our commercial auto and liability lines of business and our golf Coast region.

At September Thirtyth 2019, our total reserves remained within actuarial estimates.

As Randy mentioned in the third quarter 2019, we had 19.3 million of cat losses from 17 event.

Which accounted for the majority of our losses. These events included a hailstorm in Wyoming and a tornado in South Dakota.

Losses added seven points to the third quarter combined ratio, which is slightly below what we typically see having a 10 year historical average of 7.3 point.

Looking ahead to the fourth quarter, our preliminary loss estimates from the October tornado in Dallas are in the $5 million to $6 million range with respect to the ongoing wildfires. It is too early to estimate losses. However, as a reminder, we have limited property exposure, we do not write personal lines in the.

Yes, and we have catastrophe reinsurance in place with retention of losses from a single event of up to 20 million.

Combined ratio in the third quarter and year to date in 2019 was 110% and a 106% respectively compared to 105.5% and a 102.5% for the same periods in 2018.

And moving the impact of catastrophe losses in reserve development, our core loss ratio in 2019 deteriorated 3.7 percentage points in the quarter and improved 3.1 percentage points here today.

Referring to slide nine in the slide deck on our website. We've provided a detailed reconciliation of the impact of catastrophe and development on a combined ratio.

The expense ratio for the third quarter, 2019 was 33% compared with 32.3% for the third quarter 2018 year to date the expense ratio was 32.7% compared to 33.7% in the same period of 2018, the increase in the expense ratio during the third quarter.

It's primarily due to quarterly fluctuations in expenses borrowing base. This project extensively upgrading our underwriting technology platform.

In addition, we continue to benefit from a decrease in employee benefit expenses with the changes we made at the end of 2018 to our retirement benefits plans.

Moving onto capital matters annualized return on equity was 5.5% during the first nine months of 2019 compared to 7.3% in the same period of 2018.

During the third quarter, we declared and paid a 33 cents per share cash dividend to shareholders of record as of August Thirtyth 2019, we have paid quarterly dividends consecutively for the past 206 quarters since March of 968.

We also repurchased 177249 shares totaling 8.1 million in the third quarter. We are authorized by the board of directors purchased an additional 1.9 million shares of common stock under our share repurchase program, which will expire in August of 2020.

And with the closing of our prepared remarks, I will now open the line for question.

Operator.

Yes. Thank you.

Now I'll begin the question and answer session, if you'd like to ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

At this time, we'll pause a moment to assemble roster.

And the first question comes from Paul Newsome with Sandler O'neill.

Yes.

Good morning.

I was hoping you could talk a little bit about how the severity issues that you.

We experienced in commercial auto.

Have expanded into.

On commercial auto areas and kind of what where you're seeing it outside of commercial auto.

Paul This is Randy.

Number one also in umbrella so some of these losses or.

Went through the.

Underlying policy and gotten into the umbrella so thats number one but we're also seeing.

No it kind of I don't if I like always using the term social inflation, but.

Just korten jury awards.

I have shown a pattern of increasing all bodily injury situations and particularly.

In situations, where there are.

Severe or semi severe bodily injuries, but little or no negligence and yet.

Courts injuries or overlooking the negligence aspect of it and that's really where we're seeing it still predominately in the commercial auto line leaking a little bit into the general liability line, but also hit me umbrella.

Is the umbrella principally just.

The commercial auto excess.

Yes, principally us okay.

And then I was.

Turning to talk.

Talk about the increased speed the claim process.

So I certainly understand why we want to do that to lower the ultra clean cost.

Right.

Is there a possibility that accelerated claim process will have.

And accelerated recognition.

Oh claims themselves.

In in the fourth quarter or beyond.

So this is where we have Corey rulli here our.

Chief claims officer, and I'll, let him if he has any comments.

That is possible in the short term.

Long term.

All studies have shown that if you can settle a claim quicker you can usually settle it at lower dollar amounts, but you're right as you as you implement this there's a possibility of some acceleration of claim payments.

Maybe for a quarter to quarter, you have any other comments other than that.

I would agree with what Randy said.

We are working.

Pretty feverously too to speed up that process and we are keeping an eye.

Whether or not that will have an impact in the short run or not.

But.

You don't plan to make any adjustments assuming.

Through the reserving process. If you do see increased frequency of claims because of the speed to.

Reduced I beat our because you think ultimately the claims will be less.

I would say no not at this point, so as I said that noise could be possible. The actuaries see some of that coming through but at this point, we don't have any plans to do that mill.

And then finally how differ.

Will the fourth quarter reserved process be true that between those from the quarterly much.

How do you mean ball.

Well, sometimes it's much more involved sometimes it ends up.

Being.

Just two more careful.

Recognition.

Trends, we are sometimes the quarterly it's just really a recognition and what you've seen.

Just in that quarter.

Hi, Paul This is Don with respect to the reserving process, we have both in internal actuarial review and an external actuarial review we have done at each of the quarter ends. So we feel our process throughout the year is consistent and robust so I don't foresee us changing.

Any of our approach in that regard certainly if other things develop there could be potential for more items more reserve.

Reserve changes et cetera, but the overall process will remain consistent.

Great. Thank you very much.

Thank you Paul.

Thank you and once again. Please press Star then one if you would like to ask your question.

As there is nothing wants Prescott wed like to return afford or any patent for any closing comments.

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

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