Q4 2019 Earnings Call

Thanks, Randy. Good morning.

Everyone and Welcome to our fourth quarter and year-end 2019 conference call earlier this morning. We reported our fourth quarter 2019 results including a Consolidated net loss. Ninety-three cents per diluted share and adjusted operating loss of a dollar forty cents per diluted share and a gap combined ratio of 117.9% this Compares with a net loss of a dollar Seventeen and adjusted operating loss of $0.30 and a gap combined ratio of 108.5 percent in the fourth quarter of 2018 month for the full year of 2019. We reported net income of $0.58 per diluted share and adjusted operating loss of a dollar eight per diluted share and a gap combined ratio of 109% this Compares with full year 2018. Net income of $1.08 per diluted share adjusted operating income of sixty seven cents per diluted share and a gas.

combined ratio of 104%

Our 2018 results continued to be negatively impacted by Commercial Auto losses and prior-year Reserve strengthening in our Gulf Coast region with the majority just strengthening occurring in the first half of 2019 from a profitability standpoint. The fourth quarter was disappointing and an unacceptable end to a year in which we failed wage expectations and failed to make an operational profit. There's a lot of losses continue to be the main driver of the net operating loss in the fourth quarter. We know we have work to do and not focused on moving forward with our strategic plan to improve profitability as part of our strategic plan. We have several initiatives underway in underwriting claims analytics off portfolio management and Technology Innovation to name some of our Focus areas. Mike will discuss our strategy in more detail, but one example of a noteworthy development at home.

in our portfolio management

Strategy specifically related to our commercial auto book despite our best efforts to manage poor-performing Commercial Auto accounts with double-digit rate increases and non-renewals off these efforts proved to be insufficient to return this line of business to underwriting profitability in 2019 with the continued escalation of commercial Auto loss industry-wide wage and no signs of improvement in the key metrics. We track such as miles driven driver shortages distracted driving and social inflation. We decided to take off several difficult, but necessary actions beginning in the fourth quarter our plans include being even more aggressive with non-renewal than 20/20 which will reduce our Commercial Auto unit counts, especially in poor-performing segments, and we won't write new accounts that are heavy inaudible.

By taking these actions we're confident. We'll achieve a better balance, you know our overall book of business, which has become too heavily weighted in commercial Auto in recent years. Although we stand to lose some of our commercial package policy business as a consequence of this action. We believe it will have the most immediate and profound impact on our profitability.

part of

40 G plan has been to increase reefs, which we have been more aggressive than the rest of the industry the past two years commercial lines average renewal pricing increases remained in the mid-single digits again in the fourth quarter. However, it's clear to us that our Commercial Auto issue cannot be solved with rate increases alone. As we enter twenty-twenty. We are mortgage and and prepared than ever to take stronger action to turn around this unprofitable line of business. We realize it is even more important to focus on the bottom 30% of our book underperformer accounts and accounts that are model has identified as having characteristics that are predictive of adverse future loss experience. There were definitely positive signs of progress in our commercial log in 2019, including a decreased frequency in commercial Auto claims a decline in policy retention and a decrease in our number of insured Commercial Auto unit's dead.

but these positives

Significant enough to offset the continued rise in severity, of course Commercial Auto claims again this quarter we continue to see an increase in severity of commercial Auto claims. This increase in severity has been a common theme all year this along with prior-year Reserve strengthening in our Gulf Coast region are the main drivers of our disappointing results in 2019 early in the fourth quarter of 2019. We had nineteen point four million dollars of cat losses, which included tornadoes in Dallas, Texas and Alexandria, Mississippi that losses for the fourth quarter of 2019 added 7.1 percentage points to the combined ratio, which is above our 10-year historical catastrophe load of four point eight percentage points for the fourth quarter for the full year of 2019 catastrophe losses added 5.9 percentage points to the combined ratio, which is below our 10-year historical kitaj.

load of 6 points

Four percentage points, I will end my portion of our prepared remarks with reporting some good news as we first reported in our press release in December of 2019. Am best had affirmed the financial strength rating of a excellent for the Property and Casualty subsidiaries of United Fire Group Inc. The Outlook of these credit ratings remain stable. This is the 26th consecutive year. We've earned an a financial strength rating from am best. Am Best ratings are a meaningful measure in the insurance industry with an a rating given to companies that have an excellent ability to meet their ongoing Insurance obligations. Second business insurance industry news and information Source name USG and its annual list of best places to work in Insurance the list honors workplaces for exceptional performance in establishing environments where employees can through Thursday.

Enjoy their work.

And help the companies grow which is important to us with that. I will turn the discussion over to Mike Wilkins might.

Thanks, Randy and good morning. Everyone is Randy mentioned or Focus remains on improving profitability or strategic plan contains some very ambitious initiatives in several areas, including underwriting claim analytics portfolio management and Innovation the 300 focus on today our portfolio management underwriting initiatives and claims.

First our portfolio management initiative focuses on balancing the portfolio of a various lines of business targeting profitable geographies classes of business and products to optimize profitability off today with the exception of commercial Auto the majority of our book of business is performing within our expectations from the profitability standpoint, the portfolio management initiative will increase the percentage of of odd business written and possible lines and reduce the percentage of business written in the auto line.

most key metrics showing no one

Movement for commercial Auto is clear. We need to reduce the size of our commercial auto book of business the performance of our commercial auto book of business has failed to meet our expectations and is a drag on profitability will accomplish this by being more aggressive with non-renewal of underperforming accounts focusing on the bottom 30% of our book and we won't write new accounts that are heavy Auto.

As a consequence of this we stand to lose entire account since we have traditionally been a package writer providing insured all of their commercial insurance needs we feel this is a necessary step to balance our book of business and improve profitability.

In the fourth quarter of 2019. We began to see this initiative take hold with the reduction in policy and premium retention and a reduction in insured Auto units of approximately 15% off our expectation for 20/20 is that policy count premium retention and insured Auto units will continue to decline with no expected premium growth in 2020.

An initiative that I will discuss is our underwriting initiative this initiative consists of several tactics including a continued focus on rate increases the quality program consisting of targeted file reviews designs, both identify ongoing performance Trends and provide coaching and feedback for Frontline Underwriters and underwriting best practice guide to promote consistency in the underwriting process across all regions as well as other than a special development initiatives across the underwriting operation in the fourth quarter, the average renewal pricing change for commercial lines increased 6.6% compared to 7.0% in the third quarter of 2019 renewal pricing increases continued to be driven by commercial auto rate increases during the fourth quarter of 2019 Commercial Auto renewal rate increases averaged in the low double-digits.

Over the past three years. We have achieved a cumulative renewal rate increase of almost 30% in our commercial auto book.

These increases were targeted towards the worst-performing second segments of our book personalized rate increases remained in the mid single-digits finally are gold standard claims initiative began the second half of 2019 and will continue to be implemented throughout 2020 and Beyond this initiative began with the development of a Target operating model, whereby we analyze the entire claim cycle from beginning to end evaluating each step from both the external and internal customer experience perspective from our Target operating model. We for multiple work streams which include claims Excellence liquidation management and data analytics. Our mission with gold standard is to create a seamless customer experience while creating consistency instead of stability and are reserving practices across examples that have come from gold standard include a defined set of best practices to operate as a foundation that every claims employee and every region will utilize

our goal is data analytics is

To assist us in identifying severity and claims quicker setting Acura reserves more timely and shortening the claims cycle time leading to reduction and legal expenses are data scientists are currently in the text mining phase of this process. We anticipate our first claims model books son severity in our casualty lines to be launched in the second half of 2020 with that. I'll turn over discussion to Don Jeffrey Don. Thanks Mike and good morning everyone in the fourth quarter of 2019. We reported a Consolidated net loss of 23.2 million month compared to a net loss of 29.3 million in the same. For 2018 for the full year. 2019 Consolidated net income was 14.8 million compared to twenty seven point seven million in 2018 as Randy mentioned 2019 results were negatively impacted by an increase in severity of commercial Auto boxes and prior-year Reserve strengthening in our Golf Club.

And these were the main factor.

Contributing to our disappointing loss ratio for the year our Investment Portfolio continue to benefit during 2019 from the strong Equity Market. We reported in after-tax gain a 40.5 million for the full year 2019, but the increases in the value of our Equity security for comparison purposes in 2018. We had a decrease in the fair value of home security with an after-tax loss of 17.4 million. However, last year's decrease was offset by the twenty seven point three million dollar gain on the sale of our life company in March of 2018 investment in limited liability Partnerships, or what we refer to as our bank funds also benefited from the strength of the financial markets, and we're positive contributor to our 14% increase in that investment income for 2019 specifically during the fourth quarter of 2019. We reported net investment income of 16.5 million and 60.4 million.

for 2018

Be reported nine million in the fourth quarter and 52.9 million for the full year.

We recognize slightly less favorable Reserve development quarter-over-quarter, four point six million in the fourth quarter of 2019 compared to six point five million in the fourth quarter of 2018 month. However for the entire 2019 year there was a more significant year-over-year impact with a forty nine million dollar reduction in reported favorable development. The difference is due to age are strengthening in our Commercial Auto and liability lines of business in our Gulf Coast region as we've been reporting all year. We did end the 2019 year with aggregate favorable development of 5.3 million vs. 54.2 million for 2018. This continues our historical trend of having overall favorable development every year since 2009 and assert our total Reserve position remains within actual estimates.

Moving on to operating metrics the combined ratio in the fourth quarter at 117.9% compared to 108.5% in Q4 of 2018. And for the full 2019. It was 109% compared to 104% for 2018 we have work to do to improve our operating performance. Each of us at uoft are engaged in driving the subjects of the initiatives Randy and Mike have discussed in detail and collectively we are all committed to improve our long-term profitability for reference of what we term the adjusted combined ratio, which remove the impact of catastrophe losses and Reserve development Arc or loss ratio in 2019 deteriorated. He's point four percentage points in the quarter. However, it improved vary slightly by zero point six percentage points on a year-to-date basis for a breakdown of the components of the adjusted combined ratio. Please see slide 9 in the slide deck we presented on our website.

The expense ratio has improved almost a point in the quarterly and annual comparative. For the fourth quarter 2019. We reported 32.2% compared to 33.19% in the fourth quarter of 2018 for the full year. The 2019 expense ratio was 32.6% compared with 33.5% for 2018. The decrease the expense ratio in both periods is primarily due to a decrease in employee benefit expenses as a reminder the changes we made during 2018 to our retirement benefits plan continues to take effect in our results moving on to a discussion of capital matters or annualized return on Equity was 1.6% in 2019 compared to 3% a 2018.

And as we have consistently done for the past two hundred and seven quarters since March of nineteen sixty-eight, we declared and paid a $0.33 per share cash dividend to shareholders of record Thursday, November 29th, 2019 with a u s t stock price of $46 that translates to an annual dividend yield of approximately 2.9%

and the last

Citom I will speak to is the FCS share repurchases we have made for the year during 2019. We repurchased just over 250,000 shares 411.7 million month. We believe that share repurchases can be a good use of our Capital subject to certain conditions. However, we are also Limited in the number of shares we can we purchase by the rules of the stock exchange base wage our daily trading volumes. We remain authorized by our board of directors to purchase an additional one point nine million shares of common stock under our share repurchase program, which will expire in August of 2020 and with that the closing of our prepared remarks. I will now open the line for questions operator.

We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question. You can press * then to our first question will come from Paul Newsome with Piper Sandler O'Neill.

Morning.

could you give me a little bit more detail about the components of the reserve development between what was the impact of issues with Gulf Coast operation versus Commercial Auto versus going to everything else just to kind of get a sense of

You know what may or may not persist?

Call this is Mike Wilkins. I'll take a stab at it. We have a query really hear our chief claims officer to he may have some additional information on on that Iceberg. You know, the components would be heavily weighted towards Commercial Auto. But most of that commercial Auto impact is coming from our Golf Coast office. So it may it's focused in both of those areas, you know Commercial Auto but out of the adult primarily out of the Gulf Coast office Kori anything dead. I'll just add to that page. The deficiency in the Gulf Coast was roughly forty million dollars last year in about 30 to 33 million of that was Commercial Auto.

They're significant Reserve issues outside of the Gulf Coast with commercial Auto.

No, and then I was a little bit surprised to see that incrementally the rate increases had decelerated slightly off fourth-quarter versus third quarter. Maybe you could talk about the components of that change. Now, this is Mike again. So first the reduction was primarily driven by less rate increase in the auto line of business that surprised it's a little bit at first, you know, as we dug into it, you know to comments. I'll make one it it seemed to Rebound in January two thousand and two, I think what what may have driven that we we really took a lot more aggressive non-renewal action and a lot of those accounts that we non-renewed would have been accounts where we would have been able to achieve the birth rate increases. So I think you know that

Would have moved the average.

Auto rate increase down just the fact that a lot of the accounts, you know prior to our more aggressive non-renewal. We would have got the biggest increases on.

All you we mentioned a couple of times that were, you know, kind of focusing on the you know, the bottom 30% We've kind of found ourselves now to the point where you know, the top 70% is actually off, you know, pretty close to where we want it to be priced. So it's Mike said, you know, we're leaning more toward non-renewal in that bottom 30% simply because some of those our accounts are so pissed off, you know, we can't get there with rates. So instead of you know last year or previous quarters, we may have raised something twenty-five thirty percent now, we're just not renewing it. So we we losing a big impact on the overall reading trees.

My final question. I don't know every answer this but you know, do you have any sense of sort of what is the all-in claims inflation Factor book? Obviously, there's some some negatives and workers comp and we pastas and Commercial Auto but you know, I guess we're all trying to figure out whether or not dead.

net

For the entire book, we need more rate or less than your current lease cheating.

All this is Randy and I wish I could help you. But we're we're kind of struggling with that too. We see evidence of of the inflation every day, but to try to put a number on it. We had not been able to do that either.

Do you have a sense of what it was last year?

No.

Good. Thanks. Thanks.

again, if you have a question, you can press * then 1

At this time, I'm showing no questions. This will conclude our question-and-answer session. I would like to turn the conference back over to Randy patent for any closing remarks now concludes our conference call with joining us and have a great day.

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