Q1 2020 Earnings Call
Good morning, and welcome to the United Fire Group incorporated 2021st quarter Conference call.
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At this time I'd like turn the conference call over to Randy Patton Assistant Vice President and controller. Sir. Please go ahead.
Good morning, everyone and thank you for joining this call earlier today, we shouldn't news release on a result to find a copy of this document. Please visit our website at U.S.G. insurance Dot Com press releases on flights are located under the Investor Relations tab.
Our speakers today, our Chief Executive Officer, Randy Ramlo, Mike Wilkins, Chief operating Officer, and Dawn Jaffray, Chief Financial Officer.
Please note that her 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 this having certainty and are not a guarantee of future performance. These forward looking statements are based on management's current expectations and we have seen.
No obligation to update them. The actual results may differ materially due to a variety of factors, which are described in our press release in FCC filings.
Please also note that entered 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 I see filings at this time I'm pleased to present Mr., Randy Ramlo CTO, what do you have GE insurance.
Thanks, Randy Good morning, everyone and welcome to our first quarter 2020 conference call.
I'll start off our call today with a discussion on the cobot 19 pandemic.
The incredible resiliency of our U.S.G. employees during this world wide health crisis.
The covert 19 pandemic has had a profound impact on day to day life financial markets and the economy beginning in mid March [laughter] in response to the challenges presented by cope with my team, we activated our pre existing business continuity and debit plan.
With your exceptional were essential services employees, we have dispatched our staff to work remotely for the safety health and wellbeing of our employees, which is our top priority.
Thanks to our past experience and personally dealing with catastrophes, including the floods of 2008 and 2016 at our corporate headquarters, we were well prepared to have the technological infrastructure in place for a seamless transition to work from home for most of our employees.
We were fully operational from day one.
We modified certain routine work completed by our field claims had lost control representatives, such as premium audits and inspections to comply with social distancing recommendations for the safety of our employees agents and policyholders.
Nearly all of the policies, we haven't issued contain contract language, which specifically excludes business interruption coverage losses attributable to viruses such as cold that 19 pandemic, but we continue to carefully scrutinize each claim and will be affording coverage when appropriate at this time, we expect the effect of cobot.
Hi, Jane on claims currently under our coverages to be manageable.
However, the effects of the cold 19 pandemic continue to evolve and we cannot predict how future legislation regulation or court actions.
Good luck to avoid all written contracts or how these actions could affect us.
We anticipate that the larger impact on our financial conditions and results of operations will likely result from development in the economy as a whole, including the effect on financial markets and the investments we hold in our investment portfolio premiums and demand for our products and our ability to collect premiums.
Or requirements to return premiums to our policyholders.
Much like many of our industry peers have experienced the covert 19 pandemic has significantly impacted the financial markets and in turn the value of our investment in equities.
However, through the first quarter, there was not a significant impact on our core insurance operations.
The most significant impact to our reported net loss in the first quarter of 2020 was the sharp decline in equity markets due to the cold with 19 pandemic, which decreased both the value of our investments in equity securities.
And our net investment income from the declines in the fair value of our investments in limited liability partnerships.
Operationally, our first quarter results were impacted by an increase in severity of catastrophe and non catastrophe losses.
During the first quarter of 2020, we reported $15.3 million of catastrophe losses were 5.7 percentage points of the combined ratio compared to $3.6 million were 1.4 percentage points in the first quarter of 29 team.
Our historical average for catastrophe losses in the first quarter is 2.9 percentage points.
Our higher catastrophe loss results stem from two events.
First the large explosion in January at a manufacturing business in Houston, Texas classified as a catastrophe buy reinsurance service office.
Second to hailstorm in Jefferson City, Missouri.
During the last week of March.
The increase in severity in non catastrophe losses was in our other liability commercial property and workers compensation lines of business Dawn will discuss our quarterly financial results later during the call.
I will then my portion of the call with an update on our progress to improve the profitability of our commercial auto book of business.
In the first quarter of 2020, we reported an improvement in our commercial auto loss ratio of 10.1 points with a decrease in the frequency your commercial auto claims and a reduction in commercial auto exposure units compared to the first quarter of 2019.
Although we saw improvement or loss ratio for commercial auto remains at a higher than acceptable level, primarily due to the result of continued severity of commercial auto claims.
During the cold that 19 pandemic there has been a decrease in miles driven and fewer vehicles on the road, but this is not led to the same level of declines in the severity of commercial auto accidents.
This back continues to reinforce that we must continue to aggressively move forward with our strategic plan to improve the profitability in our commercial auto book of business.
Mike will now discuss our operational results in more detail, including the progress we have made with our strategic plan to improve profitability Mike.
Thanks, Randy and good morning, everyone as Randy mentioned and as we've discussed on previous calls our focus remains on improving profitability. During first quarter of 20 to 20, we continued to see progress with our portfolio management strategy to improve our commercial auto book of business. This quarter marks the fifth consecutive quarter.
Flat or declining frequency of commercial auto claims 4% decline in the first quarter of 2020.
Our moving average auto claims frequency is now its lowest point in the past seven years.
Slide six and our slide deck on our website presents this decline along with the decline in the number of commercial auto exposure units.
The 12 month, moving average number of commercial auto exposure units decreased 4% from December 30, Onest 2019, and 9% since March 30, Onest 2018.
A combination of the reduction in commercial auto claims frequency number commercial auto exposure units in the prior year reserve strengthening in the Gulf Coast region. During the first quarter of 29 team resulted in an improvement of 10.1 points, our commercial auto loss ratio during the first quarter of 2020.
As Randy mentioned the decrease in a number of miles driven and vehicles on the road. During the covert 19 pandemic has not resulted in the same level of decrease in severity of commercial auto claims.
Therefore during the first quarter of 2020, we've expanded our targets setting setting renewed retention rate increase goals for the bottom half of our business.
We'll continue with our plans to be aggressive with Nonrenewals throughout 2020 were allowed.
Our focus continues to be on poor performing segments and not writing new accounts that are heavy in auto.
By taking these actions we're confident we'll achieve our goal of a better balance in our overall book of business, which has become too heavily weighted in commercial auto in recent years.
As a consequence of this we know we stand to lose entire accounts since we have traditionally done a package writer.
For the second consecutive quarter, we experienced a decrease in both policy in premium retention.
Although both premiums written premiums earned increase this quarter, which was primarily due to rate increases Korean audits and endorsements, we do not expect any premium growth in 2020.
As for rate increases in the first quarter 2020, the average renewal pricing change for commercial lines increased 7.6% compared to 6.6% in the fourth quarter of 2019.
The renewal pricing increases continue to be driven by commercial auto rate increases during the first quarter of 2020 commercial auto effective rate change remained in the low double digits.
Personal lines renewal rate increases remained in the mid single digits.
With overall claims frequency down significantly in the first quarter of 2020, if a decrease of 18% on a new claimed basis in 23% on a written premium basis story. This quarter is definitely claim severity.
As Randy mentioned operationally, our first quarter 2020 results impacted by an increase in severity of both catastrophe and non catastrophe losses, primarily in our commercial fire.
Other liability and workers compensation lines of business.
The increase in severity of catastrophe losses is primarily from two events as Randy mentioned increase in severity in non catastrophe losses in our commercial fire playing a business is due to an increase in large fires. During the first quarter of 2020, there were 11 large fire losses compared to five large fire losses in the first quarter of.
2019.
The increase in the severity in our workers compensation line of business is due to one large claim.
Our workers compensation line of business continues to perform within our expectations with a net loss ratio of 39.7%.
With that I'll turn it over the discussion to Dawn Jaffray Don.
Thanks, Mike and good morning, everyone in the first quarter of 2020, we reported a consolidated net loss.
72.5 million compared to net income of 44.5 million in the same period for 2019.
Net loss was primarily the result of a change in the value of our investment in equity security, which declined by 90.6 million in first quarter 2020.
This compared to an increasing the value of equity investment of 24.6 million during first quarter of 2019, that's representing a change of 115.2 million between these comparative quarters.
It's important to note that our investments in equity securities remain in a gain position of 140 million at March 31st 2020, Despite the nearly $91 million decrease in value in the first quarter.
In addition, we recognized an after tax unrealized gain of 4.5 million in our bond portfolio in the first quarter 2020 operationally, we reported adjusted operating income of 1.3 million well five cents per share in first quarter 2020, compared with 23.4 million or 91.
As per share in the same period of 29 team our operational results were impacted by an increase in both catastrophe losses, and non catastrophe losses, as Randy and Mike mentioned, along with this decrease in net investment income.
The decrease in net investment income was due to volatility in the equity markets and the change in the value of our limited liability partnerships or what we refer to as our bank.
Moving on to operating metrics the combined ratio in the first quarter 2020 was 105.2% compared to 95.6% in the first quarter 2019.
Slide eight in our presentation on our website contains a reconciliation of the component of our reported combined ratio.
Referencing the adjusted combined ratio, which removes the impact of catastrophe losses in reserve development, our core loss ratio deteriorated 5.8 percentage points in the quarter, primarily due to an increase in severity of losses in our other liability commercial fire and workers compensation lines of business as Mike has mentioned.
We recognize more favorable reserve development with 13.7 million in first quarter 2020, compared to 4.6 million in the first quarter of 2019 higher prior year favorable reserve development, that's primarily in our workers compensation and commercial fire lines of business.
Our total reserve position remains within actuarial estimate.
The expense ratio increased 2.8 point in first quarter of 2020 as compared to the same period in 2019, although we've seen improvement and our commercial auto book of business. The loss ratio remains at a higher than acceptable level, which impacts the amount of acquisition expenses, we can differ during the quarter, resulting in increased.
In the expense ratio.
Also contributing to an increase in the expense ratio, but to a much lesser extent is the continued investment in our multiyear Oasis project and upgrade to our technology platform designed to enhance core underwriting decisions selection of risk and productivity.
And my portion of the call discussing capital matters.
First as we have consistently done for the past 208 quarters. Since March of 968, we declared and paid up 33 cents per share cash dividends to shareholders of record as of March six 2020.
During the quarter, we repurchased just over 70000 shares for 2.7 million in mid March we made the decision to suspend share repurchases for the time being we remain authorized by our board of directors to purchase an additional 1.8 million shares of common stock under our share repurchase program, which will expire.
In August of 2020.
As previously announced we signed a new of credit agreement with Wells Fargo Bank in first quarter. Its revolving credit facility has similar terms to our prior credit facility, which expired in February 2020.
At this time you FG has no intention to drop off from its current credit agreement and once again the entry into the credit agreement was completed as part of our regular course financial planning and was not initiated as a result of market conditions, resulting from the co bid 19 pandemic, we believe our current capital and liquidity position.
And our adequate.
The credit agreement with Wells Fargo demonstrates our continued focus on maintaining access to additional liquidity in the event such need should ever right.
And with the closing of our prepared remarks, I will now open the lines for questions operator.
Ladies and gentlemen at this time will begin the question and answer session to ask a question you May Press Star then one so what you all your questions you May press Star and too. If you are using a speaker phone. We do ask you. Please pick up the handset before pressing the numbers to ensure the best sound quality.
Once again in order to ask a question that is star and then one.
Our first question today comes from Marla Backer from Sidoti. Please go ahead with your question.
Thank you.
So I'm just wondering if we could get a little bit more.
Color on how the.
Process is proceeding.
In this environment, making it easier where I'm a little bit easier for you to raise rates or drop policies that you had already planned to drop.
Thanks Marlow this is Randy.
One of the things, it's kind of happening with regards to renewables is we're we're actually working.
More days out.
We have a lot less new business coming in so we're processing renewals out a bit further.
[music].
No I don't know rate increases we went over what we've been getting for rate.
On an aggregate basis in the transcript.
Hi, I don't know, if it's necessarily easier or harder.
There are a lot of in shirts that are difficult financial position.
We don't right like a lot of bars and restaurants, but we've seen a lot of the claims that we've gotten in business income side are obviously some of those businesses are hit the hardest so.
We havent seen a.
Huge amount of cancellations coming but the renewal process is going very well it looks like most insurance or kind of staying put for the most part we write a lot of construction then construction or throughout the country is pretty much been open for business. So.
Yes, things are going fairly well and we've been pretty satisfied with the level of rate increase that were getting I think if we asked our agents is it easy to sell rate increases in these times, they would probably say not really but so far we've we've done pretty well with it.
Okay.
Hello.
Okay.
Another question I pad, which is <unk>.
<unk>.
Oh.
Yes.
Hello.
<unk>.
A lot of your activity.
Customers initiated.
Two.
Stay at home orders.
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Existing customers.
HM.
I will initiate conversations with.
Potential customers.
I'm, sorry, Marla you really broke up there I.
I didn't really catch the gist of that could you.
Okay I pod.
Just a question is about.
In this.
On it in your press yes.
You see or your agents.
Reach out to.
Pixels do customers or has that sort of.
In terms of this.
At the moment.
So unfortunate you're breaking up a little bit there again, marla I kind of maybe cost that how our agents able to kind of solicit new business and.
I haven't.
I haven't talked to a lot of our agents above that I get the impression that.
[music].
You know a lot of them are working from home as well and you don't just see a lot of insurance aren't moving around right now.
Opportunities to quote new business new business applications are are very down but also we're we're not seeing a lot of cancellations for people moving to other competitors. So I apologize if I totally missed what what you're asking there.
And ladies and gentlemen, our next question comes from Paul Newsome from Piper Sandler. Please go ahead with your question.
Good morning, Oh, yes, a little bit of it off too in the expense ratios, hoping you could talk about the outlook for the expense ratio perspective.
Hey, Paul its Don Thanks, So much you know we're running a historically somewhere in the up roughly 32% range and that's what we would expect under normal circumstances with the commercial auto loss ratio producing a total combined ratio.
<unk> over 100, we didn't have to recognize about a 1.6 points of additional deferred acquisition costs that we were unable to differ.
So I would suggest somewhere in that 32% range because of both the Oasis project.
And where weve been historically.
Would the deferral continue how was the deferral acceleration deferral Wes just four years it just the quarterly.
No we have to evaluate it based on the actuarial estimates every quarter, a and because it's somewhat of a look back scenario. So we didn't have to look back to fourth quarter, which had a large uptick a in the commercial auto loss ratio, we evaluated over a number of quarters, but there are some good sign.
Of things like Mike had mentioned about frequency, a et cetera that we're able to consider so every quarter, we have to evaluate it.
And we'll do that again in a second quarter with our actually.
It was your parts on the topline growth.
Also include some factor for.
The effective.
The higher.
Low level.
I loved ones.
Good.
Possibly could reduce revenues for workers comp and other lines were there.
Tied to economic activity.
Well, we did grow a little bit in the first quarter I don't anticipate that that is going to continue and if you kind of even look at.
Last two weeks of March things really we had some good momentum going to economy is working well then when the pandemic Kid things changed a lot. So I think.
And we're already seeing.
A lot of.
Reductions we've been pretty.
Open to reductions in payroll and sales so insurers are calling in and we're.
Being pretty liberal with.
Doing as they ask and lowering sales and payroll premium basis.
Our flopped is that those policies will be audited if anybody's playing any games will be able to catch up on those but normally we would if someone called it and wanted to lower their payroll. We would you say well, let's wait until the audit is done it it will true things up then, but we realize there's lot of people are difficult cash for situation. So we've been pretty liberal in making.
Those changes.
A request it so I think though you know second quarter is going to look.
Quite a bit different for the whole rest of the industry because of that.
No doubt, but I think you mentioned about keeping <unk> flat and I was just wondering if that.
Also included the impact of what could be a.
Dick <unk> fairly Inc.
Give me a decrease in the well change in the auto premiums.
Yeah, I think well that's okay.
We will.
You know rates are going up so that's a positive but I think.
First of premium and cancellations were going to see premiums.
Certainly no right now theyre headed substantially lower now whether you know when some of the economy gets open back up again.
You know maybe late May early June maybe things will rebound a little bit but.
So what we're seeing right now in the second quarter premiums are down.
We substantially.
Great. Thanks Hope stay safe.
Thank you you do Paul.
Once again, if you would like to ask a question. Please press star in one our next question comes from Ron Bobman from capital returns. Please go ahead with your question.
Hi, Thanks, a lot seems like a lifetime since I saw you last Randy.
Just two months ago.
Well, we were shaking hands and eating in the phase.
Yeah.
So I wasn't touching the buffet, even then in any event I had were smart iOS.
Well hopefully both Dutch trouble.
Hi.
So I had a question and I'm, sorry, if I'm reading.
Your comments in the press release to literally yet I'm sort of.
The question is sort of misplaced, but but I.
I wanted to ask it anyway.
The <unk>.
Reference and the.
The sentence or two that have some be in the press release.
About virus not being covered.
In your property B. I coverages I, just want to make sure that I'm I'm not reading a two liberally.
Do you were commercial property policies have explicit virus exclusion and is it.
Nearly <unk> you know the reference to nearly every policy.
Has an explicit virus wording exclusion.
Where are you making a.
Slightly different.
Communication and the words you chose.
Well.
Our lawyers have to approve what we put out and.
We struggled with we started with most when that to be seemed you know not enough.
We talked about 99.9% and.
We have very policies that don't have.
I have that exclusion and.
Most of our not most.
Nearly all I think is the best wages.
Term, but.
We have a couple of.
Isolated.
Types of policies in a couple of states that does that doesn't have that exclusion audit but.
Far and away most of our policies.
The virus exclusion, so we don't anticipate any issues.
Which claims from the virus.
Apart from some courts makes him goofy decisions or.
Theres still talk from a legislation.
Not too much from regulators, but you know there's still some talk soon.
You know, making voiding that exclusion and making retroactive business income I don't think those things that a lot of Oh momentum, but I think we said in the transcript that we feel that you'll be I.
Losses will be very manageable.
If for example, we don't read a lot of work comp, we don't break worldcom, Oh hardly any healthcare workers, but we do have.
Injured workers that have say carpal tunnel low back.
Issues or shoulder injuries that are waiting for surgeries and all will surgeries are considered elective so.
We do have.
Indemnity payments that are they are having to be made until you know those elective surgeries can be done normally these are not very serious injuries and can be repaired pretty quickly but until.
Operating rooms are opened up for a elective surgeries. These people are not going to be able to have their procedures.
Well I was our largest worktop state and this week, so I would open up for elective surgery. So hopefully, we'll kind of see that trend.
So it's difficult for us to say that there's not going to be any effect from the so covert incidents, but we think it will be extremely manageable for you.
Thanks that was a quite helpful. I appreciate that.
That is it for my questions. Thanks.
Dropped good luck, while the best Thank you stay healthy yourself thing.
[noise] [noise] once again, if he would like to ask a question. Please press Star then one.
Survey yourself from the question to you made press star and Sue.
And ladies and gentlemen, and showing no additional questions I'd like to turn the conference call back over to Randy patent for any closing remarks.
This now concludes our conference call. Thank you for joining us and have a great day.
Ladies and gentlemen, with that will conclude today's presentation. We thank you for joining may now disconnect your lines.