Q2 2020 United Fire Group Inc Earnings Call
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Good morning, My name is great Lumpier culture, operator today at this time I'd like to welcome everyone. Today U.S.G. insurance second quarter 2020, <unk> financial results Conference call.
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After todays presentation, there will be an opportunity to ask questions asking a question and their press Star then one on your Touchtone phone withdraw your question. Please press Star then too.
Please note this event, it's being recorded.
I will now I'll turn the call over to Randy Patton Assistant Vice President and controller.
Good morning, everyone and thank you for joining this call earlier today, we issued a news release Henrys arc to find a copy of this document. Please visit our website at UGI insurance Satcom press releases in slightly located under the.
Thats relations tab.
Our speakers today, our Chief Executive Officer, Randy Ramlo micro organs, 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 90, 95 company cautions investors that any forward looking statements include risks and uncertainties internationally guarantee of future performance.
These forward looking statements are based on management's current expectations.
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 our discussion today, we may use a non-GAAP financial measures reconciliations of these measures should the most comparable GAAP measures are also available in our press release SEC filings.
At this time Im pleased to present Mr., Randy Ramlo CEO of UGI insurance.
Thanks, Randy Good morning, everyone and welcome to our second quarter 2020 conference call first to our employees agents policyholders and shareholders. We hope everyone Hussey unhealthy during this ongoing pandemic.
Continue to be amazed by the extraordinary were being completed by our employees. During this time.
During our outstanding service to agents and policyholders without interruption, while working remotely.
These efforts are truly remarkable considering the higher than normal catastrophe losses, we experienced in the second quarter of this year.
As we mentioned last call, we had a pre existing business continuity pandemic plan already in place prior to this year.
Thanks to our past experience impersonally dealing with catastrophes, including the floods of 2000 feet in 2016, and our corporate headquarters, we were well prepared and have the technological infrastructure in place for a seamless transition to work from home.
This plan was activated in mid March and continues to be followed on a daily basis.
While our essential services employees have remained in our offices as necessary.
Majority of our employees continue to work remotely.
We have had ongoing discussions on a return to office plan for our employees, but no definitive dates have been set yet.
Of course, the safety health and wellbeing of our employees will be the top priority of our return to the office plan, whether it is finalized.
Also as we mentioned during the first quarter call and as a reminder.
Nearly all of the policies, we have issued contain contract language, which specifically excludes business interruption coverage losses attributable to viruses such as the cold 19 pandemic.
At this time, we expect the effect of covert 19 on claims currently under our coverages to be manageable.
However, the impact of the Cobot 19 pandemic continues to evolve and we cannot predict how future legislation regulation or court actions will impact us.
Although we are still in the midst of the pandemic and it is early in the litigation process.
A bit of good industry news the emerge from two recent court decisions one in New York and one in Michigan.
In these decisions the courts upheld the physical damage requirement was business interruption coverage.
This is promising sign the contract law will be upheld in the courts.
Through the first half of 2020, the colder 19 pandemic did not have as much of an impact on our core insurance operations as we expected.
A large portion of our book of business is with contractors, who have not been impacted as significantly as many other types of businesses.
The 1% decrease in net premiums earned in the first half of 2020 as compared to the first half of 2019 is primarily due to our focus on improving profitability through non renewal of underperforming accounts in our commercial auto line of business.
There was some impact to net premiums earned related to the current economic environment, but it was little less significant than the impact from our commercial auto profitability initiatives in the first half of 2020.
We anticipate some additional pressure on premiums in the second half of the year as we expect some decrease in new business submission and net endorsement premiums on some business, we have reduced payrolls sales and other exposure units.
In addition, we anticipate premium growth will taper off in the latter part of 2020 due to a combination of underwriting and business factors.
We estimate an overall reduction in net premiums earned in the range of 6% to 8% in the second half of 2020.
Overall, we believe uncertainty remains surrounding the overall economic impact of cold and 19 pandemic.
Although there was a moderate recovery in the financial markets. This quarter the impact on the economy as a whole may not be filled for some time.
Unemployment continues to remain historically high levels and a number of businesses are not operating at full capacity or close their doors.
These factors may contribute to future pressure on premiums and the demand for our products, which could impact our financial condition and the results of operations.
Before turning the call over to Mike to discuss our operational results I'll briefly comment on our quarterly results.
The themes this quarter were historically high quarterly catastrophe losses, improving core insurance profitability and as I just discussed manageable impact from the covert 19 pandemic through June Thirtyth 2020.
As we previously announced on July 29 to 2020, the largest impact on our financial results. During the second quarter of 2020 was catastrophe losses.
In the second quarter of 2020, we reported $50.6 million of catastrophe losses, or 19.2 percentage points of the combined ratio.
Compared to $22 million or eight percentage points in the second quarter 2019.
Our historical average for catastrophe losses in the second quarter is 12.2 percentage points.
The second quarter of 2020 marks the highest quarterly impact on the combined ratio since the second quarter of 2011, when we experienced losses from a tornado in Joplin, Missouri.
This one out of every 10 years quarter included 20 catastrophic events, primarily in the Midwest and southern United States.
The majority of losses came from seven of the 20 events.
With the largest being a hailstorm near our home office in Cedar Rapids, Iowa.
Included in our catastrophe losses. This quarter is also a 4 million in losses from the riots in civil unrest in Minneapolis, Minnesota, where we incurred two large fire losses.
As for our operational results Im pleased with the progress in improving the profitability of our book through our underwriting actions and use of analytical tools. Despite the challenges we faced with the Kogan 19 pandemic.
In the second quarter of 2020, we reported a 10.2 improvement in our commercial auto loss ratio.
We also had an 11.9 point improvement in general liability and a nine point improvement in our workers compensation lines of business improvements in these lines of business contributed to a 5.8 points improvement in our core loss ratio, which excludes caps and our prior accident year rich.
Serve development.
Mike will now discuss the improvement in more detail Mike.
Thanks, Randy and good morning, everyone as Randy mentioned, we continue to make progress with improving the profitability of our commercial auto book of business in 2020.
In the second quarter of 2020, we again saw a decline in the frequency of commercial auto claims.
As June of 2019 commercial auto frequency is down 8%.
Additionally, our 12 month moving average of insured commercial auto units has declined 14% since June of 2018.
Slide seven and eight in the slide deck on our website present these declines.
The other covert 19 pandemic may have contributed to some of this decline is important to note that the decline in both frequency and number of insured units began well before the pandemic and is primarily the result of our deliberate strategic actions also another important point is that frequency of claims continued to decline in the second quarter.
Even when miles driven increase during the month of May and June of 2020.
The reduction in commercial auto claims frequency and number of commercial auto exposure units along with favorable prior accident year development resulted in an improvement of 10.2 points in our commercial auto loss ratio during the second quarter of 2020 as compared to the second quarter of 2019.
Year to date improvement in our commercial auto loss ratio was 10 points. We also experienced an 11.9 point improvement in our other liability line of business and a nine point improvement and workers compensation during the second quarter of 2020.
We're very pleased with these results.
As we take steps to retire commercial auto line of business to profitability, we acknowledge that we stand eludes entire accounts since we have traditionally been a package writer.
For the third consecutive quarter, we experienced a decrease in both policy and premium retention as we focus on non renewing underperforming commercial auto accounts and continue to seek rate increases.
The average renewal pricing change for commercial lines increased 6.6% in second quarter of 2020 compared to a 7.6% increase in the first quarter of 2020.
The renewal price increases were driven by commercial auto and commercial property rate increases.
During the second quarter of 2020, the commercial auto effective rate change increased by 12.4% compared to 11.6% increase in the first quarter of 2020.
Also during the second quarter of 2020, the commercial property effective rate change increased 7.3% compared to a 5.9% increase in the first quarter of 2020.
Personal lines renewal price increases remained in the mid single digits.
I will wrap up my portion of today's call discussing a couple additional strategic decisions. We made during the second quarter to improve profitability.
First in May we entered into a personal lines renewal rates agreement with nationwide mutual insurance company.
This agreement was completed as part of our long term strategic planning, allowing us to concentrate our efforts on growth and profitability of our core commercial lines business, including commercial insurance excess and surplus lines insurance and surety bonds.
Our commercial lines represents 94% of our business mix.
Thank you have cheese entry into this agreement was purely strategic and was not initiated as a result of market conditions from the coven 19 pandemic.
This agreement provides our independent agency opportunity to transfer their personal lines policies to nationwide mutual insurance company beginning in the third quarter of 2020 subject to the receipt of applicable regulatory approvals.
As part of this agreement nationwide will offer contracts to almost all of our personal lines agents across the country with the exception of agents in Louisiana.
A decision related to our personal lines business in Louisiana will be made at a later date.
Also during the second quarter, we named Jeremy ball as our Chief underwriting officer.
In his new role Jeremy will lead the corporate underwriting department and focus on the implementation of our underwriting strategic initiatives Jeremys first priority will be to drive the implementation of the U.S.G. way of underwriting promoting consistency across the enterprise portfolio scaring quality assurance and staff development.
Finally, we continue to make progress with the development of our analytical models. We anticipate that are BOP analytics model will be introduction for use in the third quarter of this year and our workers compensation model will be in production in the fourth quarter.
With that I'll turn over the discussion to Dawn Jaffray Don.
Thanks, Mike and good morning, everyone and the second quarter 20, Twond, We reported consolidated net income of six nine compared to a net loss of 4.29. This same period for 2019 yesterday, we reported a consolidated net loss of 66.6 anomaly compared with net income of 40.3.
In the same period 2019, the increase in a fair value of our investments in equity carrying well what I like to refer to that Phantom gain of 29 on.
Along with an improvement in the profitability of our core commercial I remind quality level contributed positive moment, the net income reportable second quarter upon.
Positive for offset by the historically high quarterly level of catastrophe losses.
We realized investment model net decrease premiums down from our continued efforts to improve the profitability of our commercial auto business your non renewing underperforming accounts.
Operationally, we recorded an offer an adjusted operating loss of 6.5 long or 26 cents per share in the second quarter plumbing model compared with an adjusted operating loss for 14.9 long at 59 cents per share the same here into 2019.
Oh, well are one time pre tax benefit of 5.7 loans in our second quarter 20, Twond was attributable to a renewal rights agreement and our personal line, which line.
Year to date, we reported an adjusted operating loss of 5.2 long or 21 cents per share compared with an adjusted operating income of 8.5 model well 33 cents per share in the same period in 2019.
Net investment income decreased 10% on the second quantum 20.
Primarily the result, a decrease in Boston on them.
Here today net investment income declined 51%, primarily due to the change in the value of our limited liability partnerships or what we referred to as our bank line.
Couple of additional items to note with our investment portfolio, our equity portfolio remains an unrealized gain recognition of 100 point Fourmillion as of June 30 at 20 point and we recognized an after tax unrealized gain of 32 models in our bond portfolio. During the first six months deployment plan.
In addition, we recognize pretax realized investment losses 14 loan on a GAAP.
We like losses, primarily from the sale of equity Karen.
And again as measured against our actual costs.
We saw an opportunity can reduce future volatility in our equity portfolio uncertain bottom and use offsetting tax box.
Moving on to operating metrics the combined ratio in the second quarter, 2021 was 111.4% improving slightly compared to 111.7% in the second quarter 2019.
And with all the combined ratio was 108.2% compared to 103.9% in the same came in 2019.
Hi, Ken in our presentation on our website contains a reconciliation of the components of our reported to adjusted combined ratio.
Our core loss ratio, which removes the impact of catastrophe losses and prior accident year Reserve development improved 5.8 points in the quarter, primarily due to improved profitability in our commercial auto other liability and workers compensation line of business as Mike had mentioned.
We recognize the prior accident year favorable reserve development of 10 million and 23.8 model second quarter and year to date 22000, respectively compared to unfavorable prior accident years now bottle of 9.4 million and 4.7 now in the second quarter and year to date 2019.
The prior year favorable reserve development in 2020, primarily from our commercial property and workers compensation lineup that long.
Our total reserve position remains at the natural and then.
The expense ratio increased 1.5, 0.42nd quarter, and 2.1 points year to date 2020 as compared to the thinking in 2019.
The increase in the expense ratio during the second question as compared to prior year second quarter, primarily due to our continued investment in technology, including our multiyear Oasis project.
Which is an upgrade to our underwriting technology platform.
Year to date, Yacov mentioned increased and technology costs, along with the acceleration at the amortization of our deferred acquisition costs in our commercial auto lineup.
Added to the increase a little censoring shale, the latter of which added about a point titling Fantasia.
I will now in my portion of the call discussing capital matters and cash flow as at June Thirtyth 2020, our year to date cash flow remains positive our capital position, including having zero debt in our assumptions remain strong as at June 30, 20, Twond, we had 126 million on cash equivalents compared to 121.
No at December 31st from 19.
We continue to look for opportunistic investments to drive investment income as an attorney arrive.
As many in the industry have done we have implemented payment lean programs for some of our policyholders as a result at the kind of in 19 pandemic as at June 30 at 2020, we did not see a significant impacts of premium cash inflow or an increase in our allowance for doubtful accounts as a result will be programs.
Our campus lapse and non renewed account.
The majority of nominate accounts for new AFG initiative, Kevin represented an increase the only 5% year over year.
However, uncertainty renewed depomed hormone impacted winding down of deferred cancellation of state mandated and ueki providing.
And the corresponding collectability of annual premium or requirement to return premium in future periods in Watsonville terminal.
And future impacts on the financial marketing investment portfolio and demand for our product could impact our results. At this time, we have no intention to drop on some our credit agreement, but it is available in the event in the arrive.
We maintained our current level of cash dividends during the second part during the quarter, we declared and paid a 33 cents per share cash dividends to shareholders of record as of June 2020.
This marks our 209 consecutive quarter I've consistently on dividends.
And lastly, during the quarter, we did not repurchase any loss sharing we made a decision in mid March to suspend share repurchases in long term as a reminder, we had repurchased just over 70000 shares for 2.7 $9 on a year to date.
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 at the on the net non unless it is expanded by the board.
And with the closing of our prepared remarks, I will now open the lines for questions.
Operator.
Because your line is now aligned we will begin the question answer session Task. Your question you May Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the kids.
Withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our Ross.
Our first question will come some early Becker with Sidoti. Please go ahead.
Thank you.
So.
Just couple of questions to clarify.
Some of the items.
What we've been hearing from other insurers reading about.
Is that the frequency of auto collisions declined.
This pandemic, but the severity climb and in many markets. So that doesn't seem to be what youre, saying is that.
That.
The way to read that.
We've actually this is Randy.
We've actually experienced the exact same thing.
I think we mentioned that we were pretty heavily in the construction area. So that line of business kind of continued through most of the pandemic, but our frequencies were down pretty considerably, but we didnt have any break and then in the severity of losses. So.
It seems like the people that were of driving around on.
Empty roads must have been driving faster so.
We have experienced kind of the exact same thing okay.
And.
The nationwide agreement can you just provide a little bit more color there.
So.
I will see agreement.
Structure to exclude that one state is it was specific to nationwide because they don't.
Right most of this there or.
What was the.
What was the reason for the way it was structure to exclude Louisiana. Thank you Sir.
Yes, that's exactly it I think a nationwide rights and 49 states and Louisiana is one that they don't so we'll we'll get that figured out going forward.
We're having a pretty good success the non renewals.
Kind of start.
Starting 10 one.
We've got commitments from.
Hi, 80% of agents to go with a nationwide deal so.
Not much more to comment other than we think it's going pretty well.
We have to get approval from all the states and we've had good progress there, but we're not completely done that process, yet so Mike you got anything to add.
Now I think you had all the high points as Randy I think we have three states remaining that we don't have approval from yet I think two of those are pretty close.
So you have good progress.
We are no longer writing.
New business and in the first lines.
Segment, So we are seeing.
Production already starting to decline.
Even in the second quarter, a little bit.
Okay, and then last question, which is.
On the so that's great news about the business interruption clauses being tested and being supported and.
Those cases in those two states that you mentioned.
Is there anything else that that we should think about in terms of you know possibly testing.
The policies because of Cove, it anything because of riots.
That have occurred and in many markets or is there anything else that we should be thinking about that might arise because of coal that.
That.
Right.
Well this is Randy and I've long ways from an expert on this.
I think the biggest thing going forward is.
The possibility of kind of more shutdowns, which could cause more.
Businesses going out of business more bankruptcies.
You shrinkage of kind of the insurance industry due to that and.
Nodes, where thats going to go.
Ryan Civil unrest is a covered barrels so if the riots continue which they've been quieting down a little bit if they do continue those those are covered but I don't see as being.
You know a gigantic part of the industry in general and build the legislation.
Those legislatively regulatorily things have been pretty pretty good.
There's a big question on.
I was workers compensation going to respond to this within California has had some.
Negative.
Rumblings that gets you might say, we don't write any workers compensation.
California, and obviously from just the.
We don't duty med mal or any of that stuff. So for us I don't think it's.
Going to be at large.
Factor, but we we really keep watching on.
Individual states individual court cases that could go could go sell so.
Keeping track of it but.
I'd be lying if I did say do all the answers.
Okay. Thank you very much.
Thank you.
Our next question will come from Paul is somewhat type of Sandler.
Please go ahead.
Good morning, hopefully, everyone healthy and safe.
I want to see asking remote more about the the premium reduction comments you made for the second half I think recall correctly that.
You look yet this decline is 60%.
And does that include the run off for the personal lines business in there as well or is it just the commercial lines that were talking about.
Hi, Paul This is Mike I'll I'll try to take that Alan Yes that does include the personal lines runoff in that.
Calculation as we tried to make an estimate for the second half a couple other things that.
We think we'll probably impact second half.
Written premium one is our specialty division.
They have had really nice growth in the first half and we think growth will continue in the second half, but we don't think the percentage increase will be quite as large.
For various reasons and because of that we think we won't get quite as much contribution from from that unit.
We also have a.
Program with the Arrowhead writing some.
Earthquake business in California that we've got to reach our capacity capacity on so again in the second half were.
We think we'll see a little bit of growth from rate increases in that segment, but we aren't expecting the contribution from that in the second half that we saw in the first half. So those things combined we are little more pessimistic about the topline in the second half.
Make sense then then.
Lead and we could you talk about sort of the outlook for the expense ratio.
I assume that.
Spec that need to see some pressure there because of the.
Declining premium, but obviously, there's some offsets you will you.
Turning then personalized business.
Could you help help me with that.
Sure Hi, Paul This is Don So I think a couple of things you're correct with the decline in premium that is certainly going to make an impact.
To our numbers. We also as I had mentioned continue to have a little bit at the back issue the inability to differ on the commercial auto because a loss ratio has still not where it needs to be for the very formulaic calculation required to undertake.
I also I think during the third quarter it'll be interesting to see that portion of payments that.
I have been deferred for cancellation that town, we have not been able to canceled due to state mandated by the impact of that will be.
Currently how that works is the payments get deferred and they get build out spread out over the remaining term and then we continue to make investments in technology.
I think at the number of companies are doing so realistically probably in that sort as between 33 and a half maybe a 34, depending on the nature the circumstances with the decline in premium.
Is it fair to say that this is probably both of these issues the premium and the expenses.
Probably something you'd be talking about it the first half of.
Next year, given that we still I would imagine personalized we'll take that loan to two and often.
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In the end is.
As well, but just thinking either through the first half.
Pardon.
No I think.
It will depend you know as you know and as Mike and Randy at both indicated Paul We've also taken on a considerable amount of deliberate nonrenewals. So clearly we are looking at some every element of our expenses.
The Commission.
Salaries are the two biggest component.
Our expense ratio so.
I have to pay attention to both of those we have looked at a few changes in our commission plans that will start to take effect, but.
I think it's a little early to say I'm completely what will happen, but with a smaller premium base I.
I would expect that continue to be pressuring next year in the first half of next year, but we're going to look for ways to offset that.
Was there much resources dedicated just as a personal lines business.
Hi.
I think.
This is Randy Paul.
It is made up about 6% of our ratings.
And we probably benchmark to hear high on expenses so.
Thats kind of about that same area I think theres, how many employees under 20 I think yes. So.
Not at not a huge factor but.
It was probably something that.
Overall cost basis.
One of the reasons, we did to deal with nationwide as we founded very difficult to compete as a small personalized player. So.
And then not kind of a agreement future a little bit for especially small carriers like us so.
I don't think that will be.
A negative or positive necessarily on expenses long term, but it might be a little drag in the short term.
That makes sense lots of folks are seen same thing I think.
And then.
The last thing I was wondering is helping with is maybe talking about the components.
We invested assets decline you're talking about that.
Prospectively and I'm looking at the balance sheet doesn't look like you said huge changes in total and us yet and so we don't around.
Are you in it essentially.
Cash flow negative.
Position at the moment from is that why investments through this asset portfolio or some other components to that.
So to answer the question.
Hi, Paul This is Bob Caetano. Thanks for question No. We've had no or have not initiated any concerted effort to reduce or raise cash in the portfolio I think what you're seeing is just natural runoff as the business is contracted slightly overall it makes sense of the assets would follow that trend as well, we did reduce a little bit on the equity side as was mentioned earlier by Don.
But that was again just opportunistic and.
More of a rebalancing exercise of any reallocation change in the investment philosophy or policy.
Yeah.
Great Thats really uptake guys appreciate.
Thank you Paul.
Again as you might ask your question that a star then one star then one asked the question.
Yeah.
Yes.
This will conclude our question answer session I'd like to teleconference spectrum trendy outlook for any closing remarks.
This now concludes our conference call. Thank you for joining us and have a great day.
The conference has now concluded. Thank you for telling today's presentation you may now disconnect.
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