Q3 2020 United Fire Group Inc Earnings Call
Good morning, My name is Kate and I'll be your conference operator today at this time I would like to welcome everyone to U.S.G. insurance third quarter 2020 financial results Conference call. All participants will be in a listen only mode should you need assistance you can signal a conference specialist by pressing the star.
Key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw from the question queue. You May Press Star then two please.
Please note. This event is being recorded thank you I will now turn the call over to Randy Patten Assistant Vice President and controller. Please go ahead.
Good morning, everyone and thank you for joining this call earlier today, we sure news release that are resolved to find a copy of this document. Please visit our website at U.S.P. insurance sat Com press releases in slides are located under the Investor Relations tab.
Our speakers today are chief Executive Officer, Randy Ramlo micro organs, Chief operating officer, and Dawn Jaffray, Chief Financial Officer.
Please note that our presentation. Today may include forward looking statements as defined in the private Securities Litigation Reform Act of 995, 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 managements.
Current expectation yes.
The actual results may differ materially due to a variety of factors, which are described in our press release under SEC filings.
Please also note that 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 SEC filings.
At this time I'm pleased to present Mr., Randy Ramlo CEO Yoshi insurance.
Thanks, Randy Good morning, everyone and welcome to our third quarter 2020 conference call.
As we previously announced on October 29 to 20 twice the largest impact on our financial results. During the third quarter of 2020, what's catastrophe losses. This marks the second consecutive quarter in which we have experienced a historically high level of catastrophe losses.
Based on our historical experience, we typically only experience a quarter similar to this one sort of every 10 years. However, we have now had two quarters in a row.
In the third quarter of 2020, we reported $55.4 million of catastrophe losses were 21.4 percentage points of work on the combined ratio compared to $19.3 million worth seven percentage points in the third quarter of 2019.
Our historical average for catastrophe losses in the third quarter was 8.9 percentage points the catastrophe losses.
Were from 25, but that's what's the most notable catastrophe event being the August Midwest to Rachel.
We all just mid west Rachel exceeded our 20 million dollar reinsurance retention.
We also recorded $9 million of reinsurance reinstatement premiums related to this event in the third quarter of 2020.
In addition to the duration, we experienced a number of other captive that's with the most significant being hurricane Laurel with losses of $12.3 million.
The remaining cat losses in the third quarter, we from severe convective storms, none greater than $5 million individually.
Cedar Rapids, Iowa, the location of our corporate headquarters experienced some of the most severe damage from the August mid west to Rachel.
Nearly every structure and the 75 square miles city limits of Cedar Rapids sustained at least some damage.
This massive thunderstorm covered over 53000 square miles at a distance of nearly 800 miles throughout the Midwest flattening crops, destroying trees and homes and knocking down power lines, which left hundreds of thousands of people without power for up to two weeks.
The storm at its full strength in eastern Iowa was equivalent to and you have three tornado work category four hurricane.
Estimated peak wind gusts of up to 140 miles per hour.
According to the National Oceanic and atmospheric administration, the losses from the Midwest to Rachel.
Our second only to hurricane Laura in 2020, and it ranks as the most costly thunderstorm and U.S. history.
Slide nine in our slide deck on our website.
Presents a comparison of the ritual and hurricane Laura.
Many of our employees dealt with personal losses to their homes and vehicles from the duraseal, including myself.
Despite dealing with personal losses. Once again, you have to employees came together to help take care of customers were impacted by the same devastation.
Our employees assisted policyholders with nearly 2800 claims following the very true.
I continue to be amazed by the dedication of our employees most of whom are working from home due to the ongoing pandemic.
One thing is for certain when catastrophe ship or people rise up to do extraordinary things, even while dealing with their own personal crisis.
In regards to the ongoing pandemic our employees continue to work remotely and continued to deliver outstanding service to our agents and policyholders.
We continue to assess the current situation the safety health and well being of our employees being our top priority.
As we mentioned during the last two quarterly calls and as a reminder, nearly all of the policies. We have issued contain contract language that specifically excludes business interruption coverage losses attributable to viruses such as the cold cold at 19 pandemic.
At this time, we expect the effective COVID-19 on claims currently under our coverages to be manageable. However.
However, the impact of the COVID-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 the litigation process in court decisions remain favorable for the insurance sector, thus far with contract law being upheld in the courts.
Before turning the call over to Mike I will highlight our operational results starting with our core book of business.
Excluding the impact of catastrophe losses and favorable prior year reserve development, our core loss ratio improved slightly in the third quarter and year to date 2020 with improvements of 24.3 percentage points, respectively to the combined ratio.
Year to date, our commercial auto loss ratio improved 4.8 points compared to the same period in 2019.
This improvement is being driven by continued decreases in the frequency of commercial auto claims and our intentional reduction in the number of commercial auto exposure units, both positive signs of progress in our strategic initiatives.
However, we know we have work to do as our commercial auto loss ratio remains higher than acceptable with severity of commercial auto losses and reserve strengthening continuing in the third quarter.
With respect to premiums last quarter, we forecasted an overall reduction in net premiums earned in the range of 6% to 8% in the second half of 2020, we.
We still believe this forecast is accurate due to a combination of underwriting and business factors, including the renewal rights agreement for our personal lines business, which we signed in May with nationwide insurance company and became effective with renewals beginning on September 1st.
The premiums earned decreased 5.8 percentage points in the third quarter of 2020 as compared to the third quarter of 29 team.
On a positive note, we're experiencing growth in our profitable DNS and surety business and also with our M.G. agreement with Arrow have insurance.
I will now turn the call over to Mike to discuss our operational results in more detail Mike.
[music].
Thanks, Randy and good morning, everyone. We continued to make progress on improving the profitability of our commercial auto book of business and 2020 in the third quarter. We again saw a decline in the frequency of commercial auto claims since September of 2019 commercial auto frequency is down 13%. Additionally, our 12 month moving average I've been.
Sure commercial commercial auto units has declined 16%.
Since September 2019.
Slide six and seven in the slide deck on our website present these declines.
As a reminder, the decline in both frequency and the number of insured units began prior to the ongoing pandemic.
The reduction in commercial auto claims frequency a number of commercial auto exposure units resulted in an improvement of 4.8 points and our commercial auto loss ratio year to date.
However, we did experience an increase in our commercial auto loss ratio in the third quarter as Randy mentioned, there were three factors contributing to this increase.
First we added I'd be in our reserves of 6.7 million second to third quarter included prior accident year reserve strengthening and finally in the third quarter. There was an increase in severity of commercial auto losses, primarily in our great Lakes and Gulf Coast regions.
Excluding the impact of prior accident year reserve strengthening and I'd be in our reserve additions the commercial auto loss ratio would have improved 5.2 points in the third quarter of 2020, despite the increase in severity.
As Randy mentioned and as highlighted in slide 10 in the slide deck on our website, our core loss ratio, which removes the impact of catastrophe losses and prior accident year Reserve development improved in both the third quarter and year to date 2020 as compared to the same periods in 2019, our core loss ratio improved 0.4 percentage points.
And 0.3 percentage points respectively.
We are pleased with this continued improvement.
We remain focused on our pricing and retention strategy, specifically on our commercial auto property, an umbrella books of business as previously mentioned our commercial auto strategy is unit reduction through non renewing underperforming accounts limits reductions on commercial umbrella and rate increases.
During the third quarter of 2020, the average renewal pricing increases were driven by commercial auto and commercial property.
The commercial auto average renewal rate increase remained in the double digits at 11.5% in the third quarter of 2020.
In commercial auto average 12 month rate increases have been in the low double digits since the beginning of the year.
We continue to get the most rate and our bottom 30% of our retained commercial auto book as a reminder, we are not renewing a large percentage of our underperforming commercial auto business in the bottom 30% of our book.
We believe there is an opportunity with our commercial property book to be more aggressive with rate increases and reduce on desirable exposures.
The average renewal rate increase was 5.8% for commercial property remaining in the mid single digits again third quarter of 2020.
There are signs that the commercial property market is hardening and we believe we should be able to get more rate in this book.
I will wrap up my portion of the call with a few comments on our workers compensation performance.
In the third quarter and year to date in.
2020, our workers compensation loss ratio increased as compared to the same periods in 2019.
The increase in 2020 is from eight large claims.
Important to note. The 2019 was an exceptional performance year for workers compensation book with loss ratios of 14.0% and 27.7% in the third quarter and year to date 2019, respectively.
Our expectation for this book of business is loss ratios in the low Sixtys. Therefore, 2020 is performing better than our expectations with loss ratios are 53.3% and 41.8% in the third quarter and year to date 2020, respectively with.
With that I'll turn the discussion over to Dawn Jaffray Don.
Thanks, Mike and good morning, everyone.
The significant catastrophe experience driving results during 2020 in the third quarter, we reported a consolidated net loss of 37.2 million compared to a net loss of 2.3 million in the same period for 2019.
Year to date, we reported a consolidated net loss of 103.8 million compared with net income of 38 million in the same period of 2019.
Partially offsetting the quarterly catastrophe losses, we've discussed was the increase in the fair value of our investments in equity or what I refer to as Phantom gains of which 22 million in pre tax income was added to our results net investment income decreased 6 million and 21.6 million in the third.
At quarter and year to date 2020, respectively.
The decrease in both periods was primarily the result of a change in the value of our limited liability partnerships or Bank fund. These investments do tend to fluctuate with market volatility.
Also contributing to the decline with an overall decrease in invested assets.
As of the end of third quarter, our equity portfolio remains in $137 million unrealized gain position.
For the first nine months of 2020, we further recognized an after tax unrealized gain of 35 million in our bond portfolio.
We sold from equity securities in the third quarter, recognizing a pre tax loss of 6.8 million note. We did have a gain when measured against our actual cost basis for these securities.
We undertook a quantitative analysis of our goodwill as a result of the disruptions in the equity markets from COVID-19, and in consideration of the fact that our stock has been trading below book value. This quarter. As a result of this quantitative analysis, we recorded a one time write off our remaining goodwill balance of 15.1 million.
In the third quarter. This goodwill was related to the acquisition of Mercer insurance group in 2011.
Moving onto operating metrics with significant impacts from catastrophe, but year to date combined ratio was 113.5% compared to 106% in the same period of 2019.
We have recognized more favorable prior year accident reserve development. During the first three quarters of 2020 at 30 million when compared to 2019 at 800000.
The favorable prior year reserve development in 21 has been primarily from our workers compensation and commercial property lines of business.
The expense ratio for the third quarter of 2020 was 0.8% higher compared to third quarter 2019, our year to date expense ratio was 34.4% compared to 32.7% for 2019, the increase in a year to date expense ratio during during the comparable three and nine month period.
It's primarily due to our continued investment in technology initiatives.
I will end my portion of the call by discussing capital matters as.
As of September 30 of 2020, we continue to maintain a healthy balance sheet and good liquidity with 100 million available to seek investment income opportunity.
During the third quarter, we declared and paid a 33 cents per share cash dividend to shareholders of record as of September 4th 2020, marking our 210 consecutive quarter of consistently paying dividends.
Lastly, during the quarter, we did not repurchase any U.S.U.S. shares we made the decision in mid March to suspend share repurchases.
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 end of August 2022.
And with the closing of our prepared remarks, I will now open the line for questions operator.
Operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then too.
The first question is from Paul Newsome of Piper Sandler. Please go ahead.
Hi, good morning, everyone, hopefully your salt chip in cell.
I was wondering I ask you if the if you could talk to what the loss ratio sort of the underlying loss ratio would be if you exclude the personal lines business does that have a material impact on the comparison that we see in.
Not that we see.
Quarterly or your thesis.
Yeah. Paul This is Randy I don't know, if we have that front of us.
The.
The Midwest the ratio was a big factor and though we don't write a lot of personal lines as a percentage of our total book.
We have a lot of personal lines and.
In Cedar Rapids area, so the duration.
The personal lines.
The hard again, we've got reinsurance contributions to so we could probably want to see if we can find out but I have a feeling that.
Personal lines was.
More of a top contributor to our overall loss ratio than we would normally expect.
Guys.
Hi, guys I'm, just curious if there's actually more improvement there than than we would fix.
Expect.
The other thing I wanted to ask goes to sort of a run rate for investment income and whether or not you could help me with that.
It's a little bit of a head scratcher relative to other companies.
Because.
Well, we're pretty used to having a three month lag between.
Sort of venture capital insurance alternative asset results.
Which would have suggested actually an improvement.
Most companies in their alternatives in the third quarter, but it looks like that Didnt happen for you guys.
Could you talk about why that may or may not happen are you okay.
Having for a little bit differently or or.
Just give us any color that gives us a sense of where we should.
Think about the run rate for investment.
Hey, Paul This is Bob I can't really speak to the accounting.
Of our equity exposure, our limited partnerships, but I can say just with the general level of interest rates.
First we are experiencing an overall decline in investment yields which is not typical of our peers, but again I'll have to defer to to get the dawn or comic books are really a walk through the accounting treatment.
Please.
So the limited partnerships.
I apologize Paul I was looking up the number for the.
Personal lines Exlar commercial lines and personal lines loss ratio.
Are we talking about the investment income the street investment income or the.
Treatment as I call, Pat well [laughter] <unk> no mystery investment income.
And I understand equities, obviously, you have been always had been food for a long time, mark to market and reported as as the quarter progresses, but.
Other alternatives hedge fund, Texas, though some companies report them within a quarter lag.
And I just wondering if you were doing the same here in the <unk> or something different.
Whether or not that had an impact on the third quarter results yeah.
Yeah, We book a everything in the current quarter there is no lack for us.
On the you know the bank Brian.
Largest proponent of that.
Okay, that's great.
And then just real quick the goodwill write down was.
Was that mostly a function of profitability of the entire firm or is that.
A function of.
The Mercer operations in particular.
I would have thought by now.
Mercer was pretty well integrated with the rest of the firm.
But just curious as to how that that works through the process.
Yeah. The it's a really formulaic driven calculation, it's related to the entire company and as you know our stock price has been trading significantly below book value.
So it's a combination of looking at the stock price as well as you know projection to a future performance.
From a quantity quality excuse me a quantitative basis.
The calculation dictated that we had an impairment. So unfortunately its aggregating it in the 15.1 million is a very small number compared to many others. So the Mercer is so good with.
Current operations.
Any other intangibles that we need to think about that you know so I think the only thing left would be maybe the <unk>.
The tax.
Any <unk> any tax assets.
But I.
I would guess no but just checking.
We have a very small amount associated with agent licenses.
Oh, excuse me state licenses, which obviously carry value in that some portion with age.
Agent relationships, but it's very very small.
It's 6 million until.
Well anything to worry about a DTA.
Oh no not at this point.
Great Fantastic. Thank you guys really appreciate all the help.
Thanks, Paul.
The next question is from Marla backer of Sidoti. Please go ahead.
Q.
Given how high the caps a contribution was during the quarter and given that we've seen two back to back quarters with severe weather in the fourth quarter is looking like it. It also has some severe weather events.
Is this impacting and anyway, you know the way you're thinking about your reinsurance approach.
Model this is Randy.
One way to look at it is we had an extremely severe event.
Really right in our backyard, probably arguably your top two or three.
Levels of exposure, we have country wide and the reinsurance really don't have held up very well and we we got into it but a long long ways from.
The maximum so I think it's kind of a testament to that.
We were pretty good position from where we bought.
We will probably evaluate some of the upper layers after our personal lines book.
Runs off that so a big contributor to some of our probable maximum losses in some areas, so but really right now going into next year.
I think we're pretty comfortable where we are but we may reevaluate and like I said after the personal lines or mobile Mike you got anything else.
Yeah, I would just add that you know every year when we evaluate reinsurance we try to optimize it.
Coverage that we get in the program.
Against what we spend for the coverage and.
You know I think we have great relationships with brokers that help us with that analysis and I think we've always had.
Reinsurance programs that have helped us through.
Big Cat events like that ratio and I would just cycle or Andy said about the yeah. We look at an event like that which is very much a tail event for U.S.G. and something that we would not expect to occur.
You know even in every decade, it would be much longer out on the tail than that and.
Oh had coverage that I really am only went through about half of our arc our cat program. So.
Feel like we're well protected against future events like this <unk>. Okay. Thank you and then just switching gears a little bit you know in the past.
I know I've asked about you know what the industry terms social inflation. So can you address a little bit what you're saying in terms of any changes there or any improvements in our friends and social inflation or is it.
I believe that right now the pandemic is sort of masking any possible changes in the way people are approaching litigation and the way litigation litigation might be trending.
Marshall This is Randy.
Good question.
I'll give you like 10 cents worth and if anyone has anything else to offer.
A couple of things that that we seem to see over and over again.
First as you know the court sort of judges.
Ignoring actual negligence and so if you find yourself in a.
The court case, and you happen to have a large limits with little or no negligence that that is really ignore.
Also.
Post traumatic stress syndrome or dramatic.
Dramatic brain injuries were something you saw maybe a couple of times a year on claims and now you see.
That almost constantly even on.
Especially in car accidents that have evolved.
We've had a car accidents that literally were below the deductibles with regards to damage to the two vehicles, yes, you know either post traumatic stress syndrome or.
Traumatic brain injuries were.
Claim.
And so.
So we have to do we don't see this necessarily changing overnight. So I think Mike talked a little bit about the transcript we have to be much more stingy with.
Large liability limits, especially umbrella is over $5 million and you know we have everything agenda stay out of quarter, because we don't see a lot of these things changing.
We also see.
More of these judgments in foreign jurisdictions it used to be we could kind of keep track of a dozen or so places around the United States that you really wanted to try to stay out of court at all costs.
Those up.
Many many more even some areas that we can.
Sort of pretty conservative in the past.
Okay. Thank you.
Okay and if you have a question. Please press Star then one.
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<unk>.
There are no other questions at this time, ladies and gentlemen, this concludes today's.
Great. Thank you for joining us and have a great day you may disconnect your line.
Okay.