Q4 2020 United Fire Group Inc Earnings Call
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Good morning, My name is Chuck and I'll be your conference operator today at this time I would like to welcome everyone to the UFC and insurance fourth quarter and year end 'twenty and 'twenty financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed.
Zero after today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the call over to Randy Patten Assistant Vice President and controller. Please go ahead Sir.
Good morning, everyone and thank you for joining this call earlier today, we issued a news release on our resolve to find a copy of their stack and Nick. Please visit our website at <unk> insurance Dot Com press releases and slides are located under the Investor Relations tab.
Our speakers today are Chief Executive Officer, Randy Randy, Mike Wilkins, 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 1095, 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 managed.
From its current expectations. The actual result may differ materially due to a variety of factors, which are described in our press release and SEC filings.
Please also note that on a discussion today, we may use some non-GAAP financial measures.
Considerations of these measures to the most comparable GAAP measures are also available and our press release and SEC filings.
At this time I am pleased to percent Mr. Randy Rambo CEO of EOG insurance.
Thanks, Randy Good morning, everyone and welcome to our fourth quarter and year end 2020 conference call as we mentioned in our press release on February 11th 2021, and our fourth quarter results were negatively impacted by social inflation, resulting in an increase and severity of current accident year losses, and and prior accident year reserve strengthening.
Social inflation continues to impact for the entire industry. Unfortunately, our two largest states, Texas and California are amongst the highest trending social inflation states, meaning the impact for USG is Mexico line.
And recognition of social inflation trends during 2020, and particularly on the fourth quarter, New commercial auto and general liability claims were reserved and with more customers. Additionally.
Additionally, progress has been made to shorten the claims cycle with reserves being established earlier and the process than in past years. This new analytic insights driving these outcomes.
Also during the fourth quarter, we reviewed and <unk>.
Reserve adequacy of our open prior year accident year case reserves and consideration of our more pessimistic view.
Yes.
For the full year of 2020 results were also negatively impacted by and historical level of catastrophe losses.
This atrophy losses added 13 five points to the combined ratio in 2020, which is the highest and the last five years and significantly higher than on our five year historical average of five six points prior to 2020.
During the year, we experienced catastrophe losses of $231 million before reinsurance.
$142 million net of reinsurance.
The majority of these losses came from three significant events that occurred and some of our largest geographically exposed areas.
Two of these events impacted Cedar Rapids, Iowa, and the location of our corporate headquarters.
These events will be August Midwest ratio was peak wins of 145 miles per hour and the hailstorm and April impacting the greater CRF desirable area for <unk>.
And third event was hurricane Lora, which impacted another heavy exposure area for USG and southern Louisiana and location of our 2019 agent of the year.
So we are very disappointed with our results and 2020, we remain optimistic about our future.
Throughout 2020, we focused on building the foundation of our new strategic plan to improve profitability.
Our strategic plan, which we call one USG boldly forward contains a number of initiatives aimed at long term profitability.
Portfolio diversification.
Sustainable growth and continuous innovation.
As a result of our efforts we are able to point to some early underlying improvements, including our fifth consecutive quarter with a decrease and the frequency of commercial auto losses and commercial auto exposure units. We also saw improvements and our core loss ratio despite reserves being established earlier.
And the claims cycle and with more customers.
For our core loss ratio improved $6.
Four percentage points, respectively in the fourth quarter and full year of 2020 compared to the same periods and 2019.
Mike and Don will go into more depth and a few minutes of discussing additional positive outcomes from our strategic plans and 2020.
Although the level and speed of improvement this year was unacceptable.
Firmly believe that we're on the right path forward and we'll remain focused on improving profitability as part of our strategic plan.
In regard to the ongoing pandemic as a reminder, nearly all of the policies. We have issued contains contract language that specifically excludes business interruption coverage losses attributable attributable to viruses, such as COVID-19 pandemic.
At this time, we expect the effects of COVID-19 on claims currently under our coverages to be manageable. However, the pandemic continues to evolve and we cannot predict how future legislation regulation or court actions will impact us.
Before turning the call over to Mike I want to mention that <unk> reached an important milestone on January 2021, our 70 <unk> anniversary.
And so much has changed and our 75 year existence, we remain committed to our humble roots and founding belief that the insurance business is a people business.
It was our founder and Scott Mcintyre Senior who instilled in the company the principal of doing business, the right way and treating people the right way of legacy and proud to say that is carried out daily by USG employees across the country.
I will now turn the call over to Mike Wilkins. Thanks.
Thanks, Randy and good morning, everyone.
For my portion of the call and will discuss the progress of our strategic plan focusing on the positive outcomes for the past year, while addressing our 2020 results and our plans for improvement for.
And as mentioned throughout 2020, our focus has been on reducing the size of our commercial auto portfolio by non renewing underperforming accounts and reducing the number of exposure units.
During 2020, we successfully decreased our commercial auto book, which now makes up 28, 7% of our portfolio compared to 31, 2% at the end of 2019.
Looking at only new premiums on slide six and our slide deck commercial auto accounts for 24% from the new premiums added in 2020 versus 32% and 2019.
Our goal is to have a commercial auto represent closer to 24% of our portfolio mix, which we are achieving.
Part of the strategy and balancing our book of business is also to improve our risk selection and.
And 2020, we established a centralized approach to underwriting establishing consistency across our geographic regions using a broad brush and selecting risks and our strategic plan to balance our book of business.
And 2021, we intend to be more targeted on where and what we write based on state and geographic region, especially focusing on the states and has the highest trends of social inflation, Texas, California and Florida.
And with the sale of our personal lines renewal rates nationwide effective September one 2020, we believe we have reduced our exposure to the type of catastrophe events, we experienced in 2020, especially near our headquarters.
We remain disciplined on our pricing strategy, specifically on our commercial auto property and umbrella book of business and.
For commercial auto average renewal rate increase remained and the double digits at 10, 5% and the fourth quarter of 2020.
And commercial auto average 12 month rate increases have been and the low double digits since the beginning of the year.
We continue to get the most rate and our bottoms and 30% of our retained commercial auto book.
As a reminder, we are non renewing a large percentage of our underperforming commercial auto business and the bottom 30% of our book.
Commercial property improved and the fourth quarter with the average renewal rate increases now at seven 4% up from five 8% at third quarter.
As we stated last quarter. We believe there is an opportunity with our commercial property book to be more aggressive with rate increases and reducing and desirable exposures as we see signs of the market hardening.
From a claims perspective, our strategic plan focuses on shortening the claim and cycle time, reducing legal expenses and the impact of litigation.
As Randy mentioned the impact from social inflation for USG is more significant and other carriers given the concentration of our book of business and Texas and California.
Part of our strategy to address this is improving our legal and claims process and the fourth quarter and started to see the impact from the strategy of shortening claim cycles, and say and case reserves earlier and the claims process and with more pessimism.
Additionally, we recognized that increased specialization by our claims adjusters will allow us to deploy enhanced expertise on our most complex and severe claims.
And the fourth quarter as a precursor to specialization we deployed a team of experts to review reserves on open claims leading to prior accident year reserve strengthening.
We also deployed and analytics model for claims severity and the fourth quarter.
This model assists, our adjusters by identifying early and regular indicators of the severity of the loss.
We expect to release, our case reserving model for commercial auto by the third quarter of 2021 and continued support of our reserving accuracy.
Additionally, we are pursuing opportunities for early but equitable settlements, reducing the tenure of our open claims.
And we'll wrap up my portion of the call today discussing some of our growth strategies.
And our strategic plan is to grow and expand on our profitable lines on.
Most profitable lines and 2020 and aligns we believe present us with the greatest opportunities are surety and E&S.
Both our surety and E&S lines exceeded the profitability and written premium goals in 2020.
Our plans are to continue to grow these lines and 2021.
And for E&S. This includes state and product expansion and for surety. This includes additional share the producers and the northeast U S.
Another historically profitable line that we intend to grow as assumed reinsurance.
Growth in this line will allow diversification of our current portfolio mix.
We had several new assumed reinsurance programs in place and 2021 that will diversify our overall book of business.
Lastly, and mid 2021, we are excited to begin the initial rollout of a new online quoting experience for agents, allowing us to increase our straight through processing and policies and grow our profitable bottom line of business and the future.
With that I'll turn over the discussion to Dawn Jaffray.
Thanks, Mike and good morning, everyone in.
And the fourth quarter, we reported a consolidated net loss of $8 9 million compared to a net loss of $23 2 million and the same period of 2019 for the full year of 2020 and reported a consolidated net loss for $112 7 million compared with net income of $14 8 million for the full year of 2019.
Inc.
And Randy and Mike mentioned quarterly results were impacted by severity of losses from what we believe to be the influence of social inflation and prior accident year Reserve development.
During the fourth quarter, we recognized unfavorable prior accident year reserve development of $12 4 million, primarily driven by our commercial liability and auto liability lines of business for the full year of 2020, we had favorable development of $17 7 million compared to favorable development of $5 3 million for the full year.
2019, as a reminder, we have had continued favorable prior accident year reserve development every year since 2009.
After fees for significant and impactful on results during 2020, but the results of $142 million compared to $64 4 million for the full year of 2019.
Also contributing to the fourth quarter net loss was the continued impact and severity of losses.
Moving on to investments, we reported an improvement and the fourth quarter for both realized investment gains and net investment income. This is primarily due to an increase and the fair value of our investment portfolio recovering a portion of the realized losses and decline in investment income from the first three quarters of 2020, and the fourth quarter and <unk>.
And in 'twenty, the fair value of our investments and equity.
Refer to and Phantom gains increased $32 million pretax compared to $4 4 million increase and the fourth quarter of 2019.
And net investment income increased <unk> 9 million and the fourth quarter compared to the fourth quarter of 2019, primarily due to an increase and fair value of our limited liability partnerships for our bank funds.
Our bond portfolio also increased in 2020 with and after tax unrealized gain of $36 million during the year.
Despite these improvements and the fourth quarter, we reported net realized investment losses of $32 4 million and a decline in net investment income of 34% for the full year of 2020 compared to the full year of 2019, we have reduced some of the volatility and the investment portfolio with the sale of equities, we undertook this year.
And for our operating metrics for the quarter, we reported a combined ratio of 123, 1% compared to 117, 9% and the same period of 2019 for the full year, we reported a combined ratio of 115, 9% compared to 109% for the full year of 2019.
We did see a decrease and the expense ratio and the fourth quarter of 2020% to 38% from 32, 2% reported and the fourth quarter of 2019. The decrease is primarily the result of a decrease and commission for the full year of 2020, the expense ratio was 33, 5% and compared to 32, 6%.
And for the full year of 2019 the Inc.
Kris and less than one point was primarily due to our continued investment and technology initiatives. We have several expense initiatives and as part of our part of our strategic plan, including a change and our agent Commission structure. The establishment of a vendor management office and a shift and the design of our pension and retiree medical benefit plan.
And the second half of 2020, we began to see some impact from changes to our commission structure. These changes included net adjusted Agency Commission schedule and aligning with the profitability of our lines of business and and adjusted agency profit sharing plan and emphasizing profit over volume.
These changes will have a greater impact in 2021 day.
We also established a centralized vendor management office and 2020 to better track and manage our vendor contracts. We believe this approach will provide opportunities for further negotiation of contracts and ultimately additional cost savings going forward.
For the pension plan, we made the decision at the end of 2020 to transition from a traditional defined benefit pension plan to a cash balance pension plan, which significantly reduced our long term liability and our volatility and the potential benefit obligation.
This had a positive impact on equity and 2020 and will have a positive effect on our expense ratio beginning in 2021.
In addition, we just announced the difficult but necessary decision to change our retiree medical plan to a voluntary plan funded exclusively by participants.
And at the start of 2023.
Currently working through the financial reporting and accounting implications of this decision our expectations are that this decision to and the employer provided funding for the retiree medical plan, we will have a short term benefit to the expense ratio and 'twenty, one and 'twenty two.
With the greatest proportion of the impact to 2021 longer term. We expect this action will provide some additional savings to the ongoing escalating cost and benefit expenses for U S. G.
For reference the retiree medical plan liability at December 31, 2020 was about $32 million. This existing obligation will be recaptured along with releasing prior credits into the income statement over the next two years on.
Although dependent on premium levels with these expense management actions, our expectation is that our expense ratio will be lower in 2021 with a conservative estimate for the ratio to decrease by approximately two point for our 2021 performance here, we will provide a more definitive number during our first quarter 2021 conference call for.
Following the completion of the required accounting and actuarial evaluations of this change and the retiree medical plan.
Moving on I will and my portion of the call by discussing capital matters.
As of December 31, 2020, I am pleased to report that we continue to maintain a strong balance sheet to support our business and our <unk> strategic plan initiatives at the end of 2020, we made the decision to leverage our balance sheet by adding $50 million of long term debt with the addition of two surplus notes from a privately negotiated.
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And the new instruments result, and a small impact to our capital structure with USG now holding 6% in terms of a debt to equity ratio.
This decision to add additional debt capital will support the profitable growth initiatives, Mike discussed as part of our one <unk> strategic plan.
Also during the fourth quarter, we declared and paid a <unk> 15 per share cash dividend to shareholders of record as of December for a 2020 marketing our 211th consecutive quarter of consistently paying dividends dating back to March of $19 68.
Lastly, during the quarter, we did not repurchase any USPS shares we made the decision in mid March to suspend share repurchases. We remain authorized by our board of directors to purchase an additional one 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.
Thank you 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 your question. Please press Star then two and at this time, we will pause momentarily to assemble our roster.
Okay.
And the first question will come from Paul Newsome with Piper Sandler. Please go ahead.
Good morning.
Thanks for the recall, where we were as well.
I was hoping you could give us a little bit more details on what you call social inflation.
Is it very much specific to commercial auto.
And is there any sort of additional details to declines.
Lawsuits to there and that you are seeing that would.
Give us a sense of whats.
Might be going on.
So Paul I'll start with this one and then maybe Corey will.
China and a little bit from the.
On the claims side.
And I think we've kind of mentioned that.
Couple of the states for that.
So up and the press.
And as being the more difficult ones and <unk>.
Texas and California. Unfortunately, our two biggest states. So we have a bit of a problem right there.
Yes, commercial auto has been a huge target kind of by the plaintiffs' bar.
Kind of workers' compensation, maybe it was at one time, but a lot of the kind of sketch.
Scheduled limits on compensation is made that less attractive.
But commercial auto and.
Especially on the covered with an umbrella.
Have been real targets and.
It's not just necessarily jewelry or <unk>.
Judging from the words, but two things we see that we used to see and claims were somewhat unique which is traumatic brain injuries and and post traumatic stress syndrome and it is amazing on what percentage of really even low impact claims that we see both of those we've kind of talked a little bit about.
Our.
Analytics tools and those.
Tools picked out and characteristics of claims that.
Translate into a high likelihood that.
And there'll be litigation and.
B adverse litigation and those are two terms and that really stick out and so where that's coming from if it's.
Physicians are more likely to.
Diagnosed those two conditions.
But both of them kind of translate into possible bigger payout. So a lot of it is.
Juries and judges ignoring nickel.
Negligence.
But also it's kind.
And of the propensity of these these kind of injuries. So.
USG, Yes auto is a big target auto with umbrellas.
Unfortunately, we have a large percentage of our book and auto and considerably above a lot of our peers and as I think Mike mentioned, we're working on getting that more.
And line and then we're also and kind of some of the worst states. So those two both of them.
<unk>.
<unk> been very adverse to USG and so maybe ill ask <unk> if he wants to try and me in here a little bit with some.
More information on claims specifically.
Hi, Paul is this quarter and really.
If you look at our social inflation on on overall basis, its running right in line with what the industry is seeing as well if you break out commercial auto for California, and Texas for Us.
And about double that year over year over the last five years.
We are seeing some positive results though.
Our new suite count starting in January of 2019 until now have been dropping steadily but.
But if you look at those new suits, California, and Texas run almost half of the total.
For overall new suits.
Our closing cycle time on those suits has continued to be.
Very steady and so what we've created is a nice GAAP between the number of new seats coming in and the number of close to that we are still maintaining.
Our payment cycle times and has also improved over the last few years, which to me is a good leading indicator that we're actually getting out ahead of these claims.
<unk> been tracking.
Yes.
For new commercial auto claims that come in and in a given quarter.
What level of reserving that we're establishing on those claims and I can tell you that we've almost doubled.
And where we were at traditionally starting in the third quarter of 2019 and all of 2020, So we're making really good progress there.
As Randy had mentioned, we we also instituted the severity model and.
And the fourth quarter of last year, and that's severity models and it allowed us to be able to triage and these.
And these claims to the rate adjustors write off for that so that we're getting out ahead of these claims and.
Seeing improved settlements.
And if you look at social inflation.
On claims that are opened longer than two years versus those claims that were able to close and less than a year on the GAAP.
GAAP is continuing to widen there too so the longer claim is open.
Especially if its and litigation, we're seeing quite a bit more inflation there.
Okay.
Great.
And my second question.
Regards to the math.
And.
The one.
Raising $50 million and stuff.
Throughput and as debt.
Could you kind of put together the pieces of why $50 million would be needed to fund growth.
And it looks like the book is actually going to shrink at least on a revenue basis.
Because if you're underwriting initiatives.
So maybe I'll, let Don told you a little bit about.
She was most heavily involved and the surplus notes so let her kind of give us background share.
Sure I'll make a couple of pump comments here, Paul and then I'll ask Mike to weigh in as well.
And clearly our growth opportunities looking forward.
And it made sense for us to add some additional.
And what's treated for insurance purposes and cash.
And as you know and a form of surplus notes net on a GAAP basis, it's treated as debt and.
And we thought it was an opportunistic time to add a very small amount.
That was.
To support our various one and that team from Michigan.
And Paul this is Mike.
Sure.
Sorry, Paul.
You are accurate that we expect.
She premiums shrink.
Going forward. However, we do have some areas that we plan to.
Tried to grow fairly aggressively areas that have been extremely profitable for us and the past and we think represent good opportunities going into the future.
The main areas there would be our surety operations.
Excess surplus lines and assumed reinsurance.
Set out fairly aggressive growth goals and those areas and.
And felt this was a good move to make sure we have that adequately supported.
So is this and.
Desire to end up putting cash and the bright spot for that particular segment and growth or is it just.
And I guess I'm still not if the business is shrinking.
Indeed.
For surplus capital.
Take it offline.
Wondering how the matching squeezed on.
Thanks, Paul and I think that the main point and just continuing our historical approach to retaining a strong balance sheet and being prepared for the future as Youre aware. This is a very small amount on.
Relative small overall.
Capital structure, and we have no debt type instrument.
And the uniqueness of this opportunity.
And the surplus note.
But it was also part of the draw for us.
Great. Okay. Thank you I'll, let some other people ask questions. If they have I appreciate the call will be as well.
Thanks, Paul.
The next question will come from Marla backer with Sidoti. Please go ahead.
Thank you.
I have a couple of questions.
And part of follow up to what the discussion just.
You talked around.
First.
During 2020, we obviously saw a lot of delays if not outright closures.
And the courts do.
Do you think there is any.
Impact of that in terms of what Youre seeing that makes you more pessimistic now and social inflation.
So again, maybe this is Randy maybe I'll make a quick comment on it next quarter. If he has any.
Bob.
And have early on I think we did we saw some willingness.
To settle claims early on and the pandemic.
And I'm not sure that is necessarily lasted on but.
Kind of from everything we're seeing most people are predicting this cut and.
Not to be a short term fad, but.
It's kind of just baked in.
Another factor that income inequality.
And what are the big driver is in and states that have the largest income GAAP.
<unk> are also where a lot of the.
Big judgments are coming out of some calling them.
Clear judgments, we haven't necessarily had that much problem with that ours is more.
Percentage is kind of being added on to what.
On a normal judgment would have been for five years ago. So.
I think some of the courts are getting ready to.
To start to open up but.
And I don't know if the pandemic has had much overall effect on social inflation itself. I think it's just more of a kind of a changing attitude of society or did you guys even from it.
Hi Mara.
When we look at some of the leading indicators.
Debt.
It's kind of driven on where we're at with social inflation.
Lot of those were we were seeing good signs prior to the pandemic, even starting and I had mentioned.
And.
So I've mentioned, our new suits, dropping and even with the pandemic the rate of drop.
On a year over year basis has continued to be pretty steady so it wasn't a sharp drop off.
And when the pandemic started there it will be interesting to see though is core to open up.
What happens there to see if there are changes and the way people approach things, but we're still taking a very fair, but very aggressive approach to getting claims settled as early as possible.
Uh huh.
Okay, and then in terms from higher reserving.
And really our reserving.
Sure.
Does that mean that we should expect to see that try and continue at least until we sort of anniversary.
This slight shift and your strategy vis vis a reserve.
We're going to continue to review claims on a regular basis, one thing about social inflation and as it is a moving target and.
Debt claims are changing on a daily basis, and so it's important for us to do continue to do a constant review and there could be some continued development and into 2021, but there'll be more to come there.
Okay, and borrower and therefore.
Well go ahead and this is Randy.
And what kind of further comment I would make because usually when you hear of reserve strengthening.
And you look to that the reserve was maybe put up incorrectly and.
I think what we're more seeing is just that the game has kind of changed the reserves and we may have put up a year or two ago.
And are adequate for the times, but as we have kind of seen things settle and develop.
As we mentioned and we've just become a bit more pessimistic on what its going to cross to settle some of these claims.
Okay. Thank you, Okay, and my last question and I'm actually switching topics and how you talked to before and your.
And prepared remarks about.
Introducing and online platform for your agents sometime in mid 2021 can you expand a little bit on.
And the platform and also talk about the potential perhaps at some point down the road too.
Expand its.
Functionality a bit too.
Possibly off for some direct to consumer.
And.
Offerings.
Thank you.
So tomorrow this is Randy.
We probably will respectfully not touch the going direct to consumer a question right now.
And because we could make some enemies with that but I think I'll, let Mike talk a little bit about our platform.
As a good handle on and kind of what some of the offer.
Hi, Michael and Mike will consider so yes, a little bit more information about the.
Initiative.
And we're going to release that as a pilot in April so not that far away, but expect a broader release to.
And so seven states mid year.
It's a.
Product that is <unk>.
And at the small business segment so the.
Often referred to as the BOP segment and insurance business owners.
Policies.
We will expand to additional states about every three or four months after that initial mid year.
Please.
The.
User interface is very intuitive it's been built.
And built to be very flexible.
And we market, 100% through independent agents and.
And the.
The tool was built and collaboration with our agents to support them.
Issuing that business now and.
What is common and the business owners segment is a lot of that business is handled and our service centers. So we have a service center that provides a lot of the servicing for the agents.
And we've also designed the system.
And that makes servicing and that business easy and also allow the insurance and do some of the self service servicing and that business as we go forward. So it's very flexible and will allow us a lot of.
Opportunities to change the way, we do business with insurers and with the agents overtime.
And we're pretty excited about it.
Okay. Thank you.
Again, if you have a question. Please press Star then one.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Randy Patten for any closing remarks. Please go ahead Sir.
This now concludes our conference call. Thank you for joining us and have a great day.
Ladies and.
And this concludes today's program. Thank you for joining us and have a great day you may disconnect your lines.
Okay.
Okay.
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