Q1 2021 United Fire Group Inc Earnings Call
After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded.
I'd now like to turn the conference over to Randy Patten Assistant Vice President and controller.
Okay.
Please go ahead.
Yeah.
Good morning, everyone and thank you for joining this call earlier today, we issued a news release on our results to find a copy of the stock and net things visit our website at UPC insurance Dotcom press releases on 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.
Yeah.
Please note that our 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 risks and uncertainties and are not a guarantee of future performance. These forward looking statements are based on management's current.
Patients. 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 our discussion of the day, we may use a non-GAAP financial measures reconciliations of these measures for the most comparable GAAP measures are also available in our press release and SEC filings at.
At this time I'm pleased to per Se, Mr. Randy Randy CEO at EOG insurance.
Thanks, Randy Good morning, everyone and welcome to our first quarter 2021 conference call.
I will start off today's call, saying there are a lot of moving parts in our earnings this quarter.
Don and I will do our best to walk you through the reported numbers in detail.
This morning, we reported net income of 74 cents per diluted share for the first quarter of 2021.
This was driven by a net realized investment gains and higher net investment income from an increase in the valuation of our investments in equity Securities and limited liability partnerships also contributing to our net income in the first quarter was a decrease in expenses due to a change in the design of our employee post.
Retirement health plan.
Ron will provide more details on the impact from this change later on the call.
Offsetting these positive items was an increase in both catastrophe losses and severity of commercial auto losses.
Catastrophe losses added 11, three points to the combined ratio compared to our 10 year historical average for the first quarter up four points.
The increase in catastrophe losses was primarily due to the winter storm freeze event Uri.
Mostly occurring in the state of Texas.
This catastrophic event was a full retention loss with losses in excess of our stated reinsurance retention of $20 million.
Excluding this event catastrophe losses in the first quarter of 2021 were in line with our expectations for the first quarter.
In the first quarter of 2021, we continue to see a decrease in the frequency of commercial auto claims and a decrease in the number of commercial auto exposure units, both positive signs of progress of our strategic initiatives.
There was an increase in severity of commercial auto losses involving bodily injury during the quarter, which increased our core loss ratio as summarized on slide 12 in our presentation on our website.
This deterioration comes on the heels of three consecutive quarters of improvement in our core loss ratio.
This increase in severity as a result of the current year case reserves being set higher and earlier in the claims cycle through.
Through the use of analytics.
While this increased on core loss ratio on the first quarter of 2021.
We ultimately believe this will lead to less unfavorable reserve accident year Reserve development.
In the future.
Also has the benefit of assisting our underwriters with pricing at the time of policy renewals.
In executing our strategic plan, we know the key to improving profitability at USG liaison addressing commercial auto losses reserve development and portfolio diversification.
All of our strategic initiatives are important to our success and work in concert to remove the variability in our underwriting execution.
To achieve more consistent profitable results.
Our top priority on the focus of my portion on today's call is surrounding the diversification of our book of business.
During the first quarter of 2021 commercial auto made up 27 per cent of the written premiums in our portfolio down from 31 per cent for the full year of 2019.
Slide six in our presentation summarizes new business.
This slide shows that new commercial auto business has dropped to almost 20% in the first quarter of 2021 compared to 32% in 2019.
We are also pleased to report the growth in inland Marine property general liability.
Yes sure.
Assumed reinsurance along with the addition of our investment in Lloyd's syndicates in the first quarter of 2021.
Declines of our new commercial on the business, especially as targeted classes of jurisdiction.
Addictions, coupled with the growth on a profitable line such as assumed reinsurance will allow us to achieve greater diversification.
Reducing our vulnerability to commercial auto claims and reducing our exposure in geographically exposed for catastrophe areas.
Also part of portfolio diversification is a clearly defined and consistent selection of appropriate risks markets and partners moving forward for U S. T E on.
Working closely with our agency partners to ensure they are aligned with our strategic vision and confirming there was a clear path to profitability.
Finally, a part of our portfolio diversification plans include the launch of a new online quoting platform in.
In April we began a pilot program with a few agents and have plans to rollout. This in select states starting in mid 2021.
We are confident that this platform will propel our growth in the small commercial market.
Oliver a straight through processing those policies and growth in our profitable bottom line of business.
I will now turn the call over to Mike Wilkins.
Yeah.
Thanks, Randy and good morning, everyone.
For my portion of the call today, I will discuss the progress of our strategic plan focusing on positive outcomes during the first quarter of 2021.
First as discussed throughout 2020 for focus has been on reducing the size of our commercial auto portfolio on non renewing underperforming accounts and reducing the number of exposure units.
The first quarter of 2021, we continue these efforts and are pleased to report that exposure units decreased 23% over the past 12 months on the 265000 units in March 2020 to approximately 203000 units in March 2021.
Commercial auto frequency expressed in claims per insured units also continues to decrease with a 12 month moving average declining slightly in the first quarter of 2021 to $4 five 3% from $4 five 6% from the fourth quarter of 2020.
This decline is summarized on slide seven in our earnings call presentation on our website.
In addition slides nine and 10 provide a three year view of our claim balance by her.
Major commercial casualty lines of business.
For example, our commercial auto bodily injury and property damage claim counts are down 33% in the first quarter of 2021 as compared to the same period in 2020.
It also provided commercial general liability BOP liability and workers' compensation claim counts on these slides are down notably in the first quarter of 2021.
Positive signs of our strategic efforts.
We remain disciplined in our pricing strategy and continue to embed analytics, driven technical pricing into our underwriting processes across all major lines of business.
In particular, we are focused on pricing adequacy and a group.
Herschel auto property and umbrella books of business.
Commercial auto average renewal rate increases remained in the double digits at 10 eight percentage in the first quarter of 2021.
From 10, 4% in the fourth quarter of 2020.
Commercial auto average 12 month rate increases have been in the low double digits since the beginning of 2020.
Commercial property pricing also improved in the fourth quarter with average renewal rate increases now at seven 9% up from seven 4% in the fourth quarter.
As we stated last quarter. We believe there is an opportunity with our commercial property book to be more aggressive low freight increases and reducing desirable exposures as we see signs on the market.
Our claims initiatives also remain a focus on key to improving possibility for USG.
First quarter of 2021 our claims metrics trended positively with improvements in litigation expenses, which are the result of declining claims frequencies and strategic initiatives to embed analytics into the claims triage process that reserves for the claims cycle early and shorten the length of the cycle time.
But my portion of the call today, expanding on some of our growth strategies that Randy mentioned.
During the first quarter of 2021, we added several new assumed reinsurance programs. We believe these new programs for will further diversify our direct book of business and improve our profitability as an assumed reinsurance has historically been a profitable book of business for USG.
Also another additional on the first quarter of 2021 was <unk> investment in five Lloyd's of London syndicates.
We recorded $14 5 million of net premiums written in the first quarter of 2021 with this new participation. This new program will also help diversify our address book of business.
With that I'll turn the discussion over to Dawn Jaffray.
Thanks, Mike and good morning, everyone in the first quarter, we reported consolidated net income of $18 7 million compared to a net loss of $72 five nine in the same period of 2020 as Randy mentioned net income reported in the first quarter of 'twenty 'twenty. One it was driven by net realized investment gains.
And an increase in net investment income offset by higher catastrophe losses, and an increase in loss severity of commercial auto.
We reported net realized investment gains of $24 5 million in the first quarter of 2021 as compared to net realized investment losses of $93 for me in the same period in 2020, $20 6 million of net realized investment gains were driven by a change in the fair value of our equity security investment but.
I referred to as Phantom zone.
The remaining $3 9 million a gain for primarily driven by actual sales of equity hold on me.
Net investment income was $17 1 million in the first quarter of 2021 as compared to two point for me in the same period of 2020, the increase of $14 7 million life, primarily due to the change in the fair value of our bank line.
These bank fund L. L. P increased in value by $6 6 million in the first quarter 2021 compared to a decrease of 11.1 zone in the same period from 2020.
Moving on to operating metrics for the quarter comparison, we reported a combined ratio of 107, 2% compared to one on five 2% last year.
Favorable prior accident year Reserve development contributed 5.1 points during the first quarter of 2021 and was flat compared to first quarter 2020.
As I mentioned during our fourth quarter earnings call, we announced we were making changes to our pension and retiree medical plan and managing long term escalating personnel expense.
Changes in that traditional pension plan structure to a cash balance plan for may to mitigate long term liability and volatility.
The net retiree medical plan to a participant funding playing on both an immediate first quarter and will have a longer term cost saving impact the required accounting for this change had a much more significant impact on operating results in the first quarter.
Both the expense and loss adjustment expense ratio benefited from net change with approximately 22 million in total recapture it into income and recorded in the first quarter. This aggregate changed provided about eight points of reduction to the combined ratio during the first quarter of 2021 no.
No the beneficial impact on the combined ratio in first quarter will taper off that for the year progresses as premiums are earned or the denominator on the ratio rose throughout the balance of the year, we anticipate the resulting impact for the <unk> 2021 year will be approximately two points of improvement on the expense ratio.
Including these changes our expense ratio was 27, 6% for the first quarter of 2021 compared to $35 eight per cent for first quarter of 2020.
Moving on to capital as of March 31, 2021, our balance sheet remains strong and statutory surplus increased approximately three percentage during the quarter.
During the first quarter, we declared and paid a <unk> 15 cents per share cash dividend to shareholders of record as of March 2021, marking our 212th consecutive quarter of consistently paying dividend dating back to March of 1968.
Lastly, during the quarter, we restarted our share repurchase program buying a small amount of shares the amount and timing of any purchases is that management's discretion and it depends on a number of factors, including the share price general economic and market condition and corporate and regulatory requirements.
As a reminder, we remain authorized by our board of directors for 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.
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.
This time, we will pause momentarily to assemble our roster.
Okay volume growth.
Our first question is from Paul Newsome from Piper Sandler.
Yeah.
Good morning, everyone hope you're doing well.
Paul.
I wanted to ask you about how maybe a broader question right now but how.
How you feel about what youre doing with right vs.
The underlying claims inflation and and how much you think the underlying.
Improvement might be.
Happening at the moment.
Yeah.
Paul This is Randy I'll take a shot at that one on maybe Michael have something to add but.
We were just talking we feel pretty good about.
Where we are on commercial auto right now on on rate versus loss cost.
Property, we think we can do a little bit better, especially.
Especially in some of the parts of the country that have had storms like went over what our overall rate increase which was I think up to seven 9% on across the board and we think that should be north of 10. So we think there's more opportunities there.
Work comp is it's kind of moved to flat, which is better than it has been an independent from the past.
General liability.
That's kind of been one of our more profitable lines.
And that I think there's some opportunities there as well it isn't the umbrella.
You know we're getting.
Good right there, but I think we can we probably could even do more there I think some of the nationwide statistics, we've seen on umbrella business as excess coverages.
No pretty severe rate increases so I think we we've gotta do a little bit better there, even though we.
Loss ratio wise, it's been up one of our more profitable lines, but I think we got to be a little more opportunity opportunistic in that area and that's really an area that.
I promise not to mentioned social inflation as much anymore, but.
You know when the court costs for the court cases that so you know those larger umbrella really attracts the plaintiffs'.
Plaintiffs bar.
If you've got anything in Florida.
Maybe just add I think on <unk>.
Overall basis, we're confident that our rate increases exceed the loss cost inflation and hum in the environment that we operate short term I think with analytics.
On providing guidance for our reserve setting we're setting our case reserves earlier in the process and closer to ultimate which is driving our severity and.
In the quarterly results, but in the long term that should be a positive.
Yeah.
The and then I wonder a little help just to clarifying my understanding of the pension impact on expenses. So is it.
But as simple as there was a $21 million true up in the first quarter.
And then there'll be an ongoing benefit that helps the expense ratio by about two points, respectively, or but you also mentioned there was something about survey earn in over time so.
Maybe you could just kind of.
Clarify what we should think about that as we're looking at over the course of the year is it.
Is it is the true up done or are there some more true ups that come up through the course of the year and then it hit the run rate for them, how does that how does the accounting work.
Hi, Paul This is Don you're correct. We did recapture a liability are in the first quarter that we had previously set up and will be a small amount of ongoing recapture throughout the year and that's why we come to approximately for the total year two point associated with the overall improved.
Rates are relative to the expense ratio, specifically I said eight points overall about six points of that is our expense isn't about two points on the LTE side understanding that there are people in the U a component of the calculation.
And then there's some offsetting expenses as Randy indicated, it's really a quarter of moving parts.
Continuing to invest in additional technical talent and analytics, our risk office and assumed reinsurance team. We continue to put our investment in technology, our online quoting platform Oasis and analytics and so as a result, there's some fluctuation as the fixed expenses in the level of earned premiums are well very old for us.
For the course of time.
So I would anticipate that our run rate you know in 2021 will be somewhere in the range of about you know it's between 30 to 32 and a half roughly we're getting about a half point on the long haul of improvement from the medical plan and the pension plan offset by some interest.
On the surplus now.
Okay. So I guess I misunderstood so the the two points you're referring to is is what you expect the expense ratio to benefit for the full year 2021.
Run rate into 'twenty two.
About a half point is that right.
Yeah, I would expect a half point and then you know again, how much the denominator on earned premium changes.
Opportunistically there could be some additional savings, but right now I would suggest about a half point on going forward beyond 2021.
Debt that's great.
And then I was hoping you could talk a little bit on a different topic about these on Lloyds the blending business and maybe the reinsurance businesses as well as they become more important.
Hum.
How should we think about your participation in these businesses.
Is it.
Is it properly exposures that these kind of exposures you were talking about.
And where do you think United fires.
Sort of edge is in in these kinds of businesses.
What's the strategic.
Piece that you think are United fire brings to the diesel these businesses.
Hi, Paul This is Bob Cataldo.
We consider the funds at Lloyd's as an investment in the investment portfolio. So we monitor the size accordingly within our investment policy, but we'd.
We've established a member company in which we've invested in five syndicates as we disclosed but we look at it as a complement to our assumed reinsurance strategy, which is intended to further diversify our existing book of business. So as we look at the opportunities and underwrite the individuals syndicates, we keep that in mind is that we're trying to expand the scope of our book and diversify ourselves away from.
On social inflation severe Midwestern convective storms and risks of our life.
So we'll probably continue to look at further investments or at least maintaining our share of the investments that we've made but again, we monitor and governed by the size of this exposure vis vis our investment policy statement.
So are these few property exposures outside the U S or.
For the different types of casualty exposures that are outside the U S or how's the hazards.
Is it your group justification for it.
Paul This is Mike I'll take that one so we.
We do look to write property exposures in places, where we don't write it on the direct side so that could be.
U S. For example, we write a fair amount in Japan Europe.
In other places or it could be in the United States and areas, where we don't write rec business for example.
Our northeast or the southeast Carolinas, Georgia et cetera, I would also look to fill out lines, where we're underweight. So we've targeted on.
Some work comp.
Business, where we are underweight as a company.
Segment, that's currently been very profitable.
Really just trying to.
You know sand off for a sharp corners that we have in our current portfolio.
Yes.
Paul This is Randy.
No comment.
I think youre aware, we hired a chief risk officer, a fellow by the name of might go on studio and you asked you know kind of what what is Usg's advantage here and Mike have brought a lot of just past relationships a lot of the programs that we got on a bit long established and we would have not been able to be invited to get out of.
A lot of these programs without someone who's connections so that's kind of.
You know obviously, we underwrite all of the programs, but Mike is really introduced us to you know a lot of opportunities that we wouldn't have otherwise had so that's kind of where we have a little bit of an advantage over just anybody.
Doing all of our internal underwriting on their own.
Thank you.
Well, let some other folks ask questions, but I appreciate the call from users.
Alright, Thanks, Paul.
And then if you have a question. Please press Star then one.
Yeah.
Yeah.
At this time, we have no more questions.
Okay.
So this concludes our question and answer session.
I will like to turn it over to turn the conference back over to Randy Patten for 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 attending today's presentation you may now disconnect.