Q2 2021 United Fire Group Inc Earnings Call
Some highlights of the progress we are making with our strategic initiative of the portfolio diversification through rebalancing our mix of business.
The commercial auto now makes up only 21% of our new business premiums for the first half of 2021 as compared to 33% in 2019.
Also we are achieving growth in our more profitable lines of business with general liability, increasing from 21% to 24% commercial property, increasing from 11% to over 18% and inland marine growing from 9% to 15% from 2019 to 2020.
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We are also seeing growth in our surety specialty and assumed reinsurance lines of business, which contributed to our improved profitability in the second quarter of 2021.
The decline of new commercial auto business, especially in targeted classes and jurisdictions, coupled with the growth of our more profitable lines will allow us to continue to achieve greater diversification, reducing our vulnerability to commercial auto claims.
Also contributing to the improvement in profitability in the second quarter of 2021 were below average catastrophe losses.
<unk> losses added 9.6 points to the combined ratio in the second quarter of 2021 compared to $19.2 percentage points in the second quarter of 2020.
Our 10 year historical average for the second quarter is 10.6 points the largest catastrophic events in the second quarter of 2021 was a 4 million dollar convective storm in early April and the state of Texas.
During the second quarter of 2021, we also saw improvements in our core loss ratio.
This improvement occurred while we also strategically established reserves earlier in the claims cycle with.
With greater pessimism.
Slide 12 in our presentation shows that our core loss ratio improved 3.5 percentage points in the second quarter of 2021.
As compared to the same period in 2020 if.
If we take into consideration the recovery of $15.4 million in the second quarter of 2020 under our all lines aggregate reinsurance program, our core loss ratio improved 9.3 percentage points in the second quarter of 2021 as compared to the second quarter of 2021.
We are encouraged by the improvement in our core loss ratio, we remain cautiously optimistic heading into the third quarter, which is historically, our second highest quarter for cash catastrophe losses.
Before I turn the call over to Mike I am pleased to report that our new online quoting platform, which we began piloting in mid April has now been rolled out in select states the amount of premium written.
The platform as of today is not material, but we believe this platform will propel our growth in the small commercial market delivering straight through processing of policies and growth in our profitable bottom line of business I will now turn the call over to Mike Wilkins Mike.
Thanks, Randy and good morning, everyone.
Randy mentioned, we are pleased with progress shown in our second quarter results.
We believe that we are on the correct course to improving our profitability.
Now more than ever we remain focused on executing the 3 pillars of our 1 year boldly forward strategic plan long term profitability diversified growth and continuous innovation.
Our focus on reducing the size of our commercial auto portfolio by non renewing underperforming accounts and reducing the number of exposure units continued to show progress in the second quarter of 2021.
Through our strategic efforts I am pleased to report the exposure units decreased 23% over the past 12 months from 247000 units in June of 2020 to approximately 190000 units in June of 2021.
Commercial auto claims frequency expressed in claims per insured units also continues to decrease with the 12 month moving average declining again in the second quarter of 2021 down to 4.8% from 5 point of zero percent in the second quarter of 2020.
This decline is summarized on slide 7 in our earnings call presentation on our website.
It is important to note that the decline in frequency began prior to the pandemic and continues to decline by an increase in miles driven in the second quarter of 2021.
We believe this continued decline is the direct result of our strategic underwriting actions.
Slides 9 and 10 provide a 3 year view of our claims counts by major commercial casualty lines of business.
For example on commercial auto bodily injury and property damage claim counts are down 22% in the first half of 2021 as compared to the same period in 2020.
We have also provided commercial general liability BOP liability and workers' compensation claims counts on the slides is all of our down in the first half of 2021, which is a positive sign of our strategic efforts.
We remain disciplined in our pricing and focused on pricing adequacy in our commercial auto property and umbrella of books of business.
Year to date, the overall renewal pricing increase of 6.4%.
Excluding workers' compensation line of business. The overall average renewal price increase was 7.8%.
The increase in pricing was driven by our commercial auto and commercial property lines of business.
Year to date, the commercial auto average renewal rate increase was 9.9%.
The commercial property average renewal rate increase was 8.4%.
We continue to believe there is an opportunity with our commercial property book to be more aggressive of rate increases and reducing undesirable exposures.
Before I turn the call over to Don I'll wrap up my portion of the call today with the reminder of our claims initiatives, which also remain a focus and key to improving profitability for USG.
Similar to the first quarter of 2021, and the second quarter of claims metrics trended positively with improvements in litigation expenses.
This is the result of declining claims frequency as well as our strategic initiatives to embed analytics into our claims triage process set reserves early in the claim cycle and shorten the length of the claims cycle.
With that I'll turn the discussion over to Dawn Jaffray done.
Thanks, Mike and good morning, everyone in the second quarter, we reported consolidated net income of $13.8 million compared to net income of $6 million in the same period of 2020 year to date, we reported consolidated net income of $32.5 million compared to a net loss of 62.
$6.6 million year to date 2020, as Randy mentioned the improvement in profitability in the second quarter of 2020 line was driven by a decrease in frequency in severity of commercial auto liability losses, along with below average catastrophe market.
Also contributing to net income reported in the second quarter and year to date 2021, with an increase in investment income and net realized investment loss.
Net investment income was $13.8 million and 39 level in the second quarter and year to date 2021, as compared to $12.7 million and $15.1 million in the same periods of 2020.
The increase in both periods was primarily due to the change in the fair value of our bank fund out of LP.
<unk> increased in value by $2.5 million in the second quarter and $9.5 million year to date 2021, compared to an increase of $1 million and a decrease of $9.1 million in the same period of 2020.
The reported net realized investment gains of $6 million in the second quarter 2021, compared to $15.8 million in the second quarter, 2020, and $35 million 2021 year to date versus net investment losses of $77.6 million in the comparable 2026 months year to date.
The majority of the change between the 2 periods was driven by a change in the fair value of our equity security investments, what I refer to as Phantom gains. The remaining change was primarily driven by actual sales of equity holdings.
Moving on to operating metrics for the quarter, we reported a combined ratio of 108% compared to 111, 4% last year.
Year to date, we reported a combined ratio of 104, 3% compared to 108, 2% last year.
The favorable prior accident year Reserve development contributed about 1 point of 3.1 points during the second quarter and year to date 2021 as compared to 3.8.
And 4.5 in the same periods of 2020.
As mentioned during last quarter's call, we expect improvement in the expense ratio in 2021, because of the previously announced changes to our retiree medical plans and managing long term escalating personnel expenses.
The benefit impacted both expense and loss adjustment expense ratio in the first quarter of 2021 with the smaller ongoing benefit recognized throughout 2021 and the into 2022 for the second quarter of 2021, we reported net expense ratio of 33, 1% as compared to 33.6.
In the same period of 2020.
Year to date, we reported net expense ratio of 32% in 2021 compared to 34, 7% year to date of 2020, we still anticipate the resulting impact for the 2021 year will be approximately 2 points of improvement on the expense ratio associated with this change.
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Also benefiting the expense ratio in the second quarter and year to date 2021 of the decrease in the acceleration of the amortization of our deferred acquisition costs due to improved profitability in our commercial auto line of business.
At June 30 of 2021, as a result of having year to date net income of $33 million per GAAP and $54 million for statutory reporting both of our GAAP equity and statutory surplus continue to support our strong balance sheet.
During the second quarter, we declared and paid of <unk> 15 per share cash dividend to shareholders of record as of June <unk> 2021, marking our 213th consecutive quarter of consistently paying dividend dating back to March of 1968.
And lastly, during the recorder, we repurchased just over 31000 shares of our common stock as a reminder, we remain authorized by our board of directors to purchase an additional 1.8 million shares 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 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw. Your question. Please press Star then 2 and at this time, we will pause momentarily to assemble our roster.
Yes.
And the first question will come from Marla backer with Sidoti. Please go ahead.
Thank you.
So yeah.
Your strategy to reduce the commercial auto is obviously showing strong results well what are you seeing if you could step back and just take a look at what youre seeing industry wide.
Are you still seeing the same kind of social inflation pressures that.
You've talked about in prior quarters.
Not affecting the loss mark because of your proactive strategy.
Okay.
Marla this is Randy.
We're certainly not declaring victory yet the commercial auto.
We mentioned we saw a continued decrease in frequency, which is the big plus.
Especially since some of the other carriers are saw frequency go upward as the economy started to open up so.
That tells us that our reduction in units and reducing the most problematic units.
Of paid off with our continued lower frequency with the.
We've also seen severity get more in line, which is a positive.
Our our difference in the way we're handling claims with the trying to our best to stay out of court and settle claims quickly I think all of them have helped but there really hasnt been.
Still seeing traumatic brain injuries post traumatic stress syndrome and.
So many more claims than we ever did in the past we could try our best of stay out of court.
The the plaintiff's bar of Cowen.
Found ways EBITDA low impact accidents to continue to.
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Bolster the the claims of the people that were in some of these accidents.
We think absolutely we want to write less auto going forward, we can't avoid the line, obviously completely but we can kind of manage what we offer we're also kind of.
Tempering of the limits that we're able to offer umbrella as we've cut back on.
Considerably of trying to avoid some of the.
Big severity losses, but.
I don't know I think the the term social inflation, which I don't think we actually used any word of our transcript, which is a miracle from.
Over the past several quarters, but we're still seeing a lot of evidence of it. Unfortunately, there has been a little bit of legislative changes Texas' for sure of past a lot of that could help a little bit.
But really.
We're doing everything on our end with rates and cutting back with the.
Exposure limits.
It's too early to really say anything that we're seeing a lot less with regards to the core things that are making commercial auto tough line of business.
Okay, and then in terms of again staying with the commercial auto category.
<unk> taken a lot of the exposure out of your overall book.
Where do you think you are in that process in terms of eliminating the risky assets.
Our riskiest.
Policy is from that category.
Thank you.
This is Randy again, if I.
Where we ultimately need to be.
And I think we said, we're getting closer to 25% of our overall book.
I would say that probably needs to go to 20 long term.
Possibly lower than that that would still make us.
Little bit higher percentage of than a lot of our peer companies have the commercial auto so.
You've heard us talk about diversifying the book of business overall.
The commercial order without a doubt is still an area that we want the decrease versus some of your other areas that we want to increase.
Sure.
Mhm, Okay. Thanks, and then just last question switching topics.
The online quoting system.
The platform can you give us just in general terms from what the roadmap or time line is for rolling that out.
Yes, so all of it.
Maybe the.
Turning a little bit over to Mike.
We kind of mentioned that the premium volume.
It was kind of insignificant so far and we're only offering in a select number of states so far but what.
I really like as we get high marks for the experience.
That agents go through and coating business.
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The system is fast I think our average call time is lake under 8 minutes, which is.
Terrific.
Have found us.
We still have work to do on our rates and Thats very correct.
Kind of thrilled.
With the program.
It has translated into a lot of.
Premium yet and that is solely because of competitiveness and we can get that fixed income fairly short period of time like do you have more on the kind of the timeline.
Just on.
On the timeline no specifics that we would share, but we will be rolling out additional states.
Regular basis every quarter.
Or so be rolling out another.
Page of few states.
The build momentum to for that process rolling out of the states and maybe 1.
In addition to the comments Randy made on.
How excited we are about the system 1 of the other key things that we've seen is.
Pretty high percentage of our <unk>.
Risks are able to go through the process.
Straight to the issue without involving an underwriter in our size of our analytics is able to make the call unacceptability and pricing without underwriter of involvement.
Part of what speeding up the process now is as Randy said, we are disappointed with the bind rates and that's based on.
Our rates not being where they are they need to be we inc.
<unk> made a lot of new analytics into our pricing process.
That's difficult to get rate right out of the gate. So we had some adjusting to do there in some states in particular, but.
With the system itself and the process. We are very excited about how that has gone so far.
Okay. Thank you.
Again, if you have a question. Please press Star then 1 our next question will come from Paul Newsome with Piper Sandler. Please go ahead.
Good morning.
Hey, Paul.
Could you talk a little bit about the.
The property lines of fire and Allied lines.
What youre doing there as well.
Looks like it's <unk>.
Growing.
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Maybe thats mostly rate but.
The the loss ratio there is still a little bit.
Ralph.
In fact, it looks like its been leased year to date rougher than the.
The auto business.
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Maybe you could just talk about what you're doing there.
And.
Yes, Paul this is Mike I'll take a shot at that 1 so.
The first comment or our property loss ratio is a little rough and thats being driven year to date, primarily by the Texas Winter storm that we had earlier in the year. So that's the.
Out of the big impact, but that being said over the past few years storms have had an outsized impact on our property line of business and Thats something that were aggressively trying to address so I would say.
Our focus has been on auto and our focus will continue to be on auto right. Now our efforts are really aimed at improving net property line substantially because that is.
Our second line that we're not happy with the results in <unk>.
We've seen.
We just went through an RFP process.
At some maybe different reinsurance solutions or our cash and 1 of the conclusions from that based on presentations from a lot of different industry experts of some of the storm patterns have changed and shifted in that shifted into some areas, where USG tends to be heavy heavily exposed so.
We'll probably be making some.
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The strategic plans.
Reduce exposure in some areas, we're pushing very hard on rate, you've probably seen our rate quarter to quarter. We continue to go up in the property line. We think there is an additional opportunity to push rate, especially in some states and jurisdictions.
And we're also getting a lot.
Tougher on the underwriting process a lot more risk control involvement.
We're reviewing the existing accounts on the books of risk control and.
Trying to improve the quality of that book as we go forward.
So is the thought that the last couple of years of cat losses, or kind of normal annual price for that or am I thinking of it.
Should we be thinking of a differently.
Well, maybe not normal, but I think we feel like the models that we use in the industry.
Under estimate the impact from severe convective storm.
If you look at our portfolio over the last decade, we've done a good job of reducing our exposure to hurricanes on the coast, but we've grown in the Midwest, we're more susceptible to the severe convective storm. So Meanwhile.
Seeing fewer big hits and of course, we just had the ratio. So we do have a big hit from time to time, but.
We've generally seen fewer big hits to our bottom line, but we are seeing more frequency of smaller cat events. So the aggregation of severe convective storm losses.
Created some volatility in our results and Thats something were trying to address.
Great.
I appreciate it.
Thank you Paul.
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.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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