Q3 2021 United Fire Group Inc Earnings Call

Good morning, and welcome to the United Fire groups, H Q3, 2021 conference call.

All participants will be and listen only mode. So did you need assistance, placing all conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May press star one on your Touchtone phone to withdraw your question. Please press Star then too.

Please note this event is being recorded.

I like to turn the conference over to Randy pattern. Please go ahead.

Good morning, everyone and thank you for joining this call.

This morning, we issued a news release any results.

And a copy of this document please visit our website at U of T insurance Dot com dresser reaches and slides are located under the Investor Relations tab.

Joining me day on a call our Chief Executive Officer, Randy Rambo, and Mike Wilkins Chief operating officer.

We also have other members of management available to answer questions at the end of our prepared remarks.

Before I turn the call over to Randy ran though a couple of reminders.

First please note that our presentation. Today may include forward looking statements as defined in the private Securities Litigation Reform Act of 1995.

The company cautious investors that any forward looking statements include risks and uncertainties and they're not a guarantee of future performance.

These forward looking statements are based on management current expectations. The actual results may differ materially due to a variety of factors, which are described in a press release and SEC filings.

Also please note that our discussion today, we may use of non-GAAP financial measures reconciliation of these measures to the most comparable GAAP measures are also available in our press release and the SEC filings.

At this time I'm pleased to present, Mr. Randy Rambo C O F U G insurance.

Yeah.

Thanks, Randy Good morning, everyone and welcome to our third quarter 2021 conference call.

I will begin today by discussing the strong improvement in our core loss ratio in the third quarter would you improve 10.1 percentage points as compared to the same period last year.

On a year to date basis, our core loss ratio improved 2.6 percentage points compared to the same period last year.

When taking into consideration the recovery of $7.1 million and $22.5 million, respectively in the third quarter.

Year to date last year under our all lines aggregate reinsurance program, our core loss ratio improved 12.8 percentage points and 5.5 percentage points respectfully.

Summary of our core loss ratio, which removes the impact of catastrophe losses and favorable prior your reserve development can be found on slide 13 in the presentation on our website.

We are pleased with this significant improvement, which is a direct result of our strategic initiatives.

Or the third quarter, we reported a combined ratio of one O 9.7%, a decrease of 14.7 percentage points as compared to third quarter of last year year.

Year to date, we reported a combined ratio of one O 6.1%, a decrease of 7.4 percentage points as compared to year to date 2020.

The most significant improvement was in our commercial auto loss, Rachel, which improved 43.7 percentage points in the third quarter and 11.8 percentage points year to date of 2021 is compared to the same periods last year.

The combined ratio continued to benefit from favourable prior accident Your reserve development at 4.6 points and 3.6.

Since respectively during the third quarter and year to date 2021, compared to 2.4 points and 3.8 points in the same periods last year.

Most of the favorable prior accident your reserved development. This year was in our commercial auto line of business.

Offsetting the improvement in our core loss ratio was higher than average catastrophe losses.

Pretax catastrophe losses added 16.5 percentage points to the combined ratio in the third quarter of 2021 compared to our third quarter historical average of 9.2 percentage points.

During the third quarter, we experienced 19 catastrophic events with the most significant events being hurricane Ida and the European floods from our assumed reinsurance business.

As part of our portfolio management strategy throughout 2020, and 2021, we are focused on reducing the size of our commercial auto portfolio by reducing the number of exposure units and implementing nearly double digit read increases which.

Is increase the quality and profitability of our commercial audible.

We also continue to experienced a decrease in the frequency and severity of commercial auto claims.

Slide six and seven in our presentation on our website highlights our progress and diversifying our portfolio by rebalancing our mix of business.

Commercial auto now makes up 24.8% of our portfolio year to date this year compared to 28% for the same period last year.

Commercial auto new business premium written year to date in 2021 is decreased to 21% as compared to 33% in 2019.

Also we are achieving growth and are more profitable lines of business with new business premium for general liability, increasing from 21% to 24% and inland marine growing from 9% to 16% between 2019 to 2021.

We are also seeing growth in our Shirty E&S and assumed reinsurance lines of business, which contributed to the improvement in our core loss ratio and underlying profitability year to date.

Before I turn the call over to Mike I would like to take this opportunity to share share some progress on our strategic plan.

It is clear to me that our strategic plan is working as is evident from the improvement in our core loss ratio the last two quarters.

A plan of this scale takes time to be fully implemented and we believe we are seeing significant progress and gaining momentum and all three pillars of our one USG boldly forward strategic plan.

Including longterm profitability diversified growth and continuous innovation.

And the profitability pill pillar.

We are relentlessly focused on core skill execution with an emphasis on consistency quality and continuous improvement.

We have fostered a one USG mindset to identify and scale best practices across our organization.

We are now managing our portfolio too tightly fit or risk appetite across all underwriting branches of USG with best in class data and analytical tools to assist our underwriters and making effective decisions.

And the growth pillar, we're scaling our business indirect standard markets that we know well and can write profitably with the right partners.

We are expanding our presence in Shirty E&S and inland Marine lines. We have also developed and deployed a state of the art digital quoting platform for small business within our online division.

Finally, we have broadened our marketscope through our assumed reinsurance strategies.

In our innovation pillar, we have upskilled and developed a gross mindset and our employees.

We have deployed analytics and data driven decision, making across the enterprise, including working on strengthening our cat modeling capabilities. We have strengthened and optimized are key agency partnerships, we've expanded our business agility to drive faster delivery and speak to market.

We have transformed USG by creating an environment that inspires innovative ideas into action.

As I mentioned the plan of this scale takes time and 2020, we laid the foundation for our plan and in 2021, we are seeing the plan take root.

Overall, we wish things were progressing faster, but all metrics are improving and we are convinced we're on the right path to deliver consistent sustainable and profitable results.

Now, we will turn the call over to Mike Wilkens, Mike.

Thanks, Randy and good morning, everyone I will echo Randy's comments that we are transforming USG and believe we are on the correct course to improving our profitability or.

Our focus on reducing the size of our commercial auto portfolio by Nonrenewing underperforming accounts and reducing the number of exposure units continue to show progress in the third quarter of 2021.

Through our strategic efforts I'm pleased to report that exposure units decreased 24% over the past 12 months from 235000 units in September of 2022, approximately 179000 units in September of 2021.

This decrease as a result of targeted reductions worst performing accounts is part of our strategic plan.

Commercial auto claims frequency expressed in claims per insured units also continues to decrease with the 12 month moving average declining again in the third quarter of 2021 down to 442% from 478% in the third quarter of 2020.

This decline summarized on slides eight nine in our presentation on our website.

It is important to note that the decline in frequency began prior to the pandemic and continues to decline despite an increase in miles driven in 2021.

We believe this continued decline as a direct result of our strategic underwriting actions.

Slides 10, and 11 provide a three year view of our claim counts by major commercial casually lines of business for.

For example, our commercial auto bodily injury and property damage claim counts are down 22% year to date 2021 is compared to the same period in 2020.

They have also provided commercial general liability BOP liability and worker's compensation claim counts on these slides as all our down year to date 2021, which is a positive sign of our strategic efforts.

Part of our strategic plan is to focus on pricing adequacy in our commercial auto property in umbrella books of business year to date. The overall average renewal price increase was six 3%.

Excluding our workers compensation line of business. The overall average renewal pricing increase was seven 6%.

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 9.5%.

Commercial property average renewal rate increase was $8 seven per cent.

These rate changes are very consistent with the second quarter of 2021, we will continue to be aggressive with rate increases and reduce undesirable exposures.

Our claims initiatives also continued to progress extremely well during the third quarter and are contributing to net income primarily from a reduction in legal fees through litigation management and avoidance by settling claims quicker than the claim cycle.

Before I turn the call over to Randy pattern I want to discuss our strategic plan to reduce the volatility in a catastrophe losses experienced in recent quarters.

We continually review our book of business and model for catastrophe losses, We've recently hired a cat modeling professional and bright cap modeling capabilities in house, where in the past we relied on reinsurance broker modeling capabilities.

Earlier. This year, we also did an RFP for a cat reinsurance program with select reinsurance broker's as part of the effort to optimize our cat reinsurance program.

In addition to these efforts to reduce the impact of cats were also strategically diversifying our book of business with non cat exposed business, such as charity E&S inland marine and non cat exposed assumed reinsurance business.

In addition, our strategic plan to exit personal lines of business, which is material materially completed will significantly reduce our volatility in exposure to catastrophe losses.

It is important to note that the increase in loss ratio and are assumed reinsurance line of business. During the third quarter of 2021 was due to cat losses on our legacy book, a business, which has been in place for many years.

During 2021 part of our diversification strategy is to grow our non-cash assumed reinsurance business as it has been very profitable for us traditionally with combined ratios below a 100%.

With that I'll turn over the discussion to Randy Pat Randy.

Thanks, Mike and good morning, again, everyone in the third quarter reported a consolidated net loss of nine $6 million compared to a net loss of 30 729 in the same periods of 2020.

Year to date, we reported consolidated net income of $22.9 million compared to a net loss of one O 3.8 million year to date prior year.

As Randy mentioned are Covid loss ratios continue to improve in the third quarter, but it was offset by 30, 959, and catastrophe losses, which is $17.5 million or seven three points higher than our average for third quarter.

Also contributing to net income in third quarter and year to date 2021 was an increase in investment income.

Net investment income was $11.6 million and $42.4 million in the third quarter and year to date of 2021 as compared to $7.2 million and $22.3 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 limited liability partnerships, which increased in value by $1.3 million and $10.8 million in the third quarter and year to date 2021 compared to a decrease of four $6 million and 13.8 million in the same period of 2020.

We reported net realized investment losses of $2 million in the third quarter of 2021, and net realize investment gains of $28 2 million year to date as compared to net realized investment gains a $15 2 million and events net losses of $62.4 million in the same period of 2020, the majority of the change.

Between the two periods was driven by a change in the fair value of our equity security investments, which is required degree reported in net income the.

The remaining changes primarily driven by actual sales of equity holdings.

As mentioned during our earnings call. This year, we expect improvement in the expense ratio in 2021, because of the previously announced changes to our postretirement medical plan and.

The majority of the benefit impacted both expense and loss adjustment expense ratios in the first quarter of 2021 with a smaller ongoing benefit recognized throughout 2021 and 2022.

Year to date, we report an expense ratio of 32.2% compared to $34, 4% year to date 2020 or 2.2 points of improvement.

For the third quarter of 2021, we did see an increase in expense ratio of 2.5 points as compared to the third quarter of 2020.

This is due to improved performance in a book up business, resulting ambitions to our profit sharing accruals for our agents employees and program business.

We still anticipate approximately 1.5 to two points improvement an expense ratio for the full year of 2021 as compared to the full year of 2020.

I will conclude my portion of the call today discussing our capital position.

As of September 30th 2021.

Tori surplus increased approximately 2% year to date.

During the third quarter, we declared and paid a 15 per share cash, giving the shareholders of record as of September 3rd marking are 214th consecutive quarter of consistently paying dividends dating back to March of 1968.

Lastly, during the quarter, we repurchased about 1 million or just over 36000 shares of our common stock.

<unk> and timing of any purchases is that managements discretion and depends on several factors, including the share price general economic and market conditions and regulatory requirements.

This concludes our prepared remarks I will now open the line for questions operator.

We will now begin the question and answer session. Basking question you May Press Star then one on your Touchtone phone.

You're using a speaker phone please pick up your handset before pressing the keys.

Withdraw your question was best Star then too.

At this time, we will pause momentarily to some who are all sir.

Our first question today comes from my Love Backer with Sidoti. Please go ahead.

Thank you so I you.

Done a very strong shop at reducing exposure on commercial auto.

How much more painting do you think you want to do in that category.

Marlowe this is Randy.

I would say were substantially through it.

There's more to go.

I think we.

Highlighted kind of what percentage or book of.

Businesses and auto and ultimately we'd like to get that down to about 20% or so so we do have a little ways to go but I think we are substantially through it right now.

Okay and then.

On the flip side some of the categories by your you know emphasized in greater growth again, you know we've seen some nice.

And many of those categories.

Specifically curious right now that inland Marine and you know how that category is doing right. Now is there any impact also from some of that you know.

Global logistics issues that does that you know are impacting a lot of other sectors.

Sectors.

I'm not sure what you mean by global logistics, but.

That line is doing well we have.

A couple of.

Underwriters that really specialize in that business.

We do a lot of.

Insuring buildings in course of construction builder's risk in that area, but I don't I don't think we've seen any material impact on that line from.

Kind of the global shortages that we're seeing.

Mhm.

Okay and then finally the last question is you know back when.

<unk> you know more at the height I guess of the pandemic that with a lot of talk around the potential risk of business interruption plain and you know I I think that you've had in the past, but that's not a risk that you foresee you know regarding your book of business, but has there been any.

You know any updates within the industry overall regarding business interruption.

As potential risk factor.

So we we didn't mention it in our our conference call, which I guess is a good thing.

There has been a couple of court cases.

And the last quarter and they've been positive ones.

Kind of continued to say.

It's not zero exposure, but it's very manageable exposure.

As a reminder, we have the requirement of direct physical loss plus we have the virus exclusion on almost every policy that we right.

So we continue to watch the court cases, as they develop but everything we've seen in the last quarter has been for the most part positive and what.

What we have seen in claims.

If we had to pay all of them would be very manageable, but so far did you feel it looks like the courts are upholding but that is not going to be a covered.

Cause a loss.

Again, if you would like to ask a question that is star about a one star the other one to ask a question.

There being no further questions. This will conclude our question and answer session I would like to turn the conference back over to Randy pattern for any closing remarks.

This now concludes our conference call. Thank you for joining us and have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.