Q4 2021 United Fire Group Inc Earnings Call
Good morning, everyone. My name is Jamie and I'll be your conference operator today.
At this time I would like to welcome everyone to the U F T insurance fourth quarter and year end 2021 financial results conference call.
All participants will be in a listen only mode.
Need assistance at least they know a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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Please note today's event is also being recorded.
At this time I'd like to turn the conference call over to Randy Patten Co Chief Financial Officer, Sir Please.
Please go ahead.
Good morning, everyone and thank you for joining this call. This morning, we issued a news release Henry talk to find a copy of this document. Please visit our website at <unk> insurance Dot Com press releases as to why they're located under the Investor Relations tab.
Joining me today on the call are Chief Executive Officer, Randy Randy and Mike Wilkins Chief operating officer.
We also have other members of management are available to answer questions at the end of our prepared remark.
Before I turn the call over to Randy Man, 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 1095.
The company cautions investors that any forward looking statements include risks and uncertainties and they're not a guarantee of future performance.
Forward looking statements are based on management's current expectations and the actual results may differ materially due to a variety of factors, which are described in our press release and SEC filings.
So please note that our discussion today, we may use a non-GAAP financial measures reconciliations of these measures to the most comparable GAAP measures are also available in our press release and SEC filings.
At this time I'm pleased to present, Mr. Randy Van <unk> CEO of <unk> insurance.
Thanks, Randy Good morning, everyone and welcome to our fourth quarter and year end 2021 conference call.
I am extremely pleased to report strong fourth quarter results today.
<unk> ability, we reported is a culmination of the hard work and team effort that has gone into developing and executing our one <unk> strategic plan, which is aimed at long term profitability diversified growth and continuous innovation.
Based on the financial results reported today. It is clear to me that our strategic plan is working and achieving the desired outcome.
So we knew a plan of this scale would take time to fully implement we believe we've hit our stride and are confident of our path forward.
In the year ahead, we are committed to building on the progress we've made and continuing towards our goal of delivering consistent sustainable and profitable results for all <unk> stakeholders.
Now for some highlights from our results.
The fourth quarter marks the third consecutive quarter, we reported improvements in our core loss ratio.
Our core loss ratio, which removes the impact of catastrophe losses and favorable prior year Reserve development improved 24, five percentage points, an 8.0 percentage points, respectively in the fourth quarter and year to date 2021 as compared to the same periods of 2020.
This trend of quarterly core loss ratio improvement began in the second quarter of 2021 and is a direct result of our strategic initiatives.
For a summary of our core loss ratio calculation refer to the slide 13 in the presentation on our website.
The improvements in the core loss ratio contributed to the reported combined ratio of 83, 1% in the fourth quarter, which is our lowest quarterly combined ratio in over 14 years dating back to the second quarter of 2007.
For the full year of 2021, we reported a combined ratio of 103% an improvement of 15 six percentage points over the previous year.
The line of business with the most significant loss ratio improvement was commercial auto.
Which improved 68, one percentage points in the fourth quarter and 25, one percentage points for the full year of 2021 as compared to the same periods of 2020.
The improvements in profitability in our commercial auto line of business.
From a combination of a decrease in frequency and severity of losses and an increase in favorable prior year Reserve development.
The combined ratio also benefited from favorable prior accident year reserve development at nine five points and five one points respectively. During the fourth quarter and full year of 2021 compared to unfavorable prior accident year reserve development of $4 seven.
Points in the fourth quarter of 2020 and favorable prior accident year Reserve development of one seven points for the full year of 2020.
Most of the favorable prior accident year Reserve development. This year was in our commercial auto line of business.
The favorable reserve development of five one points reported for 2021 continues our historical trend of having overall favorable reserve development every year since 2009.
The annual average favorable development reported since 2009 is six three points.
Also contributing to our profitability in the fourth quarter were below average catastrophe losses.
Pre tax catastrophe losses added three five percentage points to the combined ratio in the fourth quarter of 2021, which was nearly two points lower than our fourth quarter historical average of five three percentage points.
The fourth quarter is the first time in eight consecutive quarters that cat losses were below our historical average dating back to the third quarter of 2019.
For the full year of 2021 cat losses added 10, two percentage points to the combined ratio compared to 13 five percentage points in the previous year.
This compares to a 10 year historical average of seven three percentage points added to the combined ratio for cat losses.
As part of our strategic plan, we are taking steps to reduce volatility by limiting our exposure to the level of catastrophe losses experienced in recent quarters. One example of this is our now nearly complete exit from personal lines, which was a contributing factor to below average cat losses incurred in the fourth quarter.
In addition to the exit of personal lines. We have also strategically diversified our book of business with less cat exposed business, such as surety E&S inland marine and assumed reinsurance business.
Before I turn the call over to Mike I want to make mention of some additional good news in December a M. Best affirmed the financial strength rating of a excellent for the property and casualty subsidiaries of United Fire Group, Inc.
This is the 28th consecutive year, we've earned in a financial strength rating from a M best.
Am best readings are a meaningful measure and the insurance industry with an a rating given to companies that have an excellent ability to meet their ongoing insurance obligations I will now turn the call over to Mike Wilkins.
Thanks, Randy and good morning, everyone as Randy mentioned from a combined ratio standpoint. This was our most profitable quarter in over 14 years. This profitability is a reflection of our continued progress in the execution of our enterprise strategy.
Today, I will focus on some key metrics and initiatives that are contributing to the increase in profitability.
The primary contributor was the decrease in frequency in severity of commercial auto losses in the fourth quarter.
As part of our portfolio management strategy throughout 2020 in 2021, we are focused on decreasing the size of our commercial auto portfolio through targeted reductions in the number of exposure units and implementing targeted targeted rate increases.
These efforts have improved the quality and profitability of our commercial auto book of business.
Exposure units decreased 24% over the past 12 months from 221000 units in December 2022, approximately 168000 units in December 2021.
Looking ahead to 2022, our expectation is that we will not see a significant decrease in auto exposure units as we move closer to our optimal portfolio mix.
Slide six and seven in our presentation on our website highlights our progress in diversifying our portfolio by rebalancing our mix of business.
At the end of 2021 commercial auto accounted for 24% of our portfolio composition compared to 28% at the end of 2020.
Commercial auto new business premium written in 2020 , one has decreased to 21% as compared to 32% in 2019.
Also we are achieving growth in our historically profitable lines of business with new business premium for general liability, increasing from 22% to 24% and inland marine growing from 9% to 17% between 2019 and 2021.
We are also witnessing growth in our surety E&S.
E&S and assumed reinsurance lines of business, which contributed to the improvement in our core loss ratio and underlying profitability in 2021 the.
The most significant growth occurred in our assumed reinsurance lines, which represented seven 4% of our portfolio in 2021 as compared to three 4% in 2020.
Commercial auto claims frequency expressed in claims per insured units also continues to decrease with the 12 month moving average declining again in the fourth quarter of 2021 down to $4 five 1% from 456% in the fourth quarter of 2020.
This decline is summarized on slides eight and nine in our presentation on our website its 11th consecutive quarter of declining commercial auto claims frequency dating back to the second quarter of 2019.
Slides 10, and 11 provide a three year view of our claim counts by major commercial casualty line of business. For example, our commercial auto bodily injury and property damage claim counts are down 21% in 2021 as compared to 2020.
We've also provided commercial general liability BOP liability and workers' compensation claim counts on the slides. That's all are down in 2021, which is a positive sign of our strategic efforts.
From a pricing standpoint rate increases for the full year of 2021, and our commercial auto property and umbrella books of business remained relatively stable and in line with the pricing I shared during our third quarter call.
For 2021, the overall average renewal price increase was six 4%.
Excluding our workers' compensation line of business. The overall average renewal pricing increase was seven 7%.
This 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 nine 5% the commercial property average renewal rate increase was eight 7%.
Looking ahead to 2022 with a focus on profitability and carefully monitoring inflation. Our underlying initiatives include targeted rate increases with continued focus on commercial auto commercial property and umbrella along with an emphasis on commercial property risk selection and umbrella limits management.
Overall, we will continue to pursue profitable growth opportunities backed by our strong underwriting and pricing discipline.
Workers' compensation rates continued to decline in 2021.
This decline along with a decrease in prior accident year favorable reserve development and an increase in frequency of losses resulted in deterioration of the workers' compensation loss ratio in 2021, we will be we will be deploying a new analytics model in the first half of 2022 to assist with improving profitability in this line.
This is a line we will watch very closely in 2022.
Before I wrap up I'd like to expand upon comments that Randy made about our efforts to reduce volatility in our results.
Andy mentioned, the exit from personal lines and the optimization of our portfolio of business.
For 2022, we also restructured our kind of our catastrophe reinsurance program could provide better protection from both an occurrence in an aggregate loss perspective.
Through a new aggregate program, we now have named storm protection for aggregate losses. In addition to the other perils in prior years named storms are excluded from <unk> aggregate catastrophe protection.
So with the new structure, our retention for each catastrophe occurrence has reduced the mechanics of the structure provides the potential for additional reduction in catastrophe retention for occurrences subsequent to an initial loss to the program.
Before I turn the call over to Randy Patten I'd like to comment on the progress we're seeing in claims.
Favorable reserve development reported in the fourth quarter of 2021 is being driven by excellent work of our claims team who have focused on settling claims quicker and the claims cycle, resulting in favorable outcomes and reducing legal fees to litigation management and avoidance with that I'll turn the discussion over to Randy Patten Randy.
Thanks, Mike and good morning, again, everyone in the fourth quarter, we reported consolidated net income by $57 7 million compared to a net loss of $8 9 million in the same period of 2020.
For the full year reported consolidated net income of $80 6 million compared to a net loss of $112 7 million for 2020.
Net income reported in fourth quarter and full year of 2021 as compared to a net loss in the same periods of 2020 is primarily result of a decrease in the frequency and severity of commercial auto losses and increase in favorable reserve development and comparatively lower catastrophe losses.
Also contributing to net income in the fourth quarter and full year 2021, when that investment gains for.
For the fourth quarter and full year 2021, we reported net investment gains of $19 1 million and $47 4 million, respectively compared to net investment gains of $30 million and net investment losses of $32 4 million in the same period of 2020. The majority of the change between the two periods was driven by a change in that.
Fair value of our equity security investments, which I recognized in net income.
The remaining change was driven by net realized investment gains from sales of equity holdings.
Net investment income was $13 3 million and $55 8 million in the fourth quarter and full year of 2021 as compared to $17 4 million and $39 7 million in the same periods of 2020 and change in both periods was primarily due to the change in the fair value of our limited liability partnerships.
Net premiums earned decreased eight 7% in 2021 as compared to 2020 the.
The decrease in net premiums was the result of our portfolio management strategy to diversify our portfolio by rebalancing our mix of business.
This strategy includes reducing our commercial auto book of business, which accounted for four 6% decrease in exiting personal lines, which made up three 7% a decrease.
These were partially offset by growth in more profitable lines of business with the largest increase coming from our assumed reinsurance line of business in 2021.
The decrease in net premiums earned during the quarter did put some pressure on the expense ratio.
For the fourth quarter of 2021, and the expense ratio was 33, 9% as compared to 38% in the same period of 2020.
Also impacting the expense ratio in the fourth quarter were additions to our profit sharing accrual agents employees and program business from improved performance and profitability in our book of business.
For the full year of 2021 reporting an expense ratio of 32, 6% as compared to 33, 5% for the full year of 2020.
As mentioned during previous earnings calls this year, we expect improvement in our expense ratio in 2021 due to prior announced changes to our post retirement medical plan.
A 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.
I will conclude my portion of the call today discussing our capital position and.
In 2021 statutory surplus increased approximately 13% primarily due to the increase in net income also we reported an ROE in 2021 of nine 5%, finishing the year with our highest reported ROE in six years.
During the fourth quarter, we declared and paid a <unk> 15 per share cash dividend to shareholders of record as of December 3rd marking our 215th consecutive quarter of consistently paying dividends dating back to March of $19 68.
Lastly, during the quarter, we did not repurchase any shares for.
For the year, we repurchased approximately 67000 shares of our common stock for $2 million the amount and timing of any purchases is at management's discretion and depends on several factors, including the share price general economic and market conditions and regulatory requirements.
This now concludes our prepared remarks I will now open the line for questions operator.
Ladies and gentlemen at this time, we'll begin the question and answer session.
I ask you a question you May press Star and then one using a touchtone telephone if you are using a speakerphone.
Please pick up the handset before pressing the keys.
All your questions you May press star two.
Once again that is star and then one to join the question queue.
We will pause momentarily to assemble the roster.
And our first question comes from Marla Backer problems Sidoti. Please go ahead with your questions.
Thank you.
A couple of questions here first of all so you've made a lot of progress and reducing the exposure to commercial auto.
You talked in your prepared remarks about you know your optimal portfolio mix.
Wow.
Uh huh.
Morning exposure to commercial auto is expected to decline in 'twenty. Two do you still expect to continue that initiative to some degree.
Mario This is Randy.
Answer to that is yes.
We will probably continue at a lesser pace you know through all of time, but as you know we kind of our analytics Kim divide our auto book kind of into 10 deaths aisles and will always be doing some pruning.
Through the higher decile, which are the least profitable but.
We're substantially through the process ultimately, we'd like to get commercial auto down to about 20% of our books and that would be the long term bally.
Balance we have to write commercial auto which were a package writer, it's an important part of what we do.
But we have to.
Right as little as possible and be careful with what we do right, but we.
We will have kind of an ongoing.
Our process with.
Kind of looking at the overall <unk>.
Commercial auto book, probably for the for the end of time so.
Okay, great. Thanks.
So on the increase in the expense ratio it sounds like quite a bit about this seasonal.
You know in the fourth quarter.
Can you speak to that a little bit about what you know what you what you see.
For for that.
Race yet.
Okay.
Mario This is Mike I'll take a shot at that one so I think in the fourth quarter.
Seasonally would be correct and I think the improvement in our profitability as Randy mentioned in his comments.
We had increased accruals for some profit sharing programs both for agents and employees are based on improved profitability.
Our top line reduction is putting some pressure on our expense ratio and we hope to make improvements in top line during 2022.
So we won't have that same level of pressure there, but the fourth quarter. The jump up was more related to the improved profitability.
Okay, and then along those the.
Same line of.
Questions.
One is reading about and talking about inflationary pressure, including on you know wages and difficulty hiring can you speak to you know whether you included any assumption for that in some of your outlook.
Outlook for 'twenty, 'twenty, two and beyond.
So model. This is Randy again, this inflation supposed to be temporary right.
No.
Sure.
So we have kind of a.
<unk> guards like a lot of companies so our exposure bases get an automatic increase based on inflationary data.
So we keep our exposures up to date are.
Part of the rate.
Rate increases that we're able to get in the rest of the industry is getting.
Partly driven by you know that our exposure to inflation as well.
It's kind of interestingly.
Energy fuel.
He is up substantially and that doesn't affect us quite as much as you know.
Building materials and.
Used cars are a big hassle someone.
It gets their car ruined and we have to try to find a replacement.
<unk> prices are up considerably so.
The rate increases are.
You know enough to I think make up for most of the inflationary months, we continue to increase our exposure basis.
Renewable to try to keep up with the cost of construction inflation.
But.
We're also trying to listen to the economists say this.
Inflation won't be here forever, but we're planning on it being being here for at least most of 2022.
Mhm, Okay. Thanks very much.
Thank you Martin.
And our next question comes from Paul Newsome from Piper Sandler. Please go ahead with your question.
Okay.
Yeah.
Mr. Nielsen is it possible that your phone is on mute.
It is possible can you hear me now.
Good good Hawaiian and.
Congratulations on the quarter.
Could you give us a few thoughts about the sustainability of the underlying loss ratio in the fourth quarter as we look out prospectively.
The slides.
Presentation show a fee.
Early measured in.
Gradual improvement in commercial auto.
June .
Doing other things elsewhere.
But it was a pretty dramatic.
Movement in the last quarter or two.
So could you talk about sort of the connecting the two and how sustainable you think.
The fourth quarter would be as a run rate on the underlying loss ratio.
So Paul this is Randy.
I don't know if we expect to see low eighty's combined going forward, but.
Our frequency reductions are are very material and have actually.
It started dropping before the pandemic.
So we think that's going to help.
You know being out of personal lines.
There is will help.
Mike mentioned in his remarks.
Being very deliberate offering.
Hi limits, we've seen a lot of.
Severity improvement and a lot of that's just driven by.
The refusal to offer a large.
Liability limits, especially in certain parts of the country and.
I think a lot of the underlying we're going to see kind of a regular improvement. Mike also mentioned just the work of our claims department and tried to get losses settled quickly and fairly and <unk>.
Trying to stay out of court wherever we can so I think a lot of those things are very sustainable and we should see probably not low eighty's combined necessarily but.
Certainly.
Sub 100 combines I think is very sustainable.
And then that coupled with the.
Good reads environment, there, we're still seeing so far.
Hum.
The commodity youre talking about the overall or that the underlying because obviously theres a.
Material difference.
When you're thinking about sub 100.
I think Mike is going to take a shot at that.
If you look at the core loss ratio ex cat ex prior year reserve development and for the full year.
Low sixties I actually think we can we expect to see continued improvement in that number as we go forward we still.
The trajectory is good on a lot of our lines of business. We still are working to improve more in some areas and I think that our expectation is that we'll continue to improve and as you know for the full year, we still had more of an impact from cats. Then we would expect so going forward and especially with personal lines being gone now we expect less impact.
From cat losses in future quarters.
So, yes, I think our.
We have a lot of optimism for our results in coming quarters.
That's great.
Just kind of banging on the commercial auto again now that the dust has settled on the vast majority of the.
Business that you non renewed.
Can you maybe kind of talk about just.
In hindsight, what would the pieces that that didn't work was it just about you know this.
Businesses with large limits or were there other characteristics to the commercial auto book.
That.
But what you ultimately realize.
So pieces that were problem.
Right.
Hey, Paul this is Jeremy.
Kind of a combination of legal environment in areas, we were exposed, particularly on the auto line whether that <unk>.
California, Texas and elsewhere.
We found ourselves with more limits on heavier exposures and whether heavier means heavy renal or just heavier exposure.
Accounts, and then I would say the last thing is.
The larger the size of the fleet has a tendency to sometimes to drive the price.
And rate environment down without a corresponding benefit.
And I think we found that that's not a terribly good environment for us.
Thank you.
Good luck for next year.
Thanks, Paul.
Once again, if you would like to ask it.
Once again, if you would like to ask a question. Please press star and then one so with your all your questions you May Press Star two.
Yeah.
And ladies and gentlemen at this time in showing no additional questions I'd like to turn the floor back over to Mr. Patten for any closing remarks.
This now concludes our conference call. Thank you for joining us and have a great day.
And ladies and gentlemen, with that we will conclude today's presentation. We do thank you for joining you may now disconnect your lines.