Q1 2022 United Fire Group Inc Earnings Call
Good day, and welcome to the United Fire Group Insurance 2022 first quarter conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Randy Patten Assistant Vice President and corporate controller. Please go ahead.
Good morning, everyone and thank you for joining this call. This morning, we issued a news release on our resolve to find a copy of this document. Please visit our website at <unk> Dot Com press releases and slides are located under the Investor Relations tab.
Joining me today on the call are Chief Executive Officer, Randy Remo, and Chief operating Officer, Mike Wilkins.
We have other members of management available to answer your questions at the end of our prepared remarks.
Before I turn the call over to Randy Remo, 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 are not a guarantee of future performance. These forward looking statements are based on management's current expectations.
The actual results may differ materially due to a variety of factors, which are described in our press release and SEC filings.
Also please note that our discussion today, we may use some 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 will now turn the call over to Mr. Randy Whammo CEO of <unk> insurance.
Thanks, Randy Good morning, everyone and welcome to our first quarter 2022 conference call.
Today I am pleased to report strong results for the first quarter of 2022, which I am confident.
<unk> is a direct result of our one <unk> strategic plan and initiatives aimed at improved profitability.
For the second consecutive quarter, we have reported a combined ratio under 90%. This marks the first time in seven years that we've delivered back to back quarters with combined ratios below 90% dating back to the fourth quarter of 2014, and the first quarter of 2015.
In addition for the fourth consecutive quarter, we saw improvements in both our core loss ratio in commercial auto loss ratio when compared to the same quarter in the prior year. We are pleased with the significant improvement in our profitability.
Promising start to 2022.
In the first quarter of 2022, our core loss ratio, which removes the impact of catastrophe losses and prior year Reserve development improved 17 four percentage points.
This improvement is being driven by continuing decreases in frequency and severity of claims for a summary of our core loss ratio calculation refer to the slide 11 in the presentation on our website.
The improvement in the core loss ratio contributed to the reported combined ratio of 89, 5% in the first quarter of 2022, which is a significant improvement over the 107, 2% combined ratio reported in the same period in 2021.
Contributing to the improvement in our combined ratio is the decrease in catastrophe losses.
Our strategic decision to exit from personal lines has paid off in less catastrophe exposure and thus less volatility in the first quarter of 2022.
Pre tax catastrophe losses added two six percentage points to the combined ratio in the first quarter of 2022, which is lower than our first quarter historical average of three three percentage points and eight seven points lower than the 11 three percentage points added to the combined ratio in the first quarter.
Of 2021.
As a reminder, the first quarter of 2021 included losses from Winter Storm Yuri.
Which was a full retention loss with losses in excess of our reinsurance retention of $20 million.
The line of business with the most significant loss ratio improvement was commercial auto which improved 41, two percentage points in the first quarter of 2022 as compared to the same period of 2021 the.
The improvement in profitability in our commercial auto line of business was from decreased severity of losses and increased favorable prior year Reserve development.
The combined ratio also benefited from favorable prior year reserve development at two nine points during the first quarter of 2022 compared to favorable reserve development of five one points in the first quarter of 2021.
Most of the favorable reserve development in the current quarter was in our commercial auto line of business as.
As a company we have reported favorable reserve development every year since 2009.
Trend that continued in the first quarter of 2022.
Before I turn the call over to Mike I would like to take this opportunity to introduce our newest member of our USG leadership team.
Eric Martin as our new Chief Financial Officer, and we are pleased to have him here with US. This morning, Europe began with USG just a couple of weeks ago on April 18th and is quickly getting up to speed in his new role. We are excited to have Eric on board contributing to the momentum we've experienced and improving our profitability over the last.
Year.
Also as many of you know after nearly 40 years at USG I am planning to retire at the end of October this year.
Today I am confident that the timing is right and <unk> is on a solid path forward evidenced by the recent trend of strong quarterly results.
It is an honor to serve as CEO for these past 15 years and I am proud of the growth and success. We have had during my tenure.
Our board of directors is actively conducting a search and have some great internal and external candidates.
Time will tell who will be named the sixth leader in Usg's history, but I can assure you that our board will choose the very best person for the job and I am confident USG is in for an upgrade.
I will now turn the call over to Mike Wilkins Mike.
Thanks, Randy and good morning, everyone as Randy mentioned <unk> delivered another quarter of strong financial performance and improving profitability.
Pleased with the progress we've made over the last year, and especially with our trend of consistently improving the core loss ratio.
A primary contributor to this success has been the decrease in frequency and severity of commercial auto losses over the last two years.
As part of our portfolio management strategy, we are focused on decreasing the size of our commercial auto portfolio through targeted reductions in the number of exposure units and implementing targeted rate increases.
These efforts have improved the quality and profitability of our commercial auto book of business as we get closer to our optimal portfolio mix. Our expectation is that we will not see a significant decrease in auto exposure units.
At the first quarter of 2022 commercial auto accounted for 22, 6% of our portfolio composition compared to 26, 3% at the end of the first quarter of 2021.
Commercial auto new business premium written in the first quarter of 2022 has decreased to 19% as compared to 27% in 2020.
Also we are achieving growth in our historically profitable lines of business with new business premium for general liability, increasing from 22% to 23% and inland marine growing from 10% to 15% between 2020% in 2022.
We are also achieving growth objectives, and our surety E&S and assumed reinsurance lines of business.
These lines contributed to the improvement in our core loss ratio and underlying profitability in the first quarter of 2022.
Most significant growth occurred in our assumed reinsurance line, which represented 12, 2% of our portfolio.
In the first quarter of 2022 as compared to six 2% in the first quarter of 2021.
Slides eight and nine provide a three year view of our claim counts by major commercial casualty lines of business.
For example, our commercial auto bodily injury and property damage claim counts are down 21% in the first quarter of 2022 as compared to the same quarter in 2021.
We have also provided commercial general liability BOP liability and workers' compensation claims counts on the slides is all are down in the first quarter of 2022, which is a positive sign of our strategic efforts.
Before I turn the call over to Randy Patten, I'd like to comment on pricing and inflation.
From a pricing standpoint, the overall average change and renewal premium was seven 6% with two 4% from exposure changes and five 2% from rate increases.
Excluding the workers compensation line of business. The overall change in renewal premiums was 9% with two 4% from exposure changes and six 6% from rate increases.
The increase in rates was driven by our commercial auto and commercial property lines of business. The commercial auto average renewal rate increase of seven 4% in the commercial property average renewal rate increase was 10, 1%.
We feel the rate increases we are achieving are currently seeing the overall loss cost inflation impacting our book. This is particularly true in lines that commercial property and commercial auto where we are seeing the strongest pricing opportunities.
Claims frequency across all of our major lines of business also contribute to our belief that were continuing to achieve margin expansion for our overall portfolio of business.
However in this dynamic economic environment, we will continue to monitor conditions and make appropriate adjustments to our pricing portfolio and underwriting strategies.
With that I'll turn over the discussion to Randy Patten Randy.
Thanks, Mike and good morning again, everyone in the first quarter, we reported consolidated net income of $28 3 million compared to net income of $18 7 million in the same period of 2021.
Adjusted operating income, which removes net investment gains and losses was $28 7 million in the first quarter of 2022 compared to an adjusted operating loss in the first quarter of 2021 at 659000.
The increase in net income and adjusted operating income in the first quarter of 2022 is primarily due to a decrease in catastrophe losses and a decrease in frequency and severity of claims.
During the first quarter of 2022, we reported net investment losses of 465000 as compared to net investment gains of $24 five nine in the first quarter of 2021 and majority of the change between the two periods is driven by change in fair value of our equity security investments, which are recognized in net income.
The remaining change was driven by net realized investment gains from the sale of equity holdings in the first quarter of prior year.
Net investment income was $11 3 million in the first quarter of 2022 as compared to $17 1 million in the same period of 2021 the change between the two periods is primarily due to the change recognizing the fair value of our limited liability partnerships.
Net premiums earned decreased nine 6% in the first quarter of 2022 as compared to the first quarter of 2021. The decrease in net premiums as a 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 9% a decrease and exiting personal lines, which made up three 7% a decrease.
These are partially offset by growth in our more profitable lines of business with the largest increase coming from assumed our assumed reinsurance by our business.
Moving on to expenses the underwriting expense ratio for the first quarter of 2022 with 33, 8% compared to 27, 6% for the first quarter of 2021.
The change in the expense ratio between the two periods is primarily due to the onetime benefit recognized from the change in the design of our employee post retirement health benefit in first quarter of 2021.
I will conclude my portion of the call today discussing our capital position and first quarter of 2020 to statutory surplus increased approximately 2% primarily due to net income reported in the first quarter.
Also we reported an annualized ROE in the first quarter 2022 up 13, 2%, a four 1% increase over the nine 1% reported in the first quarter of 2021.
During the first quarter, we declared and paid a <unk> <unk> per share cash dividend to shareholders of record as of March 4th marketing, our 216th consecutive quarter of consistently paying dividends dating back to March of $19 68.
Lastly, during the quarter, we did not repurchase any shares 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 concludes 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.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Marla Backer from Sidoti. Please go ahead.
Yes.
Just wanted to confirm.
Something you just said in your prepared remarks.
There are.
Kim.
So the ranks further decreases in the commercial auto category, but they won't any decreases won't be at the same level.
Given that you really adjusted down the category over the past several quarters is that a fair.
The takeaway from your remarks.
Hi, Mario this is Randy that is a very fair remark.
We probably have got that.
<unk>.
Line of business fairly close to where we want it permanently I think.
Long term, we'd like to have that to be around 20% of our.
Book of business and it's very close to that so we will do some tweaking going forward, but it won't be anywhere near the unit reduction that we've done over the last couple of years.
Okay, and you had some really impressive.
Improvement in that category.
Quarter.
Okay.
The reduction in the frequency and severity.
Would you ascribe most of that to your internal initiatives.
But can you parse out.
To what extent if any some of the changes that we've seen in <unk>.
Driver behavior during the pandemic and maybe coming out of the pandemic might have contributed to that.
This is Randy again and of course, we're going to take all the credit for that change in our actions.
So we track our frequencies were going down.
Even before the pandemic so.
We're heavy construction book.
Construction was very open through most of the pandemic, so I'm not going to say there wasn't any effect because.
As of the pandemic.
Less driving but for the most part the construction industry was flicking all three ultimately the pandemic.
Our frequency going down is very much affected by Covid. So that's my two cents.
<unk>.
Okay, and then last way.
Can you give us any additional color on some of those.
Insurance lines that you've targeted for growth to more profitable lines of business that you've targeted for growth can you give us any more color on where youre seeing.
Traction, where you might anticipate some headwinds given changes in the economy right now.
Michael This is Mike I'll, maybe take a shot at that one.
We've had good success across.
All of our targeted lines for growth, including surety E&S and assumed reinsurance.
Maybe if I had to say an area, where there is some headwinds I would say the E&S segment has gotten a little bit more competitive.
And the last.
A quarter or two.
Still we feel like there's a lot of margin in that business and we're going to continue to.
I tried to grow that but it's maybe not as.
Not as much margin there as it was say a year ago I think good a lot of competitors have moved into that space continues to be a lot of opportunities in the assumed reinsurance side of things and our surety operation has had really good success continuing to grow that segment.
Okay. Thank you for that.
Again, if you have a question. Please press Star then one.
Our next question comes from Paul Newsome from Piper Sandler. Please go ahead.
Good morning Congrats.
Congrats on the quarter was hoping you could just give us some further thoughts about what you seek a loss trend perspective.
Who your major lines of business and whether or not that.
Loss trend is accelerating.
And would require even more price increases or if you think that there is some moderation there.
Hi, Paul.
Thanks for that.
You're probably asking us to look at our crystal ball a little bit.
I think youre kind of maybe talk a little bit about we're inflation's going in.
As we've kind of said, we feel that we're getting adequate rate right now to cover inflation, we probably would prefer to get more rate, but right now.
Rate increases have moderated a little bit but still adequate in.
Our opinions and just like a lot of companies.
The cost to carpet drywall doors paint shingles medical expenses everything.
So as long as we're able to kind of get additional rates like we are right now.
We think overall, we can cover.
The additional loss costs.
We're more.
Probably pretty confident on property.
Confident on auto.
Comp, we're probably not getting.
Enough to cover medical cost increase.
Increases so it kind of varies by line, a little bit, but our overall rate increase percentage on the entire book.
As of today is as adequate I think to cover the increased costs, but.
Who knows how long these increased costs are going to continue.
The experts keep saying it's.
Somewhat temporary, but it's probably not going to turnaround tomorrow.
Or are you got any other comments on that and maybe this is Mike Paul maybe one comment I would make I think our portfolio management strategies are also aimed at.
Trying to move away from some lines that we have more concerns about.
Or if not line segments of business. So for example, construction defect I think is.
Area, where we have some concerns with the long tail there in an inflationary environment and I can say our underwriting has done a nice job of.
Moving away from.
The types of business that are exposed to construction defect type claims and so we're trying to be very deliberate in the types of business that we're writing.
I'm trying to make sure that we minimize that exposure to <unk> as much as we possibly can.
And then.
Second question.
I was hoping you could talk a little bit more about your assumed reinsurance business.
In.
The strategy as well as.
Is that if theres some limits as to how much you would like to have that business grow.
Relative to the rest of you.
Business.
I'll start the answer here and then I'm going to turn it over to Michael Wilson Jones, Who's really been instrumental in the execution of that assumed reinsurance strategy.
Probably have some.
Appetite for that business that would have limits, but that's not probably anything that we're going to disclose.
In this call at this time, but that segment right now has a lot of opportunities again, our strategy. There is very deliberate and we're really look into.
Not only drive that core loss ratio down and improve profit, but also to reduce the volatility and results in our overall book and I'm going to turn it over to Mike who has really been.
The architect of that strategy.
Bob This is Michael Wilson.
The core objective and growing our assumed reinsurance operations into diversified excuse me to diversify the overall USG underwriting risk profile. So when we underwrite new reinsurance Treaty is the first thing we look at we look at a marginal impact analysis of our overall.
Corporate.
Portfolio before and after that reinsurance treaty and of course, we we require a certain level of margin in this business and we look at our relationships and so forth, but the number one objective we're solving for is too.
Round off some of the sharp corners in our risk profile.
Sure.
The strategy that we're pursuing as part of our business plan, our multiyear business plan that we.
Sort of.
<unk> laid the groundwork for an.
2020, and we just concluded our second renewal season as of one <unk>.
102022.
There are a number of lines for example, the number of lines of business that we wouldn't have access to and our.
Direct agency distribution platform that medical professional liability.
As one example, where based on our economic capital model. We believe there is some value some diversification value in that line of business, we don't underwrite it on our own we're not going to do a lot of it overall, but we know sort of.
About how much has that kind of a diversifying effect and value of our portfolio. So we have a target for how much of that business, we want to do and.
To that end we are in.
We have developed the relationships with the brokers that transact that business in the reinsurance space.
And we're in.
Halfway there in terms of meeting the target for how much that NPL business. We wanted to do so assumed reinsurance is just another channel for accessing <unk>.
P&C insurance risks that diversify our overall risk profile and.
We're in kind of two years into a three year plan to grow it to a certain level and once we get to that set of goals. We will reevaluate where we are the last thing I'll note here is that the value in another sort of appealing aspect of the assumed reinsurance is a visit.
Business is a model that.
Market conditions are good right now.
But if they turn against US we can scale back pretty quickly and pretty easily.
And in contrast, when market conditions turn from bad to good we can scale quickly without having to add a lot of staff at the same time, so thats part of our strategy, there and a little color on our strategy there.
Thank you much appreciated.
Thanks, Paul.
Again, if you have a question. Please press Star then one.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Randy Patten 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.
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