Good morning and welcome to the United Fire Group, Inc. Q3 2021 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Randy Patten. Please go ahead..

Good morning, everyone and thank you for joining this call. This morning, we issued a news release on our results. To find a copy of this document, please visit our website at ufginsurance.com. Press releases and slides are located under the Investor Relations tab.

Joining me today on the call are Chief Executive Officer, Randy Ramlo 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 Ramlo, 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 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 variety of factors, which are described in our press release and SEC filings.

Also, please note that in 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 am pleased to present Mr. Randy Ramlo, CEO of UFG Insurance..

Boldly Forward strategic plan, including long-term profitability, diversified growth and continuous innovation. In the profitability pillar, we are relentlessly focused on core skill execution with an emphasis on consistency, quality and continuous improvement.

We have fostered a One UFG mindset to identify and scale best practices across our organization. We are now managing our portfolio to tightly fit our risk appetite across all underwriting branches of UFG with best-in-class data and analytic tools to assist our underwriters in making effective decisions.

In the growth pillar, we are scaling our business in direct standard markets that we know well and can write profitably with the right partners. We are expanding our presence in surety, 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 market scope through our assumed reinsurance strategies. In our innovation pillar, we have upskilled and developed a growth mindset in 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 our key agency partnerships. We have expanded our business agility to drive faster delivery and speed to market. We have transformed UFG by creating an environment that inspires innovative ideas into action. As I mentioned, a plan of this scale takes time. In 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. I now will turn the call over to Mike Wilkins.

Mike?.

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

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 third quarter of 2021.

Through our strategic efforts, I’m pleased to report that exposure units decreased 24% over the past 12 months from 235,000 units in September of 2020 to approximately 179,000 units in September of 2021. This decrease is a result of targeted reductions in our worst-performing accounts as 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 4.42% from 4.78% in the third quarter of 2020. This decline is summarized on Slides 8 and 9 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 is a direct result of our strategic underwriting actions. Slides 10 and 11 provide a 3-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 22% year-to-date 2021 as compared to the same period in 2020.

We have also provided commercial general liability, BOP liability and workers’ compensation claim counts on these slides, as all are 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 and umbrella books of business.

Year-to-date, the overall average renewal price increase was 6.3%. Excluding our workers’ compensation line of business, the overall average renewal pricing increase was 7.6%. 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 8.7%. 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 in the claims cycle.

Before I turn the call over to Randy Patten, I want to discuss our strategic plan to reduce the volatility in our catastrophe losses experienced in recent quarters. We continually review our book of business and model for catastrophe losses.

We have recently hired a CAT modeling professional and brought CAT modeling capabilities in-house, where in the past we relied on reinsurance broker modeling capabilities. Earlier this year, we also did an RFP for our CAT reinsurance program with select reinsurance brokers as part of the effort to optimize our CAT reinsurance program.

In addition to these efforts to reduce the impact of cats, we are also strategically diversifying our book of business with non-CAT-exposed business, such as surety, E&S, inland marine and non-CAT-exposed assumed reinsurance business.

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

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

During 2021, part of our diversification strategy is to grow our non-CAT assumed reinsurance business as it has been very profitable for us traditionally, with combined ratios below 100%. With that, I’ll turn over the discussion to Randy Patten.

Randy?.

Thanks, Mike, and good morning again, everyone. In the third quarter, we reported a consolidated net loss of $9.6 million, compared to a net loss of $37.2 million in the same period of 2020. Year-to-date, we reported consolidated net income of $22.9 million, compared to a net loss of $103.8 million year-to-date prior year.

As Randy mentioned, our core loss ratio continued to improve in the third quarter, but was offset by $39.5 million of catastrophe losses, which is $17.5 million or 7.3 points higher than our average for third quarter. Also contributing to net income in the 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 2021 as compared to $7.2 million and $22.3 million in the same period 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 $4.6 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 realized investment gains of $28.2 million year-to-date as compared to net realized investment gains of $15.2 million and investment 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 to be reported in net income. The remaining change was 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 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. Year-to-date, we reported 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 the expense ratio of 2.5 points as compared to the third quarter of 2020. This is due to improved performance in our book of business resulting in additions to our profit-sharing accruals for our agents, employees and program business.

We still anticipate approximately 1.5 to 2 points of improvement in the 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 30, 2021, statutory surplus increased approximately 2% year-to-date.

During the third quarter, we declared and paid a $0.15 per share cash dividend to shareholders of record as of September 3, marking our 214 consecutive quarter of consistently paying dividends dating back to March of 1968. Lastly, during the quarter, we repurchased about $1 million or just over 36,000 shares of our common stock.

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?.

[Operator Instructions] Our first question today comes from Marla Backer with Sidoti. Please go ahead..

Thank you. So you’ve done a very strong job at reducing exposure in commercial auto.

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

Marla, this is Randy. I would say we’re substantially through it. There is more to go. I think we’ve highlighted kind of what percentage of our book of business is in 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’re substantially through it right now..

Okay. And then on the flipside, some of the categories where you’re emphasizing greater growth, again, we’ve seen some nice growth in many of those categories. I’m specifically curious right now about inland marine and how that category is doing right now.

Is there any impact also from some of the global logistics issues that are impacting a lot of other 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’re – we do a lot of insuring buildings in course of construction, builder’s risk in that area.

But I don’t think we’ve seen any material impact on that line from kind of the global shortages that we’re seeing..

Okay. And then finally, last question is, back when we were more at the height, I guess, of the pandemic, there was a lot of talk around the potential risk of business interruption claims. And I think that you’ve said in the past that that’s not a risk that you foresee regarding your book of business.

But has there been any updates within the industry overall regarding business interruption as potential risk factor?.

So we didn’t mention it in our conference call, which, I guess, is a good thing. There has been a couple of court cases in the last quarter, and they have been positive ones. We’ve kind of continued to say it’s not zero exposure, but it’s a 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 write. 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 we have seen in claims, if we had to pay all of them, would be very manageable.

But so far, it looks like the courts are upholding that, that is not going to be a covered cause of loss..

[Operator Instructions] There being no further questions, this will conclude 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..