United Hearth Group, Inc. (NASDAQ:UFCS) Q1 2022 Earnings Convention Name Could 5, 2022 10:00 AM ET
Firm Individuals
Randy Patten – Assistant Vice President and Company Controller
Randy Ramlo – Chief Govt Officer
Mike Wilkins – Chief Working Officer
Micah Woolstenhulme – Chief Danger Officer
Convention Name Individuals
Marla Backer – Sidoti
Paul Newsome – Piper Sandler
Operator
Good day and welcome to the United Hearth Group Insurance coverage 2022 First Quarter Convention Name. [Operator Instructions] Please word this occasion is being recorded. I’d now like to show the convention over to Randy Patten, Assistant Vice President and Company Controller. Please go forward.
Randy Patten
Good morning, everybody and thanks for becoming a member of this name. This morning, we issued a information launch on the outcomes. To discover a copy of this doc, please go to our web site at ufginsurance.com. Press releases and slides are situated underneath the Investor Relations tab. Becoming a member of me right now on the decision are Chief Govt Officer, Randy Ramlo and Chief Working Officer Mike Wilkins. We additionally produce other members of administration accessible to reply questions on the finish of our ready remarks.
Earlier than I flip the decision over to Randy Ramlo, a few reminders. First, please word that our presentation right now could embrace forward-looking statements as outlined within the Personal Securities Litigation Reform Act of 1995. The corporate cautions traders that any forward-looking statements embrace dangers and uncertainties and aren’t a assure of future efficiency. These forward-looking statements are primarily based on administration’s present expectations. The precise outcomes could differ materially resulting from quite a lot of components that are described in our press launch in SEC Filings. Additionally, please word that in our dialogue right now, we could use some non-GAAP monetary measures. Reconciliations of those measures to probably the most comparable GAAP measures are additionally accessible in our press launch and SEC Filings.
Right now, I’ll now flip the decision over to Mr. Randy Ramlo, CEO of UFG Insurance coverage.
Randy Ramlo
Thanks, Randy. Good morning, everybody and welcome to our first quarter 2022 convention name. Right this moment, I’m happy to report robust outcomes for the primary quarter of 2022 which I’m assured in saying is a direct results of our: one, UFG strategic plan and initiatives aimed toward improved profitability. For the second consecutive quarter, we’ve reported a mixed ratio underneath 90%. This marks the primary time in 7 years that we’ve delivered back-to-back quarters with mixed ratios beneath 90% courting again to the fourth quarter of 2014 and the primary quarter of 2015.
As well as for the fourth consecutive quarter, we noticed enhancements in each our core loss ratio and business auto loss ratio when in comparison with the identical quarter within the prior 12 months. We’re happy with this vital enchancment in our profitability and a promising begin to 2022. Within the first quarter of 2022, our core loss ratio, which eliminated the impression of disaster losses and prior 12 months reserve growth, improved 17.4 share factors. This enchancment is being pushed by persevering with decreases in frequency and severity of claims. For a abstract of our core loss ratio calculation, check with the Slide 11 within the presentation on our web site.
The advance within the core loss ratio contributed to the reported mixed ratio of 89.5% within the first quarter of 2022, which is a major enchancment over the 107.2% mixed ratio reported in the identical interval in 2021. Contributing to the development in our mixed ratio is the lower in disaster losses. Our strategic determination to exit from private traces has paid off in much less disaster publicity and thus much less volatility within the first quarter of 2022.
Pre-tax disaster losses added 2.6 share factors to the mixed ratio within the first quarter of 2022, which is decrease than our first quarter historic common of three.3 share factors and eight.7 factors decrease than the 11.3 share factors added to the mixed ratio within the first quarter of 2021. As a reminder, the primary quarter of 2021 included losses from Winter Storm Uri, which was a full retention loss with losses in extra of our reinsurance retention of $20 million.
The road of enterprise with probably the most vital loss ratio enchancment was Industrial Auto, which improved 41.2 share factors within the first quarter of 2022 as in comparison with the identical interval of 2021. The advance in profitability in our Industrial Auto line of enterprise was from decreased severity of losses and elevated favorable prior 12 months reserve growth. The mixed ratio additionally benefited from favorable prior 12 months reserve growth at 2.9 factors through the first quarter of 2022 in comparison with favorable reserve growth of 5.1 factors within the first quarter of 2021. Many of the favorable reserve growth within the present quarter was in our Industrial Auto line of enterprise. As an organization, we’ve reported favorable reserve growth yearly since 2009, a development that continued within the first quarter of 2022.
Earlier than I flip the decision over to Mike, I wish to take this chance to introduce our latest member of our UFG management staff. Eric Martin is our new Chief Monetary Officer and we’re happy to have him right here with us this morning. Eric started with UFG simply a few weeks in the past on April 18 and is rapidly getting in control in his new function. We’re excited to have Eric on board contributing to the momentum we’ve skilled in enhancing our profitability over the past 12 months.
Additionally, as a lot of you recognize, after almost 40 years at UFG, I’m planning to retire on the finish of October this 12 months. Right this moment, I’m assured that the timing is true and UFG is on a stable path ahead, evidenced by the current development of robust quarterly outcomes. It’s an honor to function CEO for these previous 15 years and I’m happy with the expansion and success we’ve had throughout my tenure. Our Board of Administrators is actively conducting a search and have some nice inside and exterior candidates. Time will inform who will probably be named the sixth chief in UFG’s historical past, however I can guarantee you that our Board will select the easiest individual for the job. And I’m assured UFG is in for an improve.
I’ll now flip the decision over to Mike Wilkins. Mike?
Mike Wilkins
Thanks, Randy and good morning everybody. As Randy talked about, UFG delivered one other quarter of robust monetary efficiency and enhancing profitability. We’re happy with the progress we’ve made over the past 12 months and particularly with our development of persistently enhancing the core loss ratio. A major contributor to this success has been the lower in frequency and severity of Industrial Auto losses over the past 2 years.
As a part of our portfolio administration technique, we’ve targeted on lowering the dimensions of our Industrial Auto portfolio by focused reductions within the variety of publicity models and implementing focused charge will increase. These efforts have improved the standard and profitability of our Industrial Auto e book of enterprise. As we get nearer to our optimum portfolio combine, our expectation is that we are going to not see as vital a lower in auto publicity models.
On the first quarter of 2022, Industrial Auto accounted for 22.6% of our portfolio composition in comparison with 26.3% on the finish of the primary quarter of 2021. Industrial Auto and new enterprise premium written within the first quarter of 2022 has decreased to 19% as in comparison with 27% in 2020. Additionally, we’re reaching development in our traditionally worthwhile traces of enterprise, with new enterprise premium for common legal responsibility growing from 22% to 23%, and Inland Marine rising from 10% to fifteen% between 2020 and 2022.
We’re additionally reaching development aims in our surety, ENS, and assumed reinsurance traces of enterprise. These traces contributed to the development in our core loss ratio and underlying profitability within the first quarter of 2022. Probably the most vital development occurred in our assumed reinsurance line, which represented 12.2% of our portfolio within the first quarter of 2022 as in comparison with 6.2% within the first quarter of 2021.
Slides 8 and 9 present a 3-year view of our declare counts by main business casualty traces of enterprise. For instance, our Industrial Auto bodily damage and property harm declare counts are down 21% within the first quarter of 2022 as in comparison with the identical quarter in 2021. We now have additionally supplied business common legal responsibility, VOP legal responsibility, and employees’ compensation claims counts on these slides as all are down within the first quarter of 2022, which is a optimistic signal of our strategic efforts.
Earlier than I flip the decision over to Randy Patten, I’d prefer to touch upon pricing and inflation. From a pricing standpoint, the general common change in renewal premium was 7.6%, with 2.4% from publicity adjustments and 5.2% from charge will increase. Excluding the employee’s compensation line of enterprise, the general change in renewal premiums was 9% with 2.4% from publicity adjustments and 6.6% from charge will increase. The rise in charges was pushed by our Industrial Auto and Industrial Property traces of enterprise.
The Industrial Auto common renewal charge improve was 7.4% and the Industrial Property common renewal charge improve was 10.1%. We really feel the speed will increase we’re reaching are at the moment exceeding the general loss value inflation impacting our e book. This was notably true according to that Industrial Property and Industrial Auto the place we’re seeing the strongest pricing alternatives.
Following claims frequency throughout all of our main traces of enterprise additionally contribute to our perception that we’re persevering with to attain margin enlargement for our general portfolio of enterprise. Nevertheless, on this dynamic financial atmosphere, we’ll proceed to watch situations and make applicable changes to our pricing, portfolio and underwriting methods.
With that, I’ll flip over the dialogue to Randy Patten. Randy?
Randy Patten
Thanks, Mike and good morning once more, everybody. Within the first quarter, we reported a consolidated web revenue of $28.3 million in comparison with web revenue of $18.7 million in the identical interval of 2021. Adjusted working revenue, which removes web funding good points and losses, was $28.7 million within the first quarter of 2022 in comparison with an adjusting working loss within the first quarter of 2021 of $659,000. The rise in web revenue and adjusted working revenue within the first quarter of 2022 is primarily resulting from a lower in disaster losses and a lower in frequency and severity of claims.
Throughout the first quarter of 2022, we reported web funding losses of $465,000 as in comparison with web funding good points of $24.5 million within the first quarter of 2021. The vast majority of the change between the 2 durations was pushed by change within the honest worth of our fairness safety investments, that are acknowledged in web revenue. The remaining change was pushed by web realized funding good points from the sale of fairness holdings within the first quarter of prior 12 months.
Internet funding revenue was $11.3 million within the first quarter of 2022 as in comparison with $17.1 million in the identical interval of 2021. The change between the 2 durations is primarily because of the change acknowledged within the honest worth of our restricted legal responsibility partnerships. Internet premiums earned decreased 9.6% within the first quarter of 2022 as in comparison with the primary quarter of 2021. The lower in web premium was the results of our portfolio administration technique to diversify our portfolio by rebalancing our mixture of enterprise. This technique consists of decreasing our Industrial Auto e book of enterprise, which accounted for 4.9% of the lower and exiting private traces, which made up 3.7% of the lower. These are partially offset by development in our extra worthwhile traces of enterprise, with the biggest improve coming from our assumed reinsurance facet of enterprise.
Transferring on to bills, the underwriting expense ratio for the primary quarter of 2022 was 33.8% in comparison with 27.6% for the primary quarter of 2021. The change within the expense ratio between the 2 durations is primarily because of the one-time profit acknowledged from the change within the design of our worker post-retirement well being profit in first quarter of 2021.
I’ll conclude my portion of the decision right now discussing our capital place. Within the first quarter of 2022, statutory surplus elevated roughly 2%, primarily resulting from web revenue reported within the first quarter. Additionally, we reported an annualized ROE within the first quarter of 2022 of 13.2%, a 4.1% improve over the 9.1% reported within the first quarter of 2021. Throughout the first quarter, we declared and paid a $0.15 per share money dividend to shareholders of report as of March 4, marking our 216th consecutive quarter of persistently paying dividends courting again to March of 1968. Lastly, through the quarter, we didn’t repurchase any shares. The quantity and timing of any purchases is at administration’s discretion and is dependent upon a number of components, together with the share value, common financial and market situations, and regulatory necessities.
This concludes our ready remarks. I’ll now open the road for questions. Operator?
Query-and-Reply Session
Operator
Thanks. We’ll now start the question-and-answer session. [Operator Instructions] Our first query comes from Marla Backer from Sidoti. Please go forward.
Marla Backer
Sure. So, simply needed to substantiate one thing you simply stated in your ready remarks, there are – you’ll work contemplating additional decreases within the Industrial Auto class however they gained’t – any decreases gained’t be on the identical degree given that you’ve got actually adjusted down the class over the previous a number of quarters. Is {that a} honest takeaway out of your remarks?
Randy Ramlo
Sure. Hello, Marla. That is Randy. That could be a very reasonable comment. We most likely have gotten that line of enterprise pretty near the place we would like it completely. I believe long-term we wish to have that to be round 20% of our e book of enterprise and it’s very near that. So, we’ll do some tweaking going ahead, however it gained’t be anyplace close to the unit discount that we’ve performed over the past couple of years.
Marla Backer
Okay. And you’ve got some actually spectacular enchancment in that class within the quarter. By way of the discount within the frequency and severity, would you ascribe most of that to your inside initiative? However are you able to parse out to what extent, if any, among the adjustments that we’ve seen in driver conduct through the pandemic and possibly popping out of the pandemic might need contributed to that?
Randy Ramlo
That is Randy, once more. And naturally, we’re going to take all of the credit score for that change in our actions, however – so, we monitor – our frequencies had been happening even earlier than the pandemic. So, we’re a heavy building e book. Building was very open by many of the pandemic. So, I’m not going to say there wasn’t any impact due to the pandemic and rather less driving, however for probably the most half, the development business was clicking all by the pandemic. And I don’t suppose our frequency happening could be very a lot affected by COVID. So, that’s my [indiscernible].
Marla Backer
Okay. After which lastly, are you able to give us any further shade on a few of these insurance coverage traces that you simply’ve focused for development, the extra worthwhile traces of enterprise that you simply’ve focused for development. Are you able to give us any extra shade on the place you might be seeing traction, the place you would possibly anticipate some headwinds given adjustments within the economic system proper now?
Mike Wilkins
Marla, that is Mike. I’ll possibly take a shot at that one. We now have had good success throughout all of our focused traces for development, together with surety, ENS, and assumed reinsurance. Perhaps, if I needed to say an space the place there may be some headwinds, I’d say, the ENS phase has gotten somewhat bit extra aggressive within the final quarter or two. Nonetheless, we really feel like there may be a whole lot of margin in that enterprise and we’re going to proceed to attempt to develop that, however it’s possibly not as a lot margin there as there was say a 12 months in the past. I believe lot of opponents have moved into that house, continues to be a whole lot of alternatives within the assumed reinsurance facet of issues. And our surety operation has had actually good success persevering with to develop that phase.
Marla Backer
Okay, thanks for that.
Operator
[Operator Instructions] Our subsequent query comes from Paul Newsome from Piper Sandler. Please go forward.
Paul Newsome
Good morning. Congrats on the quarter. I hoped you may simply give us some additional ideas about what you consider loss development prospectively in your main traces of enterprise, and whether or not or not that loss development is accelerating and would require much more value will increase or in the event you suppose that there’s some moderation there?
Randy Ramlo
Hello, Paul and thanks for that. You might be most likely asking us to have a look at our crystal ball somewhat bit. I believe you might be sort of possibly speaking somewhat bit about the place inflation goes. And as we’ve sort of stated, we really feel that we’re getting satisfactory charges proper now to cowl inflation. We most likely would like to get extra charges, however proper now charge will increase have moderated somewhat bit, however are nonetheless satisfactory in our opinions. And identical to a whole lot of firms we monitor the price of carpet, drywall, doorways, paint, shingles, medical bills, the whole lot. And so so long as we’re in a position to get further charges like we’re proper now, we predict general we will cowl the extra loss prices. We’re extra most likely fairly assured on property, assured on auto, work comp. We’re most likely not getting sufficient to cowl medical value will increase. So, it sort of varies by line somewhat bit, however our general charge improve share on your entire e book as of right now is satisfactory I believe to cowl the elevated prices. However who is aware of how lengthy these elevated prices are going to proceed? The specialists hold saying it’s considerably non permanent, however it’s most likely not going to show round tomorrow. I don’t know, Mike or Corey, you bought some other feedback on that?
Mike Wilkins
Perhaps – now, that is Mike. Hello, Paul. Perhaps one remark I’d make I believe our portfolio administration methods are additionally aimed toward attempting to maneuver away from some traces that we’ve extra issues about or if not line segments of enterprise. So, for instance, building defect, I believe is space the place we’ve some issues with the lengthy tail there in an inflationary atmosphere. And I can say our underwriting has performed a pleasant job of transferring away from the forms of enterprise which are uncovered to building defect-type claims. So we try to be very deliberate within the forms of enterprise that we’re writing and attempting to ensure that we decrease that publicity to UFG as a lot as we probably can.
Paul Newsome
After which my second query is like, I hoped you may speak somewhat bit extra about your assumed reinsurance enterprise and each the technique in addition to if that– if there may be some limits as to how a lot you wish to have that enterprise develop relative to the remainder of your enterprise?
Randy Ramlo
Paul, I’ll begin the reply right here after which I’m going to show over to Micah Woolstenhulme who has actually been instrumental within the execution of that assumed reinsurance technique. We most likely have some urge for food for that enterprise that might have limits, however it’s not most likely something that we’re going to disclose on this name at the moment. However that phase proper now has a whole lot of alternatives. Once more, our technique there may be very deliberate. We’re actually trying to not solely drive that core loss ratio down and enhance revenue, but in addition to scale back the volatility in leads to our general e book. And I’m going to show it over to Micah who has actually been the architect of that technique.
Micah Woolstenhulme
Paul, that is Micah Woolstenhulme. The core goal in rising our assumed reinsurance operations is to diversify– excuse me, to diversify the general UFG underwriting threat profile. So, after we underwrite new reinsurance treaty, that’s the very first thing we take a look at. We take a look at a marginal impression evaluation of our general company portfolio earlier than and after that reinsurance treaty. And naturally, we require a sure degree of margin on this enterprise and we take a look at relationships and so forth, however the primary goal we’re fixing for is to spherical off among the sharp corners in our threat profile. The technique that we’re pursuing is a part of a marketing strategy, a multiyear marketing strategy that we form of laid the groundwork for in mid-2020 and we simply concluded our second renewal season as of 1/1/2022. There are variety of traces, for instance, there are variety of traces of enterprise that we wouldn’t have entry to in our direct company distribution platform. Medical skilled legal responsibility is one instance, the place primarily based on our financial capital mannequin, we consider there may be some worth, some diversification worth in that line of enterprise. We don’t underwrite it on our personal. We aren’t going to do a whole lot of it general, however we all know form of about how a lot has that sort of diversifying impact in worth in our portfolio. So, we’ve a goal for a way a lot of that enterprise we need to do. And to that finish, we’ve developed the relationships with the brokers that transact that enterprise within the reinsurance house. And we’re midway there when it comes to assembly the goal for a way a lot that MTL enterprise we need to do.
So assumed reinsurance is simply one other channel for accessing PNC insurance coverage dangers that diversify our general threat profile and we’re sort of 2 years in to a 3-year plan to develop it to a sure degree. And as soon as we get to that set of objectives we’ll reevaluate the place we’re. The very last thing I’ll word right here is that the worth – one other form of interesting side of the assumed reinsurance of the enterprise as a mannequin is that market situations are good proper now, but when they flip in opposition to us, we will reduce fairly rapidly and fairly simply. In distinction, when market situations flip from dangerous to good, we will scale up fairly rapidly with out having so as to add a whole lot of employees on the identical time. So, that’s a part of our technique there and little shade on our technique there.
Paul Newsome
Thanks. A lot appreciated.
Randy Ramlo
Thanks, Paul.
Operator
[Operator Instructions] There are not any extra questions within the queue. This concludes our question-and-answer session. I wish to flip the convention again over to Randy Patten for any closing remarks.
Randy Patten
This now concludes our convention name. Thanks for becoming a member of us and have a fantastic day.
Operator
The convention has now concluded. Thanks for attending right now’s presentation. It’s possible you’ll now disconnect.
