Good morning, my name is Kate and I’ll be your conference operator today. At this time, I would like to welcome everybody to UFG Insurance First Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instruction] Please note that, this event is being recorded. I would now like to turn the conference over to Randy Patten, Assistant Vice President and Controller. Please go ahead.
UFCS United Fire
Good morning, everyone, and thank you for joining this call. Earlier today, we showed 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.
Our speakers today are Chief Executive Officer Randy Ramlo; Mike Wilkins, Chief Operating Officer; and Dawn Jaffray, Chief Financial Officer. 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 a variety of factors, which are described in our press release and SEC filings. Please also 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 in SFC filings. At this time, I'm pleased to present Mr. Randy Ramlo, CEO of UFG Insurance.
Thanks. Randy. Good morning everyone. Welcome to our first quarter 2021 conference call. I will start off today's call saying there are a lot of moving parts in our earnings for this quarter. Mike, Dawn and I will do our best to walk you through the reported numbers in detail. This morning, we reported net income of $0.74 per diluted share, for the first quarter of 2021. This was driven by a net realized investment gains and higher net investment income from an increase in the valuation of our investments in equity, securities and limited liability partnerships. Also contributing to our net income in the first quarter, was a decrease in expenses, due to a change in the design of our employee post retirement health plan. Dawn will provide more details on the impact from this change later in the call. Offsetting these positive items was an increase in both catastrophe losses and severity of commercial auto losses. Catastrophe losses added 11.3 points to the combined ratio compared to our 10-year historical average for the first quarter of 4 points. The increase in catastrophe losses was primarily due to the winter storm freeze event, Uri, mostly occurring in the state of Texas. This catastrophic event was full retention loss, with losses in excess of our stated re-insurance retention of $20 million.
Excluding this event, catastrophe losses in the first quarter of 2021, we're in line with our expectations for the first quarter. In the first quarter of 2021, we continued to see a decrease in the frequency of commercial auto claims and a decrease in the number of commercial auto exposure units, both positive signs of progress of our strategic initiatives. There was an increase in severity of commercial auto losses, involving bodily injury during the quarter, which increased our core loss ratio and summarized on slide 12 in our presentation on our website. This deterioration comes on the heels of 3 consecutive quarters of improvement in our core loss ratio. This increase in severity is the result of current year case reserves being set higher and earlier in the claim cycle, through the use of analytics.
While this increased our core loss ratio in the first quarter of 2021, we ultimately believe this will lead to less unfavorable reserve accident year reserve development in the future. It will also have the benefits of assisting our underwriters with pricing at the time of policy renewal. In executing our strategic plan we know the key to improving profitability at UFG, lies in addressing commercial auto losses, reserve development and portfolio diversification.
All of our strategic initiatives are important to our success and work in concert to remove the variability in our underwriting execution. To achieve more consistent, profitable results our top priority, and the focus of my portion of today's call, is surrounding diversification of our book of business.
During the first quarter of 2021, commercial auto made up 27% of the written premium in our portfolio, down from 31% for the full year of 2019. Slide 6 in our presentation summarizes new business. This slide shows that new commercial auto business has dropped to almost 20% in the first quarter of 2021 compared to 32% in 2019.
We are also pleased to report the growth in Inland Marine, Property, General Liability, ENS, Shuri, assumed Reinsurance along with the addition of our investment in Lloyd's syndicates, in the first quarter of 2021. The decline of our new commercial auto business, especially in targeted classes and jurisdictions, coupled with the growth in our profitable lines, such as assumed re-insurance, will allow us to achieve greater diversification. We do sing our vulnerability to commercial auto planes and reducing our exposure in geographically exposed to catastrophe areas. Also, part of portfolio diversification is a clearly defined and consistent selection of appropriate risks, markets and partners.
Moving forward for USG, we are working closely with our agency partners to ensure they are aligned with our strategic vision and confirming there is a clear path to profitability.
Finally, a part of our portfolio diversification plans include the launch of a new online quoting platform. In April, we began a pilot program with a few agents and have plans to roll out this in select states, starting in mid-2021.
We are confident that this platform will propel our growth in the small commercial market. Delivering straight through processing of policies and growth in our profitable bop lines of business. I will now turn the call over to Mike Wilkins. Mike?
Thanks, Randy. Good morning, everyone.
For my portion of the call today, I will discuss the progress of our strategic plan, focusing on positive outcomes during the first quarter of 2021.
First, is discussed throughout 2020, our focus has been on reducing the size of our commercial audit portfolio and nonrenewing underperforming accounts and reducing the number of exposure units.
During the first quarter of 2021 we continued these efforts and our pleased to report the exposure units decreased 23% over the past 12 months, from 265,000 units in March 2020, to approximately 203,000 units in March 2021. Partial auto frequency, expressed in claims per insured units, also continues to decrease.
With the 12 month moving average, declining slightly in the first quarter of 2021 to 4.53% from 4.56% in the fourth quarter of 2020. This decline is summarized on Slide 7 in our earnings call presentation on our website.
In addition, Slides 9 and 10 provide a 3-year view of our claim counts by our major commercial casually lines of business.
For example, our commercial auto bodily injury and property damage claim counts are down 33% in the first quarter of 2021, as compared to the same period in 2020. They've also provided commercial general liability, both liability and workers' compensation claim counts on these slides. All are down notably in the first quarter of 2021, which are positive signs of our strategic efforts. We remain disciplined in our pricing strategy and continue to embed analytics-driven technical pricing into our underwriting processes across all major lines of business. In particular, we were focused on pricing adequacy in our commercial auto, property and umbrella books of business. Commercial auto average renewal rate increase remained in the double digits at 10.8% in the first quarter of 2021, up from 10.4% in the fourth quarter of 2020. The commercial auto average 12-month rate increases have been in the low double digits since the beginning of 2020. Commercial property pricing also improved in the first quarter, with average renewal rate increases now at 7.9%, up from 7.4% in the fourth quarter.
As we stated last quarter, we believe there's an opportunity with our commercial property growth to be more aggressive with rate increases in reducing desirable exposures, as we see signs in the market arguing.
Our claims initiatives also remain a focus and key to improving possibility for UFT. In the first quarter of 2021, our claims metrics trended positively with improvements in litigation expenses, which are the result of declining claims, frequency and strategic initiatives to embed analytics into the claims triage process, set reserves in the claim cycle early and shorten the length of the cycle time. I will wrap up my portion of the call today, expanding on some of our growth strategies that Randy mentioned.
During the first quarter of 2021, we added several new assumed reinsurance programs. We believe these new programs will further diversify our direct book of business and improve our profitability, as assumed green insurance has historically been a profitable book of business for UFG. Also, another edition in the first quarter of 2021 was you have UFG's investment in 5 Lloyds of London syndicates. We recorded 14.5 million of net premiums written in the first quarter of 2021 with this new participation. This new program will also help diversify our draft book of business. With that, I'll turn the discussion over to Dawn Jaffray. Dawn?
Thanks, Mike. Good morning, everyone. In the first quarter, we reported consolidated net income of 18.7 million compared to a net loss of 72.5 million in the same period of 2020.
As Randy mentioned, net income reported in the first quarter of 2021 was driven by net realized investment gains and an increase in net investment income, offset by higher catastrophe losses, and an increase in loss severity of commercial auto. We reported net realized investment gains of 24.5 million in the first quarter of 2021. That's compared to net realized investment losses of 93.4 million in the same period in 2020. 20.6 million of the net realized investment gains were driven by a change in the fair value of our equity security investments, what I refer to as Phantom gains, the remaining 3.9 million of gains were primarily driven by actual sales of equity holdings. Net investment income was 17.1 million in the first quarter of 2021 as compared to 2.4 million in the same period of 2020. The increase of 14.7 million was primarily due to the change in the fair value of our bank funds. These bank fund LLPs increased in value by 6.6 million in the first quarter of 2021, compared to a decrease of 11.1 million in the same period in 2020.
Moving on to operating metrics for the quarter comparison, we reported a combined ratio of 107.2% compared to 105.2% last year. Favorable prior accident year reserved development, contributed 5.1 points during the first quarter of 2021 and was flat compared to the first quarter of 2020.
As I mentioned during our fourth quarter earnings call, we announced we were making changes to our pension and retiree medical plan in managing long-term escalating personnel expenses. Changes in the traditional pension plan structure to a cash balance plan, are made to mitigate long-term liability and volatility. Changes in the retiree medical plan to a participant funded plan had both an immediate first quarter and will have a longer-term cost saving impact. The required accounting for this change had a much more significant impact on operating results in the first quarter. Both the expense and loss adjustment expense ratio, benefited from this change, with approximately 22 million in total recaptured into income and recorded in the first quarter. This aggregate change provided about 8 points of reduction to the combined ratio during the first quarter of 2021. Note the beneficial impact on the combined ratio in first quarter will taper off as the year progresses as premiums are earned, or the denominator of the ratio grows throughout the balance of the year. We anticipate the resulting impact for the 2021 year will be approximately 2 points of improvement on the expense ratio. Including these changes, our expense ratio was 27.6% for the first quarter of 2021 compared to 35.8% for first quarter of 2020.
Moving on to capital.
As of March 31, 2021, our balance sheet remains strong and statutory surplus increased approximately 3% during the quarter.
During the first quarter, we declared and paid a $0.15 per share cash dividends to shareholders of record as of March 5, 2021, marking our 212th consecutive quarter of consistently paying dividends, dating back to March of 1968.
Lastly, during the quarter, we restarted our share repurchase program. Buying a small amount of shares, the amount and timing of any purchases is at management's discretion and depends on a number of factors, including the share price, general economic and market condition and corporate and regulatory requirements.
As a reminder, we remain authorized by our Board of Directors to purchase an additional 1.8 million shares of common stock under our share repurchase program, which will expire at the end of August 2022. And with the closing of our prepared remarks, I will now open the line for questions. Operator?
[Operator Instructions] Our first question is from Paul Newsome from Piper Sandler.
I wanted to ask about how -- it may be a broader question right now, but how you feel about what you're doing with rate versus the underlying claims inflation and how much you think the underlying improvement might be happening at the moment.
Paul, this is Randy. I'll take a shot at that one and maybe Michael has something to add. We were just talking, we feel pretty good about where we are on commercial auto right now on rate versus lost costs property. We think we can do a little bit better, especially in some of the parts of the country that have had storms. Mike went over what our overall rate increase, which was I think up to 7.9% across the board and we think that should be north of 10. We think there's more opportunities there. Work comp has kind of moved to flat, which is better than it's been in the past. General liability, that's kind of been one of our more profitable lines and I think there's some opportunities there as well. In the umbrella, we're getting wood rate there, but I think we can probably do more there.
I think some of the nationwide statistics we've seen on the umbrella business and excess coverage is pretty severe rate increases.
I think we got to do a little bit better there, even though we've lost ratio-wise, that's been one of our more profitable lines, but I think we got to be a little more opportunistic in that area. That's really an area that, I promised not to mention social inflation as much anymore, but go into court costs or the court cases that those larger umbrellas, it really attracts the plaintiff's bar. Mike, you got anything more to.
Maybe just add, I think on an overall basis, we're confident that our rate increases exceed the loss cost inflation in the environment that we operate. In the short term, with analytics providing guidance for our reserves setting, we're setting our case reserves earlier in the process and closer to alternate. Striving our severity in the quarterly results but in the long term, that should be a positive.
A little help, just clarifying my understanding of the pension impact on expenses. Is it as simple as there was a $21 million true-up in the first quarter, and then there'll be an ongoing benefit that helps the expense ratio by about 2 points prospectively? You also mentioned there was something about server earning in over time, so maybe you could clarify what we should think about that as we're looking at over the course of the year. Is the true-up done? Or there's more true-ups that come up through the course of the year and then it hits a run rate? How's the accounting working?
Paul, this is Dawn.
You're correct, we did recapture the liability in the first quarter that we had previously set up. There will be a small amount of ongoing recapture throughout the year and that's where we come to approximately, for the total year, 2 points associated with the overall improvement. Relative to the expense ratio specifically, I said 8 points overall, about 6 points of that is expenses and about 2 points on the LAE side. Understanding that there are people in the UA components of the calculation, and then there's some offsetting expenses.
As Randy indicated, earlier, a quarter of moving parts, we continue to invest in additional technical talent and analytics, our risk office and assume reinsurance team.
We continue to put investment in technology, our online quoting platform, oasis and analytics.
As a result, there's some fluctuation as the fixed expenses and the level of earned premium will vary over the course of time.
So I would anticipate that our run rate in 2021 will be somewhere in the range of about between 32, 32.5 roughly. We're getting about 0.5 point on the long haul of improvement from the medical plan and the pension plan, offset by some interest costs on the surplus note.
Okay. I guess I misunderstood. The 2 points you were referring to is what you expect the expense ratio to benefit for the full year 2021 and then run rate into '22 was about 0.5 point. Is that right?
Yes, I would expect 0.5 point. Again, how much the denominator or premium changes, opportunistically, there could be some additional savings, but right now, I would suggest about 0.5 point going forward beyond 2021.
That's great. I was hoping you could talk a little bit on a different topic about these voids of wanting business and maybe the reinsurance businesses as well as they become more important. How should we think about your participation as businesses? Is it property exposures? The kind of exposures you were talking about? Where do you think United Fire's edge is in these kinds of businesses? What's the strategic piece that you think United Fire brings to these businesses?
Paul, this is Bob Cataldo. When we consider the funds at Lloyd and as an investment in the investment portfolio. We monitor the size accordingly within our investment policy, but we've established a member company in which we've invested in 5 syndicates as we disclosed. We look at it as a complement to our assumed reinsurance strategy, which is intended to further diversify our existing book of business.
As we look at the opportunities and underwrite, the individual syndicates, we keep that in mind, is that we're trying to expand the scope of our book and diversify ourselves away from social inflation, severe Midwestern, convective storms, and risks of the like. We'll probably continue to look at further investments, or at least maintaining our share of the investments that we've made. But again, we monitor and govern the size of this exposure vis-a-vis our investment policy statement.
So are these property exposures outside the U.S.? Or different types of casualty exposures that are outside the U.S.? Or how does the difference specification work?
Paul, this is Mike. I'll take that one. We do look to right property exposures in places where we don't write it on the direct side, so that could be XUS.
For example, we write a fair amount in Japan, Europe, and other places. Or it could be in the United States in areas where we don't write direct business, for example, the far Northeast or the Southeast, Carolinas, Georgia, et cetera. I'll also look to fill out lines where we're underweight. We've targeted some work comp business, where we are underweight as a company and a segment that's currently been very profitable. Really just trying to sand off those sharp corners that we have in our current portfolio. aware we hired a Chief Risk Officer, a fellow by the name of Micah Woolstenhulme.
You asked, what is UFG's advantage here? Micah brought a lot of just past relationships, a lot of the programs that we got on have been long established, and we would have not been able to be invited to get on a lot of these programs without somebody's connections. Obviously we underwrite all of the programs, but Mike has really introduced us to a lot of opportunities that we wouldn't have otherwise had. That's kind of where we have a little bit of an advantage over just anybody doing all their internal underwriting on their own.
[Operator Instructions] At this time, we have no more questions.
So this concludes our question and answer session. I will turn the conference back over to Randy Patten for closing remarks.
This now concludes our conference call. Thank you for joining us and have a great day.
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