Good morning, and welcome to the UFG Insurance 2018 Third Quarter Earnings Conference Call. [Operator Instructions]. Please note that this event is being recorded. I'd now like to turn the conference over to Randy Patten, AVP, Finance and Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining this call. Earlier today, 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. Our speakers today are Chief Executive Officer, Randy Ramlo; Michael Wilkins, our 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, and we assume no obligation to update them. 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 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'm pleased to present Mr. Randy Ramlo, CEO of UFG Insurance.

Thanks, Randy. Good morning, everyone, and welcome to the UFG Insurance Third Quarter 2018 Conference Call. Earlier this morning, we reported consolidated net income of $0.43 per diluted share, adjusted operating income of less than $0.01 per diluted share and a GAAP combined ratio of 105.5% for the third quarter of 2018. This compares with a net loss of $0.72 per diluted share and adjusted operating loss of $0.73 per diluted share and a GAAP combined ratio of 118.1% for the third quarter of 2017. In the third quarter 2018, net income was $1.15 per diluted share, higher compared to the same period of 2017, which was impacted by Hurricanes Harvey, Irma and Maria. The current quarter's net income benefited from a $14.4 million increase in the value of our investments in equity securities along with catastrophe losses continuing to be below our 10-year historical average. Removing the impact of the change in the value of our investments in equity securities, we recorded a small net gain for the quarter. We continue to make progress on improving our core loss ratio and believe this improvement, especially in commercial auto, is the result of our strategic initiatives. We know we are moving in the right direction to improve profitability, but at a slower pace than we would like. One example of our progress in commercial auto is that we have seen a decrease in claim counts and the number of insured units in 2018. Overall, looking across all of our major lines of business, this quarter's improvement in the core loss ratio was driven by a decrease in the frequency of claims, which was somewhat muted by an increase in severity of losses, partially due to an adverse litigious environment. We will continue with our strategic plan to improve profitability, which…

Thanks, Randy, and good morning, everyone. As Randy mentioned, we continue to make progress on improving our core loss ratio, however, we remain committed to other profit-driven strategies to improve profitability through aggressive rate increases, risk control initiatives and taking action on underperforming accounts. As for rate increases, the average renewal pricing increases for commercial lines remained in the mid-single digits during the third quarter 2018. The rate increases continue to be driven by commercial auto pricing, filed commercial lines pricing increase from the second quarter 2018 with pricing varying depending on the region and size of accounts. The average quarterly increase in filed rates during the third quarter 2018 was the highest in the last 10 years, averaging in the mid-single digits. This increase was primarily driven by low double-digit increases in commercial auto pricing, while we're getting up to 15% increase in rates in territories with the highest loss ratios and taking other actions, such as reducing commissions in regions where warranted. In personal lines, filed rate and renewal pricing increases also remained in the mid-single digits. Looking ahead, we will continue to be aggressive in seeking rate increases. Moving on to risk control initiatives. Over the last few quarters, we have outlined our enhanced risk control initiatives. One of these initiatives is expanding our reach with risk control requirements. Many of you are already aware of our Worth It campaign, a comprehensive educational and marketing program to remind drivers that life is worth it, driving distracted is not. We began the campaign with an initial rollout in the Midwest. Now we are sharing our message more broadly beyond our home office region. Targeted communication to employees and partner insurance agencies nationwide as well as social media posts are intended to increase awareness with the aim of presenting…

Thanks, Mike, and good morning, everyone. For the third quarter of 2018, consolidated net income was $11.1 million compared to a net loss of $17.9 million in the third quarter of 2017, which included net income from discontinued life operations of $1.2 million. Year-to-date consolidated net income was $57 million compared to $5 million year-to-date 2017. As a reminder, year-to-date consolidated net income includes a onetime after-tax gain of $27.3 million associated with the sale of our life business and the $1.9 million net loss in the first quarter from life operations. Looking at only property and casualty insurance operations results, for the third quarter of 2018, net income was $11.1 million compared to a net loss of $19.1 million in the third quarter of 2017. Year-to-date in 2018, net income increased to $31.6 million compared to a net loss of $0.4 million year-to-date 2017. In the third quarter and year-to-date in 2018, our net premiums earned increased 3.5% and 4%, respectively, compared with 2017. Our commercial auto line of business continues to be our line of business with the most premium growth, but the increase in this line is driven primarily by rate increases. Net investment income decreased 4.4% to $13.2 million in the third quarter of 2018 and increased 13.9% year-to-date 2018 to $44 million compared to the same periods in 2017. The decrease in net investment income for the quarter was driven by a change in the value of our investments in limited-liability partnerships and not due to a change in our investment philosophy. The valuation of these investments in limited-liability partnerships varies from period-to-period due to current equity market conditions, specifically related to financial institutions. We reported net realized investment gains of $14 million and $7.4 million in third quarter and year-to-date 2018 compared with net…

[Operator Instructions]. And our first question comes with Paul Newsome with Sandler O'Neill.

I was wondering if you could talk a little bit about -- before we bang on these severity and underwriting stuff, about the run rate -- the appropriate run rate for investment income, prospectively.

Well, as you -- as we stated the last time, it probably was our LLCs were up a little bit in the last quarter. This quarter, as Dawn stated again, it's the LLCs that caused and is mostly financial and they were down for the quarter slightly. So I think, this is a more normalized investment income that we're at, slightly down from where we probably should be because of the LLCs.

Well, do you anticipate any issues with those LLCs, given the market turmoil that we've had in the fourth quarter?

I don't. I think, we've -- we're just into visit the LLCs in October, and I think their look going forward is quite good. So I don't envision anything good or bad in there.

So turning to underwriting, maybe start with kind of a broad question here. Could you pinpoint kind of what you think has made the turnaround slower than you anticipated? Is it just the severity question? And maybe we can talk a little bit more about that as well.

This is Randy. I think, maybe Michael have some comments as well. But severity is kind of a -- we've mentioned it a couple of times in the past and oftentimes the severity issue can be a couple of handfuls of very large losses. So it's difficult to overreact too much to that. We do pay attention to frequency, which we see some positives in that area. We always think we should -- we mentioned kind of we've had good success with rate increases. But the market doesn't always allow us to get where we want to. A lot of times our analytics tells us what we need and sometimes we're not able to get it all at once. We mentioned litigation, and it's kind of early to see a trend, but when talking with some of our reinsurers, it's kind of a theme that a lot of other people reported as well. So a lot of these severity losses really kind of come down to cases where we feel we had little or no negligence, but the injuries or damages were severe. And whether it'd be judges or juries just kind of ignoring the principle of negligence. And we're also seeing some of these cases not only in the areas of the country, the usual suspects, but some areas that have tended to be a little bit more conservative. So we'll continue to keep an eye out on some of those things, but a lot of the severity has kind of been driven by blindsided jury verdicts. Mike, you've got anything to add?

I would add that while we've been very successful with the rate increases, the underlying drivers and increased loss costs in commercial auto are still there. So we still have miles driven being up, we still have unemployment being very low, commercial clients having a hard time finding qualified drivers. We've seen a lot of -- some of our clients have been unsure -- uninsured motorist claims. So while we're improving the value or the quality of our book, I think we still are subject to lot of these underlying loss cost trends that are driving loss costs up. So while we've improved the underlying loss ratio, still not where we would like it to be. We kind of feel like we're about halfway to where we need to be. If we continue to make progress like we have over the last 4 quarters, we feel like in another 4 quarters, we should be in pretty good shape with that line of business.

[Operator Instructions]. And this concludes our question-and-answer session. I'd 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 today, and have a great day.