Good morning. My name is Steven, and I'll be your conference operator today. At this time, I would like to welcome everyone to the UFG Insurance First Quarter 2019 Financial Results Conference Call. [Operator instructions] Please note this event is being recorded. I would now like to turn the call over to Randy Patten, AVP of Finance and Investor Relations.

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 our first quarter conference call. Earlier this morning, we reported our first quarter 2019 results, including consolidated net income of $1.74 per diluted share, adjusted operating income of $0.91 per diluted share and a GAAP combined ratio of 95.6%. These results compare with last year's first quarter numbers of $1.80 for net income, $1 for adjusted operating income and 93.5% for the GAAP combined ratio. During the first quarter of 2019, UFG benefited from strong equity markets, achieving higher net investment income and an increase in net realized investment gains. This compares with net realized investment losses in the first quarter of 2018, which were offset by the onetime realized gain of $1.07 per diluted share of the sale of our life company. Also in the first quarter of 2019, we experienced an increase in net premiums earned, reflecting pricing increases on our commercial business particularly commercial auto. As mentioned last year, we are focused solely on improving our profitability with several strategic initiatives in enterprise analytics underway, which Mike will elaborate on. On the claims side, our new Chief Claims Officer, Corey Ruehle, is working on the initiatives we announced during last quarter's call. As a reminder, these new initiatives are aimed at improving claims service, including shortening cycle time and reducing claims costs, attorney involvement and the impact of litigation. As always, these initiatives take time to implement, and therefore, will take time to show up in our financial results. This quarter's improvements in net investment income and net premiums earned were partially offset by reserve strengthening on commercial auto in our Gulf Coast region. This resulted in a decrease in the favorable prior year reserve development from the same period a year ago. Dawn will be discussing this in…

Thanks, Randy, and good morning, everyone. We continue to focus on the strategic underwriting and claims initiatives we discussed last quarter to improve profitability. In the first quarter, we can report that our average commercial lines renewal pricing increases are the highest in recent history with effective rate changes remaining in the mid-single digits. The renewal price increases continued to be driven by commercial auto pricing with an effective rate change in the low double digits in the first quarter of 2019. Filed commercial auto rate increases during the first quarter of 2019 continue to be in the low double digits. We continue to aggressively push rate increases in targeted areas with our commercial auto book of business, seeking double-digit rate increases. With the assistance of our Enterprise Analytics team, we are closely reviewing the bottom 30% of our commercial auto book of business, seeking significant pricing adjustments or taking underwriting action. We are also passing on new business opportunities with commercial auto which do not align with UFG's risk appetite including certain classes of heavy-wheeled commercial vehicles. Our premium retention remains strong at 84% during the first quarter of 2019 primarily due to rate increases in our commercial auto book. Going forward, we expect to see a decrease in our premium and policy retention as we continue to review our book of business for profitability. Before I turn the call over to Dawn, I'll spend a few minutes discussing a couple of additional and important initiatives we are working on, which will be instrumental in how we do business in the future. First, over the past 2 years, the newly created Enterprise Analytics team has been actively pursuing the build-out of an analytics ecosystem to support data and advanced analytics capabilities at UFG. Capitalizing on the initial stages of…

Thanks, Mike, and good morning, everyone. In the first quarter 2019, we reported consolidated net income of $44.5 million compared to net income of $45.8 million in the first quarter of 2018. First quarter 2019 net income was impacted by strong equity market performance. This included a $2.4 million after-tax increase in net investment income due primarily to an increased valuation of our bank fund limited liability partnerships and an increase in our invested assets with last year's sale of our life company. Our year-over-year increase in the value of equity securities resulted in an after-tax increase of $19.5 million recognized in the income statement. Higher net premium growth quarter-over-quarter of 7% also contributed to net income. And as Mike mentioned, this increase was primarily driven by an increase in rates with the largest rate increases occurring in our commercial auto line of business. Lastly, a reminder that the onetime after-tax gain on the sale of United Life of $27.3 million was previously recognized in first quarter of 2018. I want to highlight that the 2019 annualized return on equity is 19.3% as compared to 11% in the first quarter 2018. The change in valuation of our equity securities included in the income statement or what I personally refer to as phantom gains are impacting our first quarter annualized ROE calculation. Excluding the impact of all unrealized gains in our portfolio, our annualized return on equity would be 10.9%. In the first quarter of 2019, we recognized favorable reserve development of $4.6 million compared to favorable reserve development of $38.1 million in the first quarter of 2018. The decrease in favorable reserve development was primarily in our general liability, commercial property and commercial auto lines of business due to prior accident year reserve strengthening in our Gulf Coast region as…

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

Congratulations on the quarter. I was wanting to ask about the combined ratio or really loss ratio. If you exclude reserve development in the cats, it looked like it improved quite a bit and on -- both the year-over-year and sequential basis. And I was hoping you could talk about sort of the sustainability of that and whether there was something unusual or different in that particular metric.

Well, we sure hope that's sustainable, Paul. We think we're seeing some good progress. We continually repeat that a quarter doesn't make a trend, but we had some reserve strengthening in our Gulf Coast, as we mentioned, but we are starting to see a little bit of progress. Maybe Mike, you could add a little bit on what we're seeing on the frequency side.

Yes. A couple of comments, Paul. First, I would say the improvement was broad-based. So property lines, while we had a quiet cat quarter, we also had a reduction in prior losses versus prior years. So it's good to see that. Personal lines was improved quite a bit from last year first quarter. Assumed business performed better than it did last year first quarter. Work comp, we had a good quarter. So a lot of improvement across many different lines. Some other underlying things that maybe give us some optimism. We've had 2 consecutive quarters of quarterly moving average decrease in frequency in the auto lines. So while we still have work to do in that line, it's nice to see that trend reverse because we did several quarters consecutively prior to that time where we saw increase in frequency. So I think some good trends. As Randy said, it's just a quarter so we aren't going to get too excited, but maybe some indicators of turning tide on our underwriting profitability side.

And then maybe we can turn to the reserve issues in the Gulf region. I guess is it -- it sounds like it's just kind of commercial auto for the most part, but I'm surprised that Texas is the issue. I thought sort of the West Coast was the problem child area. Maybe some more comments on that and maybe how quickly that might turn itself around.

Well, it's -- you are correct, we've had our share of issues on the West Coast as well. We have a new branch claims manager in our Texas region. As we mentioned in the release, we don't think there's necessarily a change in philosophy, but we've probably increased our pessimism on the way some especially bodily injury losses are settling out, especially in left turn situations or rear-end accidents. And I think really this is kind of a reflection of a new set of eyes on some of the claims we've had and kind of just a bit more pessimism on how these claims are settling out. Corey, I don't know if you want to add anything to that commentary.

Sure. Paul, this is Corey Ruehle, Chief Claims Officer. While we're not looking to change our reserving philosophy, we are looking at refining it in ways that we can continue to evaluate that. A couple of examples would be looking at a quality assurance unit that will help identify trends, training gaps and then also things -- the proper institution of best practices as well so that we can make sure that the reserving philosophy is being followed completely. The second thing, Dawn Jaffray had mentioned analytics, and we have engaged analytics to work on developing a couple of claims models to start that will help us better identify this as well.

Okay. My final question, I wanted to talk a little bit more about the expense ratio and the outlook there. It looks like you've had a couple of quarters now of keeping it -- actually, more than a couple of quarters keeping it under 34%. Is that outlook more sustainable now that it looks like you've made some efforts there? So any thoughts on the sustainability of the expense ratio at this level?

Well, I'll make a comment, and if Dawn or Mike want to add anything. The OASIS Project is kind of staying kind of where we had predicted. So that's kind of a plus. We have made some changes to our postretirement benefits. Those benefits do run out someday, and hopefully, the timing with this OASIS Project, ultimately, is going to see some efficiencies. So there'd be -- I think long, long term, yes, we'll see the expense ratio return to normal. Kind of in the next 3, 4 bumpy years, that will remain to see, but we sure hope so.

Paul, this is Dawn. The only other thing I would add is relative to the investment in enterprise analytics. Obviously, there's a cost of the Enterprise Analytics team, and that investment will directly pay off in the lower loss ratio. So I do think we will continue to have some additional amount than maybe we've had in the past relative to that particular group.

[Operator instructions] I'm showing no further questions. 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 and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.