Good morning. My name is Carrie and I'll be your conference operator today. At this time, I would like to welcome everyone to the UFG Insurance Second Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. Thank you. I will now turn the call over to Randy Patten, Assistant Vice President and Controller.

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 second quarter conference call. Earlier this morning, we reported our second quarter 2019 results including a consolidated net loss of $0.17 per diluted share and adjusted operating loss of $0.59 per diluted share and a GAAP combined ratio of 111.7%. This compares to net income of $0.01 and adjusted operating loss of $0.03 and 107.9% for the GAAP combined ratio in the second quarter of 2018. This year's second quarter results were impacted by both an increase in catastrophe losses and unfavorable prior year reserve development, partly offset by continued strong equity markets and an increase in net premiums earned. Year-over-year we experienced the same number of catastrophe events in the second quarter of 2018 and 2019, but this year's events were more severe. The majority of the losses were from convective storms in Missouri and Louisiana and hailstorms in Texas which is not uncommon for the second quarter. The unfavorable prior year reserve development was primarily from reserve strengthening on commercial auto and liability claims in our Gulf Coast region. Prior year reserve strengthening was driven by continued escalation in settlements or what has been termed social inflation in the industry with commercial auto and commercial liability claims, primarily in Texas. The increase in catastrophe losses and prior year unfavorable reserve development were partially offset by an increase in the unrealized depreciation in value of our equity securities portfolio and continued increases in premiums from rate in our commercial auto book of business. Overall, our average commercial lines renewal rates increased by 6.6% which is the highest we've seen in over two years exceeding last quarter's average renewal rate increase of 5.9%. This increase continues to be driven by commercial auto with rate increases remaining in the low double-digits. Similar…

Thanks, Randy and good morning, everyone. As Randy mentioned, we continue to focus on the strategic underwriting and claims initiatives that we implemented during 2018 to improve profitability. While we recognize we have more work to do, especially in our commercial auto line of business improvements we're seeing in our core loss ratio are encouraging in spite of the increased severity of catastrophe losses and reserve strengthening in the second quarter of 2019. One item that, I point to as the key metric for improvement and profitability is the frequency of our losses in commercial auto line of business. As Randy mentioned, the frequency of auto losses has decreased for the third consecutive quarter. A driving force behind this decrease is our continued focus on reviewing the bottom 30% of our commercial auto book of business non-renewing underperforming accounts, advocating for and verifying stronger insured vehicle use policies and declining new business opportunities that do not align with UFG's risk appetite including certain classes of heavy wheeled commercial vehicles. Another key metric for UFG is pricing increases. The average renewal pricing change for commercial lines is the highest we've seen in over two years, increasing by 6.6% in the second quarter of 2019 compared to 5.9% in the first quarter of 2019. Renewal pricing increases continue to be driven by commercial auto pricing. During the second quarter of 2019, filed commercial auto rate increases averaged in the low double-digits marking the fourth consecutive quarter of filed double-digit rate increases in this line. Personal lines filed rate and renewal pricing increases also remained in the mid-single digits. Another positive this quarter is the decrease in severity of non-cat losses. During the second quarter non-cat losses over $500,000 decreased by $6.6 million, primarily from improvements in workers' compensation and commercial property lines…

Thanks Mike and good morning everyone. In the second quarter of 2019, we reported a consolidated net loss of $4.2 million compared to net income of $157,000 in the second quarter of 2018. Year-to-date with the previous strong first quarter consolidated net income was $40.3 million compared to $45.9 million in 2018. As Randy and Mike mentioned, the net loss in the second quarter of 2019 was driven by catastrophe losses and prior year reserve strengthening in our Gulf Coast region. In the second quarter of 2019 we recognized unfavorable reserve development of $9.4 million compared to a favorable reserve development of $10.3 million in the second quarter of 2018. Year-to-date in 2019 we experienced unfavorable development of $4.7 million compared to favorable development of $48.4 million in the same period of 2018. The change in prior year reserve development in the quarter and year-to-date is primarily from prior year reserve strengthening in our commercial auto and commercial liability lines of business in our Gulf Coast region as Randy had mentioned. As a reminder, our approach to reserving continues to remain conservative. And we've had annual favorable reserve development every year since 2009. At June 30 2019, our total reserve position remained within actuarial estimate. Benefiting the second quarter and year-to-date 2019 was continued strong equity market performance which increased the value of our investment in equity securities resulting in an after-tax gain of $9.9 million and $29.3 million respectively recognized in the income statement. Also positively impacting the second quarter and year-to-date 2019 results were higher net earned premiums with increases of 7.6% and 7.3% respectively. The growth in both periods was primarily driven by an increase in rates with the largest rate increases occurring in our commercial auto line of business as Mike has mentioned. Net investment income…

We will now begin the question-and-answer session [Operator Instructions] The first question will come from Paul Newsome of Sandler O'Neill.

I'd like to maybe get a little bit more details about the nature of the reserve development. Things like, it was specific to particular accident years. I know you did say, it was sort of social inflation which sounds like it's mainly at upper end of the severity. And maybe it looks like it's just one office. Is there something to the fact that it may have been an office issue or is it really just a Texas issue kind of those -- things along those lines?

Paul, this is Randy. I admire you for not asking if all the reserve is all done, because I've seen a lot of CEOs declare that they're completely done and then they weren't. So I'm not going to say that. But we're not looking at multiple other offices. And we had a leadership change there. And I think that's part of it. It is mostly Texas. It has been mostly confined to commercial auto. We’ve kind of talked -- Dawn talked a little bit about our reserving success in the past. We've been pretty redundant on and pretty consistently so. The accident years were mostly 2017 and 2018. I don't know exactly, which mix of those are. But that office is growing pretty substantially, and it could be a little bit of a result of that. So, I'm not going to say, we'll never have anymore deficiencies but right now it seems to be pretty isolated.

So, given the charge why wouldn't the accident year rise for your business? I assume that when you have development like this, you incorporate that into how you think of your current profitability and future profitably given your pricing?

Paul, this is Mike. I would say we have incorporated social inflation and things have seen on the claims side and the reserving for current accident year. I think in our comments we mentioned that we're optimistic. We've seen a decrease in frequency. There's been some decrease in severity in portions of our book. So I think maybe some of those positives would account for why you're not seeing an increase in the current accident year loss ratio.

I guess this would be my last one. How should we think about what's going to happen on the top line? Obviously, you're getting overall price increases across the board. But are you seeing changes in your retention that might lead you to -- and new business that might lead you to a change in the top line that's different than what the price increases are? So I mean essentially what's going to happen with -- growth in your view?

Paul, this is Mike again. If you look at this year's growth, we're -- it's down a little bit from what we’ve been in the previous few years. I think that's due to more focus on profitability within our operation. And I think that will continue for the immediate future. So I don't think you'll see the top line growth that we've seen in the last few years at UFG. If you look at retention, especially within -- as we segment our auto book, especially within the segments that have been less profitable our retention is -- has dropped quite a bit and that's a good thing. We have encouraged our regions to take tough action on underperforming portions of that book and we've got more of than a 10-point difference in retention for those worse parts of the book versus the better performing parts of the book. And we would like that to continue until we get the profitability numbers to where we want them.

Great. Thank you.

Thank you, Paul.

[Operator Instructions] This concludes 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.

Thank you. Ladies and gentlemen, this concludes today's program. You may disconnect your lines at this time.