Good morning. My name is Grant, and I'll be your conference operator today. At this time, I would like to welcome everyone to the UFG Insurance Second Quarter 2020 Financial Results Conference Call.[Operator Instructions] Please note this event is being recorded. 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, 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 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 2020 Conference Call. First, to our employees, agents, policyholders and shareholders, we hope everyone is safe and healthy during this ongoing pandemic. I continue to be amazed by the extraordinary work being completed by our employees during this time, delivering our outstanding service to agents and policyholders without interruption while working remotely. These efforts are truly remarkable, considering the higher-than-normal catastrophe losses we experienced in the second quarter of this year. As we mentioned last call, we had a preexisting business continuity pandemic plan already in place prior to this year. Thanks to our past experience in personally dealing with catastrophes, including the floods of 2008 and 2016 at our corporate headquarters, we were well prepared and had the technological infrastructure in place for a seamless transition to work from home. This plan was activated in mid-March and continues to be followed on a daily basis. While our essential services employees have remained in our offices as necessary, the majority of our employees continue to work remotely. We have had ongoing discussions on a return-to-office plan for our employees, but no definitive dates have been set yet. Of course, the safety, health and wellbeing of our employees will be the top priority of our return to the office plan when it is finalized. Also, as we mentioned during the first quarter call and as a reminder, nearly all of the policies we have issued contain contract language which specifically excludes business interruption coverage losses attributable to viruses such as the COVID-19 pandemic. At this time, we expect the effect of COVID-19 on claims currently under our coverages to be manageable. However, the impact of the COVID-19 pandemic continues to evolve, and we cannot predict how future legislation, regulation or…

Thanks, Randy, and good morning, everyone. As Randy mentioned, we continue to make progress with improving the profitability of our commercial auto book of business in 2020. In the second quarter of 2020, we again saw a decline in the frequency of commercial auto claims. Since June of 2019, commercial auto frequency is down 8%. Additionally, our 12-month moving average of insured commercial auto units has declined 14% since June of 2019. Slides 7 and 8 in the slide deck on our website present these declines. Although the COVID-19 pandemic may have contributed to some of this decline, it is important to note that the decline in both frequency and number of insured units began well before the pandemic and is primarily the result of our deliberate strategic actions. Also, another important point is that frequency of claims continued to decline in the second quarter, even when miles driven increased during the months of May and June of 2020. The reduction in commercial auto claims frequency and number of commercial auto exposure units, along with favorable prior accident year development, resulted in an improvement of 10.2 points in our commercial auto loss ratio during the second quarter of 2020 as compared to the second quarter of 2019. Year-to-date, the improvement in our commercial auto loss ratio was 10 points. We also experienced an 11.9-point improvement in our other liability line of business and a 9-point improvement in workers' compensation during the second quarter of 2020. We are very pleased with these results. As we take steps to return our commercial auto line of business to profitability, we acknowledge that we stand to lose entire accounts, since we have traditionally been a package writer. For the third consecutive quarter, we experienced a decrease in both policy and premium retention as we…

Thanks, Mike. And good morning, everyone. In the second quarter of 2020, we reported consolidated net income of $6 million compared to a net loss of $4.2 million in the same period for 2019. Year-to-date, we reported a consolidated net loss of $66.6 million compared with net income of $40.3 million in the same period of 2019. The increase in the fair value of our investments in equity securities, or what I like to refer to as [indiscernible] gains of $29.8 million; along with an improvement in the profitability of our core commercial auto and liability business, contributed positively to the net income reported in the second quarter of 2020. These positives were offset by the historically high quarterly level of catastrophe losses, some realized investment losses and a decrease in premiums earned from our continued efforts to improve the profitability of our commercial auto business through non-renewing underperforming accounts. Operationally, we reported an adjusted operating loss of $6.5 million or $0.26 per share in the second quarter 2020 compared with an adjusted operating loss of $14.9 million or $0.59 per share in the same period of 2019. Also, a one-time pretax benefit of $5.7 million in our second quarter of 2020 was attributable to the renewal rights agreement from our personal lines business with Nationwide. Year-to-date, we reported an adjusted operating loss of $5.2 million or $0.21 per share compared with an adjusted operating income of $8.5 million or $0.33 per share in the same period of 2019. Net investment income decreased 10% in the second quarter of 2020, primarily the result of a decrease in invested assets. Year-to-date, net investment income declined 51%, primarily due to the change in the value of our limited liability partnerships, or what we refer to as our bank fund. Couple of additional…

[Operator Instructions] Marla Backer, with Sidoti.

So just a couple of questions to clarify some of the items. What we've been hearing from other insurers and reading about is that the frequency of auto collisions declined during this pandemic, but the severity climbed in many markets. So that doesn't seem to be what you're saying. Is that the way to read that?

This is Randy. We've actually experienced the exact same thing. I think we mentioned that we're pretty heavily in the construction area, so that line of business kind of continued through most of the pandemic. But our frequencies were down pretty considerably. But we didn't have any break in the severity of losses. So it seems like the people that were out driving around on empty roads must've been driving faster. But we have experienced kind of the exact same thing.

And on the Nationwide agreement, can you just provide a little bit more color there? So why was the agreement structured to exclude that one state? Was it specific to Nationwide because they don't write policies there? Or what was the reason for the way it was structured to exclude Louisiana, I think you said?

Yes, that's exactly it. I think Nationwide writes in 49 states. And Louisiana is the one that they don't. So we'll get that figured out going forward. We're having pretty good success. The non-renewals kind of start, starting 10/1. We've got commitments from high 80% of agents to go with a Nationwide deal. So not much more to comment, other than we think it's going pretty well. We have to get approval from all the states. And we've had good progress there, but we're not completely done with that process yet. So Mike, do you have anything to add?

No, I think you hit all the high points there, Randy. I think we have three states remaining that we don't have approval from yet. I think two of those are pretty close. So yes, good progress. We are no longer writing new business in the personal lines segment, so we are seeing the production already starting to decline even in the second quarter a little bit.

And then, last question, which is -- so that's great news about the business interruption clauses being tested and being supported in those cases in those two states that you mentioned. Is there anything else that we should think about in terms of possibly testing the policies because of COVID? Anything because of the riots that have occurred in many markets? Or is there anything else that we should be thinking about that might arise because of COVID that is on the horizon?

This is Randy. And I'm a long ways from an expert on this. I think the biggest thing going forward is the possibility of kind of more shutdowns, which could cause more businesses going out of business, more bankruptcies; just shrinkage of kind of the insurance industry due to that. And who knows where that's going to go? Riots and civil unrest is a covered peril. So if the riots continue, which -- they have been quieting down a little bit -- if they do continue, those are covered, but I don't see as being a gigantic part of the industry in general. And the legislation on -- legislatively, regulatorily, things have been pretty good. There's a big question on how is workers' compensation going to respond to this. I think California's had some negative rumblings, I guess you might say. We don't write any workers' compensation in California. And obviously, if I'm just -- we don't do any med mal or any of that stuff. So for us, I don't think it's going to be a large factor. But we really keep watching on individual states, individual court cases that could go south. So keeping track of it. But I'd be lying if I said I knew all the answers.

Our next question will come from Paul Newsome of Piper Sandler.

I wanted to ask a little bit more about the premium reduction comments that you made for the second half. I think recall, if you said it, correctly that you're looking at a decline of 68%. And does that include the runoff of the personal lines business in there as well? Or is it just the commercial lines that we're talking about?

Hi, Paul, this is Mike. I'll try to take that one. Yes, that does include the personal lines runoff in that calculation as we tried to make an estimate for the second half. Couple other things that we think will probably impact the second half written premium -- one is our specialty division. They have had really nice growth in the first half. And we think growth will continue in the second half, but we don't think the percentage increase will be quite as large, for various reasons. And because of that, we think we won't get quite as much contribution from that unit. We also have a program with Arrowhead writing some earthquake business in California that we've kind of reached our capacity on. So again in the second half, we think we'll see a little bit of growth from rate increases in that segment. But we aren't expecting the contribution from that in the second half that we saw in the first half. So those things combined, we are a little more pessimistic about the topline in the second half.

And then, relatedly, could you talk about sort of the outlook for the expense ratio? I assume that, or would expect, that we'd see some pressure there because of the declining premium. But obviously, there's some offsets here while you're shutting down your personal lines business. Could you help me with that?

Sure. Hi, Paul, this is Dawn. So I think a couple things. You're correct, with the decline in premium, that is certainly going to make an impact to our numbers. We also, as I had mentioned, continue to have a little bit of the [indiscernible] the inability to defer on the commercial auto, because the loss ratio is still not where it needs to be for the very formulaic calculation we're required to undertake. I also think during the third quarter it'll be interesting to see the portion of payments that had been deferred for cancelation that we have not been able to cancel due to state mandates -- what the impact of that will be. Currently, how that works is the payments get deferred, and they get billed out, spread out over the remaining term. And then we continue to make investments in technology, I think, as a number of companies are doing. So realistically, probably in that sort of between 33.5, maybe a 34, depending on the nature of the circumstances, with the decline in premiums.

Is it fair to say that this is probably -- both of these issues, the premium and the expensing, would probably be something we'd be talking about at the first half of next year, given that, at least, I would imagine, the personal lines would take that long to run off? And as well, just thinking a little bit further than maybe the first half? Second half, pardon me.

I think it will depend. As you know, and as Mike and Randy have both indicated, Paul, we've also taken on a considerable amount of deliberate non-renewals. So clearly, we are looking at every element of our expenses. The commissions and salaries are the two biggest components of our expense ratio. So we have to pay attention to both of those. We have looked at a few changes in our commission plans that will start to take effect. But I think it's a little early to say completely what will happen. But with a smaller premium base, I would expect there to continue to be pressure next year, in the first half of next year. But we're going to look for ways to offset that.

Was there much resources dedicated just to the personal lines business at United Fire?

This is Randy, Paul. It made up about 6% of our writings. And we probably benchmarked a hair high on expenses. So that's kind of about that same area. I think there's how many employees? Under 20, I think?

Yes.

So not a huge factor. But it was probably something that, on an overall cost basis -- one of the reasons we did the deal with Nationwide is we found it very difficult to compete as a small personal lines player. And then kind of a grim future a little bit for especially small carriers like us. So I don't think that'll be a negative or a positive necessarily on expenses long term. But it might be a little drag in the short term.

That makes sense. Lots of folks are seeing the same thing, I think. And then, the last thing I was wondering if you could help me with is maybe talking about the components of the invested assets declining. You were talking about that prospectively. And then, looking at the balance sheet, doesn't look like you've had huge changes in total invested assets [indiscernible] bump around. Are you in essentially a cash flow-negative position at the moment? And is that why investments, invested assets, are falling? Or is there some other component there that -- I'll just let you answer the question.

Hi, Paul, this is Bob Cataldo. Thanks for the question. No, we've had no -- or have not initiated any concerted effort to reduce or erase cash in the portfolio. I think what you're seeing is just natural runoff as the business has contracted slightly. Overall, it would make sense that the assets would follow that trend as well. We did reduce a little bit on the equity side, as was mentioned earlier by Dawn. But that was again just opportunistic and more of a rebalancing exercise than any reallocation or change in the investment philosophy or policy.

[Operator Instructions] This will conclude 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.

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