Q4 2022 United Fire Group Inc Earnings Call

Good morning, and welcome to the U S G for Ya and.

Fourth quarter 2022 results conference call.

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I would now like to teleconference over to U S. G Senior Vice President and Chief Financial Officer, Eric Martin.

Please go ahead Sir.

Good morning, and thank you for joining this call yesterday afternoon, we issued a press release on our results.

To find a copy of this document please visit our website at USG insurance dotcom.

Press releases and slides are located under the investors tab.

Joining me today on the call is UFC, President and Chief Executive Officer, Kevin Livelier.

Before I turn the call over to Kevin a couple of reminders first 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.

Actual results may differ materially due to a variety of factors, which are described in our press release and SEC filings.

Also please 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 will turn the call over to Mr. Kevin Livelier CEO of European insurance.

Eric Good morning, everyone and welcome to our fourth quarter Conference call I'll begin this morning by providing insight into the fourth quarter results then provide an overview of our full year performance.

First let me say I'm pleased with the progress I've seen since joining you have to you in August we continue to position our company for superior financial and operational performance.

Over the past year, we have further diversified our portfolio improved its underlying fundamentals and intensified our focus on reducing the expense ratio.

A lot of the work our team has done in executing our strategic plan.

Turning now to fourth quarter results. We're pleased to report net written premium increased six 3% to $235 million compared to $221 million in the fourth quarter of 2021.

This marks the third consecutive quarter of net written premium growth as the business gains momentum following the re underwriting exercise for the last several years.

Growth was driven by our specialty surety and assumed reinsurance businesses.

Our core commercial business, including construction middle market small business and marine was down slightly however.

However, we are encouraged by the improved retention ratios and increased new business production, we saw in quarter <unk>.

Mentum continued into January and we expect the core commercial business to return to profitable growth in the coming quarters.

The combined ratio was 103, 6% in the fourth quarter and was impacted by five points of catastrophe loss activity and five points of adverse development.

The adverse development in the quarter was the result of a more granular analysis of the construction defect portfolio.

The underlying combined ratio for the fourth quarter was 93, 8%.

As mentioned last quarter, we remain intensely focused on lowering our expense ratio, which fell to 33, 8% in the fourth quarter of 2022, that's early benefits of our expense management actions begin to take effect.

Turning now to our full year results net written premium increased four 6% to $984 million compared to $941 million in 2021.

As with our most recent quarters growth was driven by our specialty surety and assumed reinsurance businesses, while our core commercial business continues to recover.

The combined ratio for full year 2022 was 101, 4% a slight deterioration over full year 2021.

The combined ratio was impacted by seven seven points of catastrophe loss activity and prior period development was neutral.

The underlying combined ratio was 93, 6% for full year 2022, a three four point improvement over the previous year.

The underlying loss ratio improved five two points to 59, 2% our best underlying loss ratio in the last 10 years.

The improvement in our underlying loss ratio was the result of significant actions taken over the past several years to improve profitability and diversify our portfolio strengthen underwriting governance and reduce volatility.

With respect to reinsurance I'm pleased to share that we successfully renewed our multiline and catastrophe program on January one.

Although we experienced increased cost in modest terms and conditions changes they were consistent with the broader market.

With the increased cost of reinsurance, we will continue pursuing property rate increases.

We also made the strategic decision to add a variable quota share treaty to support growth and reduce volatility in our specialty portfolio.

Despite the many challenges we face as an industry I'm confident the actions. We are taking today will put our company in a strong position to deliver consistent superior financial and operational performance for the benefit of all of you you got to stakeholders.

Finally, I'd like to welcome Julie Stephens into U F. G. Julie joined <unk> at the end of January as Executive Vice President and Chief operating Officer.

It's always an accomplished leader who brings a wealth of operational underwriting and portfolio management experience to our company.

We're thrilled to have her on board as we continue to execute our strategic plan and position USG for long term success.

I'll now turn the call over to our Chief Financial Officer, Eric Martin for a detailed discussion of the fourth quarter and full year results Eric.

Eric.

Thanks, Kevin and good morning again.

In the fourth quarter, we reported net income of 79 cents per diluted share and non-GAAP adjusted operating income of 18 cents per diluted share.

Net written premiums increased six 3% in the fourth quarter compared to the prior year.

Our core commercial lines premiums are stabilizing with the slowing rate of decline driven by average renewal premium change of eight 3% for the quarter and increasing levels of premium retention and new business.

This reflects our transition from re underwriting actions to positioning the core commercial portfolio for profitable growth.

Notably new business in the fourth quarter increased 55% and retention was seven points higher than the fourth quarter of 2021.

From a profitability perspective, our fourth quarter combined ratio was 103, 6%.

Which includes four nine points of catastrophe losses.

And four nine points of prior year reserve strengthening.

The catastrophe losses of $12 million in the fourth quarter were primarily driven by winter storm Elliot.

With the resulting catastrophe loss ratio of four 9% within historical ranges of performance for the fourth quarter at one point above our 10 year average catastrophe loss ratio.

And one point below our five year average catastrophe loss ratio.

In the fourth quarter, we strengthened prior year reserves by $12 million or four nine points of combined ratio impact.

Focusing on our construction defect business and accident years 2015 through 2019.

We're a combination of deeper analytical insights and emerging claims experience has increased our view of potential exposure and align with long reporting bikes.

Since we've had two consecutive quarters of reserve strengthening I'm going to address our results for the full year at this time for the full year. Our prior year reserve actions have had a neutral effect on our combined ratio and reflect two different themes playing out across the year.

In the first two quarters, we experienced favorable reserve releases in our commercial auto line of business. It continued in the third and fourth quarters.

This favorable emergence resulted from strong case, reserving and reduced claim handling cost.

Facilitated by our specialized claims operating model.

In the third and fourth quarters. These reserve releases were offset by strengthening in our commercial liability portfolio.

For a deeper review of our data has given us new perspectives and lines of business, where the most uncertainty exists.

The third quarter strengthening focused on excess umbrella, where social and economic inflationary pressures are increasing the propensity for claims to pierce the excess layers in line with what others in the industry are reporting.

We've also experienced healthy growth in our specialty excess and surplus business that writes excess layer coverage.

While our results have historically been superior to the industry, we felt it prudent to take a cautious approach here to enable continuation of our historic track record to continue to create financial benefits.

The same theme continued in the fourth quarter with the actions focused on construction defect claims that I just described.

Turning to investment results net investment income benefited from strategically positioning our fixed maturity portfolio toward a shorter duration profile that facilitates reinvesting at higher interest rates.

As a result fourth quarter investment income from fixed maturity assets increased by $2 million or 19% compared to last year.

This increase in fixed maturity income was offset by lower valuations.

And our long term investment portfolio, resulting in net investment income of $12 $9 million in the fourth quarter relatively flat compared to the fourth quarter of 2021.

In the fourth quarter, both our equity and fixed income portfolios outperformed our market benchmarks.

Our equity portfolio generated $20 million in investment gains and.

And the unrealized fixed income loss on our balance sheet decreased by $24 million during the quarter.

This improvement in equity and fixed income asset values drove a five 5% increase in book value from Q3 to Q4.

Our investment portfolio balance was $1 8 billion of invested assets in the fourth quarter.

84%.

Is allocated to a high quality fixed income book.

For the full year net income per diluted share was <unk> 59 cents.

And non-GAAP adjusted operating income per diluted share was $1 nine.

For the full year net written premiums increased four 6%.

Within our core commercial business the average renewal premium change was eight 3% for the year.

With rate increases of five 2%.

And exposure increases of three 1% as we continued to focus on adequate property valuation considering today's inflationary environment.

Both new business and retention improved on a full year basis as our core commercial book transitioned out of re underwriting actions.

Our full year combined ratio of one O. One 4% included an expense ratio of 34, 4%.

This is higher than 2021 by one eight points due to onetime impact from changes in post employee benefits. It favorably impacted the 2021 expense ratio.

Excluding the impact of those one time items. The 2022 full year expense ratio would have been 0.3 points lower than 2021 building positive momentum into 2023, as we seek to aggressively improve our expense ratio.

The full year catastrophe loss ratio of seven 7%.

Is it two five point improvement compared to our experience in 2021.

As described earlier prior year reserve development had a neutral impact on our full year loss ratio.

Is it releases in the first two quarters focused on commercial auto.

Were offset by strengthening in the third and fourth quarters in excess umbrella and construction defect coverages.

Full year net investment income of $45 million was down $11 million from 2021 as a result of lower long term partnership valuations in the first half of the year that decrease investment income by $17 million.

This more than offset the increased earnings power of reinvesting at higher interest rates that began improving net investment income in the second half of the year and increased fixed maturity income by $5 $5 million for the year.

During the quarter, we declared and paid a <unk> 16 per share cash dividend to shareholders of record as of December 2020 to continue.

Continuing our 54 year history of paying dividends dating back to March $19 68.

This concludes our prepared remarks I will now open the line for questions.

Greater.

Yeah.

Thank you we will now begin the question and answer session. I ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys.

If at any time your question has to be not just and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Paul Newsome with Piper Sandler. Please go ahead.

How is your line muted.

Okay, hopefully I'm going to come through now.

I wanted to ask a little bit more detail on reserve development in the last couple of quarters was there anything that changed there from a philosophical perspective or good.

There are special look into the reserves the last couple of quarters obviously.

New New management oftentimes takes a different approach or.

Or at least the notebook or anything like that happened during the quarter was just simply just the emergence that showed up in the last six months.

Good morning, Paul This is Eric Thank you for joining us and thanks for your question.

And it's a really good question. So what I would say is in general we have not had a change in philosophy. So if you look back at our history over the past couple of years, we've had some.

Items within our commercial auto book that we have taken action on.

But when I look back over the past couple of quarters, and I think about all four quarters of the year. The first two quarters, we had favorable development of about $23 million in the second half of the year. We've had just that's exact same amount going the other way $23 million of unfavorable.

And as we have had new management came in well we haven't had a change in philosophy one of the things that we wanted to look at was it deeper segmentation.

More more analysis around some of our longer tail businesses. So these are the items that.

All show up in our other built excuse me other liability line.

It's excess umbrella coverages.

Product liability our construction defect. So we have taken an opportunity to have a more granular view on those things, especially as we're coming through the year in an inflationary environment.

As we see quartz reopening that sort of thing we really wanted to have a good feel for our exposure on some of these longer longer tailed lines.

I think what you might see it.

As we've seen this development as we've been somewhat flipped to react, but we think the underlying themes makes sense to us and I think that's what you'll see going forward as well.

Woodford to react to negative news that perhaps.

A little longer to react to positive news.

Do you think the process of taking a more granular approach as it's finished on the other liability.

Book or and or do you think that process will be extended to other parts of the.

Business as well.

You know I think so these are the these are the places where we've got the long tail lines. We we we've done a lot of work on commercial auto over the past some of our other lines, probably a little different surety, our or workers comp or workers comp line isn't isn't very big right. Now we are wanting to continue to grow that so well I can never say we're done.

If anything I think the actions we've taken here will continue to get that granular insight, but we we've hit the lines with the long tails here.

Paul It's Kevin.

Additional observation I mean.

It's our intent to use all the tools available to us to gain as much insight as we possibly can and of course, then we will take the the appropriate level of of active or action relative to the insights that are providing back through those analysis.

Eric's point about.

Being prudent and taking action more quickly on negative trends and perhaps a little more slowly on positive trends is is exactly spot on.

It makes sense, obviously United.

Ours is a long track record as well.

Okay, who reserve.

I also wanted to ask you about reinsurance.

And the impactful on a cost basis as well as E.

Z basis, then you could.

We split those two pieces apart for us and talk about them.

The impact on them.

On the business and the bottom line for the <unk>.

It was I assume there will be a higher reinsurance costs for this year.

Yeah, and the purchaser and then.

Maybe you could talk about any changes you see in the assumed reinsurance book as well.

Sure. Let me just give you a little bit more color on our reinsurance program as we mentioned in our prepared comments all of our reinsurance for news on one one.

And so like like many others, we did experience some pricing increases across our portfolio along with some some changes in terms of conditions. Let me just give you some context there so.

You know the property cat XL, well premium increased about 54% on a risk adjusted basis. We saw some increases on our own earthquake quota share program that are about about 40% are the pillars of the current program rate increase was about 20%, but that was a bit moderated or muted compared to the cat.

Program due to some structural changes with the annual aggregate deductible and then what we call our core program, which is the multiline.

The working program rate increased a little bit over over 30% and so clearly the pricing is somewhat reflective of what the rest of the market experienced.

Let me just give you some context around retention so our property cat XO, all retention increased from 15 million to $20 million.

We also saw a co participation increase on the first layer to 28, 5%.

Our earthquake quota share limit was reduced by about $10 million. So it's now at $170 million, but still provides coverage in excess of a one and $2 50 P. M L.

Yeah.

On a pillow to current which was a new program we put in place in 2022.

We saw an increase in placement.

So from 20 in 2022 was 66, 5% replay placed in 2023. It was 90% placed so we're pretty pretty happy with the increased participation.

We also saw an increase in overall limit there from $25 million to $30 million.

And so we consider that placement success, particularly in light of this market.

Tension increase from 5 million to $6 million in annual aggregate deductible increase there from 5 million to $10 million. So certainly well see some additional debt exposure in both the property cat extra well and the poet occurrence on a core property casualty program. We didn't we did take a $5 billion annual AG.

Forget deductible on the program. This year, we did maintain though our 3 million dollar retention.

And other than the annual aggregate deductible there were no changes to the layers for the structure and that program is 100% placed.

So again much like other saw premium increase as well as some.

Retention increases in our overall program, we clearly understand the importance of pushing harder on property rate increases, particularly in cat exposed.

Parts of our portfolio and that work is underway today, and we would anticipate over the course of the coming year or two to see it.

Improved pricing on the property side to compensate for the additional reinsurance cost.

On the <unk> on the left so I'll just pause there and see if you have any questions about that otherwise I'll turn to the two of you soon.

I mean, just to simplify it for folks like me, who Martha Brian spoke to the world.

Essentially yeah.

It looks like maybe all things being equal a little bit more cat.

Because of the.

Higher retention and then maybe a little bit of overall pressure on the underwriting margin.

The total.

Sure.

Excess of loss cost goes up.

There is to it.

I think we'll probably have to spend a little bit more time on that issue. So while we saw an increase in the <unk> or the retention under the Cat program. The pillared occurrence is really designed to help.

Manage the frequency of small cat events that have to.

Accumulate losses inside of the Cat XL program and so we saw an increase in placement.

On the pillow at occurrence program. So we're still working through what we think the overall.

Additional exposure company would be but I think there is an offsetting component based on the pillow at occurrence.

Increased participation to the the overall net Inc.

Increased on the cat ex ol. So those two things are interrelated.

Okay that makes sense.

Okay.

And then you know.

Turning now to the to the assumed reinsurance business.

We certainly we're the beneficiary of the other side of the market clearly as you saw on our ceded program.

There were.

Increases obviously on the assumed reinsurance component of the portfolio, we certainly got the benefit of increased pricing and.

Yeah.

Where that came through for US was certainly on the standard Treaty. So we had a significant amount of opportunity for participation on regional carrier treaty reinsurance as other carriers or reducing their participation those opportunities were presented to us and so we saw some.

A significant benefit to participate opportunistically on some.

Treaty standard Treaty business in this cycle and so we were quite pleased with with that participation.

Is there some sort of target or goal.

So do we.

Reinsurance book relative to the rest of the book as a percent of premium or something.

Something around those lines yeah. There is yeah, so a couple of them.

Yeah, sure so where are we.

We're managing that to about 25% of the portfolio right. So that's the target today, where we're I think just a little bit below that and.

While we'll manage that in general to 25% as they as the entire portfolio grows obviously.

The premium.

Associated with that will become larger but we will also be opportunistic where there are moments in the market like we experienced most recent renewal cycle will take advantage of that and so let's say.

While we anticipate it being right around 25% there may be moments when it's just a little bit higher than that because the opportunity was there for us too.

Further diversify our portfolio and do it at significant underwriting profits.

Thank you.

I appreciate the help and I'll, let somebody else ask some questions.

Welcome.

So again, if you have a question. Please press star then one to be joined into Canada.

This concludes our crews.

<unk> and answer session I would like to turn the call over to Kevin <unk>, President and CEO for any closing remarks.

Thanks for joining us for this quarter and we look forward to talking with you again next quarter.

Yeah.

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