United Fire Group Inc. Q1 2023 Earnings Call
Good morning, and welcome to the United Fire Group incorporated first quarter 2023 results conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
Now I'd like to turn the conference over to Eric Martin Executive Vice President and Chief Financial Officer. Please go ahead.
Good morning, and thank you for joining this call yesterday afternoon, we issued a press release on our results.
A copy of this document please visit our website at USG insurance Dotcom press.
Press releases and slides are located under the investors tab.
Joining me today on the call are U F G President and Chief Executive Officer, Kevin Lightbringer, and Executive Vice President and Chief Operating Officer, Julie Stephens, Inc.
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.
The actual results may differ materially due.
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 lightweight here CEO of <unk> insurance.
Thank you Eric and good morning, everyone welcome to our first quarter conference call.
Again, this morning by providing a high level overview of our first quarter results.
Some of my comments, Julie Stephens, our Chief operating officer will discuss our underwriting production result, and Eric Barton, Our Chief Financial Officer will discuss our financial results.
As indicated in yesterday's press release. Despite the mixed result, I am pleased with the progress we are making a position in USG to achieve superior financial and operational performance.
<unk> committed to the execution of our strategic plan designed to deliver long term profitability diversify growth and continuous innovation.
We also remain intensely focused on reducing the expense ratio, while also attracting and retaining talent needed to evolve the company into a top performing commercial lines insurer.
Turning now to the results net written premium grew 13% to $273 million in the first quarter of 2023 compared to $241 million in the first quarter of 2022.
I'm pleased to note.
Growth was driven by our core commercial business as well as assumed reinsurance and surety.
Brokered turned to our core commercial business as a result of increased new business production improved retention and positive renewal rate change continuing the momentum we established in the fourth quarter of 2022.
The combined ratio was 104% in the first quarter of 2023 compared to 89, 5% in the first quarter of 2022.
The deterioration in the combined ratio was driven by an increase in the underlying loss and expense ratios as well as the lack of favorable prior period development.
Underlying loss ratio in the first quarter of 2023 was 63, 5% compared to 57, 5% in the first quarter of 2022.
The underlying loss ratio increased six points with approximately three points of the increase attributable to a shift in accident your loss ratio assumptions for our reinsurance business as we more closely aligned to expected losses with exposure in that portfolio.
Despite the impact on the underlying loss ratio, we remain confident in the performance of our assumed reinsurance business and its expected contribution to our future success.
In addition to the impact from assumed reinsurance roughly two points of the increase in the underlying loss ratio are attributable to the impact of emerging loss trends that lead to adverse prior period development in the third and fourth quarters of 2022.
Finally increased ceded reinsurance cost and higher retentions across the broader portfolio impacted the underlying loss ratio by about a point.
Past few losses contributed four 6% to the combined ratio in the quarter compared to two 6% in the first quarter of 2022.
This was in line with our five year historical average and consistent with our expectations.
Our losses in the first quarter include the wind and thunderstorm events that impacted multiple states on March 31.
Prior period development was slightly adverse for the quarter with a 0.1% impact on the combined ratio compared to four four points of favorable development in the first quarter of 2022.
Yeah.
The expense ratio was 35, 8% in the first quarter compared to 33, 8% in the first quarter of 2022.
The increase is the result of investments in senior talent that deepens, our underwriting operational and actuarial expertise.
In addition, the expense ratio was impacted by increased costs related to technology and changes in the design of the postretirement benefit programs.
Eric will discuss those more details in a few minutes.
As I indicated in my opening comments I'm pleased with the progress we are making I'm confident we have the right people and the right strategies in place to continue to move our company forward and create long term value for our shareholders.
With that I would like to introduce Charlie Stevenson, our chief operating officer to discuss our underwriting production results in more detail Julie.
Thank you Kevin we're very pleased with the momentum building across our platform.
Our core commercial assumed reinsurance specialty excess and surplus and surety businesses.
Our core commercial lines portfolio comprised of small commercial middle market construction and marine business the churn to grant that.
Written premiums increasing by 10% in the first quarter.
Our commercial contributed $38 million of new business for the first quarter, a significant increase compared to the first quarter of 2022.
New business in this portfolio, while well diversified relies heavily on our aligned underwriting this control and claims expertise in construction contributing just over 40% of our new business for the quarter.
Your line is it just makes us consistent with our expectations and necessary governance protocols are in place to ensure quality businesses being added in support of our long term profitability goals.
The retention ratios for our core business was 81% for the first quarter, a five point improvement compared to the first quarter of 2022.
We're pleased to see retention levels improve following our re underwriting efforts and credit the strength of our agency relationships and our ability to retain quality business and returned to a steady state portfolio management.
There are no opinion change are core Correctional Center.
4% for the quarter, a slight contraction from the first quarter of 2022.
However, renewal premium change in property exceeded 17% in the first quarter of 2023 rate increases are accelerating to mitigate inflation and higher reinsurance costs.
They are committed to keeping price increases on pace with the current loss trend environment.
Our assumed reinsurance portfolio grew net written premium nearly 30% as we continued to execute our strategy to deliver it diversified profitable growth to the organization.
We continue to optimize the highly curated portfolio just some.
Electric growth fueled by a hardening reinsurance market and new partnerships.
Also chose to non renew a portion of our legacy retro session portfolio at January one.
Two other business opportunities that are in fact, better diversification value T G.
Net written premiums grew 30% and our profitable surety portfolio as we expanded our geographic presence and continue to grow our agency partnerships.
Our specialty excess and surplus businesses saw a slight contraction in net written premium in the first quarter.
Continue to manage our portfolio with appropriate attachment points in pricing to provide consistent profitable results.
New business increased in the quarter compared to the first quarter of 2022.
Steps to manage volatility through the purchase of a variable quota share treaty.
I'll now turn the call over to Aric Martin to discuss the rest of our financial results.
Thank you Julie and good morning again.
In the first quarter, we reported net income of three cents per diluted share and non-GAAP adjusted operating income of eight cents per diluted share.
As Kevin mentioned, our underlying loss ratio was increased six points from the prior year and I would like to provide some additional context behind those changes.
The largest driver of this increase came from our assumed reinsurance business, which.
Is both growing and further diversifying our overall enterprise portfolio.
As this book continues to grow we have refined our allocation of losses to the current accident year to better reflect the exposure for this business.
This shift was effectively neutral across the total loss ratio and this business continues to perform in line with our expectations.
In addition.
Our underlying loss ratio reflects the higher loss cost assumptions that resulted from the reserve strengthening actions. We took in the third and fourth quarters of 2022, and our other liability line of business.
Finally, the impact of ceded reinsurance costs and Retentions put some upward pressure on our underlying loss ratio in the first quarter as we begin to take the actions Julie mentioned to mitigate the impact on our combined ratio.
Our expense ratio of 35, 8% increased two points from the first quarter of 2022.
Although the expense ratio benefited from an increase in earned premiums during the quarter.
As well as a 4% decline in head count since the start of the fourth quarter of 2022.
Expenses increased this quarter from investments in senior leadership talent and higher technology costs for the strategic implementation of our new policy administrative platform.
In addition, our cost increased in 2023 due to a change in the design of employee post retirement benefit programs.
In late 2020, we announced that you have to you would no longer contribute to post retirement medical and dental benefits and moved to a participant funded plan at the beginning of 2023.
There was a onetime benefit recognized in the first quarter of 2021.
And the remaining liability for that plan was then amortize down through an expense benefit of $3 million each quarter for eight quarters that ended in the fourth quarter of 2022.
In addition, during 2021, we changed our employee pension plan from a traditional plan to a cash balance plan.
That change reduced the ongoing expense of the plan.
But the plant expenses are still sensitive to changes in interest rates and equity markets.
Due to equity market losses, and interest rate increases last year, our expenses have increased by approximately $1 million per quarter.
Our investment portfolio was $1 9 billion of invested assets in the first quarter.
85% of which is allocated to a high quality fixed income book.
Net investment income was $12 $7 million in the first quarter up 13% compared to the first quarter of 2022.
We continue to realize the benefits of investing in a higher interest rate environment with new money yields.
Five 3% between increased fixed maturity income by 22% compared to a year ago.
The positive impact from higher bond yields was partially reduced by negative valuation impacts on our limited partnership portfolio of $1 million and realized investment losses of $2 million driven by negative changes in the valuation of our core equity portfolio.
Our return on equity in the first quarter was <unk>, 4% and we saw improvement in our unrealized loss position that increased the book value per common share to $29 80.
Our capital management strategies are focused on pursuing top tier shareholder returns.
Point available capital to fund profitable business growth and returning excess capital to shareholders.
During the first quarter, we declared and paid <unk> <unk> per share cash dividend to.
The shareholders of record as of March 10, 2023.
Continuing our 55 year history of paying dividends dating back to March 1968.
This concludes our prepared remarks.
We will now open the line for questions.
Operator.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys 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 from Piper Sandler. Please go ahead.
Good morning, Thanks for the call.
A couple of questions.
Maybe just starting off with a place where I'm a little confused.
Could you maybe just go over a little bit of more of this change in the loss ratio related to the assumed reinsurance and I'm.
It may be an issue of language, but I'm confused about how it increased the loss ratio, but it.
Didn't increase the loss ratio over the total amount.
Yeah.
So that Jamie just maybe you could talk about that in terms of.
Hum.
Yeah.
Traditional loss ratios ideas.
Yeah. Thank you Paul this is Eric Thanks for joining this morning as well so let me I'll give you just a few more details on that when you look at our underlying loss ratio and think of that as current accident year loss ratio.
Comparing back to the first quarter last year, we were at 57 and a half and this year, we're at 63 and a half so a six point jump and really if you look back to the first quarter of last year. It was a it was a very strong quarter and as we went through the year, our underlying loss ratio in the.
Fourth quarter was around 60, and I think for the full year with maybe 59 or 60.
But so as we attribute the six point change here part of this is related to our assumed re business.
With that business, there can be nuances and how premiums are reported to us and perhaps a difference between accident year and contract here. So as we look back historically, we had done some allocation of those losses and estimation of those losses between current year and prior year, but as we think about this business as it continues to grow.
And it continues to help us diversify our overall book.
We've refreshed our view on that and really applying a better matching of premiums and losses by including the losses of that in the underlying loss ratio. So when we look overall at our total loss ratio, including development, including the underlying loss ratio. There is no difference here and we continue to be happy with this book.
Well as I said.
That is growing is diversifying our overall portfolio.
That's about half of the attribution there there about two points of this reflects the changes that we made.
And in the view of our portfolio in the second half of last year and about one point is due to higher reinsurance costs and higher retentions as we come into 2023.
So the accident year loss ratio for the reinsurance business rose.
In the first quarter.
And the offset is in reserve development.
That's right four okay.
Okay. So there was a reserve benefit that ran through the income statement.
Related to the reinsurance business, which neutralized the calendar year impact.
That's right. It gives you a total insurance right right.
Okay. So.
And that was.
Offset by deterioration in <unk>.
Sure.
The reserves.
Elsewhere.
Maybe you could give us a little bit more color about.
Driver of that.
So offsetting.
Reserve development.
I think yeah. If you look back you're talking about the reserve development in Q1 last year.
No I'm talking about just the first quarter. If there was a gain in the first quarter because of the shift in what happened in reserves and reinsurance.
And to have roughly breakeven reserves you must have had a negative.
Charge someplace else.
Yeah. So we we had said there was some variations by lines of business here and the development in the first quarter of this year, but they were largely offsetting so that the assumed business didn't have any I think any major bulk.
Reserve development, but there were some other lines that had some offsetting stuff, but overall, we got to about a neutral development for the quarter.
Okay, I'll I'll take that one offline because I'm pretty certain.
I'm confused about the math did you give a sense of the well the.
Intermediate.
Outlook for the expense ratio.
And you mentioned that you're committed to taking it down over time, but.
Hum.
What sort of timeframe are we talking about for both the increase in them.
Hopefully the later decrease in and maybe some of the drivers behind what.
We take that expense ratio down over time.
Hi, Paul it's Kevin So thanks for the question just to give you a little color I mean, clearly we're focused with a high degree of intensity on the expense ratio as we indicated we brought in some very senior talent into the organization to help continue to evolve the company as we look forward.
We if we have a high focus on managing the business very efficiently going forward, what we're going to continue to evolve the organization.
And we will invest in talent to help us do that at the same time, we recognize that our.
Our expense ratio today is elevated relative to our own expectations and relative to our competitors and so as we continue to evolve the company going forward. It's at the top of our of our list of things to continue to focus on so.
We recognize we will get some benefit as we continue to grow the book of business and the earned premium begins to do improve and then we will also gain some benefit by the ongoing reduction in cost that we expect to achieve over the course of the coming year. So we would expect to see some improvement in the course over the course of this year.
We think this is probably the high watermark for the expense ratio for the year.
Yeah, that's great.
Hum.
Since about.
Where the.
Reinsurance growth is coming from from a exposure perspective.
Casually as a property is it changing.
Sort of general volatility.
This is.
Overtime cat load that gun.
Just to be clear are you referencing our assumed reinsurance business.
Yes. Please.
Yeah. So let me just give you just a little bit of color around our assumed reinsurance business I think.
We've not really talked much about that so the company has a sort of a long standing history in providing reinsurance capacity.
The longstanding history, though it's been more around retro session contracts from our reinsurance partners, but a couple of years ago, we saw an opportunity to drive some diversification into the portfolio and that's one of the underlying fundamental tenants of the assumed reinsurance business is that it will be diversifying rather than accumulate.
<unk> for the organization and so we have as you heard Julie described earlier built a highly curated portfolio.
Is diversifying rather than accumulating into our business and that he assumed reinsurance business is primarily made up of standard treaty business.
For which there is some excess of loss and property per risk and only a relatively modest amount of cat business in the in the standard Treaty business. There's some funds at Lloyd's, which is effectively a collateralized whole account quota share transactions with eight Lloyds syndicates.
And even though we non renewed a number of the retrocession treaties that Julie referenced earlier, but still have a couple of those left.
Primarily professional reinsurers with Lloyd's syndicates and very little property cat exposure, there and then there's a little bit of reinsurance around some MGA treaties that we have in place today. So most of the growth that we've experienced thing is coming as a result of engaging in standard treaty business and providing.
Providing capacity to those who needed it during the most recent renewal cycle, which as we all know was one of the hardest that we've seen in a very very long time, so quite an opportunity for the organization to drive growth and yet diversified portfolio.
Great. Thank you for the help as always appreciate it.
Youre welcome.
Again, if you have a question. Please press Star then one.
There are no more questions in the queue.
This concludes our question and answer session I would like to turn the conference back over to Kevin Ludwin winger President and CEO for any closing remarks.
Thank you for joining us today, and we'll see you next quarter.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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