Q2 2023 United Fire Group Inc Earnings Call
Good morning, My name is Chuck and I'll be your conference operator today at this time I would like to welcome everyone to the United Fire Group Insurance second quarter 2023 financial results Conference call.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and switched to all your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to your 95 groups, a b P and director of Investor Relations. Mr. Tim Borst. 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 you. After your insurance Dotcom 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 White winger Executive Vice President and Chief Operating Officer, Julie Stevenson, and Executive Vice President and Chief Financial Officer, Eric Martin.
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 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 White winger CEO of USG insurance.
Thank you, Tim and good morning, everyone and welcome to our second quarter Conference call.
I'll begin this morning by providing a high level overview of our second quarter results.
Following my comments, Julie Stephens, our Chief operating officer will discuss our underwriting results in more detail.
Eric Martin, our Chief Financial Officer will discuss our financial results as reported in our pre announcement on July 31st in our press release yesterday afternoon, you have to use combined ratio for the second quarter was 133%.
Our results were impacted by $53 million of prior period reserve strengthening as well as elevated catastrophe losses.
Before we review the quarters results in more detail I'd like to take a minute to comment on our decision to strengthen reserves.
You have to he is committed to a strong actuarial foundation supporting not only the reserving process, but a broader range of business actions critical for delivering profitable growth.
Over the past four quarters, we have deepened our actuarial expertise, including hiring you have to use first chief actuary.
In addition, we've enhanced our actuarial processes, which have increased the breadth and depth of our reserving analysis.
The process enhancements have allowed us to better understand their behavior patterns of individually managed lines of business, resulting in more actionable insights across similar product exposures.
Analyzing trends at the line of business level allowed us to see potential risks sooner than in the past and accelerated our response to changing conditions.
With this decision we believe any major reserve strengthening has been addressed.
Of course as part of our continued advancement of our reserving processes, we will continually work to evaluate emerging trends and changing environments. As we move forward, we will respond to adverse trends quickly and favorable ones cautiously.
While our decision to strengthen reserves resulted in a near term negative impact we believe the robust actuarial organization, we're building and the actual insights they will provide help reduce future risk to the company and create significantly stronger foundation on which to grow our business improving the sophistication of our actuarial capabilities is just one example of the progress we've made in reshaping the come.
Over the past year. In addition, we've re engaged our distribution partners restored responsible growth in our core commercial business, you've all the underwriting organization to deepen our expertise and better serve the distinctly different needs of small business and middle market customers.
Reduced our catastrophe footprint actually to sustainably reduce our expense ratio and funded critical investments in talent and technology.
Despite the quarters results. We believe we are executing the right strategies to move our company forward deliver consistent profitability and create long term value for our shareholders.
Turning now to the quarter's results net written premium increased 14.6% to $299 million in the second quarter of 2023 compared to the second quarter of 2022. This marks the fifth consecutive quarter of enterprise premium growth with core commercial business growing for the second consecutive quarter, although all our business units, except purity contributed favorably.
This quarter I'm, especially pleased with the growth in our core commercial business, which resulted from increased new business production improved retention accelerating rate increases and meaningful exposure growth. The underlying loss ratio was 64, 6% in the second quarter, an increase of 5.8 points over the second quarter of 2022.
Approximately three points of the increase were the result of small number of large losses in our surety business and the impact of reinsurance reached reinstatement premiums.
Surety business can experience occasional volatility, but has been exceptionally profitable for you have chi we remain confident in its ability to deliver attractive long term returns attached.
Catastrophe losses contributed 13% of the combined ratio in the quarter compared to 12, 1% in 2020 two.
These results are slightly elevated relative to our five and 10 year averages of approximately 11%.
Even though this quarter's results were within a reasonable range of our five and 10 year averages. We believe the current level of loss activity is unacceptable and continue to take a broad range of actions to reduce and optimize our catastrophe exposure across our portfolio. Prior period reserve strengthening contributed 28% to the combined ratio in the quarter compared to the favorable development of 5.4.
Percent in 2020 two.
As mentioned previously the $53 million in reserve strengthening was across multiple casualty lines and across multiple accident years.
The primary drivers included enhancements to our processes as well as the ongoing impact of social and economic inflation. The expense ratio was 34, 5% in the second quarter down seven tenths of a point compared to a year ago. We've been intensely focused on improving the expense ratio was part of our strategic plan and are pleased the actions we've been taking to sustainably reduce cost structure while grow.
The business are beginning to materialize.
I am pleased with the progress we're making in reshaping the company as we execute strategies designed to deliver consistent profitability and create long term value for our shareholders. We remain fully confident in our path forward as we position you have chi to deliver superior financial and operational performance.
With that I'll hand, it over to Julie Stevenson, our chief operating officer to discuss our underwriting results in more detail Julie. Thank you, Kevin I'm pleased to see momentum continuing to build across our portfolio of core commercial assumed reinsurance specialty excess and surplus and surety businesses.
Net written premium in our core commercial business, which includes small business and middle market grew 10% to $198 million compared to the second quarter of 2022 with all components of production increasing.
Core commercial new business premium was $39 million in the second quarter with efforts to Reengage with our agents now supporting new business production levels appropriate for sustained measured granted.
This coupled with a refined risk selection and underwriting discipline provide confidence this business will contribute favorably to our long term profitability.
Retention for our core commercial business increased to 84% in the second quarter, which we view as a steady state number that still allows for responsible pruning of accounts they no longer meet our pricing needs our risk profile.
Renewal premium change in our core commercial business accelerated to eight 5% in the second quarter.
Average rate increases were up from the first quarter across all lines of business with total rate achievement at the highest level since the fourth quarter of 2021.
We are pleased with our second quarter property renewal premium change of 19% with rate increases of 12% and exposure increases of 7%.
We remain diligently focused on price adequacy across all lines of business relative to loss trends.
Our assumed reinsurance portfolio grew net written premium over 30% in the second quarter as we continue to execute our strategy to deliver diversifying profitable growth to the organization.
This growth reflects the ongoing impact of January 1st renewals that enabled us to continue to optimize this highly curated portfolio by selectively adding new partnerships, while non renewing a portion of our legacy of retrocession portfolio as well as ongoing growth in our existing partnerships.
Surety net written premium is down compared to the second quarter of 2022 due to reinsurance reinstatement premiums while the business continues to grow on a gross basis as we expand our geographic presence and deepen our agency partnerships.
Our specialty excess and surplus businesses grew modestly in the second quarter as we continue to manage attachment points in pricing to provide consistent profitable results.
As Kevin mentioned, our second quarter underlying loss ratio of 64.6% includes three points of impact from increased surety net losses and associated reinsurance reinstatement premiums.
You have cheese surety business has historically been very profitable in the second quarter, we experienced a few large losses. It can happen in this line from time to time.
While these losses had unique circumstances, we also acknowledge that broader post pandemic economic conditions affecting the availability and cost of materials and labor combined with robust construction demand are contributing to heightened risk in this line yet she is responding with increased underwriting rigor, resulting in refined guy.
Lines to ensure the surety line continues to deliver favorable returns over the long term.
Turning to the strengthening of prior period reserves I want to first provide some additional insight on the investments and advances we have been making in this area over the past four quarters.
Beneath the strategic investments in talent and rigor of actuarial process as Kevin mentioned, you have Chi has expanded the depth sophistication and action ability of insights. These.
These enhancements and actuarial processes enabled us to take actions in the second quarter to strengthen our position relative to loss trends across a range of long tailed liability lines of business.
The largest impacts were and other liability and commercial automobile as seen in our M D and E tables.
Their liability experienced approximately 64 points of prior period development across a range of long tailed exposures and prior accident years.
A majority of this strengthening occurred in excess and surplus lines excess casualty and construction defect exposures.
The nature of claim discovery for construction defect losses and differences in state legal environments introduces significant variation in loss behavior patterns.
Traditional actuarial methods can be difficult to rely on given this uncertainty. So alternative techniques are required to better reflect the unique nature of these patterns are.
Additionally, frequency and severity can vary significantly across states. So it isn't necessary to segment the analysis appropriately recognizing these differences.
The excess and surplus lines excess casualty book has grown over the last several years, while the risk profile has evolved.
Relying solely on longer term loss patterns may not be appropriate and additional benchmarks in loss trend analysis had been added to provide additional insight.
This is allowed us to improve our reserve position for this book of business.
More broadly general liability and commercial auto reserves were also strengthened as additional studies led to an increased view of ultimate severity.
We believe these actions position our reserves to better manage the uncertainty and these longer tailed lines and strengthen our balance sheet position against future risk.
Turning to catastrophe losses in the second quarter, we experienced 13 points on the combined ratio.
Our underwriting teams continue to reduce and optimize our catastrophe exposure by improving our property risk profiles, raising deductibles and driving pricing increases and high risk geographies. As a result property premiums are increasing while expected loss ratio P M ALS and our catastrophe footprint our decree.
Leasing.
Let's take a moment to provide some additional details on how we are evolving and investing in the success of our core commercial business.
With nearly 70% of your of cheese net written premium coming from core commercial this business has a significant impact on our overall results and is an area of investment and focus.
Over the past year, we have discussed the tenants F. E. F. G strategic plan focused on long term profitability diversified growth continuous innovation expense management, and attracting and retaining talent.
A key part of delivering on the strategic plan is deepening and the expertise in our underwriting organization by evolving our core commercial business from a generalist to a specialist building on the previously established specialization and surety specialty and assumed reinsurance.
The market has evolved and the distribution landscape has changed underwriting expertise is valued and recognized as a strong competitive advantage special.
Specialization creates alignment and greater opportunity for success with agency partners.
Last month, we took significant steps to accelerate core commercials journey from generalists to specialists by establishing distinct business units and operating models for small business and middle market supported by a centralized business enablement function.
And the small business market success requires sophisticated and well tuned analytics, along with cutting edge digital technologies. This creates an efficient agency experience that results in high submission flow and low touch underwriting to attract lower volatility business.
You have chi we're already leveraging these capabilities and actively building others to better serve our agents and small business customers.
Success in middle market requires highly specialized industry segment focused multiline underwriting strategies supported by equally sophisticated risk control and claims handling processes.
Our current strength in construction lays the foundation for success in other industry verticals, helping us better align with the specialization happening across our distribution partners.
We continue to advance our underwriting skill set across all lines of business to ensure appropriately robust risk selection pricing contractual integrity and account management.
Developing a line of business and industry expertise across the entire portfolio, including increased cross functional integration with actuarial risk control and claims creates alignment and greater opportunities for successful acceleration of profitable growth.
Driving operational efficiencies reduces the expense ratio and positions U F. G to deliver a consistently profitable results I will now turn the call over to Aric Martin to discuss the rest of our financial results.
Thank you Julie I will first provide some additional commentary on the second quarter expense ratio of 34, 5%, which declined seven tenths of a point from a year ago.
As previously discussed we've been intensely focused on reducing the expense ratio as part of our broader corporate strategies to deliver sustainable profitable growth.
The most significant of these impacts is a 7% decline in head count since the beginning of the fourth quarter of 2022.
And increased earned premium levels from the rebound in growth.
In the second quarter the benefits of these actions were sufficient to outweigh the upward impact on our expense ratio from strategic technology investments in our new policy administrative platform and benefits to our prior year expense ratio from a change in the design of employee post retirement benefits that we discussed last call.
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Turning to investment results invested assets ended the second quarter at $1.8 billion, 85% of which is allocated to our high quality fixed income book.
Within our portfolio, we began reducing our exposure to public equities, which shrank to 7% of assets in the second quarter. The strategic reallocation of public equities to high quality fixed income is an attractive way to reduce volatility and improve risk adjusted returns given current market conditions.
We intend to continue executing on this trade as long as these attractive conditions exist.
Net investment income was $11.3 million in the second quarter up 23% compared to the second quarter of 2022.
We continued to realize the benefits of investing in a higher interest rate environment with new money yields exceeding 5%, helping increased fixed maturity income relative to a year ago.
The positive impact from higher bond yields was partially reduced by negative valuation impacts on our limited partnership portfolio of $4 million in the second quarter.
Realized gains of $1 million driven by changes in the valuation of our core equity portfolio rounded out second quarter investment results.
Second quarter underwriting and investment returns resulted in a net loss of $2.23 per diluted share.
And a non-GAAP adjusted operating loss of $2.27 per diluted share.
Return on equity in the second quarter was a negative 15.7%.
And we saw a slight deterioration in our unrealized loss position the decrease the book value per common share to $26.77.
During the second quarter, we declared and paid a <unk> 16 cent per share cash dividend to shareholders of record as of June 2nd 20, twenty-three continuing our 55 year history of paying dividends dating back to March 1968.
This concludes our prepared remarks.
I will now open the line for questions operator.
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 if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
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And the first question will come from Paul Newsome with Piper Sandler. Please go ahead.
Good morning, Thanks for the call.
Maybe you could just talk a little bit more about rate versus.
What you pay is claims inflation.
Who your broad business, not just core commercial but especially businesses.
Sure, it's as well just to give us a sense of whether or not on underlying basis.
Thank you, making some progress.
Progress in <unk>.
Kidney week versus the current levels as claims inflation and by how much.
Okay.
This is julie thanks for the question.
Certainly.
We believe our rate increases.
Overall, Australia Harvey a trend.
That's important and remains a key focus for us moving forward.
We're pleased with the rate achievement that we increased across all of our lines of business across all of our business units certainly must be with what's happening in the property space.
Given that catastrophe.
The results we took for the quarter that remains a focus and will continue to accelerate through the end of the year.
How should we think about the.
Cat load prospectively, given what youre doing with you.
Especially now.
Okay.
Yeah.
Oh, Okay, sorry could you repeat the question we had a hard time hearing you.
How should we think about the cat load perspective, we given what you're doing with your cat management efforts.
So Paul we were within the expectations I think relative to.
The current cat loads.
As we continue to reduce our cat footprint.
We will reevaluate those as we go forward, but for the moment were within expectations.
Yeah.
The.
Sure.
The underlying combined ratio if you pull out the.
Three points from the.
Surety business deteriorate, a little bit it looks like could you talk about sort of the sources of that deterioration.
Julie again, yeah. So.
We see the underlying loss ratio deteriorated by six point, Jeremy mentioned the impact of surety, we certainly know that.
We also are still feeling the impact of the increased ceded reinsurance costs from our one one renewals that's approximately a point.
We also are experiencing.
A higher underlying loss ratio in our assumed reinsurance is compare it to this time last year, which contributes really the remaining difference.
As we stated in our Q1 results we are enhancing our analysis of that book.
Made some adjustments to the allocation of our loss reserves to better align with the exposures I know we've talked about that extensively last quarter.
Although we know this creates some noise in the first and second quarter results, we think that the year to year to date underlying loss ratio.
For this book is a good representation of the portfolio going forward.
Obviously, our new Chief Actuary changes the reserve philosophy, which resulted in the change in reserves this quarter.
But the year end tends to be when things really change.
For most companies.
Do you anticipate the year end process will be different.
And it wasn't it has in the past.
Hi, Paul it's Kevin So we believe that.
Any major reserve strengthening has been addressed this quarter and so.
As I indicated in my prepared comments you know we will continue to obviously pay very close attention to the.
The environmental dynamics going on around Us and as we've also stated previously we will be very key.
Quick to react to negative trends and we'll be very cautious about reacting to favorable trends, but we feel very good about where we are based on the decisions. We made this quarter.
Thank you for all your help appreciate it.
Welcome. Thank you the.
The next question will come from Cory Wren with Pico wealth management. Please go ahead.
Oh, yes, good morning.
Thank you for the conference call.
I you know I was looking at your results and I've been watching results.
Paul and insurance companies since the 19 eighties.
And when people mentioned the word reserve strengthening.
What you're really saying is your reserves are understated and youre, taking a charge for that understatement is that correct.
Well I think the better way for us to characterize that as we've deepened our analysis around our reserves and based on additional insights. We just said, we decided to strengthen reserves and so through that process. We believe that we've taken the appropriate action relative to.
The current reserves on the portfolio.
Okay.
Now with all these changes that you're making you're talking about different mines business, but my.
Concern and.
You know catastrophe losses. This happens this year.
That's you're not getting your feet.
Andre you.
I've seen multiple insurance companies report pretty decent results this year.
With catastrophe losses included.
And I guess my fear is you know your company are significant.
Company in Cedar Rapids, Iowa, where we're in Iowa based firm that I'm rooting for you.
And.
I don't know what.
Yeah.
If you you know I can't see the future I can't see what the what the results are going to look like in 123 years.
And I was just wondering with all these changes and all these strengthening and improvement in re directing the business.
The focus of the focus that you're going to have what can we expect as far as the combined ratio. What is the goal for your combined ratio going forward and what kind of return on equity or are you trying to achieve.
Forward.
Alright, thanks for the question.
We're not in a position to provide guidance, but I can give you. Some general views right. So you know that the leadership team at the company is relatively new and we're driving a lot of change to reshape the organization with the <unk>.
<unk> purpose of delivering consistent profitability over time and show the company's had a track record. Most recently of underperformance and we are making significant changes inside the organization to change the trajectory of the company in terms of both gauge growth manage profitability and so you should expect over time to see continued improvement in the company.
These.
Certainly a growth rate as well as its profitability.
Yeah.
M D.
Are you expecting the rest of the year.
To be a reflection of these changes are or what it will what.
With next year would be a better.
Place to make it on it now make the the analysis on our end.
Yeah, I think you can.
Yes, I think we anticipate seeing improvement through the rest of this year, but into next year, but the kinds of changes we're implementing take some time to materialize and oftentimes the results lag the changes that we're making so I would expect to see acceleration and improvement as we.
<unk> throughout this year into next year and into 2025.
Okay.
Well, thank you and good luck to you guys. Thanks.
Thanks, so much.
This.
<unk> our question and answer session I would like to turn the conference back over to Mr. Kevin laid winker for any closing remarks. Please go ahead Sir.
Thanks for joining us and we look forward to chatting next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Okay.
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Yes.
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