Q1 2025 United Fire Group Inc Earnings Call
Speaker Change: Good day, and welcome to the United Fire Group Insurance 2025 First Quarter Conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by Zebra.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Tim Borst, Investor Relations.
Please go ahead.
Speaker Change: Joining me today on the call are UFG President and Chief Executive Officer Kevin Leidwinger, Executive Vice President and Chief Operating Officer Julie Stephenson, and Executive Vice President and Chief Financial Officer Eric Martin.
Speaker Change: 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 Security's litigation reform act of 1995.
Speaker Change: Such forward-looking statements are based on current expectations, estimates, forecasts, and projections about the company, the industry in which we operate and beliefs and assumptions made by management.
Speaker Change: The company cautions investors at any forward-looking statements include risks and uncertainties and are not a guarantee of future performance. Any forward-looking statement made by us in this presentation is based only on information currently available to us and speaks only as of the date on which it is made.
Speaker Change: These forward-looking statements are based on management's current expectations, and United Fire Group assumes no obligation to update any forward-looking statements. The actual results may differ materially due to a variety of factors which are described in our press release and SEC filings, discussed specifically in our most recent annual report on Form 10K.
Speaker Change: Also, please note that in our discussion today, we may use some non-GAAP financial measures. Reconciliation of these measures to the most comparable GAAP measures are also available in our press release and SEC filings.
Speaker Change: At this time, I will turn the call over to Mr. Kevin Leidwinger, CEO of UFG Insurance.
Kevin Leidwinger: Thank you Tim. Good morning everyone and welcome to our first quarter conference call.
Kevin Leidwinger: I'll begin this morning by providing a high level overview of our results Following my comments, Julie Stephenson will discuss our underwriting results and Eric Martin will discuss our financial results in more detail
Kevin Leidwinger: 2025 is off to a promising start. Through the continued execution of our strategic business plan, we achieved our third consecutive quarter of underwriting profitability, record net written premium and a significant increase in net income, despite elevated industry catastrophe losses and a higher expense ratio in the quarter.
Turning out of the specifics
Kevin Leidwinger: Network and Premium grew 4% to $335.4 million. However, our growth rate was not reflective of the discipline pricing, stable retention, and increased new business production we achieved across the portfolio as a few unusual seeded re-intering premium adjustments reduced net-written premium growth by 3 points.
Kevin Leidwinger: The first quarter combined ratio is 99.4%, a half a point increase over the first quarter of 2024.
Kevin Leidwinger: The underlying loss ratio improved 2.9 points to 56.5% as a result of ongoing strong earned rate achievement that exceeded lost trends, improving frequency trends, and discipline portfolio management.
Kevin Leidwinger: Prior year reserve development remained neutral overall for the fifth quarter in a row.
Kevin Leidwinger: Catastrophe losses contribute to five points of the combined ratio include $8.2 million of losses from California wildfires.
Kevin Leidwinger: The outcome is just below the midpoint of the $7 to $10 million range we provided in February and is consistent with what we know to be our exposure to this event.
Kevin Leidwinger: The underwriting expense ratio increased three points to 37.9% and includes additional costs associated with the final stages of development of our new policy administration system, as well as increased performance based compensation for agents as a result of strong prior year performance.
Kevin Leidwinger: Net investment income improved to $23.5 million in the first quarter. The majority of this improvement was due to a sustainable increase in fixed maturity income that grew to $21 million in the quarter, while we also benefited from improved valuations on the limited partnership portfolio.
Kevin Leidwinger: Report a book value per share improved to $32.13 in the first quarter as a result of positive earnings and a decrease in interest rates with adjusted book value per share growing to $34.16 on continued positive earnings.
Kevin Leidwinger: Before I turn the call over to Julie Stephenson, just a word about Terrace. We continue to monitor the issue closely and while there is significant uncertainty with respect to the ultimate outcome, we expect any impact from Terrace to be manageable on our business.
Speaker Change: I'll now hand a call over to Julie Stephenson, our chief operating officer to discuss our underwriting results in more detail Thank you, Kevin. Let me begin with how pleased I am to say UFG is in the final stages of development of a new policy administration system for our core commercial business units.
Speaker Change: Small business is fully deployed across all 32 states. Metal market and construction will begin deployment for new business in July and renewals in November . The finalization of this investment is a key milestone in improving process efficiency and product management at UFG.
Speaker Change: Written premium growth on a gross basis with nearly double digit with all businesses contributing on strong underwriting fundamentals including both pricing and risk selection.
Speaker Change: Network premium growth in the quarter of 4% was suppressed relative to growth-ridden premium as a result of some increased seeded reinsurance premium relative to prior year. We experienced some prior year adjustments and business mix impacts that uncommonly aligned to increase seeded premium for the quarter.
Speaker Change: We expect the impact of additional seated premium to diminish in the remaining quarters.
Speaker Change: For the first time, we have included rate retention and new business details for each of the business units within Core Commercial, Small Business, Metal Market, and Construction in our earnings call presentation.
Speaker Change: Netwritten premium in our core commercial businesses grew 6% in the first quarter compared to prior year Renewal premium change in core commercial remains strong at 11.7% with rates up 9.7% and continuing to exceed our view of lost trends
Speaker Change: The moderation in rates from prior quarter was largely driven by middle-market commercial property where rate change came down slightly from the fourth quarter but remained strong at over 10% and still comfortably exceeding lost trends [inaudible]
Speaker Change: Rate achievement for general liability exceeded 9% in the quarter, continuing the momentum built over the last four quarters.
Speaker Change: Automobile and umbrella continue to produce rate changes in the double digits. Our overall net loss trend remain consistent in the mid-single digits.
Speaker Change: Severity trends remain elevated but stable while we continue to see ongoing frequency improvement across the portfolio of the portfolio.
Retention remains steady and within expectations .
Speaker Change: Core commercial new business production continue to grow over prior year to an all-time high with small business construction and middle market all contributing as we continue to increase our presence in the evolving distribution landscape.
Speaker Change: We remain diligently focused on ensuring the quality and rate adequacy of new business and are pleased with writing more business and are most attractive customer segments, as well as successfully building a pipeline of more sophisticated risks that offer better economics.
Speaker Change: Our growing specialty and shorty businesses continue to perform in line with our expectations as we remain focused on ensuring long-term profitability while gaining traction in the marketplace.
Speaker Change: Alternative Distribution continues to provide UFG with diversifying and profitable business through three primary channels, treaty, programs, and funded Lloyds.
Speaker Change: Turnover in our program business for the quarter led to a higher-seated premium ratio. So although growth was strong on a growth basis, net rent premium was lower than the prior years first quarter.
Speaker Change: Standard Treaty business was down slightly as we non-renewed business, primarily casualty in the face of challenging market conditions.
Speaker Change: We remain selective in how we deploy capacity in this space. And while overall market pricing is down slightly this year, we are still meeting our profitability objectives in this business unit.
Speaker Change: The first quarter underlying loss ratio of 56.5% improved 2.9 points from the first quarter of 2024, continuing the improvement seen throughout 2024 from strong earned rate achievement and favorable frequency trends observed across our portfolio.
Speaker Change: Severity Trends remain stable and show some signs of moderating in a few lines where we have made progress in reducing risks with high severity exposure. We remain cautious, however, and continue to underwrite and price the business to the elevated Severity Trends prevalent in the market today.
Speaker Change: Prior reserve development was flat overall in the first quarter, continuing the trend seen throughout 2024. In general, we saw similar patterns with claim emergence within or better than our expectations.
Speaker Change: We saw favorable indications in most lines of business enabling us to further strengthen and live building reserves in light of the ongoing uncertainty of social inflation.
Speaker Change: The additional strengthening this quarter was more modest than we had demonstrated throughout the prior year, as we believe our reserve position against underlying liability trends is well positioned across our entire portfolio.
Speaker Change: The catastrophe loss ratio of 5% included approximately 2.6 points of impact from the California wildfires. Losses from the wildfires were $8.2 million, including $4.8 million within the Alternative Distribution Portfolio and $3.4 million from my core commercial book.
Speaker Change: Our conservative limit deployment and stringent underwriting criteria in our alternative distribution business allowed us to experience a strong underwriting profit in light of this event.
Speaker Change: Additionally, the remaining non-wildfire catastrophe losses reflected our lowest first quarter result for severe convective storms since 2019, despite an elevated number of events in the quarter.
Kevin Leidwinger: We are pleased our disciplined catastrophe management efforts produce this manageable outcome from such a difficult quarter for the industry. I want to turn the call over to Eric Martin to discuss the remainder of our financial results.
Eric Martin: Thank you, Julie. We continue to experience strong and sustainable improvement in our investment portfolio results in the first quarter.
Eric Martin: Improve the average quality from AA- to AA and maintain duration at approximately four years. In addition, in the first quarter, we executed targeted sales on approximately $25 million of assets to further improve the credit quality of our portfolio.
Eric Martin: These actions generated less than $1 million of realized losses and will be a
Eric Martin: New purchase yields in the first quarter of 5.3% exceeded the overall portfolio yield by approximately 100 basis points.
Eric Martin: The elevated interest rate environment contributed to the approximately 70 basis point increase in book yield since 1st quarter of last year and continues to provide favorable tailwinds for ongoing sustainable earnings growth.
Eric Martin: Outside of our fixed-income portfolio, the current market reinforces our decision to exit our equity portfolio a year ago to lock in attractive fixed-income yields that reduce volatility and our overall results.
Eric Martin: Our portfolio contains roughly $100 million of investments in limited partnerships
Eric Martin: The generated a favorable first quarter result with $1.8 million of income Many of these limited partnership investments contain equity-like exposure and are at increased risk of volatility in the currently turbulent market.
Eric Martin: Turning to the expense ratio, as previously mentioned, the company has made a number of investments in talent and technology to support long-term profitable growth.
Eric Martin: The first quarter expense ratio included approximately one point of additional costs
Eric Martin: associated with the final stages of development of our new policy administration system that we do not expect to recur. We also experienced continued elevated performance-based compensation for agents as a result of strong 2024 performance that will normalize over time.
Eric Martin: First quarter net income was 67 cents per diluted share with non-GAAP adjusted operating income of 70 cents per diluted share.
Eric Martin: This quarter's earnings improved book value per common share to $32.13.
Eric Martin: Adjusted book value per share, which excludes the impact of unrealized investment losses grew 52 cents to $34.16 at quarter end.
Eric Martin: From a capital management perspective, during the first quarter, we declared and paid a 16 cent per share cash dividend to shareholders of record as of March 7th, 2025.
We will now begin the question and answer session.
Eric Martin: To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys.
Eric Martin: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster.
Speaker Change: The first question is from Matthew Erdner with Jones Trading. Please go ahead.
Matthew Erdner: Hey, good morning guys. Thanks for taking the question. Could you talk a little bit about your current pricing power and the ability to counter potential greater loss expenses due to material and labor cost inflation and just talk about what you're seeing there?
Matthew Erdner: Sure. Hey, thanks for joining and thanks for the question. You know, we are watching the situation closely, just like others in our industry are underwriting and are ex-werell and finance and claims teams are staying very closely connected and monitoring any potential impact.
Matthew Erdner: But in anticipation of any impact, and frankly in our normal course of business, our actuaries re-evaluate trend every quarter. And we take a conservative view that allows us, hopefully enough, cushioning our estimates, giving us time to react.
Matthew Erdner: But also, as we mentioned in the transcript, our rates are currently exceeding our view of net loss trends. So we think that that combination of monitoring, making sure that the trends are being evaluated every quarter and keeping our pricing disciplined is really the...
the path forward and trying to stay ahead of this.
James Noyce, Eric Martin
Matthew Erdner: Eric. First off, thanks for your coverage. Appreciate it having you guys here with us on the call.
Matthew Erdner: You know, we mentioned in our preparatory marks here we're a little bit elevated this quarter by about one point related to some of the final costs
Matthew Erdner: with the deployment of our policy administration system and we're happy with that to get that system on board. This has been a long road for us and we're happy to get that moving forward here. Our small business team is already on that platform and over the next few months we're going to get middle market and construction on that.
Matthew Erdner: So, if you look at it from a year ago, we're up about three points and one of the things we've said is that we're going to invest in talent and technology. We brought a lot of new folks on board in the early part of last year and we're happy with that. We feel it's moving us forward here.
Matthew Erdner: And our performance was better last year as well and to some extent we're sharing that with some of our agents through performance comp and those three items have really pushed our expense ratio up.
Matthew Erdner: So we feel good about our progress here. The one point is going to go away. That was a one time item with some of the final cost for the platform. We're going to continue to grow here and there's going to be some leverage with our premium growth.
Matthew Erdner: compared against fixed costs here. So that's how we're thinking about our expense ratio going forward.
Speaker Change: Got it. Yeah, that's helpful information there. And then, you know, I guess, as a follow-up to that, as you guys kind of continue to grow, you'd expect this to normalize over time. You know, once all the people are onboarded and kind of as those agents kind of go back to historical, you know, averages in terms of production.
Speaker Change: If you look at our total costs, about a third of them are fixed costs, two-thirds are variable, the agent performance comp is within that variable comp, but overall particularly on the fixed cost, there's some good leverage there with premium growth.
Got it. Thank you. I appreciate it guys.
Speaker Change: At this time there are no further questions, so this concludes the question and answer session. I would like to turn the conference back over to Kevin Leidwinger CEO for any closing remarks.
Kevin Leidwinger: Thank you for joining us today and we look forward to talking with you again next quarter.
Kevin Leidwinger: The conference has concluded. Thank you for attending today's presentation. You may now disconnect.