United Fire Group, Inc

Good morning and welcome to the UFG full year and fourth quarter 2022 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to UFG 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 ufginsurance.com. Press releases and slides are located under the Investors tab. Joining me today on the call is UFG President and Chief Executive Officer Kevin Leidwinger. 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 Leidwinger, CEO of UFG Insurance. Thanks, 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 UFG 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. I'm proud 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 6.3% 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 of 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, we are encouraged by the improved retention ratios and increased new business production we saw in the quarter. The momentum 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 the 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, as early benefits of our expense management actions begin to take effect. Turning now to our full year results, net written premium increased 4.6% 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 7.7 points of catastrophe loss activity, and prior period development was neutral. The underlying combined ratio was 93.6% for full year 2022, a 3.4 point improvement over the previous year. The underlying loss ratio improved 5.2 points to 59.2%, our best underlying loss ratio in the last 10 years. The improvement in our underlying loss ratio is the result of significant actions taken over the past several years to improve profitability, diversify our portfolio, strengthen underwriting governance, and reduce volatility. With respect to reinsurance, I'm pleased to share that we successfully renewed our multi-line and catastrophe programs on January 1st. Although we experienced increased costs and 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 strong position to deliver consistent, superior financial and operational performance for the benefit of all of the UFG stakeholders. Finally, I'd like to welcome Julie Stephenson to UFG. Julie joined UFG at the end of January as Executive Vice President and Chief Operating Officer. Julie is 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 UFG 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 four-year results. Eric? Thanks, Kevin, and good morning again. In the fourth quarter, we reported net income of $0.79 per diluted share and non-GAAP-adjusted operating income of $0.18 per diluted share. Net written premiums increased 6.3% 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 8.3% 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 4.9 points of catastrophe losses and 4.9 points of prior year reserve strengthening. The catastrophe losses of $12 million in the fourth quarter were primarily driven by Winter Storm Elliott, with the resulting catastrophe loss ratio of 4.9% 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 for 4.9 points of combined ratio impact. focusing on our construction defect business in accident years 2015 through 2019, where a combination of deeper analytical insights and emerging claims experience has increased our view of potential exposure and aligned with long reporting lags. 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 that 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, where a deeper view 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 in 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 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 5.5% increase in book value from Q3 to Q4. Our investment portfolio balance was $1.8 billion of invested assets in the fourth quarter, of which 84% is allocated to a high-quality fixed income book. For the full year, net income per diluted share was 59 cents, and non-GAAP-adjusted operating income for diluted share was $1.09. For the full year, net written premiums increased 4.6%. Within our core commercial business, the average renewal premium change was 8.3% for the year, with rate increases of 5.2% and exposure increases of 3.1% as we continue 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 101.4% included an expense ratio of 34.4%. This is higher than 2021 by 1.8 points due to one-time impact from changes in post-employee benefits that 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 7.7% is a 2.5 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 as 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 decreased 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 $0.16 per share cash dividend to shareholders of record as of December 2, 2022, continuing our 54-year history of paying dividends dating back to March 1968. This concludes our prepared remarks. I 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 touch-tone phone. If you're 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. At this time, we will pause momentarily to assemble our roster. Our first question comes from Paul Newsome with Piper Sandler. Please go ahead. Paul, is your line muted?