United Fire Group Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 5 speakers on the call.

Operator

Good morning. My name is Anthony, and I'll be your conference operator today. At this time, I would like to welcome everyone to the UFG Insurance Third Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions.

Operator

Please note this event is being recorded. Thank you. I will now turn the call over to UFG VP and Director of Investor Relations, Tim Borst. You may now go ahead.

Speaker 1

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 .com. Press releases and slides are located under the Investors tab. Joining me today on the call are UFG President and Chief Executive Officer, Kevin Leidwanger Executive Vice President and Chief Operating Officer, Julie Stevenson and Executive Vice President and Chief Financial Officer, Eric Martin.

Speaker 1

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 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.

Speaker 1

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 Leidwanger, CEO of UFG Insurance.

Speaker 2

Thank you, Tim, and good morning, everyone. Welcome to our Q3 conference call. I'll begin this morning by providing a high level overview of our Q3 results. Following my comments, Julie Stevenson will discuss our underwriting results in more detail and Eric Martin will discuss our financial results. As indicated in yesterday's press release, I remain pleased with the progress we are making as we continue positioning UFG to deliver superior financial and operational performance.

Speaker 2

Our Q3 results show signs of improvement, while we continue to execute a broad range of strategies to strengthen our company. Net income improved to While the combined ratio improved 9.6 points to 102.1 percent compared to 111.7% same quarter last year. Net written premium was flat in the 3rd quarter as growth in our core commercial and assumed reinsurance business was offset by targeted underwriting action on underperforming segments as we work continuously improved profile of the portfolio. In addition, net written premium growth was impacted by increased surety reinsurance reinstatement premiums. Average renewal premium increases in core commercial accelerated to 11% in the 3rd quarter outpacing loss cost trends.

Speaker 2

The acceleration was led by property rate increases of 17%. The underlying loss ratio was 60.5 segment in the Q3, which included approximately 2 points of impact from a small number of large losses and associated reinsurance reinstatement premiums in our surety business. Catastrophe losses contributed 5.9% to the combined ratio in the 3rd quarter, a 5.5 point improvement over the Q3 of 2022 and well below our 5 10 year averages of approximately 12% and 10%, respectively. Prior period reserve development The expense ratio was 35.5% in the 2nd quarter, up 0.4 point compared to a year ago. Surety reinsurance reinstatement premiums added 0.7 point to the 3rd quarter expense ratio, which would have otherwise declined on a year over year basis because of our ongoing expense management efforts.

Speaker 2

Our intense focus on improving the expense ratio was accelerated in the Q3 by introducing a voluntary early retirement package as well as changes to our paid time off policy that will provide additional expense ratio benefits in 2024. While not satisfied with the combined ratio, I am pleased with the improvement in the quarter as well as the progress we're making in executing strategies we believe will deliver consistent profitability and create long term value for our shareholders. We remain fully confident in our path forward. With that, I'll hand it over to Julie Stevenson, our Chief Operating Officer, to discuss our underwriting results in more sale. Julie?

Speaker 3

Thank you, Kevin. Starting with growth, net written premium in our core commercial business, which includes small business and middle market, Grew 3% to $165,000,000 compared to the Q3 of 2022. Renewal premium change in our core commercial business with total rate achievement at the highest level since 2018. Commercial property was the largest contributor to this increase with 3rd quarter property renewal premium change of 23 percent, including rate increases of 17% and exposure increases of 6%. We remain diligently focused on price adequacy across all lines of business.

Speaker 3

Retention for our core commercial business at 81% remained above prior year and consistent with our expectations as we pursued additional rate increases and pruned underperforming accounts from our portfolio. Our underwriters remain focused on evaluating individual risk selection, pricing, terms and conditions and are empowered to walk away from risks that no longer meet our expectations. Core commercial new business was $27,000,000 in the Q3 of 2023 compared to $15,000,000 of new business in the Q3 of 2022. I remain pleased with the quality, line of business and industry segment mix we are adding to the portfolio. Net rent premium in our Specialty Excess and Surplus Lines business declined from a year ago as we performed targeted actions on underperforming segments to improve portfolio composition.

Speaker 3

Our alternative distribution portfolio grew net written premium 25% in the 3rd quarter as we continue to execute our strategy to deliver diversifying Profitable Growth to the Organization. Similar to last quarter, we experienced a few large losses in surety impacted by broader economic conditions affecting the construction industry. Surety premiums declined compared to the Q3 of 2022 because of increased reinsurance reinstatement premiums, as well as short term staffing challenges and a highly competitive market for surety underwriting expertise. While these large surety losses and associated reinsurance reinstatement premiums added approximately 2 points to our total third quarter underlying loss ratio, We're seeing incremental profit improvement in other lines of business, namely standard umbrella, where enhanced metrics have increased visibility into historic rate levels and profit outlook. Turning to catastrophe losses.

Speaker 3

In the Q3, we experienced 5.9 points of catastrophe loss impact on the combined ratio. While we experienced the lowest third quarter catastrophe loss ratio in 5 years, we continue to take a broad range of actions, such as improving our property risk profiles, raising deductibles and driving pricing increases in high risk geographies to reduce and optimize catastrophe exposure across our portfolio. I I will now turn the call over to Eric Martin to discuss the rest of our financial results.

Speaker 4

Thank you, Julie. I will first provide some additional commentary on the 3rd quarter expense ratio of 35.5 percent, which increased 0.4 point from a year ago. As you know, we have been intensely focused on reducing expense ratio as part of our broader corporate strategies to deliver sustainable profitable growth. The most significant of these impacts is a 10% decline in headcount since the beginning of Q4 of 2022. In the Q3, the impact of the surety reinsurance reinstatement premium added 0.7 point to the expense ratio.

Speaker 4

In addition, earlier this year, we mentioned the benefits to our 2022 expense ratio from a change in design of employee postretirement benefits that have since dissipated and are impacting the year over year comparison. These items have outweighed the growing benefits of our actions to sustainably reduce the expense ratio on a year over year basis. In the Q3, we accelerated our expense reduction efforts by offering an early retirement package that will deliver additional benefits to the expense ratio beginning in 2024. Combined with the ongoing thoughtful management of attrition, We expect the net impact of these actions to further reduce enterprise headcount, taking us from approximately 1100 people in Q3 2022 when expense management actions started to below 900 people at the beginning of 2024. We also restructured our paid time off policy and we'll be moving to a discretionary time off policy in 2024.

Speaker 4

Turning to investment results. Invested assets ended the 3rd quarter at $1,800,000,000 90% of which is allocated to a high quality fixed income book. Within our portfolio, we continued reducing our exposure to public equities, Which ranked at 3% of assets in the 3rd quarter. The strategic reallocation of public equities to high quality fixed income on this trade as long as these attractive conditions exist. Net investment income was $16,500,000 in the 3rd quarter, UP 42% compared to the Q3 of 2022.

Speaker 4

We continue to realize the benefits of investing in a higher interest rate environment with new money yields exceeding 5.5%, helping increase fixed maturity income relative to a year ago. We also experienced positive valuation impacts on our limited partnership portfolio of $1,000,000 in the 3rd quarter. Realized losses of $2,000,000 driven by changes in the valuation of our reduced core equity portfolio rounded out third quarter investment results. 3rd quarter underwriting and investment returns resulted in net income of $0.25 per diluted share and non GAAP adjusted operating income of $0.31 per diluted share. Annualized year to date return on equity in the 3rd quarter was negative 9.5%, and we saw a deterioration in our unrealized loss position that decreased book value per common share to 25 point and $0.53 During the quarter, we declared and paid a $0.16 per share cash dividend to shareholders of record as of September 1, 2023, continuing our 55 year history of paying dividends dating back to March 1968.

Speaker 4

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

Operator

We will now begin the question and answer session. It appears there are no questions. This concludes our question and answer session. I would like to turn the conference back over to Kevin Leadwinger for any closing remarks.

Speaker 2

Thank you, and we look forward to seeing you next quarter.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
United Fire Group Q3 2023
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