United Fire Group Q4 2023 Earnings Report

United Fire Group EPS Results

• Actual EPS: $0.65
• Consensus EPS: $0.53
• Beat/Miss: Beat by +$0.12
• One Year Ago EPS: N/A

United Fire Group Revenue Results

• Actual Revenue: $287.32 million
• Expected Revenue: $278.70 million
• Beat/Miss: Beat by +$8.62 million
• YoY Revenue Growth: N/A

United Fire Group Announcement Details

• Quarter: Q4 2023
• Date: 2/13/2024
• Time: N/A
• Conference Call Date: Wednesday, February 14, 2024
• Conference Call Time: 10:00AM ET

United Fire Group (NASDAQ:UFCS), together with its subsidiaries, provides property and casualty insurance for individuals and businesses in the United States. The company offers commercial and personal lines of property and casualty insurance; and reinsurance coverage for property and casualty insurance. Its commercial lines include fire and allied lines, other liability, automobile, workers' compensation, fidelity and surety coverage, and other insurance products; and personal lines comprise automobile, and fire and allied lines coverage, including homeowners, as well as provides assumed reinsurance products. The company sells its products through a network of independent agencies. United Fire Group, Inc. was incorporated in 1946 and is headquartered in Cedar Rapids, Iowa.

United Fire Group Q4 2023 Earnings Call Transcript

Key Takeaways

• Premium Growth: Q4 net written premiums rose 5% to $247 million, driven by core commercial and assumed reinsurance units, while full-year growth reached 8% to just over $1 billion—the highest since 2019—with renewal rate increases accelerating to 11.6%.
• Improved Profitability: The combined ratio fell to 99.2% in Q4 (a seven-quarter low) with an underlying loss ratio of 60%, and the expense ratio declined to 34.4% despite a favorable one-time 2022 impact that slightly distorts year-over-year comparisons.
• Cost Reduction: Headcount was reduced from over 1,100 to around 850 through disciplined attrition and a voluntary early retirement program, positioning the company for more meaningful expense‐ratio benefits in 2024.
• Investment Performance: Q4 net investment income surged 48% to $19.1 million thanks to higher fixed-income yields and positive valuations on limited partnership and equity portfolios, boosting book value per share by more than $2 to $29.04.
• Strategic Initiatives: UFG deepened underwriting, actuarial and claims expertise with new leadership roles, streamlined its organizational structure, successfully renewed its 2024 reinsurance programs, and partnered with New England Asset Management to manage its investment portfolio.

[Operator]

Good day, and welcome to the United Fire Group Insurance 2023 4th Quarter Conference Call. All participants will be in listen only mode. Please note this event is being recorded. And now I would like to turn the conference over to Tim Borst.

[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 atufginsurance.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 the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward looking statements include risks 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, 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 Leidwinger, CEO of UFG Insurance.

[Speaker 2]

Thank you, Tim. Good morning, everyone, and welcome to our Q4 conference call. I'll begin this morning by providing a high level overview of our results. Following my comments, Julie Stevenson will discuss our underwriting results in more detail and Eric Barton will discuss our financial results. I'm pleased with our 4th quarter results as the incremental improvement in profitability, Continued growth and progress we've made to deepen our expertise as well as drive operational efficiency further position UFG to deliver superior financial and operational performance over time.

[Speaker 2]

In the 4th quarter, net written premium grew 5% to $247,000,000 led by our core commercial and assumed reinsurance business units. Core commercial production remained strong with increased new business and improved retention compared to the Q4 of 2022. In addition, average renewal premium increases accelerated to 11.6 percent exceeding loss trends. On a full year basis, increased production trends led to written premium growth of 8%, just over $1,000,000,000 the highest level since 2019. The combined ratio in the 4th quarter was 99.2%, the lowest in the last 7 quarters.

[Speaker 2]

Catastrophe losses contributed 1.5% to the combined ratio, well below historical averages. Prior period reserves increased $8,800,000 or 3.3 percent on the combined ratio due to a few late developing property claims as well as severity pressure and a few casualty lines. The underlying loss ratio was 60% in the Q4, the lowest of 2023. Core commercial results show early signs of improvement resulting from our strategic efforts to deliver consistent long term profitability and helped offset elevated surety loss activity, bringing our full year underlying loss ratio to 62.2%. The expense ratio in the 4th quarter was 34.4%, the lowest in 2023, as we continue to sustainably reduce expenses.

[Speaker 2]

In addition to ongoing disciplined vacancy management, we completed a voluntary early retirement program in the 4th quarter that contributed to a 22% decline in enterprise workforce will provide more impactful benefit to our expense ratio in 2024. Our reported 2023 expense ratio was slightly elevated to prior year on both a quarterly and full year basis, largely due to one time items that benefited 2022 expense ratio, offsetting the impact of our actions to reduce expenses in 2023. In addition to the incremental improvement in profitability and continued growth, UFG also benefited from capital market conditions in the 4th quarter. Increases in fixed maturity income and higher valuation on limited partnership investments increased 4th quarter net investment income to $19,100,000 the highest since exiting the life insurance business in 2018. Improved bond valuations reduced UFG's unrealized loss position by over 40% in the 4th quarter, improving book value per share by over $2 per share compared to the Q3 of 2023.

[Speaker 2]

In the Q4, we continued to evolve the company through strategic and leadership talent to increase the depth of our underwriting, actuarial and claims expertise. We also continue to enhance our organizational structure to improve specialization and achieve a higher level of efficiency with more streamlined processes. More recently, we successfully placed our 2024 reinsurance programs on January 1, 2024. In addition, we announced the partnership with New England Asset Management to manage our investment portfolio. As we enter the new year, I'm proud of the progress we're making at UFG.

[Speaker 2]

While these actions are not yet fully reflected in our financial results, we remain confident in the path forward and committed to achieving superior performance over time by delivering deep underwriting expertise with the personal relationships and responsive service that's also greatly valued by our agency partners. With that, I'll hand it over to Julie Stevenson, our Chief Operating to discuss our underwriting results in more detail.

[Speaker 3]

Thank you, Kevin. Starting with growth, net rent premium in our core commercial business, which includes small business, middle market and construction, grew 7% to $162,000,000 in the 4th quarter compared to prior year with all dimensions of production contributing. Improved production trends supported growth on a full year basis as well, with core commercial net written premium growing 7% to $724,000,000 Renewal premium change in our core commercial business continued its quarter over quarter acceleration to 11.6% in the 4th quarter, As we remain focused on price adequacy across all lines of business, Commercial Property recorded a 4th quarter renewal premium change of 24%, With rate increases of 19% and exposure increases of 5%, workers' compensation price change was negative, but to a lesser degree, in the 1st 3 quarters of 2023. Retention in our core commercial business was 80% in the 4th quarter and for the full year, which supports healthy growth, but still allows for responsible printing of accounts that no longer meet our pricing needs or risk profile. Commercial new business of $28,000,000 in the Q4 of 2023 remained well above prior year compared to $22,000,000 in the Q4 of 2022.

[Speaker 3]

I remain pleased with the quality of accounts in the line of business and industry segment mix we're adding to the portfolio. Our alternative distribution portfolio grew net written premium 9% in the 4th quarter and grew 27% for the full year as we continue to execute our strategy to deliver diversifying profitable growth the organization. Specialty excess and surplus lines net written premiums declined from a year ago for the Q4 full year, as we continued repositioning our portfolio to reflect the mix of business that will produce more sustainable, consistent profitability. Surety net written premium declined in the 4th quarter and the full year compared to prior year because of increased reinsurance costs, while direct written premiums increased for both the quarter and full year despite short term staffing challenges. In the Q4, we introduced a new regional underwriting structure and made additional investments in surety leadership to enhance underwriting governance and consistency and strengthen distribution relationships.

[Speaker 3]

The underlying loss ratio declined sequentially from the 3rd quarter to 60% in the 4th quarter, which was flat to prior year due to property large losses coming in better than expected, frequency improving across our core commercial lines and continued rate achievement delivering more noticeable benefits on our results. These improving core commercial lines results brought our full year underlying loss ratio to 62.2%. The approximately 3 point increase in the full year underlying loss ratio from prior year was primarily driven by the increased surety loss activity discussed in previous quarters. However, our core commercial business shows improvement over prior year, reflecting underwriting actions to improve this portfolio. In the Q4, we experienced $8,800,000 or 3.3 points of prior period development.

[Speaker 3]

The majority of this impact came from our property portfolio, where we saw a few late developing large losses from 2022. There were some smaller increases in umbrella and construction defect as we continue to see increasing pressure on liability severity, driven by factors influencing social inflation and modest increases in medical costs. There was also a small benefit from stabilizing auto severity trends in recent accident years. Workers' compensation shows adverse results this quarter as we reflected a modest increase in our outlook on severity. Although early observations of severity for 2023 2022 are still within our expectations, We've updated our perspective view of trend resulting from an observed increase in medical and indemnity pressure in accident years 2018 to 2021.

[Speaker 3]

Our adjustment to recent periods reflects a proactive stance to moderate the effect of potential emerging trends. While this adjustment shows a material impact on the loss ratio for the quarter given the relatively small premium volume for this line, The year to date result is a better reflection of our ongoing expectations and supports a continued profitable outlook. The catastrophe loss ratio was light in the 4th quarter at 1.5%. Despite our full year cat loss ratio of 6.2% being below 5 10 year historic averages, we continue to take action on severe convective storm and hurricane risk by improving our risk profiles, raising deductibles, driving pricing increases in high risk geographies and non renewing accounts that do not meet our expectations. In the Q4, we continue to make strategic investments in talent and evolve our organizational structure.

[Speaker 3]

We created a new Head of Field Operations role focused on driving underwriting execution and fostering productive distribution relationships in the field. We welcomed a new Chief Underwriting Officer and a new Construction Business Unit leader to deepen our underwriting expertise and drive profitable growth. Our Chief Actuary continued to build out his actuarial team, adding new leaders for pricing, reserving and reinsurance. Earlier this month, we combined information technology and business enablement teams under a new Chief Administrative Officer to evolve how we leverage technology across our business, improve processes and drive efficiency across UFG. Finally, we are pleased with the successful renewal of our multiline catastrophe and surety reinsurance programs on January 1.

[Speaker 3]

Overall, we reduced the retention on our cat excess of loss treaty to $20,000,000 by fully placing the 1st layer and improved other terms and conditions with a modest increase in risk adjusted pricing that outperformed our expectations. 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 expense ratio. As you know, 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 significant decline in headcount since the beginning of Q4 of 2022. Due to thoughtful management of attrition and the completion of a voluntary early retirement program in the 4th quarter, Our headcount has declined from more than 1100 to around 850 at the end of 2023.

[Speaker 4]

These reductions will provide more impactful benefits to our expense ratio in 2024. Our actions to reduce the expense ratio through expense management and operational leverage from premium growth reduced our run rate 4th quarter expense ratio by over a full point and full year expense ratio by over 2 points. While this positive momentum builds, Our reported expense ratio of 34.4 percent for the 4th quarter and 34.9% for the full year We are both a few tenths of a point above prior year levels, primarily because of a favorable one time impact to 2022 results from a change in design of employee post retirement benefits that we have previously discussed. Turning to the investment portfolio. Invested assets ended the 4th quarter at $1,900,000,000 approximately 90% of which is allocated to a high quality fixed income book.

[Speaker 4]

Net investment income was $19,100,000 in the 4th quarter, up 48% compared to the Q4 of 2022. We continue to realize the benefits of investing in a higher interest rate environment with new money yields exceeding 6% in the 4th quarter. We also experienced positive valuation impacts on our limited partnership portfolio of $3,000,000 in the 4th quarter, along with realized gains of $4,000,000 as favorable equity market returns increased the value of our core equity portfolio. These favorable trends benefited full year net investment income as well, which increased 33 percent to $60,000,000 as compared to 2022. Earlier this month, we announced a partnership with New England Asset Management to manage our investment portfolio, Providing UFG with a cost effective and scalable way to manage assets, we intend to maintain a consistent investment strategy with a high quality portfolio.

[Speaker 4]

4th quarter net income was $0.77 per diluted share and non GAAP adjusted operating income of $0.65 per diluted share. 4th quarter earnings and the significant improvement in our unrealized loss position increased book value per common share to $29.04 During the Q4, we declared and paid a $0.16 per share cash dividend to shareholders of record as of December 1, 2023, continuing our 55 year history of paying dividends back to March 1968. This concludes our prepared remarks. I will now have the operator open the line for questions.

[Operator]

Thank you very much. We will now begin the question and answer Our first question comes from Paul Newsome from Piper Sandler. Paul, please go ahead.

[Speaker 5]

Good morning. Thanks for the call. Congratulations on the quarter. I was hoping you could talk a little bit more about the headcount decline. Is there any sort of areas of the firm that it was more pronounced than other places?

[Speaker 6]

Thank you, Paul. Good morning. This is Eric Martin. Really, really not more pronounced anywhere in one area or the other. As we mentioned, we offered an early retirement program late in 2023, and we had about 120 people take us up on that.

[Speaker 6]

And That was pretty well across the board. We also had a small downside in our IT that was maybe about 40 people that came also late in the year. So maybe a little bit heavier there, but overall, it's kind of across the organization.

[Speaker 5]

Great. Maybe we could delve a little bit more into the reserve development. Certainly The question of the quarter for the industry has been related to casualty reserves and Particularly social inflation kind of questions. Looks like you have a little of that yourself in the umbrella and construction defect. Could you talk a little bit about sort of how you're thinking about the claims cost inflation in those areas?

[Speaker 5]

And I think you are a fairly heavily casually focused book in general. So maybe some thoughts there.

[Speaker 7]

Thanks, Bob. Hey, it's Julie. From a liability perspective, I think we see this move, it's not terribly extreme in magnitude. We do see that continued pressure on severity and construction defect in Umbrella, but this is really our move to stay ahead of it. We can certainly point to the increased disparity in accident years 2016 2019 that were certainly driven by social inflationary effects, but we think that the prior actions we took earlier in the year, we've seen a good position for those accident years.

[Speaker 7]

So this movement for the quarter is really more about updating our view of trend in the most recent accident years, so 2022 2023. So we see this as more of a proactive stance, staying true to our philosophy of getting ahead of adverse news and responding slowly to favorable news. We don't see anything really here that we would see as problematic.

[Speaker 5]

That makes sense. Where do you pick loss trend for these sorts of types of books at this point?

[Speaker 7]

Yes, I think we see it in the mid single digits for now. And certainly, our focus on making sure that our ongoing pricing is keeping pace with trend in our liability lines. That's the focus.

[Speaker 5]

Turning to the workers' comp piece, was there any change in sort of the it seems like every year there's a decline in frequency for workers comp in general, any change in your book from a frequency perspective for workers comp?

[Speaker 7]

So we still see those frequency trends coming down and certainly pleased to do that. Even though we're experiencing persistently decreasing rates there, that negative frequency is outpacing that trend. So we're pleased with that. I think what we saw is some upward pressure on severity, which is what you see reflected in our decision to proactively update our view of trends in the most recent accident years.

[Speaker 5]

And last one, I'll let other folks ask a question. I missed any comments you made on the assumed reinsurance book. What's going on with that business at the moment?

[Speaker 7]

Can you repeat the question? We're having a little hard time hearing you.

[Speaker 5]

Sorry. Could you talk a little bit about the reinsurance book? I missed Any comments you made on that and how that book is performing of late?

[Speaker 7]

Absolutely. So I can tell you a little bit about our most recent renewal. We feel pretty good about that program coming into 2024. We did see growth. About 70% of our assumed book renewed at oneone and we felt very good about the terms and conditions and the growth that we were able to achieving that book.

[Speaker 7]

So still staying very consistent to our goal of keeping that portfolio about 25% of our overall portfolio And count on it to continue to provide diversifying impact across the whole book.

[Speaker 5]

Great. Thank you. Appreciate the help as always.

[Operator]

Okay. We are finished then with the question and answer session. And I will turn the conference back over to Kevin Leidwanger, CEO of UFG for some closing remarks. Thank you.

[Speaker 6]

Yes. Thank you. And thank

[Speaker 2]

you for joining us today, and we'll talk to you next quarter. Thank you.

[Operator]

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