United Fire Group, Inc. (UFCS) Q4 2022 Earnings Call Transcript

Trending 1 year ago

United Fire Group, Inc. (NASDAQ:UFCS) Q4 2022 Results Conference Call February 16, 2023 10:00 AM ET

Company Participants

Eric Martin - SVP and CFO

Kevin Leidwinger - President and CEO

Conference Call Participants

Paul Newsome - Piper Sandler


Good morning, and invited to nan UFG Full Year and Fourth Quarter 2022 Results Conference Call. [Operator Instructions] Please statement this arena is being recorded.

I would now for illustration to move nan convention complete to UFG, Senior Vice President and Chief Financial Officer, Eric Martin. Please spell ahead, sir.

Eric Martin

Good morning, and convey you for joining this call. Yesterday afternoon, we issued a property merchandise connected our results. To find a transcript of this document, please sojourn our website astatine Press releases and slides are located nether nan Investors tab.

Joining maine coming connected nan telephone is UFG President and Chief Executive Officer, Kevin Leidwinger. Before I move nan telephone complete to Kevin, a mates of reminders. First, please statement that our position coming whitethorn see forward-looking statements arsenic defined successful nan Private Securities Litigation Reform Act of 1995. The institution cautions investors that immoderate forward-looking statements see risks and uncertainties and are not a guarantee of early performance. These forward-looking statements are based connected management's existent expectations. The existent results whitethorn disagree materially owed to a assortment of factors, which are described successful our property merchandise and SEC filings.

Also, please statement that successful our chat today, we whitethorn usage immoderate non-GAAP financial measures. Reconciliations of these measures to nan astir comparable GAAP measures are besides disposable successful our property merchandise and SEC filings.

At this time, I will move nan telephone complete to Mr. Kevin Leidwinger, CEO of UFG Insurance.

Kevin Leidwinger

Thanks, Eric. Good morning, everyone, and invited to our 4th fourth convention call. I'll statesman this greeting by providing penetration into nan 4th fourth results, past supply an overview of our afloat twelvemonth performance.

First, fto maine opportunity I'm pleased pinch nan advancement I've seen since joining UFG successful August. We proceed to position our institution for superior financial and operational performance. Over nan past year, we have further diversified our portfolio, improved its underlying fundamentals and intensified our attraction connected reducing nan disbursal ratio. I'm proud of nan activity our squad has done successful executing our strategical plan.

Turning now to 4th fourth results. We're pleased to study nett written premium accrued 6.3% to $235 cardinal compared to $221 cardinal successful nan 4th fourth of 2021. This marks nan 3rd consecutive 4th of nett written premium maturation arsenic nan business gains momentum pursuing nan re-underwriting workout of nan past respective years. Growth was driven by our specialty, surety and assumed reinsurance businesses.

Our halfway commercialized business, including construction, mediate market, mini business and Marine was down slightly. However, we are encouraged by nan improved retention ratios and accrued caller business accumulation we saw successful nan quarter. The momentum continued into January, and we expect nan halfway commercialized business to return to profitable maturation successful nan coming quarters. The mixed ratio was 103.6% successful nan 4th fourth and was impacted by 5 points of catastrophe nonaccomplishment activity and 5 points of adverse development. The adverse improvement successful nan 4th was nan consequence of nan much granular study of nan building defect portfolio. The underlying mixed ratio for nan 4th fourth was 93.8%. As mentioned past quarter, we stay intensely focused connected lowering our disbursal ratio, which fell to 33.8% successful nan 4th fourth of 2022 arsenic early benefits of our disbursal guidance actions statesman to return effect.

Turning now to our afloat twelvemonth results. Net written premium accrued 4.6% to $984 cardinal compared to $941 cardinal successful 2021. As pinch our astir caller quarters, maturation was driven by our specialty, surety and assumed reinsurance businesses, while our halfway commercialized business continues to recover. The mixed ratio for afloat twelvemonth 2022 was 101.4%, a flimsy deterioration complete afloat twelvemonth 2021. The mixed ratio was impacted by 7.7 points of catastrophe nonaccomplishment activity and anterior play improvement was neutral. The underlying mixed ratio was 93.6% for afloat twelvemonth 2022, a 3.4 constituent betterment complete nan erstwhile year. The underlying nonaccomplishment ratio improved 5.2 points to 59.2%, our champion underlying nonaccomplishment ratio successful nan past 10 years.

The betterment successful our underlying nonaccomplishment ratio was nan consequence of important actions taken complete nan past respective years to amended profitability, diversify our portfolio, fortify underwriting governance and trim volatility. With respect to reinsurance, I'm pleased to stock that we successfully renewed our multiline and catastrophe programs connected January 1. Although we knowledgeable accrued costs and humble position and conditions changes, they were accordant pinch nan broader market. With nan accrued costs of reinsurance, we will proceed pursuing spot complaint increases.

We besides made nan strategical determination to adhd a adaptable quota-share pact to support maturation and trim volatility successful our specialty portfolio. Despite nan galore challenges we look arsenic an industry, I'm assured nan actions we are taking coming will put our institution successful a beardown position to present accordant superior financial and operational capacity for nan use of each of nan UFG stakeholders.

Finally, I'd for illustration to invited Julie Stephenson to UFG. Julie joined UFG astatine nan extremity of January arsenic Executive Vice President and Chief Operating Officer. Julie is an accomplished leader who brings a wealthiness of operational, underwriting and portfolio guidance acquisition to our company. We are thrilled to person her onboard arsenic we proceed to execute our strategical scheme and position UFG for semipermanent success.

I'll now move nan telephone complete to our Chief Financial Officer, Eric Martin, for a elaborate chat of nan 4th fourth and afloat twelvemonth results. Eric?

Eric Martin

Thanks, Kevin, and bully greeting again. In nan 4th quarter, we reported nett income of $0.79 per diluted stock and non-GAAP adjusted operating income of $0.18 per diluted share. Net written premiums accrued 6.3% successful nan 4th fourth compared to nan anterior year. Our halfway commercialized lines premiums are stabilizing pinch nan slowing complaint of decline, driven by mean renewal premium alteration of 8.3% for nan 4th and expanding levels of premium retention and caller business. This reflects our modulation from re-underwriting actions to positioning nan halfway commercialized portfolio for profitable growth.

Notably, caller business successful nan 4th fourth accrued 55% and retention was 7 points higher than nan 4th fourth of 2021. From a profitability perspective, our 4th fourth mixed ratio was 103.6%, which includes 4.9 points of catastrophe losses and 4.9 points of anterior twelvemonth reserve strengthening. The catastrophe losses of $12 cardinal successful nan 4th fourth were chiefly driven by Winter Storm Elliott. With nan resulting catastrophe nonaccomplishment ratio of 4.9% wrong humanities ranges of capacity for nan 4th fourth astatine 1 constituent supra our 10-year mean catastrophe nonaccomplishment ratio and 1 constituent beneath our 5-year mean catastrophe nonaccomplishment ratio.

In nan 4th quarter, we strengthened anterior twelvemonth reserves by $12 cardinal aliases 4.9 points of mixed ratio impact, focusing connected our building defect business successful mishap years 2015 done 2019, wherever a operation of deeper analytical insights and emerging claims acquisition has accrued our position of imaginable vulnerability and aligned pinch agelong reporting lags.

Since we've had 2 consecutive quarters of reserve strengthening, I'm going to reside our results for nan afloat twelvemonth astatine this time. For nan afloat year, our anterior twelvemonth reserve actions person had a neutral effect connected our mixed ratio and bespeak 2 different themes playing retired crossed nan year. In nan first 2 quarters, we knowledgeable favorable reserve releases successful our commercialized car statement of business that continued successful nan 3rd and 4th quarters. This favorable emergence resulted from beardown lawsuit reserving and reduced declare handling costs, facilitated by our specialized claims operating model.

In nan 3rd and 4th quarters, these reserve releases were offset by strengthening successful our commercialized liability portfolio, wherever a deeper position of our information has fixed america caller perspectives and lines of business wherever nan astir uncertainty exists. The 3rd 4th strengthening focused connected excess umbrella wherever societal and economical inflationary pressures are expanding nan propensity for claims to pierce nan excess layers, successful statement pinch what others successful nan manufacture are reporting.

We've besides knowledgeable patient maturation successful our specialty excess and surplus business that writes excess furniture coverage. While our results person historically been superior to nan industry, we felt prudent to return a cautious attack here, to alteration continuation of our historical way grounds to proceed to create financial benefits. The aforesaid taxable continued successful nan 4th fourth pinch nan actions focused connected building defect claims that I conscionable described.

Turning to finance results. Net finance income benefited from strategically positioning our fixed maturity portfolio toward a shorter long floor plan that facilitates reinvesting astatine higher liking rates. As a result, 4th fourth finance income from fixed maturity assets accrued by $2 cardinal aliases 19% compared to past year. This summation successful fixed maturity income was offset by little valuations successful our semipermanent finance portfolio, resulting successful nett finance income of $12.9 cardinal successful nan 4th quarter, comparatively level compared to nan 4th fourth of 2021.

In nan 4th quarter, some our equity and fixed income portfolios outperformed our marketplace benchmarks. Our equity portfolio generated $20 cardinal successful finance gains and nan unrealized fixed income nonaccomplishment connected our equilibrium expanse decreased by $24 cardinal during nan quarter. This betterment successful equity and fixed income plus values drove a 5.5% summation successful book worth from Q3 to Q4. Our finance portfolio equilibrium was $1.8 cardinal of invested assets successful nan 4th quarter, of which 84% is allocated to a high-quality fixed income book.

For nan afloat year, nett income per diluted stock was $0.59, and non-GAAP adjusted operating income per diluted stock was $1.09. For nan afloat year, nett written premiums accrued 4.6%. Within our halfway commercialized business, nan mean renewal premium alteration was 8.3% for nan year, pinch complaint increases of 5.2% and vulnerability increases of 3.1% arsenic we proceed to attraction connected capable spot valuation considering today's inflationary environment.

Both caller business and retention improved connected a afloat twelvemonth ground arsenic our halfway commercialized book transitioned retired of re-underwriting actions. Our afloat twelvemonth mixed ratio of 101.4% includes an disbursal ratio of 34.4%. This is higher than 2021 by 1.8 points, owed to onetime effect from changes successful post-employee benefits that favorably impacted nan 2021 disbursal ratio. Excluding nan effect of those onetime items, nan 2022 afloat twelvemonth disbursal ratio would person been 0.3 points little than 2021, building affirmative momentum into 2023 arsenic we activity to aggressively amended our disbursal ratio.

The afloat twelvemonth catastrophe nonaccomplishment ratio of 7.7% is simply a 2.5 constituent betterment compared to our acquisition successful 2021. As described earlier, anterior twelvemonth reserve improvement had a neutral effect connected our afloat twelvemonth nonaccomplishment ratio arsenic releases successful nan first 2 quarters, focused connected commercialized car were offset by strengthening successful nan 3rd and 4th quarters successful excess umbrella and building defect coverages.

Full twelvemonth nett finance income of $45 cardinal was down $11 cardinal from 2021, arsenic a consequence of little semipermanent business valuations successful nan first half of nan twelvemonth that decreased finance income by $17 million. This much than offset nan accrued net powerfulness of reinvesting astatine higher liking rates that began improving nett finance income successful nan 2nd half of nan twelvemonth and accrued fixed maturity income by $5.5 cardinal for nan year.

During nan quarter, we declared and paid a $0.16 per stock rate dividend to shareholders of grounds arsenic of December 2, 2022, continuing our 54-year history of paying dividends making love backmost to March 1968.

This concludes our prepared remarks. I will now unfastened nan statement for questions. Operator?

Question-and-Answer Session


[Operator Instructions] Our first mobility comes from Paul Newsome pinch Piper Sandler.

Paul Newsome

I wanted to inquire a small spot much item connected nan reserve improvement successful nan past mates of quarters. Was location thing that changed either from a philosophical position aliases did -- was location a typical look into nan reserves successful nan past mates of quarters? Obviously, caller guidance oftentimes takes a different attack aliases astatine slightest a caller look. Did thing for illustration that happened during nan quarter? Is this simply conscionable nan emergence that showed up successful nan past 6 months?

Eric Martin

Paul, this is Eric. Thank you for joining us, and acknowledgment for your question. And it's a really bully question. So what I would opportunity is, successful general, we person not had a alteration successful philosophy. So if you look backmost astatine our history complete nan past mates of years, we've had immoderate items wrong our commercialized car book that we person taken action on. But erstwhile I look backmost complete nan past mates of quarters, and I deliberation astir each 4 quarters of nan year, nan first 2 quarters, we had favorable improvement of astir $23 million. In nan 2nd half of nan year, we've had conscionable that nonstop aforesaid magnitude going nan different way, $23 cardinal of unfavorable. And arsenic we person had caller guidance travel in, while we haven't had a alteration successful philosophy, 1 of nan things that we wanted to look astatine was a deeper segmentation and much study astir immoderate of our longer tail businesses.

So these are nan items that each show up successful our different -- excuse me, different liability line, its excess umbrella coverage, its products, liability aliases building defects. So we person taken an opportunity to person a much granular position connected those things, particularly arsenic we're coming done nan twelvemonth successful an inflationary situation arsenic we spot courts reopening, that benignant of thing. We really wanted to person a bully consciousness for our vulnerability connected immoderate of these longer tailed lines. So I deliberation what you mightiness spot is, arsenic we've seen this development, arsenic we've been somewhat speedy to react, but we -- nan underlying themes make consciousness to us. And I deliberation that's what you'll spot going guardant is we will beryllium quicker to respond to antagonistic news and possibly a small longer to respond to affirmative news.

Paul Newsome

Do you deliberation nan process of taking a much granular attack is vanished connected nan different liability book? Or -- and/or do you deliberation that process will beryllium extended to different parts of nan business arsenic well?

Eric Martin

I deliberation -- truthful these are nan places wherever we've sewage nan agelong tail lines. We've done a batch of activity connected commercialized car complete nan past. Some of our different lines, astir apt a small different surety aliases workers' comp aliases workers' apical statement isn't very large correct now. We are wanting to proceed to turn that. While I tin ne'er opportunity we're done pinch anything, I deliberation nan actions we've taken present we'll proceed to get that granular insight, but we've deed nan lines pinch nan agelong tails here.

Kevin Leidwinger

Paul, it's Kevin. Just an further observation. I mean, it's our intent to usage each nan devices disposable to america to summation arsenic overmuch penetration arsenic we perchance can. And of course, past we'll return nan due level of -- aliases action comparative to nan insights that are provided backmost done those analysis. And I deliberation Eric's constituent astir being prudent and taking action much quickly connected antagonistic trends and possibly a small much slow connected affirmative trends is precisely spot on.

Paul Newsome

Makes sense. Obviously, UFG has a agelong way grounds of tin reserve. I besides want to inquire astir reinsurance and nan effect some connected a costs ground arsenic good arsenic connected nan assumed basis, possibly you could divided those 2 pieces isolated for america and talk astir effect connected nan business and nan bottommost statement for nan -- I presume location will beryllium a higher reinsurance costs for this twelvemonth arsenic a purchaser. And past possibly you could talk astir immoderate changes you've seen successful nan assumed reinsurance book arsenic well.

Kevin Leidwinger

Sure. Let maine conscionable springiness you a small spot much colour connected nan reinsurance program. As we mentioned successful our prepared comments, each of our reinsurance renews connected 1/1. And truthful for illustration galore others, we did acquisition immoderate pricing increases crossed our portfolio, on pinch immoderate changes successful position of conditions. Let maine conscionable springiness you immoderate discourse there. So nan spot feline XOL premium accrued astir 54% connected a risk-adjusted basis. We saw immoderate increases connected our earthquake quota-share programme that are astir 40%. The pillared occurrence programme complaint summation was astir 20%, but that was a spot moderated aliases muted compared to nan feline programme owed to immoderate structural changes pinch nan yearly aggregate deductible.

And past what we telephone our halfway program, which is nan multiline, nan moving program, complaint accrued a small spot complete 30%. And truthful clearly, nan pricing is somewhat reflective of what nan remainder of nan marketplace experienced. Let maine conscionable springiness you immoderate discourse astir retentions. So our spot feline XOL retention accrued from $15 cardinal to $20 million. We besides saw a co-participation summation connected nan first furniture to 28.5%. Our earthquake quota-share limit was reduced by astir $10 million. So it's now astatine $170 million, but still provides sum successful excess of 1 successful 250 PML. On our pillared occurrence, which was a caller programme we put successful spot successful 2022, we saw an summation successful placement. So successful 2022, it was 66.5% placed. In 2023, it was 90% placed.

So we're beautiful happy pinch nan accrued participation. We besides saw an summation successful our wide limit location from $25 cardinal to $30 million, and truthful we see that placement a success, peculiarly successful ray of this market. But nan retention accrued from $5 cardinal to $6 cardinal successful nan yearly aggregate deductible summation location from $5 cardinal to $10 million. So certainly, we'll spot immoderate further indebtedness vulnerability successful some nan spot feline XOL and nan pillared occurrence. On our halfway spot casualty program, we did return a $5 cardinal yearly aggregate deductible connected nan programme this year. We did support our $3 cardinal retention. And different than nan yearly aggregate deductible, location are nary changes to nan layers aliases nan building and that programme is 100% placed.

So again, overmuch for illustration others saw premium summation arsenic good arsenic immoderate retention increases successful our wide program. We intelligibly understand nan value of pushing harder connected spot complaint increases, peculiarly successful cat-exposed parts of our portfolio and that activity is underway today, and we would expect complete nan people of nan coming twelvemonth to spot improved pricing connected nan spot broadside to compensate for nan further reinsurance costs. On nan -- truthful I'll conscionable region location and spot if you person immoderate questions astir that. Otherwise, I'll move to you soon.

Paul Newsome

I mean conscionable to simplify it for folks for illustration maine wherever marketplace value bumps over, essentially, it looks for illustration possibly each things being equal, a small spot much feline load because of nan higher retention and past possibly a small spot of wide unit connected nan underwriting margins. This is nan full excess of nonaccomplishment costs goes up a bit. Is that a adjacent magnitude of...

Kevin Leidwinger

I deliberation we'll astir apt person to walk a small spot much clip connected that issue. So while it's each an summation successful nan retention nether nan feline program. The pillared occurrence is really designed to thief negociate nan wave of mini feline events that person to accumulate losses wrong of nan feline XOL program. And truthful we saw an summation successful placement connected nan pillared occurrence program. So we're still moving done what we deliberation nan wide further vulnerability to company. But I deliberation there's an offsetting constituent based connected nan pillared occurrence accrued information to nan wide nett summation connected nan feline XOL. So those 2 things are interrelated.

Paul Newsome

Okay, that makes sense. Okay.

Kevin Leidwinger

And past turning now to nan assumed reinsurance business. We surely were nan beneficiary of nan different broadside of nan market. Clearly, arsenic you saw connected our ceded program, location were increases, obviously, connected nan assumed reinsurance constituent of nan portfolio. We surely sewage nan use of accrued pricing. And wherever that came done for america was surely connected nan modular treaty. So we had a important magnitude of opportunity for information connected location bearer pact reinsurance arsenic different carriers were reducing their participation, those opportunities were presented to us. And truthful we saw immoderate important use to participate opportunistically connected immoderate pact -- modular pact business successful this cycle, and truthful we were rather pleased pinch that participation.

Paul Newsome

Is location immoderate benignant of target aliases extremity for nan reinsurance book comparative to nan remainder of nan book? Is it a percent of premium aliases thing on connected those lines?

Kevin Leidwinger

Yes, sure. So we're managing that to astir 25% of nan portfolio, right? So that's nan target today. We're, I think, conscionable a small spot beneath that. And while we'll negociate that, successful general, to 25% arsenic nan full portfolio grows, obviously, nan premium associated pinch that will go larger. But we will besides beryllium opportunistic wherever location are moments successful nan marketplace for illustration we knowledgeable astir caller renewal rhythm we'll return advantage of that. And truthful if it -- while we expect it being correct astir 25%, location whitethorn beryllium moments erstwhile issued a small spot higher than that because nan opportunity was location for america to further diversify our portfolio and do it astatine important underwriting profits.


[Operator Instructions] This concludes our question-and-answer session. I would for illustration to move nan telephone complete to Kevin Leidwinger, President and CEO, for immoderate closing remarks.

Kevin Leidwinger

Thanks for joining america for this quarter, and we look guardant to talking pinch you again adjacent quarter.


The convention is now concluded. Thank you for attending today's presentation. You whitethorn each now disconnect.

Editor: Naga

Read other contents from at
More Source