Good morning, and welcome to the UFG Full Year and Fourth Quarter 2022 Results Conference Call. [Operator Instructions] 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 5 points of catastrophe loss activity and 5 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…

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 7 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 1 point above our 10-year average catastrophe loss ratio and 1 point below our 5-year average catastrophe loss ratio. In the fourth quarter, we strengthened prior year reserves by $12 million or 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 2 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 2 different themes playing out across the year. In the…

[Operator Instructions] Our first question comes from Paul Newsome with Piper Sandler.

I wanted to ask a little bit more detail on the reserve development in the last couple of quarters. Was there anything that changed either from a philosophical perspective or did -- was there a special look into the reserves in the last couple of quarters? Obviously, new management oftentimes takes a different approach or at least a new look. Did anything like that happened during the quarter? Is this simply just the emergence that showed up in the last 6 months?

Paul, this is Eric. Thank you for joining us, and thanks for your question. And it's a really good question. So what I would say is, in general, we have not had a change in philosophy. So if you look back at our history over the past couple of years, we've had some items within our commercial auto book that we have taken action on. But when I look back over the past couple of quarters, and I think about all 4 quarters of the year, the first 2 quarters, we had favorable development of about $23 million. In the second half of the year, we've had just that exact same amount going the other way, $23 million of unfavorable. And as we have had new management come in, while we haven't had a change in philosophy, one of the things that we wanted to look at was a deeper segmentation and more analysis around some of our longer tail businesses. So these are the items that all show up in our other -- excuse me, other liability line, its excess umbrella coverage, its products, liability or construction defects. So we have taken an opportunity to have a more granular view on those things, especially as we're coming through the year in an inflationary environment as we see courts reopening, that sort of thing. We really wanted to have a good feel for our exposure on some of these longer tailed lines. So I think what you might see is, as we've seen this development, as we've been somewhat quick to react, but we -- the underlying themes make sense to us. And I think that's what you'll see going forward is we will be quicker to react to negative news and perhaps a little longer to react to positive news.

Do you think the process of taking a more granular approach is finished on the other liability book? Or -- and/or do you think that process will be extended to other parts of the business as well?

I think -- so these are the places where we've got the long tail lines. We've done a lot of work on commercial auto over the past. Some of our other lines, probably a little different surety or workers' comp or workers' top line isn't very big right now. We are wanting to continue to grow that. While I can never say we're done with anything, I think the actions we've taken here we'll continue to get that granular insight, but we've hit the lines with the long tails here.

Paul, it's Kevin. Just an additional observation. I mean, it's our intent to use all the tools available to us to gain as much insight as we possibly can. And of course, then we'll take the appropriate level of -- or action relative to the insights that are provided back through those analysis. And I think Eric's point about being prudent and taking action more quickly on negative trends and perhaps a little more slowly on positive trends is exactly spot on.

Makes sense. Obviously, UFG has a long track record of capable reserve. I also want to ask about reinsurance and the impact both on a cost basis as well as on the assumed basis, maybe you could split those 2 pieces apart for us and talk about impact on the business and the bottom line for the -- I assume there will be a higher reinsurance cost for this year as a purchaser. And then maybe you could talk about any changes you've seen in the assumed reinsurance book as well.

Sure. Let me just give you a little bit more color on the reinsurance program. As we mentioned in our prepared comments, all of our reinsurance renews on 1/1. And so like many others, we did experience some pricing increases across our portfolio, along with some changes in terms of conditions. Let me just give you some context there. So the property cat XOL premium increased about 54% on a risk-adjusted basis. We saw some increases on our earthquake quota-share program that are about 40%. The pillared occurrence program rate increase was about 20%, but that was a bit moderated or muted compared to the cat program due to some structural changes with the annual aggregate deductible. And then what we call our core program, which is the multiline, the working program, rate increased a little bit over 30%. And so clearly, the pricing is somewhat reflective of what the rest of the market experienced. Let me just give you some context around retentions. So our property cat XOL retention increased from $15 million to $20 million. We also saw a co-participation increase on the first layer to 28.5%. Our earthquake quota-share limit was reduced by about $10 million. So it's now at $170 million, but still provides coverage in excess of 1 in 250 PML. On our pillared occurrence, which was a new program we put in place in 2022, we saw an increase in placement. So in 2022, it was 66.5% placed. In 2023, it was 90% placed. So we're pretty happy with the increased participation. We also saw an increase in our overall limit there from $25 million to $30 million, and so we consider that placement a success, particularly in light of this market. But the retention increased from $5 million to $6 million in the annual aggregate deductible increase there from $5 million to $10 million. So certainly, we'll see some additional debt exposure in both the property cat XOL and the pillared occurrence. On our core property casualty program, we did take a $5 million annual aggregate deductible on the program this year. We did maintain our $3 million retention. And other than the annual aggregate deductible, there are no changes to the layers or the structure and that program is 100% placed. So again, much like others saw premium increase as well as some retention increases in our overall program. We clearly understand the importance of pushing harder on property rate increases, particularly in cat-exposed parts of our portfolio and that work is underway today, and we would anticipate over the course of the coming year to see improved pricing on the property side to compensate for the additional reinsurance costs. On the -- so I'll just pause there and see if you have any questions about that. Otherwise, I'll turn to you soon.

I mean just to simplify it for folks like me where market price bumps over, essentially, it looks like maybe all things being equal, a little bit more cat load because of the higher retention and then maybe a little bit of overall pressure on the underwriting margins. This is the total excess of loss cost goes up a bit. Is that a fair amount of...

I think we'll probably have to spend a little bit more time on that issue. So while it's all an increase in the retention under the cat program. The pillared occurrence is really designed to help manage the frequency of small cat events that have to accumulate losses inside of the cat XOL program. And so we saw an increase in placement on the pillared occurrence program. So we're still working through what we think the overall additional exposure to company. But I think there's an offsetting component based on the pillared occurrence increased participation to the overall net increase on the cat XOL. So those 2 things are interrelated.

Okay, that makes sense. Okay.

And then turning now to the assumed reinsurance business. We certainly were the beneficiary of the other side of the market. Clearly, as you saw on our ceded program, there were increases, obviously, on the assumed reinsurance component of the portfolio. We certainly got the benefit of increased pricing. And where that came through for us was certainly on the standard treaty. So we had a significant amount of opportunity for participation on regional carrier treaty reinsurance as other carriers were reducing their participation, those opportunities were presented to us. And so we saw some significant benefit to participate opportunistically on some treaty -- standard treaty business in this cycle, and so we were quite pleased with that participation.

Is there some sort of target or goal for the reinsurance book relative to the rest of the book? Is it a percent of premium or something along on those lines?

Yes, sure. So we're managing that to about 25% of the portfolio, right? So that's the target today. We're, I think, just a little bit below that. And while we'll manage that, in general, to 25% as the entire portfolio grows, obviously, the premium associated with that will become larger. But we will also be opportunistic where there are moments in the market like we experienced most recent renewal cycle we'll take advantage of that. And so if it -- while we anticipate it being right around 25%, there may be moments when issued a little bit higher than that because the opportunity was there for us to further diversify our portfolio and do it at significant underwriting profits.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the call over to Kevin Leidwinger, President and CEO, for any closing remarks.

Thanks for joining us for this quarter, and we look forward to talking with you again next quarter.

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