Good morning. My name is Chuck, and I'll be your conference operator today. At this time, I would like to welcome everyone to the United Fire Group Insurance Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to United Fire Group's AVP and Director of Investor Relations, Mr. Tim Borst. 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 are UFG President and Chief Executive Officer, Kevin Leidwinger; Executive Vice President and Chief Operating Officer, Julie Stephenson; and Executive Vice President and Chief Financial Officer, Eric Martin. 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.

Thank you, Tim, and good morning, everyone, and welcome to our second quarter conference call. I'll begin this morning by providing a high-level overview of our second quarter results. Following my comments, Julie Stephenson, our Chief Operating Officer, will discuss our underwriting results in more detail; and Eric Martin, our Chief Financial Officer, will discuss our financial results. As reported in our pre-announcement on July 31 in our press release yesterday afternoon, UFG's combined ratio for the second quarter was 133%. Our results were impacted by $53 million of prior period reserve strengthening as well as elevated catastrophe losses. Before we review the quarter's results in more detail, I'd like to take a minute to comment on our decision to strengthen reserves. UFG is committed to a strong actuarial foundation supporting not only the reserving process, but a broader range of business actions critical for delivering profitable growth. Over the past four quarters, we have deepened our actuarial expertise, including hiring UFG's first Chief Actuary. In addition, we've enhanced our actuary processes, which have increased the breadth and depth of our reserving analysis. The process enhancements have allowed us to better understand the behavior patterns of individually managed lines of business, resulting in more actionable insights across similar product exposures. Analyzing trends at the line of business level allowed us to see potential risks sooner than in the past and accelerated our response to changing conditions. With this decision, we believe any major reserve strengthening has been addressed. Of course, as part of our continued advancement of our reserving processes, we'll continually work to evaluate emerging trends in changing environments. As we move forward, we will respond to adverse trends quickly and favorable ones cautiously. While our decision to strengthen reserves resulted in a near-term negative impact, we believe the…

Thank you, Kevin. I'm pleased to see momentum continuing to build across our portfolio of core commercial, assumed reinsurance, specialty excess and surplus and surety businesses. Net written premium in our core commercial business, which includes small business and middle market grew 10% to $198 million compared to the second quarter of 2022, with all components of production increasing. Core Commercial new business premium was $39 million in the second quarter with efforts to reengage with our agents now supporting new business production levels appropriate for sustained, measured growth. This, coupled with our refined risk selection and underwriting discipline, provide confidence this business will contribute favorably to our long-term profitability. Retention for our core commercial business increased to 84% in the second quarter, which we view as a steady-state number that still allows for responsible pruning of accounts that no longer meet our pricing needs or risk profile. Renewal premium change in our core commercial business accelerated to 8.5% in the second quarter. Average rate increases were up from the first quarter across all lines of business, with total rate achievement at the highest level since the fourth quarter of 2021. We are pleased with the second quarter property renewal premium change of 19%, with rate increases of 12% and exposure increases of 7%. We remain diligently focused on price adequacy across all lines of business relative to loss trends. Our assumed reinsurance portfolio grew net written premium over 30% in the second quarter as we continue to execute our strategy to deliver diversifying profitable growth to the organization. This growth reflects the ongoing impact of January 1st renewals that enabled us to continue to optimize this highly curated portfolio by selectively adding new partnerships while non-renewing a portion of our legacy retrocession portfolio as well as ongoing growth in…

Thank you, Julie. I will first provide some additional commentary on the second quarter expense ratio of 34.5%, which declined 0.7 point from a year ago. As previously discussed, 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 7% decline in headcount since the beginning of the fourth quarter of 2022 and increased earned premium levels from the rebound in growth. In the second quarter, the benefits of these actions were sufficient to outweigh the upward impact on our expense ratio from strategic technology investments in our new policy administrative platform and benefits to our prior year expense ratio from a change in the design of employee postretirement benefits that we discussed last quarter. Turning to investment results, invested assets ended the second quarter at $1.8 billion, 85% of which is allocated to a high-quality fixed income book. Within our portfolio, we began reducing our exposure to public equities, which shrank to 7% of assets in the second quarter. The strategic reallocation of public equities to high-quality fixed income is an attractive way to reduce volatility and improve risk-adjusted returns given current market conditions. We intend to continue executing on this trade as long as these attractive conditions exist. Net investment income was $11.3 million in the second quarter, up 23% compared to the second quarter of 2022. We continue to realize the benefits of investing in a higher interest rate environment, with new money yields exceeding 5%, helping increase fixed maturity income relative to a year ago. The positive impact from higher bond yields was partially reduced by negative valuation impacts on our limited partnership portfolio of $4 million in the second quarter. Realized gains of $1 million driven by changes in the valuation of our core equity portfolio rounded out second quarter investment results. Second quarter underwriting and investment returns resulted in a net loss of $2.23 per diluted share and a non-GAAP adjusted operating loss of $2.27 per diluted share. Return on equity in the second quarter was a negative 15.7%, and we saw a slight deterioration in our unrealized loss position that decreased the book value per common share to $26.77. During the second quarter, we declared and paid a $0.16 per share cash dividend to shareholders of record as of June 2, 2023 continuing our 55-year history of paying dividends dating back to March 1968. This concludes our prepared remarks. I will now open the line for questions. Operator?

[Operator Instructions] And the first question will come from Paul Newsome with Piper Sandler. Please go ahead.

Good morning. Thanks for the call. Maybe you could just talk a little bit more about rate versus what you pay is claims inflation or your broad businesses, not just core commercial but especially businesses and reinsure as well. Just can you give us a sense of whether or not on an underlying basis, you think you're making progress in getting weight versus the current levels of claims inflation and by how much?

Hi, Paul. This is Julie. Thanks for the question. Certainly, we believe our rate increases are accelerating overall faster than our view of trend. And I think that's important and remains a key focus for us moving forward. We are pleased with the rate achievement that we increased across all of our lines of business across all of our business units. Certainly, most pleased with what's happening in the property space, given the catastrophe results we took for the quarter, that remains a focus, and we will continue to accelerate through the end of the year.

How should we think about the cat load perspectively given what you're doing with your cat management efforts?

Hi, Paul. Sorry, could you repeat the question? We had a hard time hearing you.

How should we think about the cat load prospectively, given what you're doing with your cat management efforts?

So Paul, we are within expectations, I think, relative to the current cat loads. As we continue to reduce our cat footprint, we will reevaluate those as we go forward. But for the moment, we're within expectations.

The underlying combined ratio, if you pull out the 3 points from the surety business deteriorated a little bit, it looks like. Could you talk about sort of the sources of that deterioration?

Hi, Paul. Julie, again, yes. So we see the underlying loss ratio deteriorating by 6 points. You already mentioned the impact of surety. We certainly know that. We also are still feeling the impact of the increased ceded reinsurance costs from our 1/1 renewals, that's approximately a point. We also are experiencing a higher underlying loss ratio in our assumed reinsurance as compared to this time last year, which contributes really the remaining difference. As we stated in our Q1 results, we are enhancing our analysis of that book and have made some adjustments in the allocation of our loss reserves to better align with the exposures. I know we talked about that extensively last quarter. Although we know this creates some noise in the first and second quarter results, we think that the year-to-date underlying loss ratio for this book is a good representation of the portfolio going forward.

Obviously, a new Chief Actuary changes the reserve philosophy, which resulted in the change in the reserves this quarter. But the year-end tends to be when things really change, at least for most companies. Do you anticipate the year-end process will be different than it has in the past?

Hi, Paul, it's Kevin. So we believe that any major reserve strengthening has been addressed this quarter. And so as I indicated in my prepared comments, we will continue to obviously pay very close attention to the environmental dynamics going on around us. And as we've also stated previously, we'll be very quick to react to negative trends, and we'll be very cautious about reacting to favorable trends. But we feel very good about where we are based on the decision we made this quarter.

Thank you for all your help. Appreciate it.

Thank you.

The next question will come from Corey Wrenn with Pecaut Wealth Management. Please go ahead.

Yes. Good morning. Thank you for the conference call. I was looking at your results, and I've been watching results, I think, all the insurance company since the 1980s. And when people mention the word reserve strengthening, what you're really saying is your reserves were understated and you're taking a charge for that understatement. Is that correct?

Well, I think the better way for us to characterize that is that we've deepened our analysis around our reserves. And based on additional insights, we've decided to strengthen the reserves. And so through that process, we believe that we've taken the appropriate action relative to the current reserves on the portfolio.

Okay. Now with all these changes that you're making and you're talking about different lines of business, my concern is catastrophe losses. This happens this year that you're not getting your feet under you. I've seen multiple insurance companies report pretty decent results this year with catastrophe losses included. And I guess my fear is you're a company or a significant company in Cedar Rapids. We are an Iowa-based firm, I'm rooting for you. And I don't know what -- if you -- I can't see the future -- I can't see what the results are going to look like in 1, 2, 3 years. And I was just wondering, with all these changes and all these strengthening and improvement in redirecting the business, the focus that you're going to have, what can we expect as far as the combined ratio? What is the goal for your combined ratio going forward? And what kind of return on equity are you trying to achieve going forward?

Corey, thanks for the question. We are not in a position to provide guidance, but I can give you some general views, right? So you know that the leadership team at the company is relatively new, and we are driving a lot of change to reshape the organization with the express purpose of delivering consistent profitability over time. And so the company has had a track record most recently of underperformance, and we are making significant changes inside the organization to change the trajectory of the company in terms of both its growth and its profitability. And so you should expect over time to see continued improvement in the company's -- certainly its growth rate as well as its profitability.

And are you expecting the rest of the year could be a reflection of these changes? Or would next year be a better place to make the analysis on our end?

Yes, I think you can. Yes, I think you -- we anticipate seeing improvement through the rest of this year, but -- and into next year. But the kind of changes we are implementing take some time to materialize. And oftentimes, the results lag the changes that we are making. So I would expect to see acceleration in improvement as we continue throughout this year into next year and into 2025.

Okay. Well, thank you and good luck to you guys.

Thanks so much.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kevin Leidwinger for any closing remarks. Please go ahead, sir.

Thanks for joining us, and we look forward to chatting next quarter. Thank you.

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