Good morning, everyone. My name is Jamie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the UFG Insurance Fourth Quarter and Year-End 2021 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please note today's event is also being recorded. At this time, I'd like to turn the conference call over to Randy Patten, Co-Chief Financial Officer. Sir, please go ahead.
Good morning, everyone, and thank you for joining this call. This morning we issued a news 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 Investor Relations tab. Joining me today on the call are Chief Executive Officer, Randy Ramlo, and Mike Wilkins, Chief Operating Officer. We also have other members of management available to answer questions at the end of our prepared remarks. Before I turn the call over to Randy Ramlo, 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 on our press release and SEC filings. At this time, I'm pleased to present Mr. Randy Ramlo, Chief Executive Officer of UFG Insurance.
Thanks, Randy. Good morning, everyone, and welcome to our fourth quarter and year-end 2021 conference call. I am extremely pleased to report strong fourth quarter results today. The profitability we reported is a culmination of the hard work and team effort that has gone into developing and executing our One UFG strategic plan, which is aimed at long-term profitability, diversified growth, and continuous innovation. Based on the financial results reported today, it is clear to me that our strategic plan is working and achieving the desired outcome. Though we knew a plan of this scale would take time to fully implement, we believe we've hit our stride and are confident of our path forward. In the year ahead, we are committed to building on the progress we've made and continuing toward our goal of delivering consistent, sustainable, and profitable results for all UFG stakeholders.
Now for some highlights from our results. The fourth quarter marks the third consecutive quarter we reported improvement in our core loss ratio. Our core loss ratio, which removed the impact of catastrophe losses and favorable prior year reserve development, improved 24.5 percentage points and 8.0 percentage points, respectively, in the fourth quarter and year-to-date 2021, as compared to the same periods of 2020. This trend of quarterly core loss ratio improvement began in the second quarter of 2021 and is a direct result of our strategic initiatives. For a summary of our core loss ratio calculation, refer to Slide 13 in the presentation on our website.
The improvement in the core loss ratio contributed to the reported combined ratio of 83.1% in the fourth quarter, which is our lowest quarterly combined ratio in over 14 years, dating back to the second quarter of 2007. For the full year of 2021, we reported a combined ratio of 100.3%, an improvement of 15.6 percentage points over the previous year. The line of business with the most significant loss ratio improvement was commercial auto, which improved 68.1 percentage points in the fourth quarter and 25.1 percentage points for the full year of 2021, as compared to the same periods of 2020.
The improvement in profitability in our commercial auto line of business was from a combination of a decrease in frequency and severity of losses and an increase in favorable prior accident year reserve development. The combined ratio also benefited from favorable prior accident year reserve development at 9.5 points and 5.1 points, respectively, during the fourth quarter and full year of 2021, compared to unfavorable prior accident year reserve development of 4.7 points in the fourth quarter of 2020 and favorable prior accident year reserve development of 1.7 points for the full year of 2020. Most of the favorable prior accident year reserve development this year was in our commercial auto line of business. The favorable reserve development of 5.1 points reported for 2021 continues our historical trend of having overall favorable reserve development every year since 2009.
The annual average favorable development reported since 2009 is 6.3 points. Also contributing to our profitability in the fourth quarter were below average catastrophe losses. Pre-tax catastrophe losses added 3.5 percentage points to the combined ratio in the fourth quarter of 2021, which is nearly 2 points lower than our fourth quarter historical average of 5.3 percentage points. The fourth quarter is the first time in eight consecutive quarters that cat losses were below our historical average dating back to the third quarter of 2019. For the full year of 2021, cat losses added 10.2 percentage points to the combined ratio, compared to 13.5 percentage points in the previous year. This compares to a 10-year historical average of 7.3 percentage points added to the combined ratio for cat losses.
As part of our strategic plan, we are taking steps to reduce volatility by limiting our exposure to the level of catastrophe losses experienced in recent quarters. One example of this is our now nearly complete exit from personal lines, which was a contributing factor to below-average cat losses incurred in the fourth quarter. In addition to the exit of personal lines, we've also strategically diversified our book of business with less cat-exposed business such as Surety, E&S, inland marine, and assumed reinsurance business. Before I turn the call over to Mike, I want to make mention of some additional good news. In December, AM Best affirmed the Financial Strength Rating of A, Excellent, for the property and casualty subsidiaries of United Fire Group, Inc. This is the twenty-eighth consecutive year we've earned an A Financial Strength Rating from AM Best.
AM Best ratings are a meaningful measure in the insurance industry, with an A rating given to companies that have an excellent ability to meet their ongoing insurance obligations. I will now turn the call over to Mike Wilkins. Mike?
Thanks, Randy, and good morning, everyone. As Randy mentioned, from a combined ratio standpoint, this was our most profitable quarter in over 14 years. This profitability is a reflection of our continued progress in the execution of our enterprise strategy. Today, I will focus on some key metrics and initiatives that are contributing to the increase in profitability. A primary contributor was the decrease in frequency and severity of commercial auto losses in the fourth quarter. As part of our portfolio management strategy, throughout 2020 and 2021, we have focused on decreasing the size of our commercial auto portfolio through targeted reductions in the number of exposure units and implementing targeted rate increases. These efforts have improved the quality and profitability of our commercial auto book of business.
Exposure units decreased 24% over the past 12 months from 221,000 units in December 2020 to approximately 168,000 units in December 2021. Looking ahead to 2022, our expectation is that we will not see a significant decrease in auto exposure units as we move closer to our optimal portfolio mix. Slide six and slide seven in our presentation on our website highlights our progress in diversifying our portfolio by rebalancing our mix of business. At the end of 2021, commercial auto accounted for 24% of our portfolio composition, compared to 28% at the end of 2020. Commercial auto new business premium written in 2021 has decreased to 21% as compared to 32% in 2019.
Also, we are achieving growth in our historically profitable lines of business, with new business premium for general liability increasing from 22%- 24% and inland marine growing from 9%- 17% between 2019 and 2021. We are also witnessing growth in our Surety, E&S, and assumed reinsurance lines of business, which contributed to the improvement in our core loss ratio and underlying profitability in 2021. The most significant growth occurred in our assumed reinsurance line, which represented 7.4% of our portfolio in 2021 as compared to 3.4% in 2020.
Commercial auto claims frequency, expressed in claims per insured units, also continues to decrease, with the 12-month moving average declining again in the fourth quarter of 2021, down to 4.51% from 4.56% in the fourth quarter of 2020. This decline is summarized on slide eight and slide nine in our presentation on our website. It's the 11th consecutive quarter of declining commercial auto claims frequency dating back to the second quarter of 2019. Slide 10 and Slide 11 provide a three-year view of our claim counts by major commercial casualty line of business. For example, our commercial auto bodily injury and property damage claim counts are down 21% in 2021 as compared to 2020.
We've also provided commercial general liability, BOP liability, and workers' compensation claim counts on these slides, as all are down in 2021, which is a positive sign of our strategic efforts. From a pricing standpoint, rate increases for the full year of 2021 in our commercial auto, property, and umbrella books of business remain relatively stable and in line with the pricing I shared during our third quarter call. For 2021, the overall average renewal price increase was 6.4%. Excluding our workers' compensation line of business, the overall average renewal pricing increase was 7.7%. This increase in pricing was driven by our commercial auto and commercial property lines of business. Year to date, the commercial auto average renewal rate increase was 9.5%. The commercial property average renewal rate increase was 8.7%.
Looking ahead to 2022, with a focus on profitability and carefully monitoring inflation, our underwriting initiatives include targeted rate increases with continued focus on commercial auto, commercial property, and umbrella, along with an emphasis on commercial property risk selection and umbrella limits management. Overall, we will continue to pursue profitable growth opportunities backed by our strong underwriting and pricing discipline. Workers' compensation rates continued to decline in 2021. This decline, along with a decrease in prior accident year favorable reserve development, and an increase in frequency of losses, resulted in deterioration of the workers' compensation loss ratio in 2021. We will be deploying a new analytics model in the first half of 2022 to assist with improving profitability in this line. This is a line we will watch very closely in 2022.
Before I wrap up, I'd like to expand upon comments that Randy made about our efforts to reduce volatility in our results. Randy mentioned the exit from personal lines and the optimization of our portfolio of business. For 2022, we also restructured our catastrophe reinsurance program to provide better protection from both an occurrence and an aggregate loss perspective. Through a new aggregate program, we now have named storm protection for aggregate losses in addition to the other perils. In prior years, named storms were excluded from UFG's aggregate catastrophe protection. Also, with the new structure, our retention for each catastrophe occurrence is reduced. The mechanics of the structure provides the potential for additional reduction in catastrophe retention for occurrences subsequent to an initial loss to the program.
Before I turn the call over to Randy Patten, I'd like to comment on the progress we are seeing in claims. Favorable reserve development reported in the fourth quarter of 2021 is being driven by excellent work of our claims team, who have focused on settling claims quicker in the claim cycle, resulting in favorable outcomes and reducing legal fees through litigation management and avoidance. With that, I'll turn the discussion over to Randy Patten. Randy?
Thanks, Mike, and good morning again, everyone. In the fourth quarter, we reported consolidated net income of $57.7 million, compared to a net loss of $8.9 million in the same period of 2020. For the full year, we reported consolidated net income of $80.6 million, compared to a net loss of $112.7 million for 2020. Net income reported in the fourth quarter and full year of 2021, as compared to a net loss in the same periods of 2020, was primarily the result of a decrease in the frequency and severity of commercial auto losses, an increase in favorable reserve development, and comparatively lower catastrophe losses. Also contributing to net income in the fourth quarter and full year of 2021 were net investment gains.
For the fourth quarter and full year of 2021, we reported net investment gains of $19.1 million and $47.4 million respectively, compared to net investment gains of $30 million and net investment losses of $32.4 million in the same periods of 2020. The majority of the change between the two periods was driven by a change in the fair value of our equity security investments, which are recognized in net income. The remaining change was driven by net realized investment gains from sales of equity holdings. Net investment income was $13.3 million and $55.8 million in the fourth quarter and full year of 2021, as compared to $17.4 million and $39.7 million in the same periods of 2020.
The change in both periods was primarily due to the change in the fair value of our limited liability partnerships. Net premiums earned decreased 8.7% in 2021, as compared to 2020. The decrease in net premiums was the result of our portfolio management strategy to diversify our portfolio by rebalancing our mix of business. This strategy includes reducing our commercial auto book of business, which accounted for 4.6% of the decrease, and exiting personal lines, which made up 3.7% of the decrease. These were partially offset by growth in more profitable lines of business, with the largest increase coming from our assumed reinsurance line of business in 2021. The decrease in net premiums earned during this quarter did put some pressure on the expense ratio.
For the fourth quarter of 2021, the expense ratio was 33.9%, as compared to 30.8% in the same period of 2020. Also impacting the expense ratio in the fourth quarter were additions to our profit sharing accruals for our agents, employees, and program business from improved performance and profitability in our book of business. For the full year of 2021, we reported an expense ratio of 32.6%, as compared to 33.5% for the full year of 2020. As mentioned during previous earnings calls this year, we expect an improvement in our expense ratio in 2021 due to prior announced changes to our post-retirement medical plan.
A majority of the benefit impacted both expense and loss adjustment expense ratios in the first quarter of 2021, with a smaller ongoing benefit recognized throughout 2021 and 2022. I will conclude my portion of the call today discussing our capital position. In 2021, statutory surplus increased approximately 13%, primarily due to the increase in net income. Also, we reported an ROE in 2021 of 9.5%, finishing the year with our highest reported ROE in six years. During the fourth quarter, we declared and paid a $0.15 per share cash dividend to shareholders of record as of December 3rd, marking our 215th consecutive quarter of consistently paying dividends dating back to March 1968. Lastly, during the quarter, we did not repurchase any shares.
For the year, we repurchased approximately 67,000 shares of our common stock for $2 million. The amount and timing of any purchases is at management's discretion and depends on several factors, including the share price, general economic and market conditions, and regulatory requirements. This now concludes our prepared remarks. I will now open the line for questions. Operator?
Ladies and gentlemen, at this time, we'll begin the question and answer session.
To ask a question, you may press Star and then One using a touchtone telephone. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press Star and Two. Once again, that is Star and then One to join the question queue. We'll pause momentarily to assemble the roster. Our first question comes from Marla Backer from Sidoti & Company. Please go ahead with your question.
Thank you. A couple of questions here. First of all, so you've made a lot of progress in reducing the exposure to commercial auto. You talked in your prepared remarks about, you know, your optimal portfolio mix while the process of pruning exposure to commercial auto, you know, is expected to decline in 2022. Do you still expect to continue that initiative to some degree?
Marla, this is Randy. Answer to that is yes. You know, we'll probably continue at a lesser pace, you know, through all of time. As you know, we kind of our analytics can divide our auto book kind of into 10 deciles. You know, we'll always be doing some pruning, you know, to the higher deciles, which are the least profitable. We're substantially through the process. Ultimately, we'd like to get commercial auto down to about 20% of our book, and that would be the long-term balance. You know, we have to write commercial auto. It's, you know, we're a package writer. It's an important part of what we do.
We have to write as little of it as possible and be careful, you know, with what we do write. We'll have kind of an ongoing, you know, process with you know, kind of looking at the overall commercial auto book, you know, probably for the end of time, so.
Okay, great. Thanks. On the increase in the expense ratio, it sounds like quite a bit of that was seasonal, you know, in the fourth quarter. Can you speak to that a little bit about what, you know, what you see for that ratio?
Marla, this is Mike. I'll take a shot at that one. I think in the fourth quarter, seasonal would be correct. I think the improvement in our profitability, as Randy mentioned in his comments, you know, we had to increase accruals for some profit-sharing programs, both for agents and employees, based on the improved profitability. You know, our top line reduction is putting some pressure on our expense ratio, and we hope to make improvements in top line during 2022, so we won't have that same level of pressure there. Yeah, fourth quarter, the jump up was more related to the improved profitability.
Okay. Along those, you know, the same line, of questions, everyone is reading about and talking about inflationary pressure, including, on, you know, wages and, difficulties hiring. Can you speak to, you know, whether you've included any assumptions for that in some of your, you know, outlook for 2022 and beyond?
Marla, this is Randy again. This inflation is supposed to be temporary, right? You know, we have kind of a, you know, inflation guards like a lot of companies. Our exposure bases get an automatic increase based on, you know, inflationary data. You know, we keep our exposures up to date. Part of the rate increases that we're able to get and, you know, the rest of the industry is getting, you know, is partly driven by, you know, that exposure to inflation as well. You know, it's kind of interestingly, you know, energy, fuel, is up substantially, and that doesn't affect us quite as much as, you know, building materials and, you know, used cars are, you know, a big hassle.
You know, if someone gets their car ruined, then we have to try to find a replacement. You know, the car prices are up considerably. You know, the rate increases are, you know, enough to, I think make up for most of the inflationary amounts. We continue to increase our exposure bases on every renewal to try to keep up with, you know, the cost of construction inflation. You know, we're also trying to listen to the economists that say this inflation, you know, won't be here forever, but we're planning on it being here for at least most of 2022.
Mm-hmm. Okay. Thanks very much.
Thank you, Marla.
Our next question comes from Paul Newsome from Piper Sandler. Please go ahead with your question. Mr. Newsome, is it possible that your phone is on mute?
It is possible. Can you hear me now? Good morning.
Yes, we can.
Congratulations on the quarter. Could you give us a few thoughts about the sustainability of the underlying loss ratio in the fourth quarter as we look out prospectively? You know, the slides in the presentation show a fairly measured and you know, gradual improvement in commercial auto. I presume they're doing other things elsewhere. But it was a pretty dramatic improvement in the last quarter or two. Can you talk about sort of the connecting the two and how sustainable you think the fourth quarter would be as a run rate on the underlying loss ratio?
Paul, this is Randy. I don't know if we expect to see, you know, a low 80s% combined going forward, but you know, our frequency reductions are very material and have actually started dropping, you know, before the pandemic. We think, you know, that's gonna help. You know, being out of personal lines, you know, in some areas will help. Mike mentioned in his remarks being very deliberate on offering high limits. We've seen a lot of severity improvement, and a lot of that's just driven by the refusal to offer large liability limits, especially in certain parts of the country. I think a lot of the underlying, you know, we're gonna see kind of regular improvement.
Mike also mentioned just the work of our claims department in trying to get losses settled quickly and fairly and trying to stay out of court wherever we can. I think a lot of those things are very sustainable and you know we should see probably not low 80s% combined necessarily but certainly you know sub-100% you know combineds I think is very sustainable. That coupled with you know the good rates environment that we're still seeing so far.
In the combined, you're talking about the overall or the underlying? 'Cause obviously there's a material difference when you're thinking about sub- 100.
I think Mike's gonna take a shot at that.
Yeah, Paul, you know, if you look at the core loss ratio, ex cat, ex prior year reserve development, for the full year, you know, low 60s%. I actually think we expect to see continued improvement in that number as we go forward. You know, we still, the trajectory is good on a lot of our lines of business. We still are working to improve more in some areas, and I think that, you know, our expectation is that will continue to improve. As you know, for the full year, we still had more of an impact from cats than we would expect. Going forward, especially with personal lines being gone now, we expect less impact from cat losses in future quarters. Yeah, I think, you know, our
We have a lot of optimism for results in coming quarters.
That's great. Just kind of banging on the commercial auto again. Now that the dust has settled on the vast majority of the business that you non-renewed, can you maybe kind of talk about just in hindsight, what were the pieces that didn't work? Was it just about, you know, businesses with large limits, or were there other characteristics to the commercial auto book that you ultimately realized were the sort of pieces that were problem underwriting pieces?
Hey, Paul, this is Jeremy. You know, kind of a combination of legal environment in areas we were exposed, particularly on the auto line, whether that's California, Texas, and elsewhere. I think we found ourselves with more limits on heavier exposures and whether heavier means heavy wheels or just heavier exposure accounts. I would say the last thing is the larger the size of the fleet has a tendency to sometimes drive the price and rate environment down without a corresponding benefit in spread of risk. I think we found that that's not a terribly good environment for us.
Good. Thank you. Good luck for the next year.
Thanks, Paul.
Once again, if you would like to ask a question, please press Star then one. To withdraw your questions, you may press Star two. Ladies and gentlemen, at this time showing no additional questions, I'd like to turn the floor back over to Mr. Patten for any closing remarks.
This now concludes our conference call. Thank you for joining us and have a great day.
Ladies and gentlemen, with that, we will conclude today's presentation. We do thank you for joining. You may now disconnect your lines.