American Coastal Insurance Corporation (ACIC) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the UPC Second Quarter 2015 Financial Results Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. Adam Prior of UPC. Please go ahead, sir.

Good morning, everyone and thank you for joining us. You may find copies of UPC’s earnings release today at www.upcinsurance.com in the Investor Relations section. You’re also welcome to contact our office at 212-836-9606 and we would be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its Web site. Before we get started, I would like to read the following statement on behalf of the company, except with respect to historical information statements made in this conference call constitute forward-looking statements within the meaning of the Federal Securities laws including statements related to trends and Company’s operations and financial results and the business and the products of the company and subsidiaries. Actual results from UPC may differ materially from the results anticipated in those forward-looking statements as a result of risks and uncertainties including those described from time-to-time in UPC’s filings with the U.S. Securities and Exchange Commission. UPC specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of the new information, future developments or otherwise. With that, I’d now like to turn the call over to Mr. John Forney, UPC’s Chief Executive Officer; please go ahead John.

Thank you, Adam, and good morning to everyone participating in the call. This is John Forney, President and CEO of UPC Insurance and with me today is Brad Martz, Chief Financial Officer. On behalf of everyone at UPC Insurance I want to thank you all for your interest in our company. Brad and I look forward to answering any questions you may have at the completion of our remarks. The story of the second quarter of 2015 for our company is growth, organic growth, diversified growth, high quality growth, accelerating growth. Let me address each one of those aspects of our growth in turn. Organic growth, in the quarter with no take outs or acquisitions we sold over 27,000 new policies. And on a net basis we grew our book of business by 76% more than we did a year ago in the same quarter. Our annualized organic growth rate for the quarter was over 22% on a book of business of over 285,000 policies. The $162 million of premiums we wrote in the quarter was over $30 million more than the Company had ever written in any quarter in its history. Diversified growth, during the quarter 79% of the new policies we sold came from outside Florida and at quarter's end over 40% of our policies were in states not meaning Florida. High quality growth, we have strict underwriting and inspection standards in all of states and do not compete for business based on price, that's why our non-cap losses in each state where we do business have been below our model targets since inception and while our payments on cap losses have been below industry averages on almost every event. Accelerating growth, in June, we sold over 10,000 new policies our best month ever as a company and in July that number was over 11,000. The bottom-line and the top-line is that our Company is gaining traction and scale in each of the states in which we operate. We work hard to tell our story and gain credibility with agents and it is paying off for us. We just opened our ninth state Georgia and our growing key strategic partnerships that will help us in all of our states. From that standpoint our plan to build a billion dollar plus wager of property insurance in coastal states over the next few years is very much on track. At the same time, we recognized that cap losses and evaluated expenses due to the ongoing investments we have made in people and infrastructure have weighed on our bottom-line results this year. We started to do better in those areas. Without the belief that a little perspective is in order, first cap losses will be a more routine fact of our quarterly existence as we continue to expand our geographic footprint however $22 million of net cap losses this year versus essentially zero last year makes for an extreme comparison and we certainly don’t expect that kind of volatility to be routine. As we grow, the normal quarterly cap losses we experienced even with events as extreme as the Q1 winter storms will have less of an impact on our results. That's one more reason why our exceptionally strong top-line growth is such good news. We also intend to announce a cap reported threshold that will allow us to keep investors informed on a more real-time basis as to the relative level of cap losses in any given month. With regards to our investment and infrastructure this year we have implemented new systems that handle the core operational functions of our insurance company. Claims and policy classifics, these new systems move us light years ahead of where we were and give us the technological platform to scale our business in a very efficient way. However, these investments have been costly and are not done yet, but they are all part of building a great company that can write profitability in coastal states and endure through generations. Finally, even with cap losses and investments we’re making our trailing 12 months return on equity is 12.6%. We’re focused on shareholder returns and look forward to growing that number and building value for our company and for you in the coming months and years. At this point I’d like to turn it over to Brad for his remarks. Brad?

Thank you, John and hello everyone. This is Brad Martz, Chief Financial Officer. Before we get to the financial highlights I’d like to encourage everyone to review our press release from August and Form 10-Q that we plan to file Thursday, August 6th. The highlights of UPC’s second quarter include record quarterly gross premium written of 163 million, 26% growth year-over-year, record quarterly gross premiums earned of 121 million, 24% growth year-over-year, net income of 5.3 million or $0.25 a share despite cap losses of approximately $0.20 per share, favorable reserve development of 1.3 million and underlying combined ratio of 89.3%, book value per share increased to $10.19 per share up 15% from the same period a year ago and the successful placement of our new catastrophe reinsurance program. As John indicated the headline for UPC’s second quarter remains solid organic premium growth, total revenues grew 26% from 58 million last year to 85 million this quarter. Direct premiums written totaled 63% all other states were 37% of our mix. Florida and South Carolina were approximately 8% of the year-over-year growth but Louisiana, Texas and North Carolina were the true superstars of the quarter. Florida new business continues to trend upward as UPC added nearly 5,900 new Florida policies in Q2 a rate that was 23% higher than Q1 but overall premium growth was constrained by lower average premiums due to rate changes. Total policies enforced now exceed 285,000 up 32% with a mix of 59% Florida, 41% outside of Florida compared to 74% Florida, 26% non-Florida a year ago. In July UPC launched its first new state in 2015 and 9th overall with Georgia. What’s really exciting about Georgia is this is the first state on our new policy administration system the launch has gone n very smooth and that paves the way for additional states that are approved and ready to go. Next I’d like to touch on reinsurance. On May 27, 2015 we completed our annual catastrophe reprogram renewal and here are some of the highlights. More severity protection than in any prior year, up to the one and 190 year return period, improved frequency protection with a retention of 25 million in Florida which steps down to 10 million for a second event and 5 million thereafter and retention of 5 million in all other states from a windstorms. A retention of 3 million for catastrophe events other than main windstorms remains in effect. Portions of layers one, two and three were placed on a true multiyear basis which means multiple limits over multiple years. We reduced our Florida hurricane catastrophe fund participation to 45% and purchased replacement coverage in the private market at significant savings. We expanded the reinsurance participants from 26 to 35 markets. We extended the hours clause, we added Promissum Re as a new trading partner Promissum Re is an unaffiliated facility dedicated exclusively to UPC Insurance which will share profits in a no loss scenario and finally UPC experienced year-over-year cost savings of approximately 7% based on the exceeded and expected loss. Moving on to expenses UPC’s loss results of the quarter included a gross loss in LAE ratio of 36.9% versus 32.5% last year an increase of 7.3 points. Roughly 5.4 points of the increase for the quarter related to capacity losses just described in our earnings release. One clarification in our earnings release, we noted that those catastrophe losses came from the Southeast U.S. in reality it was 80% Texas, 12% Louisiana. We define Southeast as the entire Gulf region. Removing the non-recurring effects of catastrophe losses and reserve development, our underlying gross loss in LAE ratio was 32.5% up approximately 2 points. The change in the underlying loss ratio can be attributed to a minor pick up in frequency, as well as continued exposure growth outside of Florida. UPC implemented several initiatives focused on curbing loss severity and we were pleased to see some progress during the quarter as severity compared favourably with both the same period a year ago and our historical averages. During the quarter, the company saw its non-loss operating expenses increase approximately 9.1 million or 39% year-over-year, approximately 1.6 million of the year-over-year change is related to Family Security Holdings, 5 million of the 9.1 million or 55% was driven by policy acquisition cost and 4.1 million or 45% by other operating expenses. The gross expense ratio increase of 2.8 points for the quarter to 26.9% was primarily driven by four things; agent commissions, promotional activities and business development costs were approximately seven-tenths, legal and professional fees were approximately seven-tenths, these were approximately 1 million of non-recurring legacy issues that were resolved successfully. The consolidated impact of Family Security including amortization of intangibles were approximately five-tenths and most of the balance related to our investment cycle aimed at in-sourcing key operating functions, we are elated that these systems are now online today but it will take another 12 to 18 months to fully migrate all enforced business and begin reaping the expected cost savings. Our balance sheet remains very healthy as you can see end of the quarter with just under 220 million in shareholders’ equity, lower financial leverage and a $2.6 million net unrealized gain in the investment portfolio. Our liquidity remains strong with cash and investment holdings increasing by 78 million or 18% year-over-year to over 500 million. Unrestricted cash available for the holding company was roughly 56 million and our combined statutory surplus of the group at June 30, 2015 was over 132 million. I’d now like to reintroduce John Forney for some closing remarks.

Thanks Brad. We appreciate your time today let's open it up for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question is from Mr. Arash Soleimani of KBW. Please go ahead, sir.

So just I had a quick question on TWIA are there any updates with the traction you had gotten there?

Yes. As a point of reference for those aren’t familiar with it, that we initiated a Depop initiative with TWIA as the first one in their history, it works very differently than Depop in Florida you don’t get policies all at once you get them at renewal over a 12 month period of time and it's not on out program it's an in program which means both the agent and the policy will have to affirmatively state their desire to move from TWIA to in this case UPC Insurance so they are much more higher hurdles to do Depopulation currently in Texas than in Florida. We identified 60,000 policies with 100 million of premium over the next 12 months. We got about 30% of the policies that we were targeting in the first month of the program was in place which is June and we expect that we will be able to continue to ramp up that percentage as time goes on so we think we will reap very good benefits from that overtime in Texas. With that said Texas is now our largest new business state independent of TWIA we are writing almost $5 million of new premium every month in Texas so the efforts we have made to educate agents with regard to the TWIA process we did a in-state marketing tour which we called the promise tour for an entire week in Texas and visited with 100s of agents and took almost our executive team there, those efforts are paying off so TWIA is having benefits but we are also reaping a lot of indirect benefits there. Like San Jose and Texas, Texas legislature did approve in senate bill 900 the skeleton of a new Depop program that would be more akin to the Florida program although the five rules have not been developed the Texas Department of Insurance is currently developing those rules and when that program is unveiled which we expect to happen in the next couple of months we will take a look at participating in that as well.

In terms of -- I know you have talked in the past about some progress you have been making towards trying to get a A.M. Best just wanted to follow-up on that and see the awards that that could impact potential partnerships with all state or others and states outside Florida?

Certainly A.M. Best would greatly facilitate especially national strategic partnerships in states outside Florida as well as some individual agent participations as you probably have garnered from our comments and our numbers we’re not having a lot of trouble putting what we believe is very good business on the books in all the states in which we operate, so it’s not a compelling that is not a compelling reason to incur the significant cost that would be associated with meeting these A.M. Best stressed at this point but the costs of that are going down as we continue to diversify outside of Florida we said consistently that, that will be part of our long-term strategy either by -- while we lost some of our Florida business from the rest of it are lot state farm and all states or by some other strategies the return on investment probably will be there for us at some point in 2016 or possibly 2017 for that to come to fruition.

And final question just on the expense ratios, I know you said 12 to 18 months until all the policies get migrated, is that also kind of a same timeframe for one to expect the expense ratio to -- so I guess have the scale to decline a bit at that point in 12 to 18 months from now is that when we should expect to see it go back down again?

Yes, that is correct.

Thank you.

We believe 2017 will be the first full year in our new operating cost model.

The next question is coming from Greg Peters of Raymond James. Please go ahead sir.

Just a couple of quick questions, I think everyone is watching with interest the increase in your underlying loss ratio both on a quarter-over-quarter basis and on a first half of the year versus first half of the year last year and with all the growth that you’re putting on the books where do you see that underlying loss ratio sort of settling out or as you grow Texas and these other markets, what do you think the, I don’t know what the -- if we should look it on the quarter-to-quarter basis or an annual basis, but what’s your vision of what that underlying loss ratio might look in order for you to achieve your targeted returns?

Thank you, Greg. We said consistently that we believe we can achieve in the ballpark of an 85 combined ratio in all the states in which we operate but we will get there very differently. We’ll have higher gross loss ratios outside of Florida but we’ll have lower reinsurance ceded and so on a basis we’ll get to approximately the same point. We still believe that’s going to be the case. The elevation in the underlying loss ratio had a lot more to do with the issues that we discussed on the first quarter call with our claims operation in Florida than they did with anything else in my opinion. And we have seen that situation resolve itself very successful here in the last couple of months unfortunately it wasn’t soon enough to show the full impact in this quarter because we didn’t get the things done that we needed to get done to make the changes until May of this quarter. So the first month we had very elevated losses in Florida. But just to give you a sense of the effectiveness of the changes that we made which were both personnel and operational our non-cap losses in Florida month-by-month for the year went like this, January 8.8 million, February 9.4 million, March 9.3 million, April 9.5 million, May 6.4 million, June 7 million. So once we have put the changes in place and did the things that we needed to do we’re seeing those losses decelerate and go down. So we think we’re making the changes that we need to rectify that situation and we still believe that targeting 85 combined ratio everywhere is going to be the right approach for us and for you to think about.

So John I appreciate the color on specifically your commentary on the Florida trends, was there in the last two months of the second quarter was there a drop in just a number of claims filed or was it a change in how you settled the claims that caused the drop?

It was the latter, we had a change in the way that we settled the claims I don’t mean to bore everybody on the call with the details but we had some leadership issues in our Florida claims department and loss of discipline and focus and were focused on some of the wrong metrics towards the latter part of 2014 that carried into 2015. We changed that reinstated the discipline that we have had there, brought in a new Director of Florida Claims who is a very capable well regarded man who started yesterday and we feel good about that operation now.

Okay. I’ll just finish up with two final questions. First, as we think about the second quarter of the year what’s your perspective on the remaining policies within Citizens and do you think there is a possibility or potential for some takeouts later in the year? And then the second question, I noted with interest you are highlighting the new reinsurance partnership was some profit commission and I was hoping perhaps you could share some more mechanics behind that?

First with regard to Citizens takeout, we have lined up as we have done in the past couple of years to be eligible for Citizens takeout so that we at least can be in the game and take a look at the policies. We will be doing that beginning in September I believe that is a first takeout that we have qualified for and we will just look to the policies and use the -- quite curious that we have established which we feel very good about the analytics we have applied we’ve had good experience on our takeout from Citizens the last couple of years. I’m not sure how many “good policies” will be left there given the competition for policies from Citizens and how depopulated it’s become but we’ll take a look at it and I wouldn’t want to predict how many we would get but we’ll be scrubbing it September, October, November and see what is there. With regard to the reinsurance partnership with the newly formed entity of Promissum Re, Promissum Re which is Latin for promise and you sort of feel like you have to -- you happen to think that a Latin or Greek name and our company model which we actually got trademarked this quarter keep the promise so Promissum Re is as Brad said a completely unaffiliated entity but which is a 100% dedicated to providing reinsurance capital to UPC Insurance be it third-party investors if anyone on the call is familiar with the ACE and BlackRock deal ABR Re very similar to that transaction although I think ours was done first. I'm not saying that ACE and BlackRock copied us but we were working on this for a year and it's a neat way to get access to independent investors who may find an inability to deploy capital into the increasingly competitive reinsurance space but while deploying capital we set this up with one of our partners and they helped us recruit the capital that goes into it I think we ended up with $90 million into it spread across our product rim and it's got some profit sharing that if there is no if there are no claims in at the end of program we will share in some of we will get some of the money back that we paid they pay the -- so anyways it's a really neat mechanism it will be in place Q2 years that is lots of flexibility on what we can do with it and there we are really excited about it.

Just one important note Greg is we are not accruing for any kind of incontinency so it is at the end of the treaty period which is May 31, 2016 if there were no losses at that time we would account for any kind of profit share but we will not include those results until then.

I see and I can’t help myself but to follow-up on that specifically, it's a new entity can you give us a investor profile or what should we think about in terms of credit risk for recoverables if there is an event?

None, fully collateralized entity, investors are a typical sort of third-party capital investors of pension funds and others that are looking to deploy money into the reinsurance space.

But it is a collateralized vehicle?

Yes. It is.

The next question is from Mr. Dan Harvey of Southeast Companies. Please go ahead, sir.

The claims are up around the box scenario and the reinsurance recovery associated with those can you expand a little bit on what potential claims could be out there and how our claims came and how our recovery came in if we got any?

We did. And I will just give you the big picture on that was that we had in total and it's probably just about done and the way we saw it was wide in our eye but we have a total of almost $23 million in gross losses for those events and we recovered about $7 million from our reinsurance partners under the terms of our treaty.

That's good. And what about this Texas hailstorm stuff is it going to have a similar situation where there might be some more claims and there maybe some reinsurance recovery there?

I don’t think we expect any reinsurance recoveries on those events they weren’t -- none of them was out there.

And outstanding claims that could come rolling in on that?

Minimal very short tail.

Good-good. And then another question here while I got a one-time queue, what is the status of moving into our office?

We are on track to move into those offices in middle of November.

[Operator Instructions] The next question is from Mr. Samir Khare of Capital Returns Management. Please go ahead.

I was just wondering what is the accident year loss ratio ex-cap, inside and outside of Florida and if you can give to me on a gross and net basis that would be great?

Can you repeat the question? You broke up some stuff and I'm sorry.

Sure. I'm looking for the accident year loss ratio ex-cap for inside and outside Florida, and if you can give that to me on a gross and net basis?

For 2015 accident year?

2015 yes accident year and then I guess Q2?

The Florida underlying loss ratio Q2 29% non-Florida 39%.

And the premium growth as you guys were playing Elvis pretty noteworthy in the quarter the two subsidiary structure that you guys have now with the Family Security is that affording you any opportunities?

Samir it means we have two separate programs in Louisiana that agents can quote and bond and they are we’re still growing both of those the Family Security acquisition has been very successful we have been profitable in every single month since we closed on that acquisition earlier this year and it also gives us some interesting possibilities vis-à-vis the A.M. Best strategy I outlined earlier in terms of the potential to wall off some of the Florida business. We haven’t done anything in that regard yet but it certainly gives us some flexibility to do that.

Okay. And then can you tell us what the rate of new premium dollars being written inside and outside Florida I think you gave us like a number of policies but premiums would be helpful in the quarter?

For the current quarter the non-Florida portion of our direct written premiums was 59.5 million.

Okay.

Florida’s direct written was 103.3 that is how you get to the 162.8.

Okay. And does that include any commercial residential inside or outside Florida and if so how much?

It is, all the commercial residential is inside of Florida at the present time. We are seeking to expand those capabilities and export them to some other states. We’re preparing those filings as we speak but it’s all Florida today and it’s still relatively small.

The book is up to about $9 million total in commercial residential which less than a year after we launched the program yes we feel good about the books that we’ve been able to bill.

And just any of the new premium growth does that include any book rolls and renewals rates or is it checked and committed as more recurring [Multiple Speakers]?

You should think of it as more recurring.

Okay.

And it’s been the old fashioned way one agent at a time, one policy at a time.

Okay. And just any cap losses or anything that we should think about in Q3 today that is probably might be under the radar?

Well, expect to meaning today I was watching the weather channel today and it looked like there were some severe storms in Boston and Cod as you know we have exposure out there I don’t know what they will produce but today meaning as we sit here we’re not aware of any.

Yes, the incurred for July was in line with expectations and is fully accounted for in our reserves at June 30th so no net development on cap so far in Q3.

Okay. And the Swiss Re cover the ex-Florida cover I’ll call it, does that have a finite number of limits and if so how many? And is there a reinstatement premium associated with restatement learnings?

There is one additional $22 million limit, so the total aggregate limit of 44 million and yes, the reinstatement premium is automatic.

And are you guys trying to putting any changes to that cover at all?

Yes, we’re probably going to explore some aggregate stop loss as they means to control some of the frequency we’ve experienced in the first half of 2015. We’ll have to evaluate the cost benefit of doing that, it may make sense and may not make sense but certainly I think that’s an opportunity array for us.

Okay. And last question the 23 million of gross losses that you guys had at least in the winter storms how much of that was from the fair plan?

We can’t track that. We don’t necessarily know what percentage of our book of business was previously part of share plan. We’re writing direct with independent agents we haven’t depopulated or assumed any business from the fair plan.

Yes I am not sure I understood the question, Samir where do you getting at with that?

Well I guess my understanding is that all the participants who participate in Massachusetts also have to participate in proportion of market share they write in I guess premiums and losses of the fair plan, so I was wondering just, if that is true if my understanding of that is correct, how much of the losses you guys are seeing in from the fair plan?

I don’t have the exact number for you. I am aware of some assessments we received those are baked into our operating and underwriting expenses not losses.

Okay.

But it is de minimis.

The next question is from Casey Alexander of Gilford Securities. Please go ahead sir.

You mentioned that you expect run rate losses outside of Florida to be higher than in Florida and I get that premiums per dollar is shorter are likely lower outside the state. And that you get a catch up from reinsurance is there any way to quantify that. I mean your ceded premiums as a percentage of gross premiums have been running around 33%. You just wrote your new reinsurance treaties, how does that just percentage breakdown in your modelling sort of in Florida and out of Florida for the coming year. And you expect Florida to be 35-36 and out of Florida to be 28-29. How does that breakdown for you?

This is Brad Martz. It varies widely by state taking the best guidance I gave is -- our expenses are going to be 5 to 10 points higher on average outside of Florida but we expect ceded around premiums to be 5 to 10 points lower outside of Florida and that’s how we fully expect to get to the net 85 combined. So when you are looking at the expenses on a gross basis it proves challenging and I know that comparison even on a net basis this quarter doesn’t eliminate that scenario I just described but that's basically how it works but every stat is very different.

When you look at sort of Florida only because I think there is sort of a way to carve that out would you suggest that 2,000 that this June-to-June 2015-2016 period that ceded premiums against your Florida book would be the same or a higher percentage or a lower percentage versus last year?

Once we grow in Florida the allocation of reinsurance cost is going to change based on the mild expected loss we’re looking at we allocate reinsurance and track profitability state-by-state by looking at the expected losses from each territory to every single layer of our program so it gets complicated but I would expect it to remain relatively stable but potentially increase as we build more concentration in Florida.

And just to give you a sense of that Casey so far based on of the way we do the allocation of the reinsurance which as Brad said is based on aggregating the loss per layer or per state and which I think is a pretty accurate way to do it. The Florida ceded year-to-date is something like 36% so you can back into math on sort of what the rest of the states would have to be.

Gentlemen there are no further questions at this time. I would like to turn the floor back over to you for any closing remarks.

Once again we thank everybody for their time and interest in our company and we look forward to continuing to grow the rest of the year and so talking to you all again in a couple of months. Thanks everybody.

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.