American Coastal Insurance Corporation (ACIC) Q1 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the UPC 2016 First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Adam Prior. Thank you, you may begin.

Thank you and good morning everyone. Thank you for joining us. You can find copies of UPC's earnings release today at www.upcinsurance.com in the Investor Relations section. You are also welcome to contact our office at 212-836-9606 and we'd be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its website. Before we get started I'd 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 relating to trends in the 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 those anticipated in these 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 revise or update 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.

Thanks, Adam. This is John Forney, President and CEO of UPC Insurance. With me today is Brad Martz, our Chief Financial Officer. On behalf of everyone at UPC, I want to thank you all for joining us today and for your interest in our Company. Continued strong organic growth and diversification were the hallmarks of Q1 for us. We wrote over 30,000 new business policies during the first three months of the year, a 28% increase from last year's first quarter. The policies were spread across our geographic footprint but over 85% came from outside Florida. Average premiums on our new business policies were up about 4% compared to last year's first quarter. We ended the quarter with over 49% of our policies in force outside Florida and total premium in force of just under $600 million. For the first time ever this quarter we reported net earned premium of over $100 million. The increased scale and diversity of our book are paying dividends for our Company. As you well know Q1 was a very active weather quarter. We note especially the highly unusual tornadic activity in Florida. One report we saw noted 29 tornadoes in Florida during Q1 versus a 15-year average of eight. And the hailstorms in Texas, one of which Allstate reported to produce the most losses of any hailstorm in its history. These events caused us to suffer in total more than $15 million of catastrophe losses during the quarter, about the same as last year's first quarter. Yet, this year, we were able to produce profits in every month of the quarter and report total pre-tax income for the quarter almost $4 million higher than last year. For the remainder of the year, the catastrophe aggregate reinsurance program we put in place on January 1st should eliminate any further impact on our financial results from non-hurricane cat activity. That is also a significant difference from last year. We're moving forward operationally as well. This month we began the conversion of our book in Texas to our new policy processing system and the conversion of Florida will commence soon. We are already using this system to bring new business in five states and as the conversion of other states progresses we will realize significant savings while delivering a greatly enhanced experience to our agents and policyholders. This is just one example of the many infrastructure investments we have made to help prepare us to become the leading provider of property insurance in catastrophe-exposed areas. Mostly, though, those investments have been in people which are the core asset of UPC Insurance. This quarter we named Paul DiFrancesco our Chief Underwriting Officer. In a very short time Paul has helped us advance many underwriting and product initiatives which are furthering the quality growth of our Company. I'm grateful to Paul and to all the men and women of UPC who work so hard every day to help us continue to move forward on our journey. At this point, I'd like to turn it over to Brad Martz for his remarks. And when Brad is done, we will both be available to take any questions that you may have. Brad?

Thank you, John. Good morning. Before we get into the financial highlights I would like to encourage everyone to review our press release from April 27th and our Form 10-Q that we plan to file on May 4. Highlights of UPC's first quarter 2016 included gross written premiums of $136 million, 28% growth year-over-year; gross premiums earned of $147 million, 27% growth year-over-year; net income of $3 million or earnings per share of $0.14 despite $15 million of catastrophe losses; an underlying combined ratio of 83.8%, down 60 basis points year-over-year; book value per share increased to $11.35 per share, up 12% year-over-year; and return on average equity on a trailing 12-month basis of 13%. As John mentioned, UPC saw continued solid organic premium growth during the quarter. Total revenues grew 31% from $82.4 million last year to $107.6 million in the most recent quarter. Direct premiums written increased approximately 30% year-over-year, primarily from balanced organic growth, which was derived 49% from Florida, 22% from the Gulf region, 14% from the Southeast and 15% from the Northeast region. Florida grew a modest 3.2% on a direct basis but contracted slightly net of return premium obligations related to business assumed in prior quarters. Total policies in force at the end of the quarter grew to just under 365,000, up approximately 38% year-over-year with a policy mix inside versus outside Florida of roughly 50/50 compared to about 64/36 last year. UPC's Q1 numbers do not yet include Interboro Insurance Company but that will begin next quarter. The Company did receive its regulatory approval from the New York Department of Financial Services last week. And that transaction is expected to close this Friday, April 29. Moving on to loss results, UPC's loss results for the quarter on an underlying basis were almost unchanged year-over-year with the ratio up about 30 basis points on a gross basis and down 40 basis points net of reinsurance. As I mentioned, unfortunately, the Company did have approximately $15 million of catastrophe losses and $3.2 million of reserve strengthening during the quarter which ultimately drove the combined ratio to 101.8%. A little more color on the cat losses. The Company had 10 different events, five in Florida, three in Texas, one in Louisiana and one in Massachusetts and Rhode Island. Four of the Florida events were tornadoes. We had one hail event in the Orlando area. The three Texas events were all hail driven. One event in Louisiana was a combination of wind and hail and the Northeast Winter Storm Olympia added to the losses for the quarter. As for the reserve development, we did some reserve strengthening primarily on accident year 2015, the most recent accident year which is still very immature. So we would encourage everyone not to read too much into the adverse development for the quarter. Some of that was, about half of it was related to cat, half of it was related to attritional losses. The cat was mainly the Texas event from 2015. On the non-cat side it was a mix of Florida and Texas. We had opportunities to probably release more IBNR but given the limited time and quantity of information and data we chose to take a more conservative route and hold up some of that IBNR on accident year 2015. Management's expectations for profitability in each state remain intact with virtually no trace of adverse selection as evidenced primarily by the solid underlying loss and LAE ratios. During the quarter the Company saw its non-loss operating expense increased approximately $8.8 million or 29% year-over-year. $7.8 million or 89% of the change was driven by policy acquisition costs. $5.7 million of that are agent commissions, which mostly vary directly with premiums and continue to reflect UPC's change in mix. The remaining $2.1 million of the change impact was related to policy administration fees and premium taxes. Policy administration fees totaled approximately $4.4 million during the quarter which is up approximately $1 million year-over-year. Our system conversion efforts designed to significantly reduce most of these costs are progressing with our first conversions on Texas renewals occurring this month. All other operating expenses increased approximately $900,000 year-over-year due to our continued growth but actually declined about 140 basis points to 8.1% of gross earned premiums. Lastly, the net expense ratio of 38.4% was a slight improvement of approximately 20 basis points year-over-year. Our balance sheet remains very healthy as UPC ended the quarter with total assets of a little over $0.75 billion and nearly $0.25 billion of shareholders' equity. Our liquidity remained strong with cash and investment holdings of just under $600 million, unrestricted cash available to the holding Company remained approximately $60 million and finally the combined statutory surplus of our group at the end of March 31st was mostly unchanged at approximately $152 million due mainly to the catastrophe losses during the quarter. And now I'd like to reintroduce John Forney for some closing remarks.

Thank you, Brad. As I noted on our last call we learn from the past but we live in the present. From that standpoint things look very good for UPC Insurance. We've had a terrific month in April from a top line and from a loss standpoint. We were so pleased to receive regulatory approval from the New York Department of Financial Services to close on the Interboro transaction, which should occur tomorrow, and we look forward to welcoming 11 new associates from Interboro into the UPC family and growing that already strong book of business as we move forward. With the catastrophe reinsurance program that we have in place, we feel good about our exposure to non-hurricane cat activity going forward and we are in the process of putting in place by far the strongest hurricane cat reinsurance program in the history of the Company. For all those reasons we are really excited for the journey ahead. At this point, we will conclude our remarks and we will take any questions that you may have.

[Operator Instructions] Our first question comes from Arash Soleimani with KBW. Please proceed. Arash, your line is live.

Hi. Can you hear me?

Yes.

Hi, good morning.

Good morning.

So in terms of weather has there been any adverse weather in April? I know you said so far April was a good quarter but any events that happened? And then the other part of that question is even if there are events, is it basically meaningless in the sense that now that you've hit your retention even if we see a repeat of the same magnitude of gross losses that we saw in 1Q that your cat losses would end up being zero in 2Q because of the reinsurance program you have in place?

I think the appropriate answer to that question is yes, in that future non-hurricane cat events in 2016 would not have an impact on our financial results because of the cat reinsurance program that we put in place. With that said, I guess one important caveat to that is that cat reinsurance program has a limit of $20 million above the $15 million. So to the extent that those losses aggregated above $35 million, we could report additional losses from that. That would be a very extreme aggregation and we don't anticipate that. So the activity - there has been some activity and April, obviously mostly in Texas but it won't impact our results.

Okay, thanks. And in terms of the adverse development, did any of that stem from Florida AOB or water claims?

Immaterial amount, Arash. This is Brad. It was mainly Texas both for cat and non-cat.

Okay, thanks. And then I guess on the ceded premium and expense ratios, obviously both of those we've been seeing some improvement relative to recent quarters. How much runway is left in those for improvement? I guess on the expense ratio side when we look at the systems going live in front of the new states and then on the ceded premium ratios side just in terms of I guess of getting scale from some of the new states. Just trying to get a sense of how much runway is left in those two ratios.

A lot, because we really haven't started realizing any of the savings yet. The benefits of scale coming from the Interboro transaction and expense synergies will also help Q2. But the second half of the year is when we finally expect to start reaping the benefits of our investments in these new systems, so there's virtually no benefit that's been realized yet by UPC on the expense side. So as we've guided in the past we think there's at least a couple of points there in the next 12 to 24 months. But it's going to come in -

On the expense ratio?

Yes.

Okay. And you still feel good about improvements that could happen on the ceded premium side as a percentage of gross earned?

I don't know if we would guide you towards that. I think we're still guiding towards our target combined ratio of 85%. We're going to get there in different ways in different states and to the extent that we have opportunities to realize savings on a reinsurance program, we may buy more reinsurance that makes the ceded ratio not change. We want to make sure that our Company is anti-fragile and that we get stronger when events do occur. So we're not going to try to cut corners on that to realize savings on our ceded premium ratio. But we are still seeing very attractive pricing on reinsurance programs and we're looking to put some creative things in place that just further the strength of our Company.

Thanks. That makes sense. And has any growth started to come from the Geico partnership yet?

Yes. We're writing about 50 policies a day with Geico and we are looking forward to growing that partnership even further.

And is that weighted in or out of Florida, the 50 policies a day?

That's all outside of Florida.

All outside. Okay, thanks. And my very last question, sorry for asking so many. In terms of I think this was a while ago you had mentioned on the A.M. Best front potentially having two different companies: the Florida company would be the multicarrier, the outside Florida would be A.M. Best. Is that something that you're still pursuing or at this point doesn't seem unnecessary given that you've been able to achieve the growth outside Florida without A.M. Best?

Well it's certainly unnecessary in the short term and our growth outside of Florida and the quality growth that we've had outside of Florida demonstrates that. But we're building this Company for the long run and we think an A.M. Best rating down the road will certainly help us access other markets that we could not access without it. So we're still positioning the Company to achieve an A.M. Best rating while keeping an eye on the changes that they are making in their modeling and rating process which we have not fully digested yet. So, yes, it's still on our radar to do that at some point.

Okay, great, thank you very much for the answers.

Thank you.

Thank you. Our next question comes from Greg Peters with Raymond James. Please proceed.

Good morning, John and Brad.

Good morning, Grey.

I actually kind of surprised I saw some questions considering the colonoscopy that Arash just gave you. Can you talk a little bit - if you look at the growth, can you give us some color additional color about the states where you're seeing more growth versus states where it's more competitive? And I'm talking specifically outside of Florida.

We still continue to see strong growth in our Gulf States. Texas and Louisiana have been very strong sources of growth but we're also seeing growth in the Carolinas and we're seeing growth in the Northeast. We started to ramp - we started to write in a couple of new states recently, Hawaii and Connecticut, those have started slowly. Like all of our states have we haven't burned our way into any state and started writing a lot of business right away. It typically takes us six months to a year to tweak our product and earn the trust and respect of agents and start writing business. So we like to start slow and we've done that. But in states once we've established a foothold there for a year or more, we become a trusted part of the insurance landscape and agents believe in our product. So we're really seeing very balanced growth in the Gulf, in the Southeast and in the Northeast.

So based on that comment, last year you had a challenging experience in the state of Massachusetts in the Northeast. When you reflect back on that a year later, what's your perspective?

Our perspective is that there was a highly unusual, very extreme series of winter storms that occurred in Massachusetts and we took a lot of losses there as did many other carriers. I think we've discussed previously our reinsurer there showed us some data that suggested that our loss experience was less severe relative to our market share than their other cedents. So we felt good about our relative experience but nonetheless wanted to learn some lessons from it, so we changed some underwriting criteria and we took some rate in Massachusetts to help us prepare for the future.

Okay, one last question, Brad, I think you mentioned statutory capital of just over $150 million at the end of the first quarter. How do you think about gross premium written to statutory surplus going forward in the context of Interboro coming online and the continued growth outside of Florida?

Sure. Well Interboro is a little more capital efficient, using less underwriting leverage than the rest of our group. So that will help, they will bring in approximately $34 million of additional statutory capital boosting the number closer to about $186 million in total. So net of their writing ratios and net of what we're doing with our aggregate reinsurance, our core reinsurance I think from a writings ratio perspective obviously we never want to exceed 3 to 1 on a net basis. That's absolutely the red line for us but the goal would be probably somewhere closer to 2 times statutory capital net of reinsurance.

And just to circle back, how does that square with like a gross to net - gross to stat surplus basis?

Gross is about double that so I think our gross writings ratio last year was about 3.6, up 360%. So if you think about a 400% gross, 200% net that those are good general targets.

Perfect. Thanks for your answers.

You’re welcome

[Operator Instructions] Our next question comes from Samir Khare with Capital Returns. Please proceed.

Hi, good morning. I was wondering if the 30,000 new policies that you experienced in the quarter, are you guys continuing at that same pace or an increased pace from that?

We are continuing more or less at that pace.

Okay. And then on the cat losses, how big was the gross loss and if you can also give us how much of the aggregate limit has been eroded?

For the end of March we were - we hadn't even gotten into that treaty yet. But with IBNR and obviously continued development in April, we knew we were going to get there. So we booked the full 15 which exhausted our retention in full. But the gross loss as of the end of April is just under 17 million, so 16.7 million to be precise. We don't expect to come anywhere close to exhausting the limit but we certainly do expect to see some loss to our partners on that treaty.

Okay. And then the Texas losses in particular, what were the gross losses to each of those events? And then I'm actually curious if the hour’s clause as defined in your cat program or aggregate program would allow for aggregation of those Texas forms?

What was the last part of your question, Samir?

I'm just curious as to if an hour’s clause as defined in your cat program or your aggregate program would allow for aggregation of any of those Texas storms that happened days apart to see it as one event?

Yeah, I would say we don't have any of those limitations at the present time. So every event has met our franchise deductible of $500,000, so the smallest event we had was just about $500,000 which means 100% of that counts towards the aggregate. Our largest event was about 4.4 million of the total. But I really would prefer not to go through all the individual losses from each individual event. The PCS numbers associated with those events were 16, 16, 16, 20, 16, 21. Those should give you a broad sort of estimates as to how our Company and the industry were impacted. But I would just say we have no - the only at limitation we have in the cat aggregate relates to Florida where we only placed the coverage at a rate of 86.5% whereas everything outside of Florida was placed at 100%.

Okay. And just bigger picture, I know Greg asked about the competitive landscape in other states but can you tell us what you're seeing inside Florida in terms of their ability to get rate and/or rate changes that you have in the pipeline with ELR? And then outside of Florida for your biggest states, the rate increases you are getting there? And if you can also comment on whether the storm activity experienced in other states are allowing you to - will allow you to get higher rate?

Sure. Well, in Florida we just did our annual rate filing and our rate indication was flat overall. That doesn't mean it was flat in every rating territory. We were up some, down some but overall it was flat. So that's where we are in Florida. Outside of Florida there is no generalization that you could make. Every state is different. As I said the new business that we wrote in the first quarter had premiums up about 4% from the new business that we wrote in the first quarter of last year. We did take some rate in Massachusetts and Rhode Island and North Carolina made some adjustments. So we take it state-by-state. We are focused on rate adequacy. We are not trying to be the low-cost provider. And we take that very seriously in every state. And as I mentioned in my remarks, Paul DiFrancesco has built onto an already strong team and added some new people and product so we have great resources to stay on top of all of our states and make sure that our products are positioned right in the market are competitive but are rate adequate.

Okay, and then a noteworthy dynamic that your Florida peers are experiencing in the industry is the increases in some AOB. I'm curious as to if you guys have also seen an increase in AOB incidents in your Florida book?

I think everybody's seen an increase in AOB in their Florida book. I think we have been less affected than some others for a couple of different reasons. One, it is primarily a Dade and Broward phenomenon, not exclusively but primarily, and our concentrations to Dade and Broward are less than some others because we don't do a lot of takeouts and that's takeout country down there. The second reason is the approach we take to AOB which is something I'm not going to share a lot of details in. But we have our General Counsel Kim Salmon before she joined us was an insurance defense litigator and the thought leader in Florida on AOB for a long time. So we have very good strategies for dealing with AOB. It doesn't mean we don't suffer losses from it. We do like everybody else. We're continuing to try to increase strength and the language in our policy forms and we saw it with Citizens data and we followed suit on that. So it's a war out there in Florida and we're fighting the good fight every day.

All right great. Thanks guys. I appreciate it.

Thank you. Our next question comes from Brandon Stoner with Stoner Equities. Please proceed.

Good morning, gentlemen, and congrats on the underlying combined ratio. I just have a couple of questions for you regarding the Interboro transaction. I just wanted to know whether that Interboro deal once they are incorporated into the business it would be covered by your reinsurance contracts.

Yes. It will.

Okay. And also regarding the reinsurance market for the pricing, I know you touched on it a little bit a little while ago with the other question, but regarding the reinsurance market pricing, how does that look? And I mean going forward I know there's been a lot of insurers and reinsurers reporting and they were taking some hits on maybe the pricing is going to be increasing for the latter part of this year. Can you talk about that a little bit?

We don't see prices increasing. The pricing environment is very attractive. I will say we view our reinsurance counterparties as partners. We're in this together for the long run, so we're not trying to take every last nickel from them. We want to have a fair price that is low but also gives us a high-quality panel of reinsurers who are committed to us for the long term. So that's how we approach our program every year.

Okay, excellent. And also I know your other reinsurance contract that you placed last June is coming to an end here at the end of May. What are your plans for, are you going to place another contract for that hurricane season?

We are. We're in the market right now and our goal is to have the program largely done within a week or so. So we're being done well before June 1st.

Excellent, excellent. And lastly, I just wanted to get your thoughts on your balance sheet in terms of your investments. Moving forward in the future I know you have the focus on growth and you're looking to grow safely and you're mostly invested in fixed income. I just wanted to get your thoughts on expanding that investment base into equity securities and whether those things are crossing you guy's mind?

Well and certain equities - this is Brad Martz. And first I should say thank you for recognizing our underlying combined ratio. We appreciate that very much. As far as our investment strategy and philosophy is concerned, we really want to minimize asset risk for shareholders. We write short-tail property insurance whereby 90% of our policyholder obligations are going to be paid out in less than a year. So we've been very consistent in our approach to having short durations, high credit qualities, highly liquid investments both stocks and bonds. So the stocks we've invested in are typically your blue-chip, equity income, solid dividend payers. The bonds are a mix of government, municipal and corporate issues that are best-in-class if you will. So we really want to avoid any surprises, be responsible. Investment income is an important part of the overall operating returns for our Company. But you don't want to be a forced seller of securities after a major catastrophe loss. And that's - we intend to hold everything we buy to maturity and maintain proper amounts for liquidity to manage through our net cap retentions.

Excellent, okay, that's helpful. And also just piggybacking on those comments, with your equity security investments those are actually individual companies or are they more like ETFs or mutual funds?

In generally individual companies, we have used mutual funds, some very ultra-short term bond of funds to part cash to earn, keep every dollar working. But we have largely avoided ETFs and mutual funds as it relates to equity.

Okay, all right, thanks for your clarity and again congrats on the growth in your revenues and your underlying base. Thanks.

Thank you.

Thank you. Our next question comes from Bruce Douglas, private investor. Please proceed.

Good morning, Bruce.

Good morning, gentlemen. My questions are all related to the closing of the Interboro acquisition. When the announcement was made back in October I believe of your plan to acquire Interboro, you stated certain cost of acquisition, number of policies to be assumed, et cetera. Are those numbers fairly solid as it relates to the closing tomorrow?

Yes, they are. Interboro has maintained their book and in fact growing a little bit.

Yes that's been solid profitable business in Q4 and Q1. So the results have been great, their balance sheet is an intact, purchase price is fixed as is the minimum equity they will deliver to us tomorrow.

And the number of policies to be assumed?

Approximately 30,000.

Okay, well, thank you and keep up the good work. We're in this for the long-haul.

Thank you, Bruce. We appreciate your support very much.

Thank you. Our next question comes from Bruce Hood, private investor. Please proceed.

Hi, I know the loss in LAE expense for the quarter was about $62 million. So that includes the $15 million in cat losses. I was just wondering where the rest of that came from?

You're talking about loss in LAE the number we reported was $64.3 million. Underlying excluding cat and reserve development was $46 million. So the $46 million is about 55% water related, about 15% fire, 10% liability that's the general mix by cause. So you know, we've got very little change in terms of the mix by cause year-over-year. It's been very, very consistent.

Okay, thank you.

Thank you. We'd now like to turn the conference over to management for closing remarks.

Thank you very much. We appreciate all of your time and your interest in UPC Insurance and your support for our Company. We look forward to talking to you again next quarter.