American Coastal Insurance Corporation (ACIC) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the UPC Insurance third-quarter financial results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Adam Prior of The Equity Group. Thank you. Mr. Prior, 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 certainly 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 website. 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 federal securities laws including statements relating to trends and the Company's operations and financial results and the business and the products of the Company and its subsidiaries. Actual results from UPC may differ materially from those results 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 US Securities and Exchange Commission. UPC specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise. With that I would now like to turn the call over to Mr. John Forney, UPC's Chief Executive Officer. Please go ahead, John.

Thanks, Adam, and good morning, everybody. 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, we appreciate you taking time to join us on the call. We had another great quarter of revenue production and organic growth across our geographic footprint. During the quarter we averaged over 12,000 new business policies per month and had our biggest new business month ever in August when we wrote over 13,000 new policies. Compared to last year's third quarter, we wrote over 31% more new business policies and our retention stayed at over 90%. We have already written more new business policies through three quarters than we wrote in all of last year which at the time was our biggest production year ever. New business production this quarter was fairly balanced across our four regions but the Gulf region which for us includes Texas, Louisiana and Hawaii, remained our largest source of new business. It was a difficult quarter for us on the loss side as we saw higher loss costs on three fronts. First, we had over $5 million of retained cat losses from Hurricane Hermine and the Louisiana storms and flooding. Second, we saw very unusual and large losses from both fire and non-cat hail during the quarter. Combined, these two perils contributed to more than 8 points of underlying loss ratio deterioration in the quarter which was more than our total increase in underlying loss ratio. So we actually had better overall loss experience during the quarter on all other non-cat perils compared to last year's third quarter. Third, during the quarter as our new claims leadership team assessed our outstanding claims and payment patterns, we decided not to take down reserves on some prior year outstanding claims to the same extent that we made payment on these claims during the quarter. This caused us to show adverse reserve development for the quarter. The reference to our new claims leadership team is a good opportunity for me to mention one of the highlights of the quarter, the arrival of Scott St. John from Farmers as our first ever Chief Claims Officer. At Farmers, Scott was responsible for property claims in 27 states east of the Mississippi River and he previously led a complete overhaul of Farmers cat operations in the wake of Hurricane Katrina in 2005. I have a lot of confidence in the team and claims operating model that Scott is implementing at UPC. In light of the headwinds from our loss experience this year, I am pleased that our trailing 12 months return on equity is 12.3%, up 40 basis points over the same time period last year and that we have been profitable in all four of our regions through the third quarter. That shows the resiliency of our operating and financial model. At this point I would like to turn it over to Brad Martz to discuss our financial results in more detail. Brad?

Thank you, John, and hello. I am Brad Martz, CFO of UPC Insurance and pleased to review the financial highlights. But before we get to those, I would like to remind and encourage everyone to review our press release from November 1 and Form 10-Q that we plan to file on November 9. Highlights of UPC's third quarter 2016 included gross written premiums of $194 million, 25% growth year-over-year, gross premiums earned of $174 million, up 35% year-over-year, net income of $3.4 million or EPS of $0.16 per share. Book value per share increased to just under $12 per share, up 14% over the same period a year ago and the return on average equity of 12.3%. As John mentioned, UPC saw continued premium growth during the quarter. Total revenue grew 42% from $89.8 million last year to $127.2 million in the current quarter. Direct premiums written for the quarter were derived 43% from Florida, 24% from the Gulf region, 20% from the Northeast and 12% from the Southeast. Florida grew a modest 8% on a direct basis year-over-year and our non-Florida regions were up 51% year-over-year and represented 86% of the overall growth in direct premiums written. Interboro production mainly in New York, contributed approximately 12 million of that change for the quarter. Total policies in force at September 30, 2016 grew to just under 432,000, up approximately 40% year-over-year with the policy mix being approximately 43% inside of Florida and 57% outside of Florida. UPC's losses increased approximately 80% from 40.4 million last year to 72.7 million in the third quarter. Our net loss ratio increased over 12 points from 48.1% last year to 60.5% in the current quarter. Included in those results were approximately 5.1 million of net retained catastrophe losses and 5.9 million of adverse reserve development on prior accident years during the quarter. We added roughly 9 points to the net loss ratio. The cat losses for the quarter stem from severe weather impacting Louisiana in August as well as Hurricane Hermine and Tropical Storm Julia in September. The adverse reserve development was primarily driven from water losses in the Tri-County area of Florida on the most recent accident year which is 2015. Excluding the impact of cat losses and reserve development, UPC's gross and net underlying loss ratios both increased over 6 points year-over-year due primarily, to higher frequency and severity of fire and hail related losses which were both up over 300% for the quarter compared to the same period a year ago as well as increased severity of water losses during the quarter. The Company saw its non-loss operating expenses increased approximately 12.8 million or 35% year-over-year, but much of this increase was caused by nonrecurring or non-cash items. 7.6 million or approximately 60% of the change was driven by policy acquisition costs consistent with UPC's revenue growth and 5.2 million or 40% of the change was driven by all other operating expenses but primarily due to amortization of intangible assets related to the Interboro acquisition and professional fees related to our pending merger with American Coastal. Despite these cost increases, the gross expense ratio was basically flat at 28.4% and the net expense ratio declined 2.5 points to 40.9% due to lower reinsurance costs which can also be seen in our improved ceding ratio year-over-year. Our balance sheet remains strong as UPC ended the quarter with total assets just under 1 billion and shareholders' equity of approximately 259 million. Our liquidity was strong with cash and investment holdings of approximately 666 million and finally, our combined statutory surplus in the group at the end of the third quarter was approximately 182 million. The Company's earnings release also referenced Hurricane Matthew and for the sake of clarity, I wanted to make a few additional points on that event. Hurricane Matthew was a fourth quarter 2016 earnings event and had no impact on UPC's third quarter results. Incurred losses on claims reported thus far have not yet reached our full retention of 30 million in total but UPC does expect further development and to occur a full retention equal to 30 million. We believe it is too early to speculate on what the ultimate gross losses will be but it is safe to say UPC's net retained losses will not exceed 30 million before tax and the ceded losses if any are not expected to erode a significant amount of our $1.5 billion reinsurance protection. Assuming Hurricane Matthew losses developed in excess of 30 million as expected and generated reinsurance recoveries, any subsequent named or numbered storm or earthquake loss before June 1, 2017 would result in a maximum 10 million net retained catastrophe loss to UPC. With that, I would like to reintroduce John Forney for some closing remarks.

Thank you, Brad. I have climbed two big mountains in my life, Mount Rainier in Washington State and Mount Kilimanjaro in Africa. Both of those are difficult multi-day climbs and my experience during those climbs was that you are not always walking straight up toward the peak. Sometimes as you traverse the mountain, you are actually walking downhill for hours at a time but if you keep your head down and keep moving forward, you get to the top. Sort of what it feels like here at UPC insurance right now, the second half of 2016, we are traversing the mountain a little bit but I have never been more confident that if we keep pushing forward we will reach the peak. That is what we intend to do. We welcome you to join us on that journey. With that we will conclude our remarks and we will be happy to take any questions that you have.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

First off if we could start just a little bit more color on the adverse development that you guys saw from 2015. Can we just get more color? I mean how much of that would you attribute to the assignment of benefits claims that we have seen be some issues for some Florida players? I know you said that it hasn't impacted you guys as much in the past. And then if you can just talk in response to I guess the adverse development as well as the weaker margins we saw this quarter, just if you guys are taking more rate and any other underwriting actions that you are taking within your book to improve the margins from here?

Sure, Elyse, this is John Forney, I will take that. So the adverse development I said was caused by the fact that we took down reserves by a lesser amount than we paid claims in the third quarter on 2015 losses and we did that to try to be cautious on the development of those losses. More than half of it was from the Tri-County area and more than half of that was from water losses in the Tri-County area. So that is the AOB issue rearing its ugly head down there and we just want to make sure that we've got it under control so we did not take down the reserves as we made payments and so we are showing that this quarter. We will see how it plays out in the future but we are taking a lot of operational actions including we've got the new forms in place that will help us going forward including the new leadership team in claims that is implementing a new operating model that we feel very good about. We have also stopped writing new business in Broward County. We don't write any new business in Dade County. We did not do any multi-peril take out this year. So we are taking all the actions we need to do to make sure that that business which is less than 10% of our overall book of business by the way, stays under control. But the fact of the matter is if you look at loss ratios, it is Dade and Broward County, not necessarily Tri-County which includes Palm Beach County but Dade and Broward County have non-cat loss ratios 20 points higher than the rest of Florida. So it has gotten to be a really bad situation down there and we are walling it off. With regard to the rest of our states, as I said, we remain strongly profitable in all of our regions through the third quarter. We are always analyzing all our states for rate need and we are in the process of doing rate reviews in seven of our biggest states right now and we will take action as needed throughout the year.

Okay. And then in terms of the underlying margin, I know in the quarter you guys pointed to fire and hail losses. Was that consistent throughout the three months? Do you see any change within the profitability of the book as we went through the third quarter? I know we just hit November but is there any kind of high level views that you have on how the book might have been running from a profitability basis in October?

Well, the good news in October was that stuff stopped burning down across our book of business to the same extent that it had in the third quarter. The losses in the third quarter from fire and hail were so out of line with historical experience, it was an anomaly. We had over $16 million of fire losses in the quarter versus $3 million in the second quarter and $3 million a year ago or less than $3 million a year ago in the third quarter. 17 large fire losses versus five last quarter, they were spread throughout the book of business. It just looked very unusual from a frequency standpoint and a severity standpoint compared to any other quarter. It is not a trend, it is just the insurance business that it doesn't unfortunately get packaged neatly into quarterly segments. It played out over a longer period of time. And the same sort of thing for hail. That was, the non-cat hail stuff was over $4 million in the quarter including $1.5 million in Florida which is super unusual for this time of year and unprecedented in our experience. As one of the research reports said, it was a triple whammy for us this quarter in terms of the cat losses, the crazy fire and hail losses and then the caution we took on the reserve development in South Florida. But we spent a lot of time with analyzing the numbers and we feel good about how we are positioned and the actions we are taking to improve the results going forward.

Okay. Then I would imagine in terms of the American Coastal deal that you have probably been in touch with them in terms of the number. Is there no change on the deal, maybe just some of the profitability issues you saw in the quarter? And do you still, any comments on kind of the regulatory approval process and the expected close of that transaction?

Our view on the expected close hasn't changed. I think we said we expect to close Q1 next year, nothing has changed. All our regulatory filings are in. We need regulatory approval from Hawaii, from Florida and New York. We've received regulatory approval from Hawaii already and Florida and New York are working away and we have been in dialogue with them so we are moving forward in good faith on both of those fronts. So no changes on the expectations for that transaction which we are very excited about.

Okay. One last question if I may. As you guys think about your capital position, obviously given the triple whammy in the quarter you are looking at about flat book value on a sequential basis, probably a decline in the fourth quarter just given the Matthew losses. So how do you think about your capital position as we end 2016 and you guys go into the American Coastal deal? Just any high-level views there. Thank you.

Good morning, Elyse, this is Brad. I will take that one. The Company is currently evaluating several options to bolster its capital position before the end of the year. We definitely have our eyes on both our net writings ratio and our RBC. We've projected out both of those with and without additional capital and/or reinsurance through the balance of 2016 and have determined we need to take some action. So the Board will be contemplating a couple of different scenarios both inclusive of some borrowings and some reinsurance options. We don't intend to use stock at all in the short term but given the pending merger with American Coastal, we are a little more bullish on using some financial leverage in the increased size of the combined company's balance sheet. So we do think borrowing some money on very favorable terms could be advantageous and will help shore up those capital statutory capital requirements before the end of the year.

Thank you. Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your question.

Good morning. Thank you for hosting the call and taking our questions. Just circling back on American Coastal, can you provide some perspective of their operating performance not only through the third quarter but also with Hurricane Matthew?

Greg, this is Brad. Good morning. We really can't. We have been advised by counsel we cannot provide that guidance at this time. That information will be included in the definitive proxy that we will likely be on file in the next 30 days or so. The SEC is reviewing the initial filing we made, the preliminary proxy filing so we've got to respond to their comments and we will update some of the numbers for American Coastal in the definitive filing.

Okay, fair enough. With Hermine and Matthew, obviously there is claims surge; can you talk about the performance of your claims operations dealing with the increased volume of activity?

Sure, this is John Forney. I am really proud of the way our claims team has responded in the midst of what has been an overhaul of the leadership and operating model of our claims department led by Scott St. John and a new crowd, very experienced, very dynamic leaders in our claims department. In the midst of that transition to have two hurricanes, we told Scott that we were happy that he joined but he brought two hurricanes with him in the first six weeks he was at the Company so hoping that is not a harbinger of things to come. But they've done a fantastic job. We are four weeks in and we will by the end of this week have over 5,000 claims, we will have inspected 99% of those claims. Only some very late straggling claims coming in that have not been inspected yet. So we are in very good shape and have done a good job overcoming some adversity there in the early stages of the transition of our claims department and performed very well.

Thanks for that color, John. Can you speak to just the reinsurance programs you have in place going into next year? I think you have an aggregate cover that was very helpful to you and to shareholders this past year. And can you talk to us about anticipated cost of these programs going next year?

Well, I will say on the aggregate cover which is a January 1 renewal, we are in the midst of negotiating a new aggregate treaty, have been out in the market and are at the point where we are almost ready to proceed with putting that program in place. And we are pleased with the way that it looks and the kind of program that we are going to be able to put into place. I will just say that. Our Company has gotten a lot bigger, our footprint has expanded so much so our kitty cat if you want to use that term for these small caps other than hurricane and earthquake, our kitty cat exposure has grown. And so our expected model loss from those kind of events has grown as well, so that all as to get taken into account when you are deciding on the retention of that reinsurance program but we have a much greater capacity to be able to do that. I will tell you our overall goal for our reinsurance programs, Greg, for both the cat, ag and our hurricane and earthquake treaty is we want to have programs in place next year so that if we have a full retention on our cat ag program and a full retention on our hurricane program that we will still be able to earn double-digit returns on equity. I think based on what we are seeing so far in the cost and structuring of our cat ag program, that goal is going to be achievable.

So that would dovetail then to where I was going which is just you have had this target for ROEs in non-cat and cat years and I am just curious how this past year has changed your perspective on that?

It hasn't actually. This year we're going to have it looks like a full retention on both our cat ag and our cat treaty which is the double whammy if you want to use that term and we are going to be solidly profitable for the year. Next year it will be even better because we are structuring the programs purposely in advance assuming we're going to have both full retention on the hurricane and full retention on a cat ag which is not something we planned for in the past but the last couple of years has shown that the unusual weather patterns and losses that have occurred may or may not be unusual. And so we are planning for that and so next year we will be able to absorb both and still be able to have double-digit returns on equity.

Okay. Just to clarify as far as process is concerned with reinsurance programs, at this point you are negotiating just for standalone UPC programs, you are not talking to your reinsurance partners about the combined entity assuming the merger goes through?

The cat ag program that will incept January 1, 2017 will just be for -- will not include American Coastal. Obviously we are not a combined entity right now. Their exposure to non-hurricane losses is much less than ours anyway given their book of business and so the kitty cats have not been a particular issue for American Coastal so they will not be part of that program. We do anticipate that the June 1 renewal next year will be a combined program including American Coastal.

Thank you. Our next question comes from the line Christopher Campbell with KBW. Please proceed with your question.

Just circling back to the adverse development and core losses, so it sounds like you are not taking down as much reserves but the core loss ratios were impacted by a lot of more random activity and less traditional. So if you are not taking down the claims reserves for assignment of benefits for increased conservatism, should we expect higher loss picks going forward?

No.

So this is a one-time true up for AOB?

Yes. If you look at our non-cat loss number so if we reported $72.7 million of loss in LE the quarter, you back out the catastrophe losses, you've got non-cat losses of $67.6 million so that it gives you a gross loss ratio non-cat of about 39%. But that includes the prior year development. So stripping out prior development which was 5 points, you are back down to about 34% which is in line with our gross loss ratio targets. We don't expect to do that kind of reserve strengthening and the conservatism related to IVN&R reserve releases should be fully absorbed and known by year-end. Do we still have some cleanup and some work to do before year-end? Absolutely. So the one-year development on 2015 looks bad but the two-year development on accident year 2015 might actually look good. We could have favorable development next year and rein in some of the adverse we saw this year. So there is still a lot to be contemplated regarding that particular accident year. But more importantly, we are focused on making sure 2016 is reserved appropriately. So we want 2016 reserves to reflect ultimate lost costs and avoid any adverse development next year on this year's results. So we want to make sure people don't read through on accident year 2015 into the current year. That is very important.

Thanks. That is very helpful. Shifting to the reinsurance costs which had about a 400 basis point tailwind, is this mostly due to pricing or are you buying less, increasing retention or has there been any potentially more restrictive terms and conditions?

No, in fact I think we have broadened coverage, we have bought more overall limits, retentions as a percent of capital and expected profitability remained in line. So the program is more robust year-over-year. I think it is a function of excess supply capital and that is unlikely to continue forever for sure. Prices are definitely flattening. We saw that this year. We are not relying upon lower reinsurance costs in our model to be successful. But one other important driver of the lower ceding ratio is the fact that we are accomplishing our diversification strategy. We are executing on it and business written outside of Florida costs less to reinsure. The expected losses are lower. So as we continue to diversify our footprint, I think we can drive down our ceding ratio even further even without any actual reinsurance cost or rate change. That is very important because obviously we do expect higher non-cat losses outside of Florida as average premiums are lower so that is the tradeoff.

Yes, that is very helpful. Just one final question relating to the elevated expenses driven by IT. Can we get a little bit more color on these investments you are making and how should we think about the expense ratio going forward?

This is John Forney. I'm not sure where you got that impression that expenses were driven by IT. We made a lot of investments in policy systems and claim systems over the last few years but that is not what drove expenses during the quarter. The expense ratio for the quarter was about the same as it was for the third quarter of last year. But this year we had over a point up non-cash amortization of intangible assets created by the Interboro transaction. So take that out, we are over a point less than last year. We also had some fairly significant nonrecurring expenses related to the merger deal with American Coastal, costs associated with that that weren't in last year. So we feel good about the trends in our expense ratio if you factor in those two either nonrecurring or non-cash items.

Okay. I think that is likely general and admin. I was looking at the operating expenses from the press release, the third paragraph on the second page where you have the operating expenses increase by 1.3 million primarily due to the increased investments in information technology systems and equipment.

That is true. We've got $18 million of property and equipment on the balance sheet today. A pretty substantial increase has occurred over the last few years. We want to continue making good investments, smart investments in technology to improve our claims operation and improve our policy administration systems, bring more of that work in-house and that is flowing through into amortization. We had almost $4 million of depreciation and amortization expense in the quarter compared to only about 800,000 in the same quarter a year ago. So a pretty significant increase but most of that is related to the intangibles on Interboro Insurance Company which was acquired at the end of April. And in the second quarter we only had two months of that amortization expense. This quarter we had all three months. So we do have some comparability challenges with the prior year as it relates to G&A. I can tell you Interboro is performing very, very well. It was profitable in Q2, it was profitable in Q3. The gross loss ratio is 40%, expense ratios are in the teens. We are very pleased with the Interboro acquisition.

Great. Thanks for all the answers and best of luck in the fourth quarter.

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

Good morning. I was wondering if as you collected your claims adjusting resources ahead of Hurricane Matthew, any surprises or shift in strategy, lessons learned from that?

We learn lessons every day from everything that we do and we always get together after events and talk about what those lessons are. I think it is premature for us to comment on that. And I am not sure it is something we would share externally anyway. But our team is always looking to learn from our experiences and get stronger and this cat event will be no exception.

Okay, sure. And then with Scott coming on board and doing a deep dive on the claims, I was just curious about the adverse development. Was that a result of him coming in and being a bit more conservative on the reserving there or was that something you guys would have taken anyway with normal course of loss emergence?

I just want to make sure everyone understands we always try to have the right reserves on our books. The accurate reserves as we as a team with our actuaries and our internal actuary resources think are the right reserves. As you know it is always an estimate given that you don't know what is going to happen in the future but we do the best we can every single quarter to have the right reserves on our books. And so when we pay claims on some of these losses that were lingering around from 2015 in the quarter and we saw some of the activity on the AOB and litigation front, we didn't think it was appropriate to take down reserves on those claims to the same extent so we left the reserves up even though we'd made some payments on some of those claims because we all thought that was the right thing to do not because we changed our reserving philosophy. So we think these are the right reserves, that is why we did it. If we didn't think we needed to keep up those reserves, we would have taken them down and not reported the adverse development units. That is not something we were looking forward to doing. So we think these are the right reserves and we make that evaluation every single quarter.

Okay, and sorry if I missed this, but are there any deal modifications to the American Coastal exchange ratio or anything if book value on either side gets reduced?

There is some book value minimum book value provisions on their side but there is not adjustment on the -- on the exchange ratio.

Thank you. Our next question comes from the line of Bruce Douglas. Please proceed with your question.

I'm sure you have considered this but since we have over 600 million in investments and the state of Florida allows a maximum of 10% in common stock, have you considered or would you consider buying your own stock which at current prices would allow you to significantly make a better investment than is offered to you by any of the fixed income securities on the market today?

Thank you for that question, Bruce. Right now I think we have 6% or 7% of our portfolio in equities and we are sitting on a $7.5 million unrealized gain in our equity portfolio right now. So we have done pretty well with our outside investment advisors on our equity picking. But I couldn't agree more, I couldn't think of a better equity to invest in than UIHC. So I'm sure it is something we will consider and talk about with our Board and analyze whether that make sense for us to do.

Thank you. Our next question comes from the line of Brenden Stoner with Stoner Equities LLC. Please proceed with your question.

I just had a quick question about your other revenue of about 11 million for the first nine months. Could you just walk us through what exactly is encompassed in that?

It is policy fee income.

Okay. And so can you give us any color on the investments you made in some of those LLC small businesses?

I'm not sure what you are referring to.

I think on your annual report, there is investments in some LLCs. I'm not sure exactly what those are off the top of my head were but I believe they were investments listed as assets on your balance sheet.

Sure, yes, you are speaking to what we refer to as alternative investments. Our current investment policy statement allows the Company to invest up to 3% of its cash and invested assets in alternatives which would include real estate, limited partnership interest, things that are less liquid. Obviously we don't take asset risk as a Company, that is not something we are very keen on. We have a very conservative short duration, high credit quality highly liquid investment strategy. So these are not going to big investments for us but from time to time we will look at private equity alternatives and that is basically what you have seen. We have invested with Kayne Anderson, Blackstone to name a couple. But they are generally small investments, are never going to represent anything significant. We have done well on all of them. So there is lots of opportunities. We see them all the time but we are very disciplined about how we deploy that capital and we have earned some pretty good returns thus far but it is not an important part of our strategy overall.

Thanks for the color. And then a question about how you guys are finding these potential acquisitions out there. I'm trying to understand are you consistently looking for these type of larger margin type of operators? I know that it was, his track record with hurricanes is outstanding so I'm wondering how are you finding, how do you approach these type of acquisitions?

Sure, Brenden. This is John Forney, I will take that. We have always said that we would only do acquisitions that are strategically consistent and culturally compatible. Strategically consistent means property right over in coastal states. Culturally compatible means entrepreneurial and consistent with the way we want to run the Company. We never sought a single acquisition actually. They have all been due to serendipity of some type or another and we are in that mode as well. We are not actively seeking any other acquisitions. We will look at stuff as it becomes available but as you might imagine there aren't a lot of companies that we would consider strategically consistent with what we are doing. And we are determined to stay on strategy and not get diverted by some of the other things that people try to show us. So not looking for acquisitions, we never have looked for acquisitions, the ones that we made we feel really good about. Family security has been profitable since we bought them, Interboro has been profitable now since we bought them and the merger with American Coastal is transformational for us. And as you noted, they have an amazing track record of operating success and strategic vision. So we couldn't be happier to be joining forces with them.

Thanks for the comments. I appreciate that and good luck with the fourth quarter and thanks for taking my questions.

Thank you. Our next question is follow from Greg Peters with Raymond James. Please proceed with your question.

Thanks for taking the follow-up. Considering that the stock price is down this morning, I thought it would be useful to go back and if you could just remind us about the exchange ratio with American Coastal and how that is calculated in the context of when the merger closes? That would be helpful.

It is a fixed exchange ratio so there is a set number of shares that will be issued to American Coastal at the merger with the only exception being if our stock was up 30% over the price that it was on the day we sign the agreement, then it would be a floating exchange ratio after that. But other than that, the exchange ratio is fixed.

So if the stock is down at the time of closing relative to where it was when you announced, there is no adjustment, is that correct?

That is correct.

Thanks for the color on that. And then I know you have talked about it both in your opening comments and I think you just referenced it again, but could you speak to the performance of Interboro this past quarter and how it performed on a year-over-year basis as well?

Certainly Greg. This is Brad. Year to date Interboro has contributed about 7.6 million of net income, 2.5 million of that was in the current quarter, pretty significant improvement year-over-year for the entity primarily because the prior owners and operators, had an auto business that was losing money. We did not assume that auto of business, that was retained by the seller and they had significantly higher operating expense ratios and reinsurance costs on a relative basis than we do. We really gutted the operating expenses, the loss ratio has been in line with expectations and it has been a great acquisition for us.

And the growth of that business, how is that proceeding and what are your expectations going forward for just the Interboro piece?

We do expect to be able to grow Interboro going forward. We are going to have to make some modifications to their product design and pricing. They haven't tinkered with it in quite a while and it has become a little bit stale and uncompetitive in what is a very competitive Long Island market. So we are going to have to make some adjustments to that to really amp up the growth and we are doing a deep dive analysis of all product features and rate adequacy to make sure that we get it right when we do file that change.

But given some of the operating expense ratio improvements we have made, we can afford to actually both make the product more competitive by decreasing rates and still earn higher margins. So that is the good news.

Okay. Finally I would like to just circle back on the capital comments that you made specifically about possibly considering other forms of additional capital other than equity through year-end. Can you talk to us about where your current RBC ratios are and where you would like them to be and how you think about capital as you contemplate the American Coastal merger and now the Company could be positioned pro forma?

Certainly. I mean the thresholds for us our RBC has to be above 300% and your net writings ratio has to be below 300%. So 300% is sort of a magic number. Writings ratio you want lower. We are probably going to run that closer to 200% but it may remain elevated for 2016 but certainly below the statutory limits imposed by our regulators. RBC last year was over 400%, we would like to be in that same general area again this year if we can. So one of the options we are looking at is quota share reinsurance. It is something that we have been reluctant to do because we believe in what we are underwriting, we want to retain 100% of that margin. But given the dramatic growth of the Company and the losses we sustained this year and especially in Q4, it might be appropriate to start a relationship with a high quality reinsurance partner who can help reduce the capital required by reducing net written premiums as well as allowing the Company to recognize significant ceding commission income on a statutory basis. On a GAAP basis, that doesn't really help you because you have to defer that income. On a statutory basis, you can recognize it immediately and hence achieve some surplus relief which will help RBC, help writings ratio, help expense ratio too. So that is a very powerful option for us. We've got some very compelling terms and opportunities both with cat and without cat that we are exploring and the Board will consider next week and along with maybe borrowing some additional money. We feel like with the combined balance sheet of American Coastal and UPC we've got the opportunity to use financial leverage in a way that maybe we wouldn't have considered historically. We don't believe in financial leverage but the opportunity -- some of the terms we are seeing are pretty compelling and might make sense.

Perfect. Thank you very much for the follow-up answers.

Thank you. Our next question is a follow up from Elyse Greenspan with Wells Fargo. Please proceed with your question.

In terms of as we think about the Q4, I know in the past you guys have mentioned some takeouts or a potential to take business from TWIA in Texas. How are conversations moving there and just how do you think about I guess the earnings that you could receive from that as we think through the Q4 profile of the Company?

It is really hard to gauge how much business we may or may not assume from TWIA. The agents control that book of business, we are working diligently with all of those agents today and gaining some commitments from them. Deepak and his team are doing a fantastic job trying to secure as much of that business as we can. We would like to see maybe $25 million of assumed written in the quarter but that is a best case scenario. Who knows, it could be zero but we do expect some additional uplift in earned premiums from assumption activity in Texas during the quarter.

But probably very modest. This is a new program, there is no history on it in terms of take-up rate and so we are not factoring in really any contribution in the fourth quarter from that. We will see how it plays out.

Okay. And then what about I guess as you think about some of the AOB and issues within Florida, it seems like -- what are your thoughts and I know Citizen takeouts have become less of a part of your business. But what are your thoughts about doing takeouts from Citizens from here if that is an option?

It is not appealing to us to look at multi-peril takeouts. There may be some small amount of wind only business which isn't really susceptible to the AOB stuff in the same way that look okay. But that still is very modest and the multi-peril stuff just doesn't look attractive to us in terms of take-out. So that is not something that is part of our strategy going forward.

Okay, great. And then in terms of the cat losses in the quarter, so I guess you didn't say this but I guess I would assume that you guys went through that cat aggregate cover, the remaining retention and the third quarter so if we see losses away from Matthew in fourth quarter that would mostly hit your bottom line?

I think that is a fair assumption.

I would now like to turn the call back over to management for any closing remarks.

Okay, thank you very much. I don't think we have anything else on our end. We really appreciate your time today and your participation in the call and we look forward to talking to you again next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.