American Coastal Insurance Corporation (ACIC) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the UPC Insurance fourth quarter and year ended December 31, 2016 conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Adam Prior of The Equity Group. 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 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 the 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 the 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’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, we appreciate you taking time to join us on the call. We're not happy to post the bottom line financial results we did for Q4 and the full year of 2016. Absorbing over $55 million of retained cat losses, representing over 8 gross margin points plus another three or four points from deterioration in the non-cat loss environment in Florida, left us with scant profits for the year. If we look on the bright side and I always do, to be able to experience eleven or twelve points of unexpected margin erosion and still turn a profit is a pretty fair accomplishment. We'll take it, especially since we know that the poor bottom line results masked many underlying accomplishments in 2016 that set us up for greater success and resiliency in the future. Here are just a few to keep in mind. First, organic growth. In 2016, we wrote over 135,000 new policies, meaning that almost 30% of our policies in force at the end of 2016 were written during that year. Our retention ratios have stayed over 90% in almost all our states and the business is seasoning well. In 2016, all our regions were profitable ex cat and our gross non-cat loss ratio outside Florida was well below the industry averages in each state. Second, our M&A activity augmented organic growth and prepared us for a transformational 2017. It seems like a long time ago but we closed our acquisition of Interboro less than one year ago. As we expected, Interboro brought us a well underwritten book of business, stellar relationships with New York brokers, and some talented professionals. We earned a profit at Interboro every month that we owned it in 2016 and had very solid full year results. With the pending launch of the UPC 1.0 product in New York, we expect to grow the business in 2017. Even more exciting on the M&A front is our pending merger with American Coastal. We now have all required approvals except New York, and we know that the New York DFS is making good progress on their review. We still expect to close this quarter. Once we do, we expect to see the enhanced margins, accretive returns, and diversification of growth opportunities which we highlighted when announcing the deal to commence immediately. As one concrete example, with American Coastal as part of the UPC group, we could have experienced a year like the one that just ended, meaning a full cat retention and a full kitty cat retention and still have earned double digit returns on equity, something our company on its own could not do this past year. Third, capital management. In Q4 of 2016, we raised capital on very attractive and flexible terms, $30 million of five and three quarters, ten-year debt with no pre-penalty was a good deal, especially when considered in light of what other market participants were able to achieve. Coupled with our first ever external quota share which we also put on the books in Q4, our company is in a strong capital position and ended the year with improved statutory capital and RBC ratios despite the cat losses we sustained. We entered 2017 with a strong team that is building a company that can produce excellent and sustainable results for our stakeholders for many years to come. 2016 offered its share of challenges but we have persevered and are stronger for them. As we continue to diversify and gain scale through the organic growth and M&A activities that we have underway, our results will become more resistant to some of the forces that impacted us in 2016. As I’ve said before, we're on a journey up a mountain and sometimes that means traversing a bit before you resume your upward path. We're confident in our strategy and determined to move forward in 2017. At this point, I'd like to turn it over to Brad Martz to discuss our financial results in more detail. Brad?

Thank you, John and hello. I'm Brad Martz, the 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 February 20 and Form 10-K that we plan to file within the next couple of weeks. The highlights for UPC’s fourth quarter 2016 included gross premiums written of $167 million, 16% growth year over year; gross premiums earned of $182.2 million, up 31% from last year; net retained catastrophe losses of $32 million compared to just $3 million a year ago, a net loss of $10.5 million or loss per share of $0.49, despite the almost $0.93 per share loss stemming from catastrophes. Our underlying combined ratio was 90.2% and book value per share was $11.15. UPC saw continued premium growth during the quarter. Total revenues grew 31% from roughly $100 million last year to $131.4 million in the current quarter. Direct premiums written for the quarter were derived 42% from Florida, 25% from the Gulf region, 21% from the Northeast, and 12% from the Southeast, fairly balanced growth. Florida grew 11% on a direct basis year over year and outside of Florida was up 46% year over year, represented 82% of the overall growth in direct premiums written. Investment income increased 16.3% consistent with our written premium, and other revenues jumped 105% in the quarter due to the ceding commission income earned. Total policies in force at year end grew to just under 452,000, up roughly 30% with our policy mix being 41% inside of Florida and 59% outside of Florida. Total insured value increased to approximately $210 billion at year end with 64% of our property exposure now outside of Florida. UPC’s fourth quarter losses increased 114% from $46.1 million last year to $98.7 million in 2016. Our Q4 net loss ratio increased over 21 points from 33.1 last year to 54.2 in the current quarter. However, included in those results were approximately $32 million of net retained catastrophe losses and $7.4 million of adverse reserve development on prior accident years during the quarter which added roughly 32.5 points to the net loss ratio. The catastrophe losses were primarily from hurricane Matthew which we previously disclosed and exhausted our $30 million first event retention for named windstorms. The adverse reserve development was driven primarily from accident year 2015 losses in Florida for which the company decided to further strengthen its reserves at year end to curve the effect of further development in future periods. Excluding the impact of net retained cat losses and prior year reserve development, UPC’s underlying loss ratio increased just under one point year every year due primarily to higher severity from water, weather and fire losses as well as efforts to improve overall case reserve adequacy. During the quarter the company saw its non-loss operating expenses increase approximately $16.5 million or 49% year over year, $10.3 million or 63% of the change was driven by policy acquisition costs consistent with UPC’s revenue growth and changing mix of business where acquisition costs are higher outside of Florida. The other $6.2 million or 37% of the change was driven by all other operating expenses which are primarily due to amortization of intangible assets for Interboro, professional fees related to our pending merger with American Coastal, higher salary expenses driven by our initiative to shift claims adjudication work away from independent adjustors back to UPC associates and by increased assessment expense including an assessment from the North Carolina JUA as a result of hurricane Matthew. This resulted in our gross expense ratio increasing 3.3 points to 27.4 in the current quarter. The net expense ratio increased slightly more due to the impact of the $9.9 million of earned premium ceded under the company's new 20% quota share reinsurance treaty which incepted December 1, 2016. Our balance sheet remained solid despite the $32 million of cash losses and $11 million change in net unrealized losses during the quarter. UPC ended the year with total assets of just under $1 billion and shareholders’ equity of approximately $241 million. Our liquidity was strong with cash investment holdings of approximately $679 million. Our notes payable increased during the fourth quarter from the company's previously announced $30 million borrowing completed in December to strengthen the statutory capital and surplus of our insurance affiliates required to support UPC’s E tremendous organic growth rate. The combined statutory surplus of the group at year end was approximately $220 million. I’d now like to reintroduce John Forney for some closing remarks.

Thanks Brad. Operator, I think we would like to open up the call for any questions at this point.

[Operator Instructions] Our first question comes from line of Elyse Greenspan with Wells Fargo.

Hi good morning. I was hoping to first spend some time on the adverse development in the quarter. I mean, I know you guys saw about 6 million in the third quarter, which seems like similar kind of water related claims within Florida. Just kind of what emerged in the fourth quarter, if you could provide more color and why you think -- from here we won’t see any kind of future development on for 2015?

What we did -- Elyse, this is John Forney, I'll start and Brad can chime in where I fell short here. So we did an exhaustive review year end of our reserve status, keeping in mind that our estimate for the 2015 reserves in Florida at the end of 2015 and our outside actuaries estimate turned out to be short of what actually transpired during the year. And so, we wanted to try to make sure we had it right going into the end of this year. So we have a very strong internal actuarial team and we task them to look at it with as conservative an eye as they could. We have external actuaries that give our opinion and we hired a third external actuary to come in and give sort of a second look at what we were doing just to try to make sure that all the trends were being captured and that we could try to put this thing to rest and book the right number for those reserves. And that's what we did. As Brad said, it's driven primarily by Florida 2015 and it's driven primarily by two counties in Florida, Miami-Dade and Broward where our non-cat loss ratio in those two counties is over 65% gross loss ratio compared to the low thirty's in the rest of the state of Florida. So the same kind of book of business, but a loss ratio that's twice as high, that's indicative of some kind of systemic problem going on down there. And we want to make sure that we're minimizing it. We're doing that by a few different things, as I think I mentioned last quarter, we don't write any new business down there, we did not do any multi peril takeouts at all. We are non-renewing in accordance with statutory guidelines what we can non-renew, and it's only about 5% of our book of business overall, thank goodness because even with that, when you have lost ratios that high, it drives several points to your overall company even if it's that small of an amount. So we're taking a bunch of steps to try to make sure that we’re fighting a good fight down there and minimizing what we can minimize but market forces are pretty extraordinary right now in that part of the world. So we're trying to reserve against it and keep it under control that way.

And so is it, there was no -- in the Q4 was there any kind of development on business written in 2016, the first three quarters of the year?

There's always development every quarter, it's just a question of whether or not that development exceeds what you expected. So yes, there is development on all prior accident quarters every quarter.

But we significantly strengthened our case reserves as well during the quarter and really during the whole second half of the year under the leadership of our new claims team led by Scott St. John that came in the second half of the year. And it really tried to be very aggressive in getting files closed quickly or getting them reviewed quickly and booking to the ultimate very quickly, and I don't have the metrics right in front of me. Elyse, we will be happy to share with you offline, but we've had very much stronger case reserves per policy than we had previously, and especially in Florida, we are trying to book to what we think the ultimate is going to be, and as I said last year the ultimate turned out to be much higher than we had anticipated or actuaries had anticipated, and we're trying to get in front of that this time.

Elyse, I can share some of the statistics if you'd like. I mean just for an example, our average case year over year is up about 10%. Our average paid up about 3%. But average severity is up about 16%. When you look at overall non-cat loss costs, they increased about 57% year over year. Okay, but reserves -- total reserves increased about 83.4%. So -- and we kept IBNR pretty much consistent as a percentage of total reserves. So the IBNR was just in roughly 41% of the total, about $57.4 million at year end, that was consistent as a percentage basis as last year but again the overall change being up at a rate much higher than the change in non-cat losses incurred.

And then you guys, I mean you did see some growth within Florida in the quarter, just tying back to some of your prior comments, John, is it safe to assume I guess within Miami-Dade and Broward and these counties that are obviously running with these really high loss ratios that that business declined? Is there any way to tell us how much that was down in the quarter and the full year? Just more color on where the growth within Florida was coming from in the quarter.

Well, Broward, Miami-Dade is the segment of our book that we isolate and review very carefully, because it performs very differently than the rest of our portfolio. So to give you a few statistics, relative to that county, that one county is hurting us, for sure, average severity year over year was up 40%. Our average case reserve is up 16%, average paid is up 15% and our pure premium which is your frequency times your severity was up 27% year over year.

And then in terms of the expense, how much --

Elyse, if we just couldn’t finish the thought. We don't have the numbers right in front of us as to their shrinkage in the business down there but it is going down and will continue as some of these other initiatives that we have go into place, we will get you that information. The growth in Florida is not coming from Dade or Broward at all. And we're just -- we're doing our best to avoid that until there's some kind of a solution that's going to make a dent in what is obviously a very significant problem down there. So growth in Florida is coming from other areas where our experience has been, if not -- has been much much much better and certainly still profitable business everywhere else in Florida.

So as you guys think about the underlying loss ratio in the profile of the book kind of ex American Coastal, just you ended 2016 was about 49.4%, so was your expectation -- like how do you think about kind of the loss profile of the book for 2017

Our plans are to show some improvement in that underlying result. We do think there are other factors, weather related non-recurring factors from an operating performance perspective and a loss trend perspective that should help us see some improvement year over year.

And then one last question, you pointed to some American Coastal fees in the quarter and there was some assessments from North Carolina. How much I guess of your expense base in the Q4 would you say was kind of one time just if you have that number in millions?

I think there were two things in Q4. There was all those one-time things which were well over $1 million that are non-recurring. You also had amortization of Interboro intangibles which is not comparable to the prior quarter, which is recurring but it's a non-cash item that we hadn't had before. And if you look back at the Q4 gross loss ratio, that quarter was really an outlier on the low side, all other quarters prior to that have been 26, 27 that was -- what was it, 24 something like that. So you had a really an outlier comp on the low side and we had several nonrecurring and/or non-cash things in the expense ratio this side. If you look at the year over year, the full year expense ratio there's not deterioration in the expense ratio at all.

Yeah, I was just thinking about in terms of modeling for the Q1 and going forward. But that’s what kind of back out from the Q4 number.

Well, we're not done with American Coastal yet, so we're still incurring fees. Until that deal closes the cost is still running on the professionals that are involved in that, so we will continue to have some fees from American Coastal until that professional fees related to lawyers and accountants and bankers and all that stuff until it gets closed. So don't take those out your model just yet, that would hopefully be closed this quarter.

Thank you. Our next question comes from the line of Arash Soleimani with KBW.

Good morning. So just kind of building off the question on the development that Elyse had I guess. Are lawsuits increasing year over year? Can you maybe just talk about how you're seeing, I guess, the AOB environment shift 4Q ’16 versus verse 4Q ’15? And it's getting better or worse or just remaining stable on 1Q ’17?

Lawsuits definitely increased year over year 2015 to 2016 and our lawsuit experience is 90 plus percent in Florida, even though only 40% of our policies are in Florida. So it's a Florida driven, AOB driven environment and you see some nice multiple lawsuits on the same claim from different parties they think they have a standing to sue. Sometimes they do, sometimes they don't but it doesn't stop them from suing. So the environment is pretty robust right now in terms of that litigation for profit industry, sub-cottage industry that’s developed in Florida and they're going full steam ahead. The more -- so I don't know that you can say there is a decline in it overall, we're trying to do the best we can to minimize it for our company and we have some legal strategies that have worked for us in certain cases, we had a case dismissed just this week with prejudice by a judge in the Tri-County area in south Florida from a contractor that did not have standing to sue us and tried it anyway. So we’re trying to fight the good fight but I would not want to comment that systemically we're seeing a decline in AOB and related litigation activity. I don't think that's the case, I think every company's got to fight its own fight on its own terms and try to fight the machine.

That makes sense. I guess along those same lines, just given that there was the adverse in 3Q and now in 4Q, it looks like things were a bit I guess worse on the AOB than previously expected. I guess what does that imply for the underlying loss ratio on the current accident year basis, should we think about it being higher going forward, just given what we learned or what the actuaries learned in Q4, does that imply that it needs to be booked higher going forward on an accident year basis?

We definitely book our 2016 Florida, specifically Dade and Broward expectations were significantly higher than we would have a year ago and that's -- as I said even though it's a small part of our book that flows through the entire expected Florida loss ratio and therefore into the company's loss ratio. So yeah we don't -- no one likes to -- we try to do the reserves in an intellectually honest way every single time and our actuaries obviously do too, based on an opinion and last year we were both mistaken on what that loss ratio was going to be, that's embarrassing and we don't want to have to repeat that. So we're trying to -- we all try to take into account what we didn't take into account last year and what we missed and how we could do a better job this year but that definitely means more conservative estimates.

Thanks for that and I guess on the quota share reinsurance that you incepted on December 1 of 2016, who were the reinsurers on that program?

Nephila and Greenlight.

And it looks like the other revenue uptick is from ceding commission and I guess my question there is just why is this -- should that be offsetting expenses or why they’re hitting revenue rather than I mean I guess an expense offset in this scenario?

Well it is on a statutory basis, it’s a contra expense offsetting your underwriting expenses, for GAAP or qualifying it as a revenue item.

And I think you touched on this with Elyse a bit on the expense ratio but I guess I'm just trying to think, if we have a new systems I guess the in-sourcing of the systems and then I think the idea there is going forward as more states get rolled on that the expense ratio would decline year over year. So is the point that if you do strip out the Interboro amortization, if you do strip out the North Carolina fees, and American Coastal fees that we are seeing year over year decline in the gross expense ratio; is that a fair statement?

I think it would be closer to in line or above, we can say definitively here now that there was a decline year to year but on a net basis, as more and more businesses free outside of Florida, there is going to be more important obviously to measure it on a net basis than on a gross. Gross is a peer measure of course but we're getting reinsurance cost savings outside of Florida to offset those higher acquisition cost impact. So looking at it on a net basis, probably makes more sense and for the full year you can see no change. And obviously then if you strip out some of the non-recurring, yes I would think on a net basis the net expense ratio did in fact decline.

We expect that to continue.

Do you have the exact dollar amount for the North Carolina assessment?

Yes, the North Carolina assessment for us was about $450,000. We had other assessments in the quarter as well. There were some clean up New York stuff from Interboro. So we had a total of something like $750,000 of assessments during the quarter, 450 was from more Carolina JUA.

And I know Florida increased year over year written premiums on a direct basis but it looks like on a gross basis it’s declined about 10% so is that just basically all Broward and Dade related?

Well lack of takeout, I mean you had assumed premium in the quarter of last year, that we did not have this year.

But I guess within the takeouts last year just flew in to direct this year as they renew or --

Yes but obviously there's significant opt outs. There's mid-term cancellations and other things, you’re not going to get the full benefit of these separate last year in direct and the current business.

And my very last question in terms of weather year to date, is there anything that we should-- that you're aware of now that could be heading 1Q ‘17 results?

We have had cat losses both in the month of January and in February, I think everyone is probably aware of some of the foul weather that's occurred so far in Q1 and we've incurred about $4 million of catastrophe losses through today’s date in Q1, that we do expect that to develop some. And it's budgeted for it, it’s part of our annual operating plan.

Thank you. Our next question comes from the line of Ron Bobman with Capital Returns.

Thanks, I never thought I’d get called after Elise's eight questions. I had a question about the -- more follow up on the adverse development and particularly the case reserve setting, and I recognize the backdrop of this is sort of on just this whole AOB phenomenon. But nonetheless getting the case reserves is really problematic obviously for you and everybody. Given that we've got now sequential quarters of additions on the fifteen year. So can you provide some metrics, I think you touched on some severity figures but could you go over those or maybe add to them some metrics on the fifteen sort of case reserves announced that you set for water claims whether it's Tri-County, whether it's state wide, how those sort of case levels that you were initially setting changed as of the end of ’15 and then how you had to increase them again. And how that's affecting your initial case estimates for water claims that are coming in? Trying to get some idea obviously as to how the current case estimates on new -- newly reported claims are being established as compared to where you started setting them and then how you had to adjust them. Thanks

Ron, this is John Forney. I don't know that we’re going to be able to give you an algorithm that answers that question about how our case reserve establishment has changed other than to say, it’s changed. And we look at our past experience in trying to judge how much a newly filed claim is going to cost us. And Scott St. John, his team and now have been here several months and have seen the evolution of that and are trying to be very proactive in making sure we do all the proper file handling within the first thirty days and get the case reserve booked to what we think the ultimate is going to be within that that first month. And if you -- some of the most striking statistics I had seen recently were on just what our what our track record was for being more aggressive in outreach and getting claims adjusted quickly and getting the case reserves set at what we think the ultimate is going to be more quickly compared to six or nine months ago when there were things that sat there at an auto reserve for quite a long period of time, that's just not happening anymore. And we use our experience to try to book case reserves that are much more robust. As Brad said our reserves are up eighty something percent year over year. But IBNR is still about 40% of our total reserves that means our case reserves are up significantly more than our premium growth, than our claims filed and our losses filed, thirty points more. So the numbers are playing out in what we're seeing in reserve conservatism. But we don't have a specific algorithm says you know from now on I want to claim and Dade and Broward is $16,000 initial reserve as opposed to $12000, it’s just not that mechanical.

In all due respects I really think you need to provide -- I mean it's a recurring problem. Again I don't -- I'm not assigning blame here. It's the environment you're within but given the fact that you're having to constantly readjust, I think you’ve got to provide a metric to your shareholders as to the magnitude of the increase that you're taking because how can we have confidence that the inbound complains that are coming into the claims department now are being more conservatively crude for than they were twenty four months ago. I mean if I'm not looking and I'm not asking to sort of sacrifice your competitive position or your litigation position. I don't want that but I think you’ve got to provide more metrics to us. Rather than sort of anecdotal or more macro balance sheet level, IBNR growth amounts. And so I really ask you to think long and hard about that. Again limited by not giving -- and not trying to sacrifice your litigation position to counterparties.

Thanks Ron. I would just say that I mean that's a fair comment. And we will look at doing that and we're not -- we don't take it personally if you want to assign blame either you know that's your right to do it and it's our obligation to try and make sure we're providing disclosure to shareholders and enable them to understand what's going on at the company. So we'll take a look at that and see if we can get some metrics out there that give you the information you're looking for.

Thank you. Our next question comes from the line of Matt Carletti with JMP Securities.

Just a couple questions, one, kind of following up on Ron's line of questioning and I would echo his request for more information there, I think could really help us understand the situation better. Can you give us what was total PIF count at year and what was total PIF count in Broward and Dade combined?

Total policies in force were 451,386, and in Broward, Miami-Dade, it’s about 24,000.

And then what does pricing look like for your book specifically in Miami Dade right now? What actions have you taken in response alongside the reserving changes?

Premiums are flat year over year, we have an indication today that will be filed here in the next couple of weeks probably to be effective no later than 7/1. So that's indicating some very significant rate changes for that segment of our book. The overall is around 9% plus nine but it'll be substantially higher in these problematic territories.

And you said year over year premiums are flat, is that -- was pricing relatively flat or premiums flat and pricings up and your policies down?

Yes, pricing meaning average premiums, so average premiums per policy was roughly flat.

And then last question just -- if you can provide a little color on kind of the competitive position of American Coastal. There's been some I guess news in the market, not a ton, but here and there about some new entrants into kind of the commercial residential market, some from the E&S, some from kind of more traditional personal residential competitors. Are they seeing anything yet? Is that a concern? Is pricing coming under pressure as more people come into the market or is it more just PR and you're not seeing it at the ground level?

I think there's definitely been more competition in the commercial residential admitted market space in Florida than there had been previously. And if you look at the track record of profitability that American Coastal had established and dominant market position that they've established for a number of years, it’s understandable why people would want to compete in that space. And so yes there's been pressure as others have sought to undercut American Coastal’s price sometimes significantly and American Coastal has -- one of the reasons we love that company is they have very good market relationships and very sophisticated underwriting and pricing algorithms that enable them to understand the total cost of ownership if you will of one of these policies, including specific reinsurance costs. And so they've been able to navigate through this losing really only the policies that they were okay losing at the prices that they were being taken at, meaning that those policies at those prices are probably not going to be sustainable in the long run. And we're starting to see some flagging enthusiasm of some of those that have sought to significantly undercut the price and American Coastal is coming out of this cycle still in a very good position, ended up with a very good 2016 with relatively small losses from Matthew and good bottom line profit. So we really admire the way that they've fought through this era and it looks like they're in good shape coming out of it.

So would I be correct to assume that I mean their results have been pretty stellar in recent periods, particularly if you take cats out kind of the all of the perils core of loss ratio, would it be fair to assume that going forward that might creep up a bit that the loss ratios might not be -- they’ll still be really good but maybe not quite as good as they had been in the past couple years given that competitive dynamics what you're describing with them letting -- giving price where they give price but drawing a line when they need to draw a line?

I think a bit is the operative term that you used there. You might see a bit of a creep. But their year end results that we've had a preview of, are very impressive from that standpoint actually.

Thank you. Our next question comes from the line of Brenden Stoner with Stoner Equities.

Hi, thanks for taking my call, gentlemen. I just want to -- just talk about a little bit of the trends you are seeing outside of Florida with your pricing, could you just -- a little bit of discussion about the competition in your market outside of Florida?

I think we've said before on these calls that every state has a unique competitive dynamic. And so it's hard to generalize on the competitive environment in Texas versus the competitive environment in Massachusetts, because they really are state-specific. And I mentioned in my opening remarks we're really pleased with the results that we've been able to produce in virtually all of our states in terms of non-cat loss ratios that have been lower than we budgeted and planned and going into all of these states, our retention has been high and we've been -- we're not the lowest priced alternative in any of those states. Q4 we went over $100 million in premium in force in Texas, our first state outside of Florida to go over $100 million and saw good growth across our entire footprint. With that said, there's definitely competitive pressures that are differing in certain states as others have expanded from Florida or elsewhere into those states. There are some home grown competitors in some of those states and we're constantly monitoring our market position and our rate adequacy and expect to file for rate adjustments as needed. In fact we just filed for a rate increase in Texas within the last month and we look to file in other states in Q1 and Q2 of 2017. So we're grateful for the success we've had, our value proposition has been well received in almost all the states. We continue to do product hygiene to make sure we've got the rates and the right product features and we're pleased with the way things are going outside of Florida.

And another question about, I guess, as we look to the weather and I guess some would call it global warming, you are seeing, the threat of more frequent severe catastrophic storms could you just talk a little about how you view those threats and how they impact your expansion and growth plans moving forward?

I don't want to get into a scientific much less a political debate on one of these calls but I'm not sure we've seen any compelling evidence suggesting that there's more frequent more catastrophic storms occurring. And so I don't know that that's a fact, we do know that there's been a lot of bad weather the last couple years in places in Massachusetts in 2015, Texas, Louisiana in 2016, some starting the year off this year and so you've got to underwrite against it. You've got to price against it. You've got to reinsure against it. You have to diversify against it. You have to do all those basic blocking and tackling insurance things and so yeah we hope to the best but we have to be prepared for the worst whatever the cause of storms is we need to be prepared for it. So we’re taking all those actions to make sure we don't have any undue concentration anywhere, we're diversified, we have scale. We have the right price and we buy the right reinsurance, all of those things have worked relatively, relatively well and we hope that they will continue to in 2017.

So I appreciate the color, I definitely appreciate your comments on the reserve development question, because looking at competitors you see that their reserve losses are almost half of what they were last year, when they are showing great revenue growth but they are not reserving a lot of losses and I appreciate the fact that you’re trying to be more conservative. So good luck with the merger and thank you for your comments.

Our next question comes from the line of Samir Khare with Capital Returns Management.

Just some comments and questions on American Coastal, I guess, first is a request if you could -- upon closing of American Coastal, if you could provide us with eight quarters -- at least eight quarters of GAAP financials for them, that would help tremendously for modeling purposes. And then just question is how much expense saves might you guys realize from duplicative functions at American Coastal?

There are no expense synergies associated with the merger with American Coastal except reinsurance cost synergies. American Coastal writes its business through AmRisc, the MGA when we will inherit a new five year exclusive contract and there are fees in that contract that are going to be unchanged as a result. And we think they get great value out of that contract. It’s one of the key components of this transaction that was very attractive to us. And so American Coastal has very limited number of employees, you can count on them one hand and so there aren’t expense energies in that merger. There are very compelling reinsurance cost synergies with regard to combining our reinsurance programs and we do expect to have a combined program this year and that's where you'll see the real savings.

So the numbers, on the cat you guys reported 32 million dollars, I just want to make sure that 30 million of it was impact to hurricane Matthew and two, was elsewhere, is it at a different reserve, different breakup of that?

That’s correct. 1.8 million, Matthew has done it 30 million, it’s 100% saving at this point, the 1.8 additional was development on prior accident quarters where we've exhausted the aggregate treaty for 2016.

One bit of color on Matthew, our model losses according to AAR and RMS were between $65 million and $70 million on Matthew and it looks like we're coming in at about half of that number. So a good performance by the book of business relative to what the model’s predicted.

And the policy acquisition costs that increased I guess as you write more outside Florida. Should we expect that increase to continue as you continue to expand outside Florida?

Well, as the percentage of business outside of Florida becomes more there's going to be pressure on that, just Florida commissions are around 12%, outside of Florida they are between 15% and 20%. So you can -- it's just a mathematical exercise, as you do, outside it’s going to be higher.

The reinsurance costs are lower, so net expense ratio again should not be significantly different.

And then the quota share that you guys entered 12/01, is that going to be filed in the 10-K?

We’ll get back to you on that one, I don't know if that will be an exhibit or not, we will probably do a more disclosure around it in the K that's for sure but I'm not certain about that.

So I guess what I'm after is certain terms and conditions one of which I guess is there's coverage limitations for UPC on the contract. So I'm imagining that the premiums will be something less than 20% of UPC premium. What do you think that percentage would be?

I think a good proxy is probably 17% or 18% of the consolidated amounts we’re reporting just because it is -- the subject premium is just United Property & Casualty Insurance Company, it excludes Interboro and family security which are smaller books.

And then the ceding commission on the quota share --

We’ve not provided that intel, that’s confidential.

And then the $4 million that you guys have had thus far cats in Q1 with that, would that gross, and then that would be decreased by 20% which are there right.

No, would not. It's a gross number but Hurricane losses will be covered ground up from zero under the quota share but not the kitty cats. The kitty cats do not get ceded under the quota share until we've reached our $30 million retention.

And just on the water claims, how many open water you guys had for 2015 and how many do you have for 2016?

I can just say all open claims pending for the 2015 and prior accident years, so all accident year 2015 and prior we had 832 claims open and the majority of those are going to be water consistent with the percentage. We've given historically about how waters between 50% of our incurred losses.

And do you guys have any rate increases in the pipeline planned?

I address that earlier. We just filed in Texas, we have several other filings pending in Q1 and Q2.

Texas -- two largest states are getting high single digits and it's going to be extremely helpful.

Thank you. Our next question comes from the line of Sam Hoffman with Lincoln Square Capital Management.

I just had two questions, with the first, was the adverse development a surprise which was pointed out by internal and external actuaries, kind of December, January, February, timeframe but was it something that kind of became clear to you guys during the quarter as the cash reserves --

I would just tell you that every single quarter we try to make sure that we booked the reserves to the right number given the information that we have at that time. So we did that I think Q3 and as additional information came available in Q4, we booked the reserves at the end of the year that we thought were the right number trying to be conservative. So we use the best information we have at the time given trends in projections and actual experience to book the reserves to a number that is there reflects what's going on economically.

And I would add our internal actuarial is converged with our external independent natural view and we both hate to be wrong. So we’re confident in the numbers.

I mean I guess what I'm getting at is was the adverse development driven by the desire to fit 2015 accident fear completely behind you, at the last minute and therefore you pick a degree that’s conservatism, that wasn’t necessarily a view of both management during the quarter or was it just whittle by whittle it’s something that you guys could tell, as the claims came in and the amounts increased throughout the quarter but with the nature of the reserve increase.

As I described earlier we don't have the latitude to just say our internal actuary things reserves ought to be ex, or we’re going to book 1.2 times as just to be conservative. We have to use a reasonable range of what is going on based on the actuarial science and the actual results that we get. And do we want to have a conservative bias on that number? Absolutely. But it's not an arbitrary number that we just say let's bump it up 10%. Just for the heck of it. We try to be at the conservative end of what we think is going on and so it is not something that is a surprise to us that we look at the numbers and go. Holy cow and we did not see that before, we're looking at stuff constantly and we see it. We see what's happening in the book of business and then we wrap it all up at the end of the year and as Brad says we triangulate with our external actuaries, in this case we've been hired another an external actuaries to come in and review the process and we ended up with a number that we feel confident that it is the right number. And we hope that certainly that will put to bed two thousand and fifteen. But there are no guarantees on that.

And then second question is what's the worth the natural catastrophes and so far this year the big?

I think Brad addressed that earlier.

Louisiana was impacted by tornadoes as was Texas but --

And then finally in terms of pricing changes in states other than Florida. What was pricing changed in the fourth quarter there and have you seen the market environment that in 2017?

We look at each state on an individual basis. So I think we mentioned earlier we just filed for a high single digit rate increase in Texas. We've got several other filings in states outside of Florida that are in the works that will be filed in Q1 and Q2, in almost all cases they are going to be slightly higher wages that are justified based on the both cat and non-cat cash loss experience outside of those states. So we have a very good and robust product management department that has a schedule a very rigorous schedule of rate review and rate filings throughout the year in all twelve of the states that were doing business.

Thank you. Your next question is a follow up from Arash Soleimani with KBW.

Thanks. I just wanted to confirm the 9% rate increase you mentioned earlier, was that the average for Florida State wide that you plan to -- I have approved in the July timeframe?

Yes, the overall is 8.9 but it varies by territory, same with Texas. The overall in Texas was nine -- the indication was 910 taking nine but it varies greatly, we’re going to take -- it's going to be higher in certain parts like Harrison and potentially lower in certain parts like Corpus Christi where we think we've got more runway for growth and better experience. End of Q&A

Thank you. At this time there are no further questions. This does conclude our question and answer session. At this time I will turn it back to management for closing remarks.

Thank you very much. We really appreciate everybody's time on the call and their feedback and good questions. We will revert back with some additional metrics that hopefully will shed some light on obviously a topic that's on our mind and everybody else's mind is, is what metric can we show that the reserving philosophy and actual practice in Dade and Broward as it relates to that where the business is going in the right direction. So we'll get back to you on that. Other than that we continue to appreciate everybody's interest and support for UPC Insurance and we look forward to talking to you again soon.

Ladies and gentlemen this does conclude today’s conference. Thank you for your participation. You may disconnect your lines at this time.