American Coastal Insurance Corporation (ACIC) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the UPC Insurance 2017 Third Quarter Financial Results 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 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’re 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 Web site. 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 and 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 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 U.S. 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're taking time to join us on the call. We had some big milestones at UPC Insurance during the quarter. We passed 500,000 policies in force, $1 billion premium in force and we have to deal with the couple of hurricanes too. I want to put those hurricanes in perspective for you. For the first time in history, two Cat 4 hurricanes made landfall in the United States in the same year. And they made landfall in our two largest states, Texas and Florida. And Irma went right through our area of largest concentration in Florida, the Southwest Coast where we have over $36 billion of total personal and commercial lines exposure and combined market share of 12%, double our state wide market share of 6%. And yes, even after all that, Harvey and Irma used less than 20% of our reinsurance capacity, leaving us at least $2.2 billion for other events. We retained $83 million of gross hurricane losses and another $30 million of other cap losses earlier in the year, and only at the benefit of the AmCo merger sense to beginning at Q2. But we still showed positive operating income for the first nine months of 2017, and we have a chance to show positive net income for the full-year, even after taking into account all the aforementioned cat losses and over $40 million of non-recurring merger charges and non-cash amortization. Those results demonstrate the financial resiliency of our Company, and we appreciate our investors, reinsurance partners and others that have expected to make us so strong. Operationally, we did well in the quarter. We have received over 35,000 claims, just from Harvey and Irma, compared to about 28,000 for the entire year of 2016. Receiving 16 months worth of claims in one month will put a strain on the resources of any company. And we certainly felt the pressure in the quarter. But our claims teams preparation and hard work paid off. To-date, we have closed almost 85% of Harvey claims and over 50% of Irma claims. And while the environment has been challenging, from a service standpoint, Scott St. John and his team answered the bell and solved every problem that arose. As I alluded to in my opening, hurricanes were not the only story at UPC during the quarter. We continued to put profitable new business on the books. In September, we wrote 13,000 new business policies, an amazing number considering that our two largest states were shutdown for much for the month. For the quarter, we grew our personal lines policy count by 4.7% and our commercial lines policy count by 1.1%. Retention was over 90%. We did all of that while improving our core underwriting performance across the Board. And the rate increases put in place earlier this year on over 70% of our book, are just beginning to flow through our results. 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. I'm pleased to review the financial highlights of our most recent quarter. But before we get to those, I would like to remind and encourage everyone to review our press release and Form 10-Q for more information regarding our results. Highlights of UPC's strong third quarter 2017 were; solid revenue growth of 35% year-over-year; improving underlying ops and expense ratios; catastrophe losses of approximately $83 million or $1.26 per share, which grow the non-GAAP operating loss of $21.2 million or $0.50 a share and a GAAP net loss of $28 million or $0.66 a share. Underlying combined ratio of 81.5% was 10 point improvement from the prior year. Some additional insight into UPC's revenue growth for the quarter includes; gross premiums written of $267 million, up 38% year-over-year; gross premiums earned of $268 million; 54% growth year-over-year; net premiums earned of $152 million, up 27%; direct premiums written for the quarter were derived 50% from Florida, 23% from the Gulf region, 17% from the Northeast and 10% from the Southeast; with a mix of 82% personal loans and 18% commercial loans. Florida's growth year-over-year was mainly driven by American Coastal Insurance Company's commercial gross written premium. Organic personal property gross written premium grew approximately 15% year-over-year from all regions. Assumed premiums of $9.6 million during the quarter were nearly all related to the commercial E&S property business underwritten by AmRisc. Net investment income increased $4.8 million or 81% year-over-year. Our total policies in force at September 30th eclipsed $511,000. And as John mentioned, premiums in force exceeded $1 billion at the end of the quarter, a landmark milestone for UPC Insurance. UPC's third quarter losses increased 97% from $73 million last year to $143 million this year, driven by catastrophes and the inclusion of AmCo in the current year. Included in those results were approximately $83 million of net retained catastrophe losses from hurricanes Harvey and Irma, as well as approximately $1 million of favorable reserve development on prior accident years during the quarter. These items, in total, added over 53 points to net loss ratio during the quarter. Excluding the impact of net catastrophe losses and prior year favorable reserve development, UPC's gross underlying loss ratio improved over 12 points year-over-year due primarily to lower attritional loss ratios of American Coastal's commercial residential business and reduced non-cat loss frequency compared to the same period a year ago. UPC saw its non-loss operating expense increased approximately $23 million to $25 million or 48% year-over-year; $15.2 million or 65% of that change was driven by policy acquisition costs, consistent with UPC’s direct written premium growth, as well as the inclusion of AmCo's policy acquisition cost; $8.3 million or the remaining 35% of the change was driven by all their operating expenses, which are primarily fueled by amortization of intangible assets, which increased approximately $6.5 million year-over-year. For the quarter, our gross expense ratio improved 1.3 points to 27.1%. UPC's gross underlying expense ratio, which adjusts for operating expenses by the feeding commission income and non-cash amortization expenses with even better improving approximately 5.8 points year-over-year. Despite the historical level of catastrophe losses during Q3, our balance sheet, capitalization and reinsurance program remained strong. UPC ended the quarter with total assets of nearly $2.2 billion, including over $1 billion of cash and invested assets, a significant increase to our flow of over $400 million from the same period a year ago. Our liquidity included approximately $41 million of unrestricted cash at the holding company, which is available for contribution to our statutory companies if necessary. Total assets and liabilities both increased significantly during the quarter, but proportionately due to changes in loss reserves and the reinsurance recoverable related to the cap losses incurred. At a minimum, UPC believes it still has roughly $2.2 billion of catastrophe reinsurance remaining until May 31, 2018 for any number of events until that limit is exhaustec, net of all expected payments related to Hurricanes Harvey and Irma. Shareholders’ equity declined to approximately $501 million due to the net loss during the quarter, which is partially offset by an increase in unrealized gains in the Company's investments portfolio. The combined statutory surplus of the Group at the end of the quarter was approximately $352 million. I’d now like to reintroduce John Forney for some closing remarks.

Thanks Brad. A doctor once told me that given my family history, I would probably live a long life. So he told me I better take care of the equipment. UPC's financial resiliency in the face of the historic 2017 hurricane season tells me the same thing about our Company. We are going to be around for a long time. So we are building and running UPC with that in mind. We are grateful to all our investors for supporting us on that journey. At this time, we’d like to open up the line for questions.

Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from Greg Peters with Raymond James. Please proceed.

I wanted to give you a chance to provide more color around the catastrophe losses, specifically how it breaks up between Irma and Harvey, how many claims were closed without a payment. There’s discussion around the risk of late notice of claims, and of course there's always working out there potential some benefits fraud. So there's a lot that I asked in that one question, but maybe you can provide some additional color.

The gross loss estimate for hurricane Harvey, we recorded at $50 million at the end of the quarter and Irma was $400 million. And as of yesterday, we've got total payments on Harvey of about little over $35 million and almost $82 million for Irma.

And on Harvey, how many of those claims were closed without payment. Do you have an idea?

43% of the Harvey claims have been closed without payment and 21% of the Irma claims have been closed without payment.

So, I guess the reinsurance conversation is going to be an important topic over the next several months. First, if you could follow-up with some color around your reinsurance recoverable. And I assume everything is progressing in terms of the recoveries there. And then second, talk about what your perspectives are for reinsurance costs in 2018?

On the reinsurance recoverable, yes, we are having no problem communicating and working with our reinsurers. We don't expect any credit risk related to the recoverable, vast majority of our program, as you know, is cash collateralized. We're very fortunate to be working with great reinsurance partners who have already -- one of which has been kind enough to advance their monies already. So we're in enviable position where we're not going to be a fore seller of any securities. And that is going very smoothly.

With regard to what's going to happen in the future with reinsurance prices, we're not in a prediction business. And so I won't add to the cacophony of voices that have made such predictions. I would just say that it's our hope that carriers that have fared well in the storms in terms of underwriting in claims performance, will be rewarded with pricing that's more favorable than companies that did not fare so well. So I think if I had one prediction to make, it would be that we'll see some differentiation, which has been lacking in the market in the last few years between those carriers that have claims infrastructure and good underwriting and those that maybe are lacking a little bit in that regard.

The final question and I'll re-queue. Can you just update on the Company's relationship with Allstate and GEICO?

Both continue to be very strong, and growing.

Any new states for GEICO or Allstate that they're partnered up with you, or any additional color?

GEICO writes across our footprint. Allstate writes with us currently only in Florida. I believe our book of business with Allstate makes us their largest partner in Florida. And we have a regular very healthy and productive dialogue about how to grow that book of business in Florida and potentially elsewhere. And GEICO's business with us does nothing but continue to grow.

[Operator Instructions] Our next question comes from Arash Soleimani with KBW. Please go ahead.

So just to start-off. What was the gross prior period reserve development in and outside Florida?

When you say outside of Florida, you’re trying to bifurcate the reserve development between Florida and outside of Florida? Is that what you’re asking Arash, or are you looking for more color on the $5.9 million of adverse that we reported last year. I'm not sure which number…

I'm looking for 3Q '17.

So just the favorable reserve development in the third quarter of '17 of roughly $1 million is primarily driven by accident year 2016 and Hurricane Matthew.

And the other question I had was on the amortization. What's the right way to think of that quarterly in the fourth quarter and in the first quarter of 2018 and then beyond that?

Note seven to our form 10-Q include some additional information on amortization for the fourth quarter, it’ll be approximately $12 million for Q1 '18, approximately $8.5 million. And then for the balance of 2018 second quarter, third quarter and fourth quarter 2018, approximately $1.4 million in each quarter for total of $5.5 million. So about $33.2 million in 2017 calendar year and $14 million in 2018.

And I think you may have mentioned this. What was the statutory capital at Q3 and also HoldCo cash at Q3?

HoldCo cash, I report it was approximately $41 million at the end of the quarter and statutory capital was $352 million.

And what are the plans to downstream any of the cash into the subsidiaries before year-end? And if you do have plans to downstream how much are you thinking?

We haven't made the formal decisions in that regard yet. We've got a Board meeting later this week where we might -- management may make some recommendations for the Board to consider. But those amounts have not been determined yet. We have done lots of capital analysis. And feel good about our ability to contribute additional capital if necessary.

For American Coastal, what was the split for Harvey and Irma?

American Coastal didn’t have anything for Harvey. Blueline, which is part of the AmCo did incur $5 million retention for Harvey, as well as for Irma and for commercial E&S business. But American Coastal’s Irma loss was about -- we pegged it at $130 million with the balance, the other $320 million being UPC.

And for the -- in terms of the seeded earned premium in the quarter, how much of the seeded earn premium was from the quota share versus the XOL cover?

I don't have that number handy. I could get it for you, give me one second.

Sure.

Arash, we'll get back to you with that number. We should move on.

Yes, you can move on. I’ll re-queue.

Thank you [Operator Instructions]. Our next question comes from Greg Peters with Raymond James. Please go ahead.

I wanted to circle back around conversations you've had with the OIR in the quarter, and after the quarter, specifically around feedback you've gotten from them regarding your performance of the claims, how you've been processing claims. And then more specifically conversations if any you had about the possibility of higher prices due to reinsurance costs rising?

We've had great conversations with OIR and we have a longstanding very healthy and positive relationship with them. We think the new commissioner is doing a terrific job. He actually visited our headquarters in person to spend time with us this quarter. And to my knowledge, his first time up Florida Insurance Commissioner has done that and we really appreciated it. That basically then had a very productive dialogue with him. We're open book for our investors, our regulators, our reinsurance partners. And so we don't have any secrets from OIR about what we're doing. We've done a great job on the claims situation. It doesn't mean that every now and then there isn’t something that falls through the cracks, every time something like that happens, we address it quickly and solve the problem. And that's been our mode of operation here in the wake of the hurricanes. We haven't had any specific conversations with OIR about prices going up for increases in reinsurance. There's a statutory capability in Florida to do an expedited rate increase, specifically to address reinsurance rate increases. But we're not anticipating that at this time.

And then on the reinsurance getting, back to reinsurance, John. I know you don't really want to get -- go down the slippery slope of commenting on what's going to happen with pricing. But a large percentage of your coverage or limit that you bought didn't get any hit with any losses in 2017. How do you think your reinsurers that didn't get losses in the higher layers are going to react around conversations with pricing in '18?

We’re really fortunate to have a very strong panel of reinsurers that are our partners, that have been with us for many years. And even though there've been losses in the last couple of years, the reinsurers that have been with us for the last five years are all profitable and have earned good returns. We wanted to be a win-win partnership for the long-term and I think that's the kind of relationship we have with our reinsurers. Most of our reinsurers are spread throughout our program don’t necessarily a lot that are hiding in the upper layers and don’t have any losses. But we have a pretty good spread on our reinsurance book. But we have a concentration with a core group of partners that have a significant commitment to us that we’re their largest intermediate -- we’re their largest counter-party and they’re our largest reinsurers. And so we talk many times a year regardless of whether their hurricanes about how we’re going to structure the program next year, we've already begun to have those discussions. And we just feel good about where we’re going to end up without predicting whether that's going to be flat or up or down, we feel that we are going to get the benefit of the doubt from our reinsurance partners, because we are who we said we are. And we're delivering after these events like we felt we would.

The other component the reinsurance cover that you have as the aggregate program to in effect cover the kitty cat events. I believe that renews at the beginning of the year. How is that process going? And then the last question would be just if you can update us on your experience around Assignment of Benefit fraud in the State of Florida?

Sure. On the ag, it does renew at the beginning of the year. And we are actively out in the market right now trying to see what kind of structure and pricing would be available. As you know, it's been very active last couple of years in the so called kitty cat market. And there has been pressure on those programs. So we have -- we’re out there with what we think is a good strategy and we’ll see how that goes. With regard to AOB, I don’t know that we have any particular insight on AOB with regard to the hurricanes. We have not seen a lot of activity with regard to AOB on the hurricanes. It doesn’t mean there won't be activity as we go forward but it has not stood out so far as a core part of Irma in Florida. The bigger picture on AOB from our perspective is that it continues to be a significant issue in Florida, especially in Southeast, especially in Dade and Broward County. And there is no legislative solution insight. There are some things that are being done and we have some things pending that we think are going to help at the regulatory level and the commissioner and his team have been supportive of trying to find things to help curb the abuse without prohibiting legitimate assignments. And we’re working closely with them to try to accomplish that.

Thank you. We have a follow-up from Arash Soleimani with KBW.

In the fourth quarter, has there been any noise from Tropical Storm Philippe?

No. We believe, yes, there have been losses but it will not be impactful to the quarter, we believe. The vast majority of those losses will be seeded under our aggregate reinsurance program. And to follow-up on your previous questions, seeded earned related to the quota share was $23 million during Q3.

Okay, and the rest is XOL then, okay.

Perhaps.

The other question I had just following on to the Philippe question. Were there any other kitty cats in Q4 year-to-date so far in the quarter?

Kitty cats, no. We had an eight, which was small and insignificant as well. But that's a named storm but nothing else significant.

And in terms of assumed premiums of $9.6 million in the quarter, I think you made a comment in your preliminary remarks. But did you say what part of that came from the American Coastal captive?

Almost 100% of it.

So there was nothing that’s -- go ahead…

Blueline is not captive of American Coastal. It's a subsidiary of AmCo Holdings. It has nothing to do with American Coastal insurance company.

And has there been anything else going on with TWIA at all?

No.

And remind me what was the latest rate increase you received in Florida and what the date was where it went into effect?

It's 8.4% on our legacy book of business, and it varied from -- that's the overall, it varied from county to county. It's been in effect for three months now and we’re starting to see some of the first renewals onto that. And we've retained the business while getting the rate increase, that's been terrific. We also have about an 8.3 rate percent increase pending on our other product in Florida, our family security product that’s pending before the OIR right now.

And I know you made some comments in terms of rates. I know you don't want to get too much into detail on that. But my question was aside from the reinsurance, you said you could make a filing potentially -- to pass through the reinsurance rate increases but just broadly speaking, in terms of the Florida market. Do you expect the Florida market to harden as a result of these storms, primarily rate more broadly?

I think the Florida market has been hardening, as a result of the AOB difficulties that some of the smaller and take out oriented carriers have faced as a result of the retention that almost everybody took on Matthew last year, as a result of the continuing AOB and retention that people will take this year. It's been a hardening market for some time now and that's worked to our advantage.

And just in terms of these storms beyond the rate increases from the AOB, do you think these storms will result in further increases on top of the AOB increases?

I don't know that we have any way to predict that nor would we -- we really want to. We like the way that we're positioned in Florida. As I said, we started to grow again in Florida. We grew our policy count in Florida in the quarter again by about 5% just for the quarter, because there is somewhat of a flight to quality going on in the state as hurricanes have become more prevalent the last couple of years and some of the other carriers have had some difficulties in delivering to their agents.

And if we do see primary rates go up in Florida, and if that causes more polices to go into Citizens. Would you look to do more Citizens take out or do you see an opportunity there potentially?

Arash, you were breaking-up and you went into a language that we didn’t quite understand.

What I was trying to ask is, if rates do go up in Florida and that causes more policy as we go into Citizens. Would that be an opportunity [multiple speakers]…

If rates go up more, say that again -- you’re still breaking-up.

I am a cellphone connection. If rates go up in Florida and more policy is going to Citizens as a result. Would that present an opportunity for you where you would want to go into more Citizens take outs?

We still can't make out the question with your connection.

John, this is Adam, if you can hear me. The question was, in the event that rates continue to go up, would you consider Citizens take out?

Adam, you have a bad connection as well, or we do. We couldn’t understand your question either.

I am hearing Adam, there might be a connection -- I heard Adam clearly. Can you hear me any better now?

We can hear you.

So I was basically trying -- in terms of the quota share that you have. Is that something that would get renewed at December 1? Or have you already been in that process?

Your connection is still bad, but I think I understood you had asked about the quota share and it's something we're looking at and evaluating.

And my other question was on the Kroll rating. What does the Kroll rating allow you to do?

Arash, we can’t hear you. We can’t understand your questions. I think we’re going to have to move on. Your connection is really bad.

You might want to try and re-queue.

[Operator Instructions] There are no further questions.

Okay, we apologize for the technical difficulty we experienced there at the end of the call. But we appreciate everybody's interest in our company and appreciate your partnership on the journey. Thank you so much for your time today.

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