American Coastal Insurance Corporation (ACIC) Q4 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the UPC Insurance 2017 Fourth Quarter Earnings 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, Adam Prior. Thank you. You may begin.

Thank you and good afternoon 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 I’d be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its website. Before we get started, I’d like to read the following statement on behalf of the Company. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends 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. This was the best quarter in teh history of UPC Insurance. It feels good to say that after an eventful year when we experienced financial and operational challenges from significant non-huuricane cat losses in the first half of the year, and losses from the unprecendented landfall of two Cat 4 hurricanes in the second half of the year. Despite all that, our team produced a quarter and the year that demonstrates both the financial resiliency of our model and the earnings power of our company. The fourth quarter’s EBITDA of over $42 million which enabled us to earn a profit for the year despite the hurricanes and other Cats choose the strength of our combined company now that we have fully integrated the American Coastal business. Both sides of our combined business,personal lines and commercial lines showed strong profitability for the quarter and overall profitability for the year. Speaking of American Coastal, it produced in December and January two of its strongest months in the past couple of years and is clearly re-asserting itself as the market leader in the Florida Commercial Residential space. On the personal line side, we grew our policies in force and premium by over 15% in 2017 while maintaining retention levels over 90% even as rate increases on over 70% of the book have begun to flow through. Part of the reason for that continued strength in writing and retaining new profitable business is our outstanding performance on our 2017 hurricanes. Financially, we came through to two Cat 4 hurricanes in our two largest states with over 85% of our reinsurance tower intact. We have already renewed a large part of our loss affected layers for June 1 at very attractive pricing, and we are well along in filling out all our June 1 reinsurance needs. Our reinsurance partnerships are working well for a number of reasons, one of which is that our book of business outperform the market on hurricane Irma. As you know and [Indiscernible] that storm took the path through the lower West Coast of Florida, where UPC is the largest residential property insurer overall. In the five lower West Coast counties, Collier, Lee, Charlotte, Sarasota and Manatee, UPC has between 10% and 15% market share, compared to our statewide market share of about 6.5%. Over 50% of our Irma claims came from those five counties, yet of the over 750,000 total Irma residential property claims reported in Florida so far, UPC is accounted for only 4.1%. Of those claims we have closed about 97%, 10 points about the statewide average of 87%. For a company to have a year where it receives over 63,000 claims more than double the prior year and a year where it retains over $115 million of catastrophe losses, almost 12% of gross written premium well and during two Cat 4 hurricanes through its two large estate is to be tested, both operationally and financially. In the same year, for that company to be able to close the transformational merger achievement investment-grade debt rating, raise $150 million of capital on favorable terms, grow organically over 15%, implement rate increases on over 70% of its book, regain momentum in the Florida commercial lines space, outperform the market on hurricane Irma, achieve profitability and report the best quarter in the history of the company to close the year is to pass the test. 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-K for more information regarding our results. Highlights of UPC's fourth quarter 2017 were; revenue growth with year-over-year; growth of 39%, improvement in loss ratios and our combined ratio, non-GAAP core income of $33 million or $0.77 a share. GAAP net loss of $27 million or EPS of $0.63 a share that was aided by a one time tax benefit related to the tax cuts in jobs act that became law on December 22, 2017. Achievement of investment grade credit rating and successfully raising $150 million of new capital on favorable terms to support our ongoing growth initiatives. Some additional insight into UPC’s revenue growth for the quarter includes gross premiums written of $252 million, up 51% year-over-year, gross premiums earned of $274 million also up 51% year-over-year, net premiums earned of $166 million up 37% year-over-year. Direct premiums written for the quarter were derived 56% from Florida, 19% from the Gulf region, 16% from the Northeast and 9% from the Southeast region. With a mix of 72% personal loans and 28% commercial loans. Florida’s growth year-over-year was mainly driven by American Coastal’s commercial gross written premium. Organic personal property of premium grew 15% year-over-year from all regions. Net investment income increased $3 million or 101% year-over-year and our total policies in force at year end, eclipsed 528,000 with nearly 1.1 billion of premium in force. UPC’s fourth quarter losses decreased 27% from $99 million last year to $72 million this year driven by hurricane Matthew in the prior year. Excluding the impact of net catastrophe losses and prior year reserve development, UPC’s growth and net underlying loss ratios improved almost seven points year-over-year due primarily to lower attritional loss ratios of ACIC's commercial residential business and improvement in our personal lines non-cat loss ratio. UPC insurance saw it non-loss operating expense increase approximately $32 million or 64% year-over-year. $17 million or 52% of the change was driven by policy acquisition costs which were consistent with premium growth as well as the inclusion of American Coastal’s Policy acquisition costs in the current year. Policy acquisition costs were approximately 18.3% of growth premiums earned compared 18.4% in the same quarter a year ago. The other 15 million of 48% of the change was driven by all other operating expenses which are primarily impacted by amortization of intangible assets and software which increased roughly $10 million year-over-year. Our operating expenses excluding non-cash charges for amortization, depreciation were approximately 6.7% of gross premiums earned compared to 7.3% in the same period a year ago UPCs growth underlying expense ratio which adjust the operating expenses for ceding commissions earned and merger expenses including the amortization of intangibles was 23.7% which is comparable to 23.4% during the fourth quarter of 2016. On the balance sheet, UPC end of the quarter with total assets over $2 billion including over 1.1 billion of cash in invested assets, a significant increase to our float of over 451 million year-over-year, our liquidity included approximately $124 million of unrestricted cash, the holding company which is available for contribution to any of our companies. Notes payable increased to just over $161 million from the issuance of the new $150 million fixed rate note and the retirement of our $30 million variable senior rate, senior note payable and $8.5 million note payable related to our acquisition of Interboro Insurance Company. Shareholders equity increased to approximately $537 million with the book value per share of $12.56 and the combined statutory surplus of our group at year-end was approximately $390 million. I’d now like to reintroduce John Forney for some closing remarks.

Thanks Brad. My only closing comment is to thank you all once again for your interest in UPC Insurance. Especially our investors who have been with us on the journey. We are looking forward to a great 2018. At this time, we’d like to open up the line for questions.

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question is from Greg Peters from Raymond James. Please go ahead.

Good afternoon, John and Brad. Congratulations on the year.

Thank you.

I’ll just try -- I do like the conference call right after you reported earnings. Most of the other companies that follow this pattern usually give us about an hour from the time they release the time the call begins so just in our and maybe some of the other investors might appreciate an extra 30 minutes to go through the financials, just my two cents on that.

We appreciate that guidance, Greg, it’s the first time we’ve done it this way, so we’ll take that into account if we do it again in the future.

Yes, well this is a great format. Anyway, I just wanted to – there’s a lot of questions that I know there is other people who are going to ask questions, so if I could just focus on a couple of areas, first of all as we think about 2018 in the context of both the top line and then combined ratio results, you know your total gross written premium for the year is up 47%. What is sort of your budgeted amount that you are anticipating are expecting in terms of growth in total gross written premium for 2018, or what kind of budget do you have set for that?

Greg, this is Brad. I mean, historically we haven't provided any forward-looking guidance and I'm hesitant to do so on this call.

Okay. If you can come out it at different way, of the four regions are any of the regions the growth profile that they generated in 2017 is there any environmental changes that may lead to some change in what your expected growth patterns are for 2018?

Nothing significant, we do expect to continue to grow both our personal lines and commercial lines book in 2018.

Yes. I think our historic organic growth rates are still reasonable estimates. And remember 2017 results only included three quarters of American Coastal, so 2018 will be our first full year with four quarters of American coastal and they were very profitable in the first quarter of last year as we evidence by the 8-K filings and pro forma filing we included our proxy last year, so taken that into consideration here you’re see a healthy topline growth again year-over-year.

Keeping on the growth thing, John, in your comments you mentioned December and January being record months for American Coastal. Its our view, we’ve been hearing in the market that the commercial property side has been increasingly more competitive. Is there any change in the marketplace or is it just a more attractive product you’re offering? Maybe you could fill-in some blanks there?

Sure. I’m going to make one clarification. I don’t believe I said record months, if I did, it was a – I misspoke. I said the best months that they’ve had in the couple of years, I couldn’t speak whether that record months, but they were very good months. So American Coastal is the market leader in the commercial residential space in Florida with close to 30% market share. They’ve been the market leader since they were established a decade ago. And so there is something that goes along with having been there for the long run. Having come through the storms in good shape, being part of a bigger stronger financial organization with great relationships with agents, a lot of companies have come and go in this space and American Coastal has been there and delivered for its agents and its policyholders. And that’s reaping the benefits. They benefit from the relationship with AmRisc which is deep premier underwriter of commercial cat-exposed risk in the country period and that underwriting prowess, their historical presence in the market, their relationships are all bearing fruits as we move forward.

I will also add, we’ve seen a decline in reckless competition. So there is competition, but there is reckless competition and with improved rate adequacy I think our appetite to resume growth in Florida has increase.

And then, is there intension to take American Coastal, the commercial side beyond Florida into other coastal states? And is that expected to happen in 2018?

We’re evaluating all potential avenues of growth for our commercial line side of our business, but we don’t have any specific plans to announce at this point.

Okay. I’ll stop with the top line inquiry. And then the other area I just wanted to focus on briefly is just both the expenses, you noted the expenses were up not only in the fourth quarter but for the full year, part of that of course is associated with the growth. I’m just curious if there’s any initiatives underway you might be able to see some expense ratio improvement in 2018? And then secondly on the underlying loss ratio, it certainly seems to have been the best result you reported in the last five years. Is there because of the rate action you’ve been able to implement over the last year is expected to improve further in 2018?

Greg, this is Brad. I think on the underlying loss ratio piece it really has more to do with the inclusion of American Coastal’s book this year versus last year. American Coastal, the commercial residential business runs at a much lower attritional loss ratio, so as that lends in, it’s bringing our revolved underlying loss results down which we expected, that’s one of the benefits we talked about at the merger. On the operating expense side, I did mention in my comments that our policy acquisition cost are relatively flat at 18.3% were down one time for 1% year-over-year and all other operating expenses. Really if you back out the amortization expense from general administration we’re right where we need to be. Is there room for improvement? Absolutely, are we satisfied with the expense ratio down? I think we can drive that lower and there is some evidence in the current quarter that, that’s recurring.

Okay, great answers and I’ll just close out, can you provide any sort of guidance around what you are modelling for your GAAP tax rate for 2018? And thanks for your answers.

You’re welcome. I would guide towards 26% as a effective rate for our company, blended to state and federal.

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

Thanks. Hey Brad can you remind me what was the impact of tax reform this quarter, what was the beneficial impact?

Beneficial impact was approximately $5.3 million. That came in... that revaluing our deferred tax liabilities at the new effective lower rates.

Okay, so basically about $0.12 of the $0.77 adjusted number.

All right.

Okay. And then just touching back on commercial residential, so what is the rate environment look like you know in 2018 I know 2017 obviously had some rate decreases within that line, but are we in a rising rate environment in Florida for that line?

I’m not sure that I would say that we are in a rising rate environment , but certainly at a – its very easy to say that the rate of decline has lessened or stopped. And it seems to be at the very least, a much more stable rate environment.

Okay. I’m just jumping back to tax a bit, with the rate lower, do you see any kind of regulatory risk in Florida similar to what’s going on in California? Or do you think that the tax benefits that you get are really be able basically flow to the bottom line without getting -- without any kind of mandate for them to be shared with policyholders?

We certainly can't speculate on what regulators might do. We’ve had no communication from the Florida office of insurance regulation with regard to that.

I guess maybe ask – go ahead, sorry.

The impact would be negligible given the profit loads in our current rate filings in Florida, I can’t say that.

Okay. And just based on what you're seeing in the market, I mean do you see continued indications for rate increases in 2018 in Florida?

We evaluate all 12 of our states every year. We’re in the process of doing that. We took rate increases on over 70% of our personal lines book last year, those are flowing through nicely now. We had another rate increase at the end of the year on our [new Florida HO3] product that’s starting to flow through here very soon and we’re evaluating all our states and we’ll be filing for our rate needs as needed here in Q1.

Okay. And does your reinsurance buying, I guess the way you approach reinsurance, does that change post Irma, obviously you guys had a good protection going into it, I think you're at like one in 400 return period. But does anything changed just given the potential for Irma to have may directly on fall into Miami. Do you do look at your spend differently now to the kind of you know prevent the worst-case scenario?

Sure. I think we were at your conference in New York when Irma was in the water and the weather channel had Miami CAT5 in the cone. And everybody asked that question at that investor conference. What does this means for UPC Insurance? And I’ll say, yes, what we said that. It means that maybe it goes halfway up our reinsurance tower rather than only 15% of the way up. And in fact for our company the lower West Coast of Florida is a more worst-case scenario than the lower East coast of Florida, because as I mentioned in my remarks that's where we have disproportionate market share compared to the rest of the state. So our -- we buy reinsurance differently than other folks do. We buy a lot of first event limit. We’ve see some estimates from the reinsurance community that suggest, we’re one of the Top 10 largest buyers of U.S. property cat reinsurance in the world, buy more first event coverage in any other company the Southern Florida even those with more cat risk. So we're really happy and comfortable with the way that we buy reinsurance. We are looking to improve and tweak it here and there. Of course we have a great program and now that we've in sourced our reinsurance intermediary work with the establishment at Skyway Re we’re going to be even better in 2018.

Thanks. And now that you obviously been a combined entity with American Coastal for some time, I mean is there any update to your thinking around on A.M. Best rating?

I don't know about update, just an evolution, we've been saying on these calls for couple years at least that we think an A.M. Best rating for all portion of our company will be a natural evolution of our business as we grow and diversify. We still think that we don’t have anything to announce in that regard, but we think there’s some potential opportunities down the road and when we get there we’ll be will be able to tell you about that. We’re doing nothing specific in that regard right now.

Okay. I guess maybe just touch on that in a different way. Is there that much of a benefit from having in the sense that you've been able to get the business that you want regardless of having one? Is it worth, I guess the capital charge in your eyes?

That is the exact question we ask ourselves when we consider that we do the analysis and try and say what's the ROI on investing in A.M. Best rating and to-date we haven't needed and the ROI did not look compelling to do it. But as we -- as I said that we grow and diversify the costs, it gets lessened and there certainly would be incremental opportunities that would come to us from a distribution standpoint if we had it. So we just continue to update that analysis and think about it and once we commit to we’ll commit to it. That’s not yet.

Thanks. And just my question is looking in Florida obviously you had I guess, stopped the writing of much new business in some County such as the Tri-County area Florida. Is that's still the case? Or when do you see an opportunity to potentially start growing in those reasons again?

That is still the case that we have virtually no new business coming in those areas intentionally and we don't see when do reopening that anytime soon. And let me clarify that, that's on the personal line side. We are still writing there on the commercial line side because of the commercial residential side the AOB issue hasn’t been an issue.

Right. Okay, perfect. Thank you for the answers.

Thank you, Arash.

Our next question is from Elyse Greenspan from Wells Fargo. Please go ahead.

Hi. This is [Weston Bloomer] on for Elyse. I apologize if this is already asked. I hopped on late. But on the reinsurance side could you provide an update following the renewal of your quota share and aggregate reinsurance cover at 1.1. And are there any changes to the program that we might see this year. I guess it will be great to have an update or initial view on the Jan 1 renewals? Thanks.

We are really happy with the way the Jan 1 renewals went. We did renew our quota share with a different panel of reinsurers that we’re really happy with. Our previous panel did a great job. But for various reasons, we decided to change that up a little bit. And so we’ve got [Indiscernible] transfer in January now as our quota share partners pretty blue-chip group of reinsurers and we are pleased with the way that that turned out. Also pleased with the way that we were able to do some non-hurricane Cat Ag renewal slightly differently than we've done before, but again it fit our needs and we’re happy with the way that all went both from a reception for the markets and pricing standpoint. And we’re well on our way. As I said in my remarks to filling out our June 1 renewal even as we speak

Great. Thank you. And then just the follow-up, were there any cats that may in the Q date or anything to call out there?

Well Q1 like first week of Q1 was pretty cold in Florida and elsewhere and there were lot of burst pipe, so the year got off to a cold start everywhere for the first couple of weeks, so there’s elevated level of claims activity when that happens especially when its cold in Southern states where they’re not used to pipes [freezing and thawing] and also for sure there is an elevated level of claims activity for at least part of January, but nothing resembling what we've seen in prior years.

Okay, great. Thank you for the answers.

Our next question from Samir Khare from Capital Returns Management. Please go ahead.

Hi. Thanks for taking my question. And apologize if I missed this already. Have you guys injected any capital into the insurance subsidiary since the hurricanes?

Yes. We have.

How much?

With the 25 million in the United Property & Casualty and 5 million into Family Security in December.

Okay. And then on the reinsurance front you guys mentioned you secured a large part of the program already at favorable terms. Can you go into that sum and with all the moving parts how much of an increase you anticipate getting in your insurance program?

We really can't. It’s premature. We will do the appropriate disclosures once the program is finalized.

Okay. All right. Any benefit to your Florida growth numbers and your underlying loss ratio owing to the temporary emergency order from the IR?

Any benefit, no.

No. Okay. And I think over the years the other income line item has had different things that contributed to it. Can you just remind us what's in that line item and what a good run rate is for that in 2018?

It’s only had to two lines -- two items in it. Historically it had policy fees and the ceding commission. Ceding commission income started in fourth quarter of 2016.

And a good run rate for into 2018?

We don’t really provide that kind of guidance.

Okay. And I just want to make sure I understand this. On the policy acquisition cost going forward when all the capitalized runs out what's a good run rate for that?

Again, we’re not going to provide specific guidance on line items in the income statement. We have not had a historical practice of doing that.

Okay. Then let me ask this way, right now the policy acquisition cost, it benefits from not having I guess the unearned premium, the acquisition cost associated with unearned premium from American coastal, is the right?

No. That’s not entirely correct. There’s obviously some of that and there's, so post-acquisition is a good chunk of that in there. So the policy acquisitions costs in the fourth quarter are as good proxy as any. Some of that amortization expense will move up in the pack -- from G&A to pack, but it’s not going to impact the overall expense ratio.

Okay. I’ll follow-up on off line. Thanks.

Our next question is from Greg Peters from Raymond James. Please go ahead.

Great. Thanks for getting -- letting me ask some follow-ups. Two for you. First I wanted you to give you an opportunity to update us on your distribution relationships with GEICO and Allstate. And then secondly provide us a perspective on the M&A environment today. You've been very successful with past M&A activities and I'm just curious where your head is at as we think about 2018?

Sure. I’ll start with GEICO and Allstate, both of whom are very important partners for us. Allstate only in Florida, been a long-standing very good partner. We’re grateful to continue to have them as a partner. GEICO writes throughout our footprint with us. They’ve been increasing their writings. We established a very good relationship with them. They have multiple distribution channels through their call centers and their field representatives and we’re able to access all of that. And our relationship is growing closer and bigger. We've established internal targets for business with them in 2018 that were both very pleased with and that continue to be a very productive relationship that we hope we’ll continue to grow and we appreciate their partnership too. In terms of M&A, it's fine to say that since we essentially have three transactions in three years, but we never intended to do any transaction. They were all serendipity that were shown to us at the right time and made sense. We said no far more often. I heard Warren Buffett say recently that the difference between successful people and really successful people is that really successful people say no almost all the time. And that’s really what we’ve done. People have shown us every idea under the son and we have such a strong belief in our core distribution system and our model that we grown in these other states that and our culture that we would only do anything that that was going to be strategically consistent and culturally compatible and there just aren't that many out there so were not seeking anything. We continue to get shown ideas here and there by folks, but we really are happy with it the company we have now and the ability that we have to grow it going forward.

John when I when I reflect back in on the fourth quarter 2016, and I remember you’re talking about some of the challenges you had on the claim side, and work that you are doing to improve that? And then I reflect on the catastrophe experience and claim activity in 2017, do you think your claim organization is now where it needs to be in terms of being able to process you know claim surge or do you have more actions underway to improve it further?

Clearly our claims department has improved light years under Scott St. John's leadership since he arrived at the company in August 2016. We have made amazing strides, you don’t need to look a whole lot farther than to see that we had no adverse development in total for 2017. We had favorable development. In 2016, we had $70 million of unfavorable development in our non-cat claims. And so that speaks volumes, especially in a year as I said when we had 63,000 claims versus 27,000 a year before. Will you get that many claims? Are there going to be challenges logistically and operationally? Absolutely. Did we have challenges? We sure did, but we closed 97% of our claims and we’ve done a really good job compared to the market as a whole is did we learn some things? Yes, we are upgrading lots of different things, based on the volume that we saw, we want to be able to scale, we are continuing to grow and so like everything else we’ve done in the last five and a half years, since this leadership team got to the company. We move forward, we make mistakes, we learn from them, we get better, we get better, we get better and our claims department is one of the really shining stars of our company in 2017 with the growth that we had and the way that they were able to respond. So it will be better in 2018. We are not where we need to be, but we getting there, you know we are at the point now where I believe all of our non-Cat claims are being handled by UPC desk adjusters who are employees. When Scott St. John got to the department in August 2016, that number was under 20% and the difference between the external handler handling your claim and internal one wearing the UPC shirt with that pride of ownership is huge. So we’re really happy with where we are going in claims.

Is there a difference in the way your claim team handles the commercial property risks and the claims in that area, versus the claims in the personal side or are they two separate teams?

Yes, there is a difference. America Coastal historically had done all the claims through a single external TPA in that relationship we inherited and now they are a very fine TPA and have done a good job, so we are – we continue to evaluate that we do have a bias at our company to in sourcing for insurance functions like claims, and so we’ll evaluate over time you know how much if any of that commercial stuff we want to bring in-house on the claims side, but for now we have that extra relationship that American Coastal has had historically.

Great. Thank you for your answers.

Thank you. I’d like to turn the floor back over to management now for any closing comments.

Well once again thank you everybody for being on the call at short notice, we definitely take note of Greg Peters comment that we should look to leave a little more time between release and call. If we do a afternoon release and afternoon call next time, we will take that into account. But in the meantime thanks again for your interest in UPC Insurance. We look forward to move in together, moving forward together with all of you. Thanks for your time today.

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