American Coastal Insurance Corporation (ACIC) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the United Insurance Holdings Corp Second Quarter 2018 Financial Results 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. It is now my pleasure to introduce your host, Adam Prior, with The Equity Group. Thank you, Mr. Prior, 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. And you’re 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 product 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 U.S. Securities and Exchange Commission. UPC specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of the new information, future developments or otherwise. With that, I would now like to turn the call over to Mr. John Forney, UPC’s Chief Executive Officer. Please go ahead, John.

Thanks, Adam. 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 are taking time to join us on the call. Q2 2018 was a solid quarter for our company. Top line, we had our best quarter ever from both the written and earned premium perspective. Bottom line, despite retaining over $17 million in cat losses we had our best Q2 ever, and the second best quarter in our company’s history after only Q4 2017 when we retained only $1.3 million in cat losses. Driving our results was balanced organic growth. Overall our book grew at a 12% annualized rate during the first half of the year and average premiums are stable or increasing. Both our personal and commercial lines books saw solid growth. Combining that growth with the improvements to our gross loss and expense ratios that we produced in Q2, you can see why we had strong results. At this point, I’d like to turn it over to Brad for his remarks.

Thank you, John. This is Brad Martz, the CFO of UPC Insurance. And I am pleased to review the financial highlights of our second quarter. But before we get to those, I’d like to remind and encourage everyone to review our press release and Form 10-Q for more information regarding our results. The highlights of UPC’s second quarter 2018 included our biggest production quarter ever with $385 million of gross premiums written, an increase of 9.2% year-over-year; GAAP net income of $14.7 million or $0.34 a share; non-GAAP core income of $15.5 million or $0.36 a share, combined and underlying combined ratios of 94.2% and 84.6%, respectively, and the successful renewal of our core catastrophe property reinsurance program at June 1st providing UPC with over $3.1 billion of robust reinsurance protection against main windstorms and earthquakes nationwide. Some additional insight into UPC’s revenue for the quarter includes group's premiums earned of $290 million, up 11% over the same period a year ago, net premiums earned of $171 million, 7% growth year-over-year. Our direct premiums written for the quarter were mix of two thirds personal lines, one third commercial lines with roughly 70% of our direct written premium growth coming from outside of Florida. The Northeast was our fastest growing region, up 16% for the year, led by New York, where we are starting to see some nice traction with our new product. Both personal lines and commercial lines each grew approximately 9% year-over-year, providing nice balance to the portfolio. Our assumed commercial E&S premiums grew nearly $15 million or 50% year-over-year and our investment income increased to $7.1 million, a 53% increase. Other revenue decreased $10.1 million or 73% year-over-year due to a change in the company's presentation of ceding commissions earned, which totaled $10.4 million for the quarter. Ceding commissions earned have historically been presented as other revenue, but our results for the three and six months ended June 30, 2018, now show these amounts as reductions to ceded earned premiums and policy acquisition costs. Ceding commissions are intended to be reimbursements for reinsurance and acquisition costs incurred related to the production of insurance contracts. This change in presentation had no impact to net income or core income, but it did remove the distortive effect on our net expense ratio and combined ratio, which means we will no longer adjust our underlying expense in combining ratios for ceding commissions going forward. This change in presentation has adopted prospectively for 2018. So our 2017 results did not change. UPC's second quarter losses increased 2% from $87 million last year to $88.6 million this year. This produced a 30.6% gross loss ratio, down nearly three points from 33.2% a year ago. Net retain cap losses of $17.3 million added about 10 points to our net loss in combined ratios for the current quarter, but did compare favorably to $21.8 million last year, which added 13.7 points two our net loss and combined ratios in Q2 17. Excluding the impacts of net retained catastrophe losses and favorable prior year development of just under $1 million, UPC's gross to net underlying loss ratios were mostly unchanged from the same period a year ago. UPC saw its non loss operating expenses decreased approximately $5 million or 6% year-over-year during the current quarter. That was driven by a $7.1 million increase in policy acquisition costs, which was offset by a $12.1 million decrease in all other operating expenses. The $50.5 million policy acquisition cost for the current quarter and the resulting increase for the year included an $8.1 million reduction related to ceding commissions earned. The remaining $2.3 million of ceding commissions earned during the quarter were presented as a reduction to ceded earned premiums. The other operating expense decreases were driven by $9.4 million decrease in non-cash amortization expense and a $6.7 million are decreased in non recurring professional service expenses related to our merger with the AmCo Holdings Company last year. The company's gross expense ratio was 25.1%, which compares favorably the prior year of 29.7% and 25.7% on an underlying basis, which just for the ceding commissions earned last year and is the most comparable measure to the current quarter. On the balance sheet, UPC ended the quarter with total assets of over $2.3 billion, including nearly $1.2 billion of cash invested assets; our liquidity included approximately $118 million of unrestricted liquidity at the holding company; shareholders' equity increased to just under $545 million with a book value per share of $12.72; and just under $13, excluding accumulated other comprehensive income. The combined statutory surplus for the group increased approximately $410 million at the end of the quarter. I’d now like to reintroduce John Forney for some closing remarks.

Thank you, Brad. This was a solid quarter but we can do better and that’s the really good news. The Sky cycling team has just won the Tour de France for the sixth time in the last seven years, has popularized the concept of the aggregation of marginal gains. We live that philosophy at UPC sweating out all the small details that matter, learning from every situation and making marginal gains across our platform that aggregates into big improvements. Q2 gives a little hint of what that can do and we’re looking forward to showing continued improvement as we go forward together on our journey. As always, we appreciate your continued support. With that, we will conclude our remarks and open up the line for questions.

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

I am going to just limit my questions to two, one is around growth, and the other is a balance sheet question. So with respect to growth, in your comments you mentioned a combination of rate and units. So I was hoping and I was hoping you could provide more color around that. I was hoping you could provide more color about where you're getting? Is it more on the personal line side or the commercial side? And then finally use it to update us on GEICO and Allstate?

Sure. I think the way to characterize that is, as I said in my remarks, rates are stable or increasing. Our average premiums are up slightly on the personal line side and fairly stable on the commercial line side, which is a big change from where things have been in the past. And so that's translated into annualized double digit growth in premium combined on our underlying book, which we feel really good about. You remember that we took some fairly significant rate increases last year on our personal lines book that are now flowing through that book. We’ve taken some additional rate action this year where we needed so that we can get the rates that we need and still be competitive. And it looks like that -- those efforts are working the way that we had intended them to. So we feel good about the fact that we’re able to maintain growth both in units and premium even in the face of some higher rates in some of the states that we needed to take rate in.

And on GEICO and Allstate?

Both relationships continue to be strong. We don't have any significant changes to announce either one of those. They’ve both been excellent partners for us. And the GEICO business is up significantly from where it was a year ago. And you remember a year ago, they accounted for about 10% of our new business. And that's number absolute and the relative number on the personal line side has gone up this year.

On the balance sheet side, now they growth -- I don't want to diminish the fact that your gross written premiums up 9% and its solid result, but growth is definitely slow relative to prior years. I was wondering if you could comment on how you view your capital position at this point. And then as an additional question, Brad, maybe you can time in on this. I’m kind of surprised that the reinsurance recoverable didn't go down by more as you pay off Irma claims, but maybe I'm missing something there.

Yes, I would say on growth. We're a $1.1 billion plus company now. So percentage wise it's going to go down. It's still double digits. It's still 12% annualized in terms of dollars. So that's a good number on that base. On an absolute basis, we’re writing more new business than we ever have before. And you know it's not even close. So our rate of production of new organic business is higher than it's ever been. It's just, as a percentage of the enforced book, it's lower than it's been in prior years as you noted just because the denominators gotten so much bigger.

Right. And just where are you with your capital position? I know one of your aspirational goals was to getting A.M. Best rating at some point?

And it still is a goal, maybe we can take it out of the aspirational category and put it into something a little -- that sounds a little more in the near to midterm. We are focused on making sure that we have the right arrows in our quiver to been us to grow our book of business. As you know, if you've -- on the last call, I asked everybody to take a quick 4.5 minute look at our video on our website UPC story. And if you watch that, you see at the end our -- both our Chairman and Vice Chairman of Board, saying some pretty big numbers that they had in mind for growth to try to get our company to $5 billion in premium over some period of time. To go from $1.1 billion to $5 billion in premium means we’re not going to be a Genentech rated personal lines focused company that's not going to get us to $5 billion. And so, yes, we are keenly aware of the need to add different products and different ratings to our portfolio in order to enable us to continue to grow the business. And we like the opportunities that we see out there. And we're focused on doing that. We don't have anything to announce at this time, but we’re trying to move in that direction.

And Brad, could you just give me an update on the reinsurance recoverable? And I will stop there.

Sure. In February, we definitely started seeing some loss credit from Irma. I thought we were really, probably one of the first carriers to address that head on. Once we got to around April, we knew it was fairly clear that it was a trend that required us to increase our reserves. So that's what's offsetting some of the recoveries we did collect is the overall increase in our gross estimates for Hurricane Irma.

Well, it’s still with the recoverable of close to $370 million. I would have expected that we're going to be approaching the anniversary of Irma, and I would have expected a big portion of that to have been paid out. Is the difference just solely the increase in what your expectation is around the gross loss? Or maybe you can -- let's come in at a different way, how much have you been -- how much have you paid out so far in total?

Give me a minute. I can get that number for you. I can tell you that the vast majority of it is -- a huge chunk of it, obviously, IBNR, but paid on Irma is over $400 million.

[Operator Instructions] Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

So I guess my first question is following-up on those flat questions about Irma from Greg. How much did your gross loss go up by this past quarter?

The only guidance we’ve ever given on Irma was in our initial press release way back in September of 2017, when we were about a week or so post event. So -- and that number was $450 million for both Harvey and Irma with Irma being $400 million of that. Today our reserve -- gross reserve for Irma sits at $623 million. That did include a small change at year end, and then, obviously, a bigger change in the first half of this year.

Because that was something we did several months ago by the way, it wasn't something we did in May or June or July. We -- and it’s not news to any of our reinsurers that we deal with. So it's something that we did early. And I think we still -- based on the most recent PCS modeled estimates, our share of the losses on Irma are significantly less in our market share of the business. And so our book performed very well on Irma.

Then a couple of other numbers questions. The investment income was pretty strong in the quarter. Is that shifts about 7 million or so about a quarterly run rate level. And can you give us the new money rate on the investment portfolio today or for the second quarter?

Yes, we feel that’s a fairly healthy increase. Obviously, we had a capital last year that’s helped boost assets under management. And the yield diverse right now is a little over 3%. So we feel good with rates on the rise related portfolios constructed it’s all short-term, high credit quality 100% investment grade, and we’re taking advantage of the rising rates.

And then where did the -- there was $45 million of assumed premium for a commercial property book in the quarter. Can we just get -- is there any more color you can provide there?

Year-over-year we’ve added a couple of new carrier partnerships. So in the previous year, we had one, today we have three carriers that we’re assuming some commercially enough business firm. We’ve not named those counterparties and we don’t tend to do so. But it’s a business we really-really like and we’re very thankful and fortunate to have those partnerships.

And is this something like how do we think about the level of, I guess, assume premium on quarterly basis. Is there some volatility to end this might come on?

Well second quarter is the strongest quarter historically for the commercial book, in general. So I think, VNSS is no exception to that given the cat-exposure embedded in some of that business. But we were originally guiding towards an annual run rate of just under $100 million.

And then, I think from your prepared remarks it doesn’t seem like there was anything kind of one-off any underlying loss ratio in the quarter, but did anything standout or is just kind of a good level to use when we think about the margin going forward?

Yes, I think it is. We -- like John said in the opening remarks, I think, we could have done better and we hope to do better, but I think it's a safe number to use. As was our gross expense ratio, I think, our gross expense ratio could be between 25%, 26%, broken out on the low side, about 18 point impact, three points in operating and underwriting, four points G&A, like it should have 25 on the high side it's 18.5 pack, 3.25 for operating, 4.25 for G&A gets to the 26. So those should be the runs rates for those numbers going forward.

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

Just the demand expects that you saw with respect to Irma that could cause you to increase your gross loss. Can you talk about that some?

I think it’s the same thing that everybody has seen in the market in Florida. The litigation can't start till 90 days after the events. And once that started in January, February timeframe it was clear that that was going to -- that the legal industry ramped up pretty good and was going to reopen and litigate claims. And so we saw fair amount of that. And then the roof tile issue, which I won't believe -- I'm sure you've all heard about the roof tile issue, which was a new issue that was a very specific one related to the timing of this event and the demographics in Asia [Indiscernible] Bruce in Florida. That was one that was a surprise, I think, everybody that ended up being a pretty, pretty expensive one. And so those were the two main drivers, litigation roof tile, but there's an accumulation of various things. And as I said our losses on Irma well higher than our initial estimate, the PCS have increased their estimate quite significantly. And so as a percentage of market share, our losses are still well below our percentage of the market.

Any rate increases that you guys have in the pipeline or contemplated in Florida in the near future and other states as well?

We operate in 12 states as you know. We have multiple products in those states. So we have literally dozens of different products that we're reviewing continually. And we filed for some rate in very states this year, including Texas, where we had a fairly significant rate increase and in Georgia. And we are constantly evaluating our rate adequacy and have a continual sort of filing program to make sure that our rates in all of our states are up to date.

On just Florida looks fair enough. Is there anything in the pipeline for that?

Nothing specific.

Yes, the annual indication will be done in Q4 and started. And so it's premature to comment on what that indication might be, but I don’t think it’ll be much, I don't expect. There are about eight states that could be up low single digit and there’re probably four states that could be down low single digits. Net overall, small increased rate change probably isn’t likely to be a big driver in the short term.

And just with the cats, can you get into that a little bit, how many cats were there, what geographies, what the gross losses were for each?

Yes, that's -- I would prefer to defer you to our 10-Q, which we expect to file on Friday that'll have more detail on the like the cat activity for the quarter.

Just specifically on the, I guess, the reinsurance covering with the smaller cats with the, I guess, the quota share in the aggregate stop loss. I would've expected to be the net loss to be a little bit smaller than $17 million. So I am just wondering if there's any cats from the commercially ENS lines there?

No. It’s all personalized.

Correct. I think it's interesting that there was some development on the Q1 events that creped into second quarter, but we’re on pace to hit our sort of annual net retained non-hurricane cat loss number. And so we feel good about the way the reinsurance programs respond both quota share and the aggregate.

The models would suggest Samir that 85% of our non-hurricane cat activity is over for the year. So Q2 was not unexpected that’s sort of how the way the book models Q1 and Q2 and then Q3 and Q4, and that side, obviously, go way up. So as Brad said, we’re on pace for what was in our annualized plan for non-hurricane cat activity.

And just a quick one on tax. It seemed to be lower than expected. Can you just talk about what caused that?

Nothing significant. I think nothing to point out, just timing differences.

And last one, your statutory surplus as of 630?

$410 million.

Our next question comes from the line of Arash Soleimani with KBW. Please proceed with your question.

Brad, a quick question on the expense ratio. You had about $2 million of the amortization. In the past you backed that out of the adjusted expense ratio. But this quarter you didn't. I was just curious if there was any reason for that?

Well, we want to be more consistent with standard industry practice. We do feel like that's an item that will be fleeting going forward. And we do track and we look at it carefully. It was just a presentation format, change that we thought was appropriate given the bigger presentation change for the quarter, which was finally dealing with our ceding commission incomes, which as you know, primarily come from our quota share reinsurance program that has distorted our net expense and combined ratios and forced us to do some of these non-GAAP measures, which everyone is uncomfortable with. So we’re very pleased that we’ve rectified that going forward.

In terms of states, in addition to the states you’re riding in your license. And are there any other states you guys are thinking up for the future?

Broadly speaking, Arash, we're a specialty property cat underwriter. That encompasses a variety of different potential cat situations that go beyond our current footprint. So you don't have any existing plans, but we're thinking were thinking long-term and big picture strategically that are certainly other states that will present opportunities for us to take advantage of our core competency in underwriting property cat risk and do business in those states. So, yes, there are other states, but we don’t have anything specific to announce on this call.

Okay. And in terms of your Florida appetite, are you still doing any kind of exposure reduction in Tri-County?

We’re not writing new business in the Broward and in Dade. And we are trying to manage our book appropriately given the difficulties in those markets down there, but our Florida book is performing very well. We have grown our Florida book fairly significantly since Irma as other carriers have either lost their appetite or agents have lost their appetite to do business with carriers who didn't perform well on Irma. And so we've been able to write high quality business in our new product rates that we really like. And our non-cat loss ratio Florida was as good as it's been in a long time of this quarter. So we feel really heartened by what's happened in Florida in the last seven or eight months as we rolled out new products seeing the fall off from Irma significantly increased their quality of our claims effort and the books shown the results of that.

And lastly I just wanted to know if you could you provide an update on the competitive environment and in commercial line.

Still a competitive environment. We love the way that the team in AmRisc that underwrites their business for us, flights on every account, applies very thoughtful analysis to where and when to draw a line in the staying on premium. And they've been very skillful about how they manage that book and those relationships with the agents. And so we welcome competition we have it in all of our lines of business that that business is certainly still competitive. But our results show that agents still want to do business with American Coastal and AmRisc because of the high quality of the people there and in the way that we service those products. And so we've been able to avoid losing premium while still maintaining our policy cat. It's been very neat trick, and we love the trends that we see in that business right now.

There are no further questions in the queue. I would like to hand the call back to management for closing comments.

Well, thanks everybody, we really appreciate it. I know there is a ton of moving parts in the numbers. There are two big things that impacted their presentation in comparison to last year where the ceding commission changed in accounting for a quota share, which puts us back to industry-standard accounting, which we did not have before. So we're happy to do it and glad that we're able to do it. But it does present comparability issues. And then the merger accounting at some stuff, which starts out in merger accounting as amortization flips over time into pack. And so that distorts this core income of accounting comparability. And so it's difficult to unravel that stuff. But the bottom line is for us, we had our best top line quarter ever. We doubled our net income from last year and we had our second best earnings ever at our company. So we feel good about it. The comparability issues will go away over time. And we appreciate you’re working through that. And thank you so much for your interest and your support for our company.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.