American Coastal Insurance Corporation (ACIC) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to UPC Insurance Second 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]It is now my pleasure to introduce Adam Prior of The Equity Group. Please go ahead sir.

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.In addition, the Company has made an accompanying presentation available on it’s website. 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 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 in 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 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’d now like to turn the call over to Mr. John Forney, UPC’s Chief Executive Officer. Please go ahead, John.

Thank you, 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 your taking time to join us on the call.As Adam said, we are publishing an investor presentation in conjunction with our earnings release. You can find it on our website and I encourage you to review it. While we will not be going slide by slide through that presentation, we will refer from time to time to some of the data and analytics included therein.This was a tough quarter for us, the first of my 29 quarters as CEO of UPC that we posted a loss without any hurricane activity. Nobody likes that less than I do and it won't happen again.The good news is the problems in the quarter and the first half of the year in general are not systemic or widespread, rather they are concentrated in our personal lines business, our commercial business is doing great and in only two of our 12 states, Florida and New York.The rest of our states and lines of business are doing fine. Both Florida and New York were victims of bad product management on our part and bad CAT activity over eight points in Florida and over 12 points in New York, which exposed the weaknesses in those products.We need more rate in both places and that is at hand. Our Florida family security 9.2% rate increase went into effect earlier this month, as did New York’s 5.4%. Additional rate increases are coming soon in both states.Please refer to Slide 9, in the investor presentation for a detailed look at what is coming in Florida and the projected impact. We have also completed the re-underwriting of all our major states using the predictive analytics tool we piloted last year with Rhode Island.Rhode Island’s loss ratio was down 12 points this year after that review. And the table on Slide 10 of the investor presentation suggests we can get three points improvement on the entire book by calling less than 5% of policies. This is not hypothetical data, it is our actual policies back tested using the predictive analytics model and shows what would have happened if we had used the model to manage our book last year. We intend to do that now beginning in Florida and New York.Our other underwriting initiatives, the use of roof aerial imagery, home self inspections and others are also showing signs of traction. Even with this quarter's adverse development our 2018 accident year personalized non-CAT loss ratio is still lower than any year since 2015. And the actuarially indicated 2019 ratio is trending down again. See Slide 7 of the investor presentation for more on this.We are redoubling our efforts in all areas and as part of that we recently welcomed a new leader of our personal lines underwriting efforts. Bob Rosbrook joined us on July 22 after 17 years at Nationwide where his last position was Director of Personal Lines Staff Underwriting. Bob will lead our personal lines underwriting efforts and we are thrilled to have him on board.I'd like to close by highlighting two other recent additions to the UPC team. First, Jeff Bergstrom who joined us this week as our new CAT Claims Director. Jeff has spent the last 12 years at Farmers, most recently in Phoenix where he was the Mountain West Territory Claims Manager. With the continued pace of CAT activity, it was imperative that we strengthen and upgrade our CAT claims team. Jeff enables us to do that immediately.Finally, we created a new position at UPC called the Director of Training Culture and Leadership Development reporting to me. We believe strongly in having a culture that supports the development of strong leaders throughout the organization and investing in our people is a high priority at UPC.We were fortunate to be able to fill this new role with [Mike Maloney]. Mike joins us after an amazing 20 year career as an army officer, the last 10 years as a troop and squadron commander in Delta Force, the military’s most elite counter terrorism unit.We are humbled to have a guy of Mike stature join UPC and we look forward to working with him as we continue to build a culture designed to help all our people be the best version of themselves.At this point, I'd like to turn it over to Brad for his remarks.

Thank you John and hello. This is Brad Martz, the CFO of UPC Insurance. I'm pleased to review UPC's financial results but also encourage everyone to review our press release, Form 10-Q and investor presentation for more information regarding the company's performance.Highlights for the quarter ended June 30, 2019, include gross premiums written of approximately $450 million, an increase of $65 million or 17% year-over-year; our net loss of $2.9 million or $0.07 a share compared to $14.7 million or $0.34 a share last year; our core loss of $3.5 million or $0.08 a share versus $15.5 million or $0.36 a share a year ago. Our underlying combined ratio was 91.8%, up 7.2 points from a year ago and our book value per share was $12.54, up $0.44 or 3.6% from year-end.Premiums written for the quarter saw an acceleration in commercial lines, which is up 28% and deceleration in personal lines year-over-year with growth slowing to just over 11%. The Florida and Northeast regions accounted for approximately 85% of the growth in direct written premiums in all regions had positive growth year-over-year. And assumed commercial E&S premiums grew 23% to over $55 million in the quarter.Ceded earned premiums were approximately 42.3% of our gross earned premiums in the quarter, compared to 41% last year, with the change being driven by the increased sessions to our quota share reinsurance program. Other significant items impacting total revenues during the second quarter included a 7% increase in net investment income and 9% increase in other revenues. Unrealized gains from equity securities at $2.7 million compared favorably to $1.4 million in the same period last year.UPC's second quarter net loss and loss adjustment expense was $116.3 million, an increase of $27.7 million or 31% year-over-year. This produced a gross loss ratio of 35.2% and a net loss ratio of 61.1%. Included in net losses were $15.8 million of current year catastrophe losses from 16 new events during the quarter and $15.3 million of unfavorable prior year reserve development. Excluding cat and prior year development, our underlying loss and loss adjustment expense was $88.1 million, up approximately $13 million or 18% year-over-year.Large fire losses assumed from our E&S quota share arrangements accounted for roughly $7.7 million or 60% of that increase in underlying losses during the quarter. The company's underlying gross loss ratio of 25.8%, was up less than a point year-over-year and an underlying net loss ratio of 44.7% was up approximately 2.5 points.UPC’s gross catastrophe losses incurred during the quarter were $51.6 million, with $17.6 million being ceded to our aggregate reinsurance program, $9.7 million ceded to the non-hurricane catastrophe excess of loss program and the remaining $8.5 million to the quota share reinsurance program.Net retained cat losses of $15.8 million, were down $1.5 million compared to the second quarter of 2018 and added 8.3 points to our net loss and combined ratio versus over 10 points from the effect of catastrophe losses last year. The prior year reserve development for the quarter included $8.6 million or 56% of the total stemming from cat losses and $6.7 million or 44% from non-cat losses.Most of the development stemmed from the company's personal lines homeowners business in Florida primarily on accident year 2018. The company saw increases in late reported claims, litigation and assignment of benefit activity during the quarter that warranted the reserve strengthening.UPC is very grateful for the support shown by the Florida Legislature and the office of Insurance Regulation for passing meaningful new legislation intended to curb the fraud and abuse we saw during the quarter. Thus, the company remains optimistic that these recent legislative changes will lead to improvements making it significantly less likely that the unusual development patterns we saw in the first half of 2019 will persist in the second half of the year or beyond. I believe the proactive reserve action taken this period went a long way to mitigate the potential reserve risk related to prior accident years. And hopefully, puts the painful narrative related to AOB behind us for good.UPC’s non-loss operating expenses were $89.6 million, an increase of $16.8 million year-over-year. The increase was driven primarily by policy acquisition costs, which rose $11.1 million or 22%, which was slightly faster than the pace of premiums written due to the strong production quarter in commercial lines. The remaining $5.7 million was related to continue investments in people and technology required to support UPC’s long-term growth strategy.Our gross expense ratio was 27.2%, an increase of a couple of points from the second quarter of last year, but for the first half of 2019, our gross expense ratio actually declined slightly to 26.9%.Moving to our balance sheet, UPC ended the quarter with total assets of approximately $2.7 billion, including nearly $1.3 billion of cash and invested assets. At June 30, the duration of our fixed maturities remained at 3.4 years with an overall composite rating of A-plus. Shareholders' equity attributable to UIHC stockholders was $541.9 million with a book value per share of $12.31 excluding accumulated other comprehensive income. And lastly, the statutory surplus of our group was $454.2 million at June 30, 2019.I'd now like to reintroduce John Forney for closing remarks.

Nothing further to add at this point. Thank you, Brad. We'd be happy to take questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo. Please state your question.

Hi, thanks. Good evening. My first question, I just want to spend a little bit more time on the adverse development that you guys took in the quarter. I guess, you tried to insinuate, obviously you guys trued this up so there won't be an issue in the future. But can you give us a sense like where did you – where is Florida sitting on for accident year 2018? And how does that compare to where you're booking your business in 2019? So we just have a sense that we won't see any kind of ongoing issues from here.

Hi Elyse, this is Brad. We basically just move closer to the top end of our range established at year-end. At year-end, our net loss reserves were approximately $183 million. So and we had a pretty wide range given all the methodologies we look at, but that was a central estimate. And given the unusual development activity we saw on the first half, we felt like it was prudent to be cautious and not expect that to change.Although, there are some positive indications, especially with the new legislation that we won't see a repeat, but we just felt like that the timing was good and the data suggested it was inappropriate charge to take now.

Elyse, this is John. I'd add that we included the accident year actuarial indications for Florida. I think in our year-end investor presentation, the first one that we did. In Florida accident year 2018 was shown like a four point improvement from accident year 2017.Even with this adverse development, it's still – there's still a significant improvement. It wasn't four points but it's a couple of points anyway and the accident year 2019 indications look even more favorable. So the underlying trend is good. We just didn't have as much improvement as we thought and we've had development as Brad said in this first half of the year, driven by I think hopefully the dying breadth of the AOB industry, trying to get in as much stuff as they could before the law changed.

And that really speaks to the non-cat side. The cat side is a little different. Obviously, the majority of the development for the quarter and for the year has been on cat and the cat events from 2018 are tough. We had 27 different events. They averaged about $3.3 million incurred loss for each event at year-end. That's what we were looking at. That's grown a little bit. And when you have the kind of frequency we had, it adds up quickly.And the cat events, we make no excuses and we want to be conservative. I can tell you at this – at June 30, 2018, we had gross losses of about $50 million, $54 million, the IBNR load on that was about 19%, $10 million-ish. This year at June 30, 2019, we've got gross losses of $79 million for the year and an IBNR load of $31.2 million or about 40%. So we are just overall taking a much more conservative stance on some of this non-hurricane weather-driven activity.

And so I guess – so if you said Florida was maybe wasn't necessarily four points better, 2018 versus 2017, but something a little bit less. So where do you book accident year 2019, I guess in terms of 2018 or did you – this quarter try to – did you go back and put some more conservatism into the first quarter of 2019?

Sure. I mean, we definitely – the results of all prior accident years always bleed in the current year indication. So accident 2019 is slightly better than 2018, but it's not significantly better at this point. We're hoping that spread widens about year-end.

Okay. And then the policy acquisition cost ratio went up in the quarter. I think you said that was due to some stronger growth within commercial lines. How should we think about modeling that going forward?

Yes. Policy acquisition costs are going to be tough to compare the prior quarter because of distortions of the quota share.

What is – is this quarter’s level a good ratio to use going forward?

It's slightly elevated this quarter. But the previous three quarters would probably give you – if you took an average of the previous three, it probably be very close to what we'd expect going forward.

Okay. And then do you see any movement in your permanent losses in the quarter on a gross basis?

No.

Okay. And then last question, you guys announced, share repurchase program, can you just update us on thoughts around buying back stock and then just when you might use the authorization, given that you just put it out there tonight?

Right, we had a very robust discussion about that issue at the board meeting and obviously with the stock trading where it is, it's accretive to buy back the stock. We're prepared to do that. We don't have imminent plans to do it tomorrow. But we'll look at what's happening day in and day out and the board is prepared to do it quickly when it seems like it's appropriate. We wanted to make sure we had the authorization in place.

Okay. Thank you very much.

Thank you.

Our next question comes from Greg Peters with Raymond James. Please state your question.

Good afternoon. Can we go back to Page 3 of your press release and you provide a roadmap on the increase in direct written and assumed premium by region. Can you give us a sense how much of that change by region is price versus how much is new policies?

I guess, I can give you a little bit of sense of that. This won't be the whole picture because it's one month data. And it's just on the renewal book, but the renewal book is big. So we we’re looking at our policies that renewed in June, 2019, okay. So they were – compared to what they renewed at in June, 2018 and the premium on those policies that actually renewed was up 7.2% year-over-year for the entire book of business, personal lines from 2018 to 2019 based on a one-month snapshot of actual renewals June to June. So that gives you a sense that there's a sort of mid to high single-digits of additional premium flowing through the book from the previous rate increases that we've done.

What about on the commercial side, John?

Commercial side, I don't have as precise a number there but we're seeing increases in both policy count and rate on commercial and personal side.

So just to tie this back with the question around share repurchase with substantial growth in your top line and at least year-to-date, little growth in capital. How should we be thinking about your capital position because presumably with the rates that you identified coming up, you're going to be generating more growth and is it in the context of your capital position that was like kind of put any pressure?

I think we've looked very closely at that, overall, the group is in very good shape from a capital position. We need to make sure that the capital is sitting in the right statutory entities and we have a plan to be able to make that happen. So we don't have any capital constraints. But our primary goal now obviously is to make sure that all this wonderful top line that's flowing into the company flows out the bottom line is profit.And that's why we're taking the rate in underwriting actions that I talked about. None of which is new or reactionary, they're all have been in process for some time. As I said, in the quarter and in the first half of the year, some underlying issues in Florida and New York got exposed by much higher than historical norm for cat losses in both of those states.We knew we needed to get more rate and now this made it clear that what we've done so far is not enough. And those are two important states for us. So we're doing that and at the same time, we're taking other actions to make sure that the new business that does come in is going to be at rates that we want. We have lots of levers we can pull to slow the growth of new business in certain states and we'll do that because our primary goal of course has to be right now making sure those states are making money and that the book is making money as a whole.

Thanks. On Page 4 of your press release, you give us some commentary around reinsurance costs as a percentage of earned premium, I think you said 40.8% or so was in the second quarter. Given the changes to your reinsurance plan program for the 2019/2020 cat season, what should those numbers look like in the back half of the year? Is that consistent with where they were on the second quarter or the first half or is there going to be a change?

It should be a very consistent.

Okay. And then…

Obviously, the ceded earned premiums from the quota share are the big change, moving from 20% to 22.5% and adding family security, which is a sizable writer, expected to produce over $200 million of premium this year. So the ceded earned premiums for the quarter were only 30.3, but that will go up because family security was only in the quota share for one of the three months of the quarter. So that gets a little tricky. I'm happy to work offline with you on that, but the guidance is we've got – you can look at family securities writings project the year and just make sure to adjust for their participation in the quota share going forward.

Great. Thanks. Thanks for those answers. The last question sort of builds on what did previous questions were around prior year development. I was studying your slide in your investor presentation on Page 6. And I was wondering if you could just spend 30 or 60 seconds walking us through, a couple of those different numbers in there, the Florida versus non-Florida and then the CAT versus non-CAT. Just want to make sure I'm reading this right.

Sure. The CAT number for the year, I mean almost 15 million, is really coming from three events, that's the sad part. We did a pretty good job with the other 50-plus events that have hit us hard in 2016, 2017, 2018. Not much related to hurricane of course, because that's all ceded. But the kitty cat stuff I mentioned, our average event size is 3.3 million. Our retention is 15 million.So as we see loss creep on some of that stuff, it's mostly fully retained. So that's basically the story on the CAT. The non-CAT side, I mentioned, late reporting claims litigation, AOB activity. But I just want to focus on the late reported claims. We think that's about 4 million of the 6.7 million. So it's the vast majority of it. We saw, we do ultimate claim development triangles, not just loss development, but actual claim count triangles.And we saw more late report – what we'd call a late reported claim than we expected. So, actual claims exceeded our expectations and you just do the math on average severity of that increased frequency and that's where the development comes from. And it's really all being driven out of Florida.

Great. Thanks for the additional color there.

You're welcome.

Thanks. [Operator Instructions] Our next question comes from Christopher Campbell with KBW. Please state your question.

Hi. Good afternoon gentlemen.

Hi Chris.

Hey, I guess my first question is just, on the reinsurance renewals, so if you, I know there was a lot of changes in the program, now if you would've had the same exact program as last year, what would the cost have been.

We don't have the same exact program as last year, so I'm not sure we can answer a hypothetical. We haven't calculated what if we had done something that we didn't do, what would it cost?

Okay. So I guess in another way, what were your risk adjusted rates up, year-over-year?

We have not ever talked about that, and only to say that we have very good reinsurance partners and they've supported us very strongly. And we have win-win relationships with all of them. And the program that we put together, worked for them and it worked really well for us too.

And a follow-up on my previous commentary on the ceding ratio, which is your ceded earned premiums divided by your gross premiums earned. That's not the true measure of the reinsurance costs anymore given the quota share and there's ceding commissions, and ceded losses you have to take into account to measure the cost of that. So, it's more complicated. We'll do our best to break out the components of the quota share for you going forward if you've got specific questions. But, we're very happy with the cost of reinsurance program.

Okay. Got it. And did the price increases that you outline, like in the earnings deck? Like how much of that, I mean, was that part of like the program where you can accelerate, rate increases, due to reinsurance costs in Florida and then I guess how much of that covers higher reinsurance cost versus like how much is loss cost inflation and then how much of that rate increase should we expect to fall to the bottom line.

It had nothing to do with reinsurance costs and we have not said we had higher reinsurance costs, nor did we need a rate increase to account for anything to do with our reinsurance program.These were rate increases that are just, you do a rate filing every year in Florida based on your indications. The 9.2 was in the pipeline long ago and it just, it takes a while to get into the system. It just got into the system in July. And as these losses have developed in Florida, especially these CAT losses that have developed in Florida from hail events and thunderstorm events that really, we've been doing business in Florida for 20 years. They don't have any corollary in the historical record.They just don't, but they're here now and now that we have the losses we can price for them. So our rate increases are sort of ordinary course of business. We've had some extraordinary CAT type events in Florida that haven't existed historically and we’re trying to price for them. That's it.

Okay. Got it. So this is like trying to get it like elevated like non-CAT weather basically when we're looking at like the 9.2% in family security and then the 13.3 in UPC, is that the way to think about it?

That's the best way to think about it, if you want to simplify it down to what's the biggest driver of the need. It's, hail events that don't exist in historical record that all of a sudden are $10 million or $15 million events and those seem to be happening in Florida now.

Okay, got it. So, I mean like the 9.2 or 13.3. I mean, so we should be thinking of that is what the loss cost inflation is in the Florida book. I mean that seems like really high to me.

We want it to be adequate to cover what we're seeing going on in the book. So, obviously we're not going to get rate increases that can't be actuarially justified. So you have to be able to show that the right need and we think it's there in Florida.

Okay, got it.

And our – the premium impact in the slide presentation and the investor presentation, is really net of our expectation to change your retention rate. So we do expect it to have an impact on retention, rate in our competitiveness. But we take that into account too and I think that calling and flowing some of the growth is going to be part of the strategy in Florida.

Okay. Got it. And then another question is on Slide 8 of the deck, it says, you have some claims handling improvements, and the second bullet says claims closed without payment are increasing. I guess, could you just give us some color on that as like why that would be going up in terms of your book and would that create the potential for increased litigation if you had like dissatisfied claimants?

I think the answer is to why it's going up is because we have an increasingly experienced and well trained claims staff that Scott St. John has really transformed in a great way since he arrived at the Company. And they're now much more expert on what gets paid and what doesn't, what's covered and what's not covered and what's under the deductible and what's not. And so, there were probably claims in before Scott got here that we were paying something on that really we didn't need to pay anything on.So claims closed without payment is a measure of we're doing our job and doing it well and not just paying stuff – if a claim isn't covered, if damages isn’t covered or it's less than deductible, then it doesn't get paid. So it doesn't have any impact on litigation. We haven't changed our stance to say don't pay claims. We said pay what we owe, which is what we've always said and let's do it quickly, which is why you see our cycle time going down dramatically.

Okay. Got it. That makes sense. And then just a few numbers, questions on the laws created by [indiscernible] Elyse’s question. I think maybe Elyse asked it. You said there was no development on Irma. So what are your Irma or your current Irma and Michael loss fix and how much IBNR do you have left for those two events.

Brad's looking that up. Hold on a second, Chris.

In a minute.

Well we don't want to slow things up. We'll get back to you on that Chris.

Okay, got it. And then just one last numbers – ones. So with the CAT development on the accident year 18 storms, so I'm assuming that you guys went over the 20 million stop loss aggregate limit with the development. So given, like your experience with the non-CAT weather, does it feel like the 30 million that you have in place this year, does that feel adequate or could there be a risk that you guys go over that one too.

We did exhaust the 20 million last year in 2018. And we've used the increased aggregate cover this year. We increased it to 30 million this year. And that's been helpful in the first and second quarters, but we do not expect to exhaust it for the full year.

Got it. Those are all the questions I had. I don’t know if you have the Irma numbers or you just wanted to follow-up offline.

We'll follow-up. Well, there wasn't any change in the quarter.

We didn't have any change, so whatever they were last quarter, they're the same, but I apologize for not bringing that.

Okay. All right. Thanks a lot. That's a lot.

Thanks Chris.

Thank you. We've now come to the end of our question-and-answer session. With that, we'd like to turn it back to management.

Hi, this is John Forney again. I would just like to thank everybody once again for their time on the call and for their interest in UPC. We're going to get back to work on making sure that next quarter we have some better news for you guys, so thank you very much. Talk to you soon.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.