American Coastal Insurance Corporation (ACIC) Q3 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to the United Insurance Holdings Corporation's third quarter 2019 conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded. As stated, after the presentation, you will have an opportunity to ask questions. [Operator Instructions].I would now turn the conference over to your host, Adam Prior of Equity Group. You may begin, sir.

Thank you very much 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. In addition, the company has made an accompanying presentation available on its website. You are also welcome to contact our office at 212-836-9606 and we would be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its website as well.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 federal securities laws, including statements relating to trends in the company's operations and financial results and the business and the product of the company and its subsidiary. 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 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 your taking time to join us on the call. As Adam said, we are now 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.$1.05 per share in after-tax cat losses obviously ruined our quarter and understandably, that's the headline. But for us, the storyline is a more conservative cat-reserving posture, continued strong organic growth in both personal and commercial lines and improvement in underlying results as the cumulative effect of rate increases, claims handling and underwriting initiatives takes hold in our book.On the reserving side, we are just putting a lot more IBNR on cat events, given the development patterns we have seen in the past couple of years. We have been in the cat business for 20 years. And on the non-hurricane cat events, we are seeing development patterns that have no precedent in the historical record. We are pricing and reserving for that as if it will continue and working hard on the claims handling side to try to mitigate it.On the growth front, both personal lines and commercial lines continue to show the ability to grow at double digit annual rates, even with significant rate increases in both lines. See page four of our investor presentation for more details.Retention remains very strong. We have intentionally ramped down the growth on the personal lines side in areas that have given us loss trouble while we adjust rates and underwriting standards to reflect our recent experience. The rate, underwriting, claims handling and technology initiatives we have discussed on previous calls are in full swing and being implemented across our geographic footprint. That's why our non-cat loss ratio continues to decline and our underlying results are so much better year-over-year. And that's why we are optimistic that we will finish 2019 strong and have good momentum heading into 2020.At this point, I would 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 am 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 ending September 30, 2019 include gross premiums earned of approximately $345 million, an increase of $41 million or 13% year over year, a core loss of $29.2 million or $0.68 a share versus $14.9 million or $0.35 a share a year ago, cat losses of $58.2 million or $1.05 a share from all accident years were the driver of results for this quarter adding over 30 points to the combined ratio. However, UPC's underlying loss and combined ratios showed significant improvement compared to the same period a year ago. The gross and net underlying loss ratios improved 4.3 and 7.3 points, respectively, from Q3 2018, which also drove a six point improvement in the underlying combined ratio year over year.Premiums written for the quarter continued to demonstrate UPC's strong organic growth engine in all regions and lines of business. Florida accounted for approximately 54% of the growth in direct written premiums with the remaining 46% being well balanced among the Gulf, Northeast and Southeast regions.Assumed commercial E&S premiums declined 47% to $9.2 million in the current quarter due to one of our three quota share agreements being put into runoff at June 1. Excluding the assumed E&S premiums, commercial premiums increased over 27% compared to the same period a year ago, further strengthening our industry-leading position in the Florida commercial residential property market.Ceded earned premiums were 44% of gross premiums earned in the quarter compared to 43.6% last year. The change was due to increased cessions to our quota share reinsurance program, which totaled $42.2 million in the current quarter compared to just $25.8 million last year. So our ceding ratio went down, netting out the effects of the quota share.Other significant items impacting total revenues during the third quarter included a 13% increase in net investment income and 11% increase in fee income. Unrealized gains from equity securities of $2.6 million were down from $6.1 million a year ago.UPC's third quarter net loss and loss adjustment expense was $148.1 million, an increase of $27.6 million or 23% year-over-year. This produced a gross loss ratio of 43% and a net loss ratio of 76.8%, but included $50.2 million of current year catastrophe losses and $12.3 million of prior-year development.We believe our gross loss estimates for Hurricane Dorian plus Tropical Storms Barry and Imelda were conservatively set at $40 million, resulting in a $31.3 million loss net of reinsurance. UPC's gross incurred loss at September 30 for these three storms was only $10.5 million. So IBNR was nearly three quarters of the ultimate loss recognized in this period.The remaining $18.9 million of catastrophe losses was driven by increased retention under UPC's aggregate reinsurance program for 26 other cat events incurred in 2019. As we mentioned last quarter, these cat events are also being reserved more cautiously and included $45.7 million of IBNR which was 37.3% of ultimate gross loss estimated at September 30, 2019. Compare that to the first nine months of 2018, where UPC estimated only $6.8 million of IBNR, representing 10.3% of the ultimate gross loss estimate.Roughly 70% or $8.4 million of the prior year development was driven by various cat events across multiple accident years. Non-cat development, primarily on accident year 2018 and Florida homeowners, contributed most of the remaining reserve charge as actual loss development continued to exceed the development we expected. Excluding the cat and the prior year development, underlying loss and LAE was $85.7 million, down almost $3 million or 3% year-over-year. This resulted in an underlying gross loss ratio of 24.9%, which was a significant improvement from 29.2% a year ago. This was very encouraging and suggest the profit improvement initiatives we communicated previously have us on the right track.UPC's non-loss operating expenses were $93.1 million, an increase of $12.6 million year-over-year. The increase was driven primarily by policy acquisition costs, which rose $7.6 million or 14%, which was consistent with the change in gross premiums earned in the quarter. The remaining $4.9 million was driven by salaries and related expenses, which were $2.8 million of the increase, with the balance stemming from a $2 million nonrecurring charge related to capitalized software.Our gross expense ratio was 27%, an increase of 0.5 point from the third quarter of 2018, but would have otherwise been in line with the prior year without the nonrecurring portion.On the balance sheet, UPC ended the quarter with total assets of $2.7 billion, including nearly $1.4 billion of cash and invested assets. The duration of our fixed maturities remained at 3.4 years with an overall composite rating of A-plus but yields continued to move lower during the quarter. Shareholders' equity attributable to UIHC stockholders was $516 million with a book value per share of $11.93 or $11.61, excluding unrealized gains. And lastly, the statutory surplus of our group was $426 million at the end of the quarter.I would now like to reintroduce John Forney for some closing remarks.

Thanks Brad. I have no further remarks at this time. So we are happy to open up the line to any questions.

[Operator Instructions]. The first question is from Greg Peters, Raymond James. Please go ahead, sir.

Hi. Good morning Team UPC. This is Marcos, calling in for Greg.

Good morning.

I was hoping you guys could drill down a little bit more on the prior year development and tell us why should we expect reserves now to be adequate? And I guess more of a big picture question is, how is the strategy changing for 2020 in the context of this year shaping out to be a loss year?

Sure. This is John. I will take that. So as we tried to emphasize in our remarks, we are adopting a more conservative reserving strategy especially as it relates to the cat events because these non-hurricane cat events especially have shown development patterns that differ from the historical record. And we have 20 years worth of historical record of events not just in Florida, but across our geographic footprint. And so we did try this quarter to bump everything up.You have heard how much more IBNR we have than we have had in previous years on these cat events. And yes, we are expecting that our reserves for those events are going to be adequate. And that's the bulk of the prior year development, about three quarters of it was on cat events.For the personal lines side, that was driven by Florida 2018, where we are still running slightly ahead of what we had estimated. And yes, we continue to take that into account when we are setting our current year reserves and how much IBNR we are going to need on Florida, which continues to be a very difficult operating environment.For next year, our focus is on improving profitability. That's been our focus this entire year. That's why we have put in place all of the underwriting, claims handling technology, rate, agency force management initiatives that we have talked about a lot on previous calls and have included data on in our previous investor presentations. So we are singularly focused on that.That means shifting the areas where we grow. That means stopping our growth in certain other areas. That means putting through big rate increases. That means canceling agents who are giving us books of business with bad loss ratios, et cetera, et cetera. It's all hands on deck to try to make sure that we are taking the actions that we need to take to operate well in the environment that we find ourselves in.

Okay. Thank you for that. And I guess switching to premiums and there's some healthy organic growth and you guys singled that out in your remarks. But I am looking at the assumed premium line, that's down 47% this quarter. Can you guys give us more color there?

Sure. This is Brad. I mentioned in my remarks that that was down because we have three quota share agreements with three E&S carriers that participate in the AmRisc commercial E&S program and one of those three quota shares went into runoff.

Okay. And I guess my final question would be, if you guys could just give us an update on AOB and what you guys are seeing out there? If it's getting better? And anything you could tell us on the Journey, that would be great. Thank you for your answers.

Sure. The AOB legislation was good legislation. But the AOB machine in Florida has not been deterred by that. We still see AOB lawsuits coming in at rates that are higher than they were in 2018. Again, for us, it's not a significant factor because it's mostly a tri-county phenomenon. We don't have a lot of business down there. But there's no evidence to us that the AOB momentum has slowed materially in Florida.

The next question is from Freddie Sleiffer, KBW. Please go ahead, sir.

Hi. Good morning. So just firstly on Hurricanes Michael and Irma, where did you see an increase in gross losses in either of those storms? And how much IBNR do you currently have remaining for each storm?

Yes. We have seen an increase in gross losses for both of those events where we bumped our reserves on Irma by about 20% to up to about $1.2 billion. Brad has got to get the IBNR number. We have a significant amount of IBNR on that. And Michael, I think, it went up by less than 10%. And Brad will have that number too in a second.

Okay. While Brad gets those numbers, I will move on to the next question. So catastrophes come in at $50 million versus your $46 million preannouncement. So just wondering what drove that delta?

The delta was primarily our BlueLine affiliates, the commercial E&S business that we didn't have absolute clarity on. We went a little bit more conservative at the end of the day as well. So cat was a little higher than previewed. Reserve development was lower than previewed. Net net, it was very, very close to the preview. There shouldn't have been any surprises on those two fronts combined.

Okay. Great. And I know it's a little early to talk about the reinsurance renewal, but do you think the recent elevated Japanese typhoon activity could impact your upcoming renewal?

We would prefer not to speculate on that. As we mentioned, we have a strong panel of really good reinsurance partners that have been with us a long time. We have win-win relationships with them. We are always seeking to diversify and broaden our panel and we expect to work collaboratively with our reinsurance partners to put together a successful program next year.

Okay. And then just following up on the earlier AOB question. So it sounds like you aren't seeing an impact on your financial results. So is it also correct to infer that AOB so-called benefits won't be impacting rate increases going forward since you have taken quite a lot of rate increases in Florida this year?

Right. And continue to take rate in Florida. It's not specifically related to AOB. It's just more related in Florida to the elevated level of non-hurricane cat losses because our non-cat loss ratio in Florida continues to decline, not go up. So that's not driving our rate need. It's the cat events like the hailstorms and severe convective storms that are developing and producing much more severity than in previous years that's driving our rate need.And the way that works is, we can't get the rate for those events until you have those events. Regulators won't give you modeled losses on hailstorms. But once you have the actual losses, you can get recoveries for them and pass them through in your rates and that's what we are doing. So it's not driven by AOB, but rather by non-hurricane cat losses.

Right. And then other than the rate increases, are you taking any other actions to improve underwriting results?

Yes. And we have talked about those extensively and included them in our investor presentations in the past, which I would encourage you to review. We have got a whole host of underwriting agency management initiatives that are underway that we are seeing good effect from.

Okay. And then just lastly, given all the rate changes that you have been taking, some of the expense movements, where do you currently see 2020 loss and expense ratios settling in at?

Right. We don't give forward-looking estimates for that kind of information. So we continue to see downward trends in our non-cat loss ratios and we are working hard to manage the cat loss stuff so that we have enough rate in our book of business to handle it. I think Brad might have the numbers you were looking for earlier.

Okay.

Hi Freddie. Yes, the Irma IBNR is $276 million and Michael $30 million. So we are about $306 million of IBNR just on those two events.

Okay. Great. Thanks for the answers.

You are welcome.

We have a question from Cliff Gallant, Philadelphia Financial. Please go ahead, sir.

Hi. Good morning. Just a little bit more color. And I think you touched on this in your slide shows. But on the rate increases, just what's the competitive market looking like in Florida? As you take these rates, are customers staying with you? Are you losing people? What's the net effect?

Our retention has stayed strong in Florida, Cliff, even with these rate increases. The market has changed. The landscape has changed a lot. And there's a lot of companies out there that are paying losses on the same events that we are paying losses on and it's a difficult operating environment. We happen to be, relative to a lot of the competition in Florida, a very big company with lots of capital and lots of claims paying resources. And so we can fight through difficult operating circumstances. And so far, we have not seen significant defections or backlash from the rate increases, which we need to take. And it doesn't matter to us, honestly, if we do have that. If we need to get the rate, we are going to get the rate and we will come out the other side.

Also I was wondering, this sort of happened in October, but we had these tornadoes come through Texas. Was that a geography you are exposed to? Or do you have any comment on that event?

Yes. That was a Q4 event and we did have, as of yesterday, we had 37 claims on that, with incurred of about $1.5 million.

Great. Thank you.

[Operator Instructions]. We have a follow-on question from Greg Peters of Raymond James. Please go ahead, sir.

Hi guys. I just was hoping maybe you guys could give us a quick update on the Journey and how you are leveraging the A.M. Best rating?

Sure.

And when should we expect to see that flowing through financials?

Journey is launched in Florida. Currently writing commercial residential business focused on apartment buildings. We have gained momentum consistently on Journey throughout the year. We just had our best month ever. And our partners at AmRisc are doing a great job on the marketing and distribution to help agents get comfortable with this new entity and write more business with us. And we are seeing that happen. We have been very conservative and disciplined on the underwriting guidelines and standards and we are not in a rush to grow Journey into a big company. So we are pleased with the progress that we have made there.We also have plans to launch Journey in personal lines in Texas. In fact, we filed that product a couple months ago now and it's working its way through the regulatory process. But we expect to be writing personal lines business in Texas with a ground-up differentiated A.M. Best rated product early next year as well as commercial lines business in Texas and South Carolina. So you will start to see some more significant ramp-up in Journey next year and it's going to be an important part of our growth story over the next few years.

Got it. Thanks guys. And good luck in the future.

Thank you.

This concludes today's question-and-answer session. I would now like to turn the call over to management for closing remarks.

This is John Forney. I just want to thank everybody again during a very busy earnings season to take time to get on a call and talk about UPC Insurance. We appreciate your long term support and partnership and we look forward to delivering some better results here going forward. So thanks again for your time.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a good day and a Happy Halloween.