American Coastal Insurance Corporation (ACIC) Q1 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the United Insurance Holdings Corp., First Quarter 2020 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adam Prior of The Equity Group. Thank you, sir. You may begin.

Thank you, and good morning, everyone. Thank you for joining us. You can find copies of UPC's earnings release today at www.upcinsurance.com in the Investor Relations section. In addition, the company has made an accompanying presentation available on its website.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 as well. 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 in 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 Securities and Exchange Commission.UPC specifically disclaims any obligation to update or revise any forward-looking statements 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, sir.

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.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 on this call, we will refer from time to time to some of the data and analytics included therein.We are off to a great start in 2020. Loss ratio, expense ratio, combined ratio, underlying combined ratio, you name it, they all improved, most of them significantly, compared to last year's first quarter.Our core pretax income was over $13 million for the quarter, an increase of $9 million from a year ago, even though we retained $6 million more in cat losses this year. So our ex-cat pretax core income was up about $15 million year over year.That's awesome, especially considering we ceded nothing to our cat ag treaty in Q1 this year, meaning we have less chance of reporting phantom cat losses in Q3 and Q4. All things considered, this was our best quarter since Q4 of 2017, which was by far the best quarter in the history of the company. I said on our year-end earnings call that we were in a strong position entering 2020, and the positive underlying trends we were seeing then are playing out now.First rates;. Look at slide four of the investor presentation. We booked over $17 million of additional annual personal lines premium in Q1, which would translate to about $68 million additional premium for the full year. And the major rate increases in Florida are just beginning to show up in earned premium.For the quarter earned premium per policy, personal lines policy was up only about 2%, which means the bulk of the 10% in forced increase we saw in the quarter has not yet matured into our book. That bodes well for future quarters especially since retention remains strong.Second, reinsurance. We refer to slide seven in the investor presentation. We are one of the top 10 buyers of U.S. property cat reinsurance in the world with over $4 billion to place on our various programs. And we are 91% done with very manageable rate increases. Thanks to our many reinsurance partners with whom we enjoy win-win partnerships.Third, reserves. We thought we were taking material 2020 reserve development off the table by the actions we took in Q3 and Q4 last year and it still looks that way. Last year, $5.6 million of adverse development in Q1. This year, $1.1 million of favorable, and that's even considering the far more conservative reserving posture we have implemented this year.Our reserves look very robust. Finally capital. Our capital position remains very strong. Given that we had a solid operating profit for the quarter, the decline in book value was solely due to the effects of accounting standards update 2016-01, the rule which caused companies to have to report unrealized gains or losses in equity securities as part of net income beginning in 2018.Warren Buffett has referred to this rule as quote truly wild and capricious unquote. And as Berkshire said we are announcing $55 billion of investment losses in this year's Q1. Quote the amount of investment gains losses in any given quarter is usually meaningless and delivers figures for net earnings per share that can be extremely misleading to investors unquote.If it is meaningless for a company whose business is investing, it is certainly meaningless for UPC, which holds only about 10% of our investment portfolio in equities. In any event, our portfolio has largely already recovered the paper losses it suffered in Q1 and our capital position is strong and stable.So we are sticking to our story. Our company is built-to-thrive in the currently challenging operating environment. We have de minimis exposure to COVID-19 claims. And since we are based in a cat prone state, we are well practiced in remote operations.Kudos to our technology team and all our UPC employees who have made the transition so seamless for us. The rate, underwriting, technology and claims handling initiatives we have undertaken over the past 18 months or so are paying off. And the underlying positive trends in our business are accelerating. We look forward to the rest of the 2020.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. I'm pleased to review UPC's financial results but also encourage everyone to review our press release, Form 10Q and investor presentation for more information regarding the company's performance.Highlights for the quarter ended March 31, 2020 include improvements in nearly all key operating metrics beginning with core income of $9.1 million or $0.21 a share compared to $3.2 million or $0.07 a share a year ago. Gross premiums earned were $344.6 million, an increase of $33 million or 11% year-over-year.The combined ratio of 99% returned us to underwriting profitability and was nearly 5 point improvement year over year. Our underlying combined ratio of 90.7% also compares favorably to 94.2% last year. And improvements in our loss and expense ratios both on a gross and net basis, were very impressive this period.Premiums written for the quarter increased approximately $17 million or 5.2% from a year ago driven by $14 million or 7% growth in personal lines and $12.4 million or 16% growth in commercial lines, both of which were partially offset by a decline of approximately $9.7 million in assumed E&S premiums.Florida accounted for approximately 69% of the growth in direct premiums year over year, with all regions outside Florida showing modest increases from a year ago. Ceded earned premiums were 44.4% of gross premiums earned compared to 42.1% last year.This change was due to the increased sessions to our quota share reinsurance program which were 12.4% of gross premiums earned in the current quarter compared to only 7.5% last year. Other significant items impacting total revenues during the first quarter included unrealized losses from equities of $26.5 million or approximately $0.50 a share after tax compared to a $10.2 million unrealized gain in the same period a year ago.Excluding the unrealized gains and losses on equities total revenues grew roughly 6% year over year. UPC's first quarter net loss and loss adjustment expense was $102.8 million a decrease of $1.7 million or 2%. UPC's gross loss ratio of 29.8% improved 3.7 points and the net loss ratio of 53.7% improved 4.1 points compared to the first quarter last year.Cat losses of $17.1 million added nearly 9 points to our net loss ratio which is partially offset by $1.1 million of favorable reserve development. Excluding these two items underlying loss in LAE was $86.8 million down approximately $400,000 from last year despite earned premiums increased in over $30 million.This resulted in an underlying gross loss ratio of 25.2%, which compared favorably to 28% a year ago. This improvement was primarily driven by lower frequency during the current quarter. UPC's operating expenses were $86.9 million, an increase of $3.8 million or 5% year-over-year.The increase was driven primarily by policy acquisition costs which rose $3.6 million, commensurate with our premium growth in the quarter. Our gross expense ratio was 25.2%, an improvement of 1.4 points from the prior year.On the balance sheet, UPC's total assets were $2.33 billion, including cash and invested assets of $1.28 billion. Our fixed maturities produced a positive total return for the quarter despite the significant widening of spreads on most risk assets in March.The modified duration of our bond portfolio ticked up slightly to 3.54 years at March 31st but maintained its overall composite rating of A+ and we do not have any significant concerns about default risk or credit fundamentals at this time.GAAP shareholders equity attributable to UIHC stockholders was approximately $485 million with a book value per share of $11.30 or $11.11 excluding unrealized gains. Declines in book value and equity in the quarter were driven by accounting rules related to the treatment of unrealized equity losses, much of those losses have already been reversed in the second quarter.And lastly our Group's statutory surplus also declined approximately $12 million or 3% to $404 million during Q1 due primarily to the unrealized losses on equities during the quarter.Now I'd like to turn it back to John for some closing remarks.

Thank you, Brad. At this point, we would welcome any questions.

Thank you. The floor is now open for questions. [Operator instructions] Our first question is coming from Greg Peters of Raymond James. Please go ahead.

Can we go to slide seven of your investor presentation, where you talk about the reinsurance renewal program? And John you said in your opening remarks the core cat program is 91% done. Should we infer that the remaining 9% is on the lower layers or is it spread across the entire spectrum or can you give us some perspective on that remaining piece that is outstanding? And what you think is going to happen with pricing on that remaining piece?

Sure. Thank you, Greg, for the question. The remaining piece is spread throughout the program. I think the stuff up at the very top is completely done. But other than that it is bits and pieces here and there throughout the program.So it is not concentrated in any one particular area. So I don't want to speculate on what is going to happen on pricing on that remaining piece other than to say we are talking to some folks that have big expiring lines on our program.We are having very constructive discussions with them. And we expect we will be able to get it done, as I said overall with price increases, yes, but very manageable and certainly within what we have planned for.

Alright. And then obviously you guys reported, as you pointed out, improving trends across many of the metrics in the combined ratio. Some have commented on how the first quarter, particularly March was a relatively benign claim month in a quarter relative to historical experience just because of what was going on with the pandemic.Do you believe that that may have been the case and therefore maybe there was some arbitrary benefit or onetime benefit that flowed through the first quarter that we may not see on an ongoing basis?

Greg, if that is true, it's marginal at best. We saw the same positive trends in January and February in terms of our frequency because of the underwriting actions that we've taken and the improvement in claims handling that we have had.So if there was any downturn in claims volume, it was only in the last week of the quarter. So one out of 12 weeks, we saw reduced claims volume, but the frequency and severity trends that we have been working on were just as prevalent in January and February as they were in the last week of March.

Got it. One of your peers announced results yesterday. And they did include some information regarding cat or other loss activity that happened in April and May. You didn't include any such commentary. Should we infer anything from that or - I guess I'm looking for a comment there.

Sure. We write residential property insurance in the Gulf Coast and Southeastern United States. We've been doing that for quite a while. It is pretty clear from the historical record that there were spring storms in April and in May and in March, some banks are more profitable in one month than the other.But if you are a property writer in those areas you plan for that. It is not like a meteor hit North Carolina. We had spring storms. They were slightly less in March they were slightly more in April. But it is nothing that is out of the ordinary or unexpected.So, yes, we had five different PCS events in April incurred with something like $18 million, slightly up from last year's April. But again totally within expectations for Q2 in that part of the country.

Thank you. Thank you for that. And then I guess - I know there's going to be other questions from other people. So my last question is can you comment a little bit on the drop in the assumed premium and tell us what's going on there.

Yeah. That's premium we assume with unrelated insurance companies through the business with AmRisc which is the MGA that does all of our underwriting and distribution for American Coastal and by the way is doing a fabulous job with that book of business.And at various times the partners that we do that business with either want to scale back or ramp up their business on that program, which we call blue line. And one of the bigger ones last year decided to ramp - to terminate that program, and so that's why you're seeing the decline in assumed premium.But we've got others that are increasing it, some of the other parties that we have on it. So we expect to see an upturn again in that. But the reason for the decline was one big partner that decided they didn't want to participate in that anymore.

Thanks for your answers. I'll let others ask questions.

Thank you, Greg.

Thank you. [Operator instructions] Our next question is coming from Elizabeth Tuxbury of Dowling & Partners. Please go ahead.

This is actually Bill Broomall. I just had a quick question going back to the reinsurance slide. I think in the last call, you mentioned several new partners with material lines. Is there - without naming anyone are you able to just give us any commentary on what you observed as you went out to the reinsurance market? And what those partners - what attracted you to those new partners on the program?

Thanks Bill. Sure. Well as I said in my remarks, we are a big buyer of reinsurance. We have $4 billion across our various programs. So we welcome a new capital to our program. It is a lot to get done.We have some really amazing partners that have grown with us over the years. But we are always looking to find new partners with big balance sheets that can grow with us as we continue to grow our business. And so every year we talk to people that are not on our program or haven't been on our program. And overtime sometimes they decide to come on to the program.And we had several this year that decided that the time was right for them to come on to our program and did so. And as I said some of those were in material amounts. And it was in different markets around the world that these partners came out to our program.So we've seen good receptivity in reinsurance markets. Obviously, the reinsurance markets are disruptive right now and trying to figure out COVID-19 and what the impact is going to be on them. And so that's been a distraction, as well as the fact that people working remotely. Some people and some companies are more set up to do it than others.And so it introduces inefficiency into the process. We've been patient. They've been patient. We've worked through it. And we feel good about where we are and bringing the program in for a landing here over the next month or so.

Great. Thank you. And just staying on reinsurance. We've heard in the media about maybe some changes coming this year to reinsurance programs, specifically the terms and conditions, one being cascading feature on a lot of programs.And I was just hoping to get your thoughts on the potential changes in terms of conditions and what you think the adoption of reinsurers not offering cascading features, what that might mean for this renewal cycle?

Sure. Bill as you know, since 2013 our core cat program has been single-shot cascading because that gives us far more first event limit than anybody else in the market. And it is why we have well over $1 billion of reinsurance left on Irma when other people are out of reinsurance or out of private cover. That's why we buy the program that way. It is a much more efficient way to do it.We've had great support from the reinsurance community over the years on that program. And that's the way our core cat program is structured this year and it is going to get done that way. So, I think maybe what you are hearing about reinsurance not doing that either is not true, or we didn't hear it because our program is getting done in that fashion.

Very helpful. Thank you very much.

[Operator instructions] Our next question is coming from Greg Peters of Raymond James. Please go ahead.

Can we pivot to page four of your slide deck? And I wasn't necessarily surprised about the premium increase. And I think that's a very positive result for the company. But I was a little bit surprised that you still had increasing TIV.I would have envisioned that the TIV would have stopped growing as you try to reset pricing and get the right return for the amount of capital you're allocating. But maybe I'm missing something or maybe just walk us through the dynamics in that slide.A - Brad MartzHey, Greg, it's Brad. You'll note that the additional TIV trend is downward. It is declining. And if you looked at it by region, you'd see very different results. So in certain regions, we are actually seeing additional TIV decline. But in other regions like the Gulf and in particular in Texas, we are still growing.We've got rate adequacy. The business is very profitable. And we see opportunity. It is also skewed by some of the business we write in Northeast which has significantly higher average total insured value per policy than what we have typically had in Florida and the Southeast.

The key for us, Greg, is to make sure the rate trends are growing faster than the loss trends. And you see the rate is growing at 5x the rate of the TIV, which is a really good metric for us. And we have very granular profitability analysis capabilities right now that enables us to see at the time, we are writing something whether it is going to contribute to our overall profitability or not and make a go, no-go decision based on some of those very granular metrics.And so we are comfortable the business we are writing is good business at this point. And the places where we can't write profitable business right now, we are standing by and letting the rate flow through.

Okay. The last question will just be on reserve development. Can you give us a sense of the pipeline of open claims versus closed claims or if you don't have that data in front of you, considering what happened, particularly in the second quarter and third quarter last year, what evidence do you have in your business that you don't think that you're going to have that same type of adverse reserve development in the second and third quarter this year?

So the two companies that are responsible for 95% plus of our personal lines business are United Property & Casualty, and Family Security. Those are the two underwriting entities that really struggled with the adverse development on exiting year '18 last year.And we measure actual development versus what we expect the development to be very carefully for every segment of our business. But for those two entities, there was about $12 million favorable variance between actual development and expected development in the first quarter.Obviously, we didn't take any of that into income. We are going to wait and see how that trend plays out. But obviously if that sort of trend continues, we are going to evaluate it pretty carefully during our midyear review, that's a great, great result for us.Cycle times I think have remained very stable, maybe even improved slightly, given the declines in frequency we saw in March and April. But there is some pretty compelling evidence that loss development in great shape.

And how should I think - because it was the exit year '18 that gave you the challenges in '19. How should I think about the exiting year '19 as we think about '20? Because obviously, your - I assume the numbers you cited on the $12 million related to the '18 year or is that just across the entire book?

Yeah, that's across all exiting years. So it was actually slightly more favorable on that for '19, but '18 still obviously was our most challenging period. So while we didn't see anything really significantly adverse on '18, most of that was driven by '19.

Got it. Alright. Thank you for the answers guys.

Thank you, Greg.

Thank you. At this time, I'd like to turn the floor back over to management for closing comments.

OK. We really appreciate everybody taking time to join us on the call today. We look forward to the rest of the year. We hope everybody stays safe and strong, and we look forward to talking to you again next quarter. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time and have a wonderful day.