Greetings, and welcome to the United Insurance Holdings Corp., Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adam Prior of The Equity Group. Thank you, sir. You may begin.

Thank you. Good afternoon, everyone, and thanks 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'd be happy to send to 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 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 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'd now like to turn the call over to Mr. Dan Peed, UPC's Chief Executive Officer. Please go ahead, Dan.

Thanks, Adam. Hello all, and thanks for joining our call. I'd like to offer an overview of our third quarter results, and then Brad Martz will provide some specific numbers, and then we'll take questions. In the third quarter, we made excellent progress towards increasing our underwriting profit on an ex [ph] name storm basis. Most importantly, our core income ex-name same storm margins continued to grow with a third consecutive quarter-over-quarter improvement. We are demonstrating continued progress as increasing rates and enhanced underwriting risk selection activities earn their way through the portfolio. In Q1, we returned to profitability on core income ex-name storm, earning $0.20 per share. In Q2, progress continued to be with $0.30, and in Q3, we earned $0.35 per share. The Q3 number includes a nonrecurring expense of $2.8 million due to our decision to discontinue an office development project or $0.05 per share. So the adjusted quarterly run rate on core ex-hurricane earnings is $0.40 per share. Year-over-year, core income ex-named storm jumped from the 2019 Q3 loss of $0.11 to income of $0.35 in the most recent quarter; a $0.46 improvement. Additionally, our gross non-cat loss ratio is down 1.5 points year-over-year to 23.4%, and our year-over-year gross expense ratio also improved to 26.1%; a 0.9 point reduction despite the nonrecurring charge. We are continuing our portfolio optimization activities, many of which are enabled by the hardening U.S. windstorm market for both our personal lines and commercial lines portfolios. Our ongoing PML exposure management strategy targets nonrenewal of the lowest tier of our exposures, which we believe improves capital efficiency as well as mitigating some of the challenges on our core cat excess and loss placement at 6.1 [ph]. Top line gross written premium increased by 15% in the third quarter, which is driven…

Thank you, Dan, and hello, everyone. This is Brad Martz, the President and CFO of UPC Insurance. I'm pleased to review UPC's financial results, but also encourage everyone to review our press release, investor presentation and Form 10-Q for more information regarding the company's performance. For the quarter ending September 30, 2020, the company reported a GAAP net loss of $74.1 million or a loss of $1.73 per share and a core loss of $83.8 million or a loss of $1.95 a share. These results included $140 million of cat losses, which came in slightly higher than our pre-announcement on September 22nd that excluded Tropical Storm Beta. Net retained losses from seven new named windstorms, during the third quarter were $125.1 million or roughly $2.30 a share. We anticipate our company will experience hurricane losses in the third quarter. But I think it's fair to say, this year's record-setting season led to higher net retained losses and a disappointing result this period. However, if you strip away the noise, created from named windstorm activity in the current and prior year, you will see a more comparable underlying view of our business that has improved each quarter this year. As Dan mentioned, excluding named windstorms, we produced core income of approximately $15 million or $0.35 a share compared to a loss of $4.5 million or $0.11 a share last year, which is nearly a $20 million improvement in our underlying results year-over-year. Page five of our investor presentation paints a nice picture of core income, excluding named windstorms, for each quarter this year compared to 2019. And we present this information not to disclaim ownership of hurricane losses, but to reiterate, this is the earnings stream, we are focused on growing to absorb hurricane losses when they occur. Premiums written for…

Thank you. At this time, we will 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.

Hi, good afternoon. I guess, I wanted to just start off with some questions around your exposure management. The gross written premium is up pretty significantly in the quarter. And that, as you suggest, is all rate, how much more aggressive can you get with exposure management in the context of limiting your gross written premium growth?

Greg, this is Dan. I think that we are taking numerous steps that fall under that bucket of exposure management. Rate is one of them. So I mentioned like the bottom PML driven risk selection, we're inspecting much more of the new business. We also have looked at all of our lines of business in all of our states to decide or to determine if any of them didn't have the scale or profitability that it was better to focus on our key speeds and our key areas of where we can be profitable. I think that the market is hardening, and I believe that it will continue to harden even more and that we will be able to continue improving the class of risk that we write as well as improving the terms and conditions under which we write it.

Well, it certainly seems like it is. It just – it feels like you could deal with a lot less loss. Can you spend a minute and describe – I know you break out in your press release, the by line of business. So the personal side versus the commercial side, has there been a difference in underwriting performance of those businesses, or are they performing in this high-frequency cat environment similarly?

I think that the personal lines takes longer to turn, and we really started improving the terms and the results and the REITs of the personal lines book a year ago, but it had further to come. It is getting there, and it seems to be continuing to improve on a pretty steady basis for the core X hurricane numbers. The American Coastal Commercial Residential book, which has always been a gem, and it is – it is profitable, significantly profitable, this year even with the named storms. And our commercial specialty business has gone through some changes as we've moved from three different contracts to one. But we believe that it has a great prognosis in the commercial specialty.

Interesting. The other – the other question that's popping up for the companies in your space is just capital. There are, as you know, almost all of the companies in the Florida market are under various levels of stress. And there is rhetoric about some, maybe a number of them, losing their capacity going forward. Can you talk about your capital position, your Demotech rating and your RBC rating ratio in the context, I think you mentioned some anticipated additional quota share. I guess, ultimately, what we're looking for is your ability to withstand this year. In the fourth quarter, you're going to have some more catastrophe exposures. And the bottom line is your ability to withstand this year and to live on and fight for next year.

Right. Well, that's a good question. We feel pretty good about our position right now. We've been working with our reinsurers. As we stated, we're very close to adding some additional quota share and we believe that that, obviously, that additional quota share would be what is needed to move our leverage back into where it was before this season. I think if you solve the RBC problem, then you're pretty consistent with solving the Demotech – the Demotech questions also. So we feel pretty comfortable, but we want to also say that, obviously, we'll be dealing with the Q4 cat exposures, and those aren't all known at the moment. So there's some unknown. And some part of that remain outside of our direct control. But we feel pretty comfortable that we've got the leverage that we can pull to handle it.

Greg, this is Brad. I would just add that AMS recently affirmed the ratings for Journey and Demotech has recently done the same for a couple of members of our core group. Obviously, all that's subject to change depending on how the fourth quarter plays out. But as Dan said, I think we feel very good about our ability to utilize reinsurance to close that gap between our direct writings and our net premium risk [indiscernible], obviously, we're well aware of that. We understand that reducing operating leverage and earnings volatility is a top priority for us right now.

Got it. Can you just conclude – last question. Can you give us an idea – I think you said in your prepared comments, you still have a lot of limit left. But as we think about these – the storms that have happened in the fourth quarter and the one that, I guess, is lurking out there. What's your per event retention as it currently stands, and as we sort of model out for the fourth quarter results?

Sure. Yes, we still have 91% of our core reinsurance program in place, over $3 billion of a $3.3 billion tower. So no worries there. We could experience a very, very significant event if Eta turned into something significant. It wouldn't be a problem for us. Our retention is $25 million on a go-forward basis. So we're prepared for the worst, and hoping for the best with that event. Probably if it comes into Florida as a tropical storm, I don't think it will be a full retention event for us.

Got it. I’ll let others ask questions. Thanks.

Thank you. Our next question comes from the line of Matt Carletti with JMP Securities. Please proceed with your question.

Hey, thanks. Good afternoon. Greg grabbed most of mine. So I just have a follow-up on the kind of the capital and additional quota share potential conversation. As we think about that additional quota share and kind of where the market is, the reinsurance market, obviously getting firmer, and I think reinsurers getting more selective. How should we think about the terms on that, if you should expect them to be materially different than what you have in place so far, or another way of thinking about it is should we expect on a net earned premiums basis it to have upward pressure on an expense ratio when we think about the ceding commission coming in as opposed to negative pressure?

Hi, Matt. This is Brad. The terms we've already received are from existing panel partners. I mean, going -- I definitely think if we were in the market trying to put together a branding program with no quota share experience, the terms could be very, very challenging. But, because we've got great support from existing partners, it's just -- it's fairly straightforward to expand the session rate without any significant changes or even any changes to the main terms of the existing agreement. So that's our first preference. We are exploring all options. But we've got great partners. We've got offers already on the table in hand. And hopefully, we'll have something to formally announce shortly.

All right. Thanks, Brad, best of luck. Thanks.

Thank you. [Operator Instructions] Our next question comes from Elyse Greenspan with Wells Fargo. Please proceed with your question.

Hi. Thanks. Good evening. My first question, so I think you mentioned, right, for go-forward events, your retention is right are about $25 million. Do you have a sense of where the cat for the fourth quarter stick out today based off of some of the events that we've already had?

Yes. We stated on page 3 of our investor presentation that Delta and Zeta are likely to be between $50 million and $55 million. There is a -- the retention for the core group is $25 million, but there could be a little bit of additional loss related to our E&S business in that blue line tower. But we think the losses are contained within that range, but it is a preliminary.

Okay. That's helpful. And then based off on the questions that you've had with Demotech, I guess what's -- is there like a timeframe, right, that they would want you guys to have some additional capital support in place or as you've spoken with them under what timeframe have you pointed to kind of working towards getting your leverage back to where you were before these storms?

They haven't requested anything from us. We're being proactive in our modeling and capital planning in anticipation of questions they may have after reviewing our third quarter results, but they haven't expressed any desire to see us do anything at this moment.

So when you think about, I guess, the conversations that you've had with some partners, I guess, some of these losses, right, that you're pointing to in the fourth quarter; when do you guys envision kind of getting your leverage back to where you were before these storms?

This quarter, we're targeting an effective date of December 1. So that could clearly change, but that is our target at the moment. And we bought some of that capital release to help bolster our RBC here in 2020.

Okay.

Yes. And also on the one comment that the real key to our success in that is the -- is the growing underlying core profit margin, because when you have that REIT and that margin to work with, it's not difficult to have additional quota share partnerships.

Okay. That's helpful color. Sorry -- you’re saying something.

No. Go ahead please.

Okay. Then I was going to say, so you guys were also mentioning a good amount of rate that you're getting in your book, which triangulated right into a pretty good level of gross premium growth in the quarter. So, what -- do you have a sense -- could you give us a little bit more color on kind of rate increases that we should expect from here as you kind of -- on your own level to put a good amount more price through your book of business?

Yes, it's pretty significant. On the personal lines side of the house, page 8, does a pretty good job of laying out what some of the changes we've already made and are planning to make. We think the effect of these changes could be upwards of $100 million of additional premium with no increase in marginal exposure. And as that rate earns in, it's extremely powerful. Obviously, our capital position will dictate how much of that we get to keep. We're happy to share some of that with our reinsurance partners to the extent we need to. But we're going to be taking, as Dan mentioned, some pretty aggressive action to rein in the direct writings over time. The reinsurance is a long-term strategy, but it's also -- but the share is probably more of a short-term tool to help us manage leverage until we refine the risk portfolio and get the direct writings dialed in where we want them.

This is Dan. I'll also make the comment on page 8 of the investor presentation, that a lot of the REIT that you see, like, for example, in Florida, 14%, 13% is the second rate increase. So we already have been working for a year under rate increases made last year, which is what's driving up our core right now, but these are rate on rate. And we're seeing retention ratios that are remaining very consistent. So we're not seeing -- we're not seeing that give us a higher non-renewal rate.

Okay. That's helpful. And then last question for me. I think you mentioned $4.2 million of favorable development. Brad, do you just have a little bit more color on what does that stem from and what accident years or if it was cat or non-cat?

Primarily all non-cat on the most recent accident year. So 2019.

Okay. Thank you for the color.

You’re welcome. Thank you.

Your next question comes from Bill Broomall with Dowling & Partners. Please proceed with your question.

Great. Thank you. If we can just go to Slide 12 of the presentation, you talked about the cat -- the agg program, which has been hit three years in a row. Can you just maybe talk about the interest that you're seeing from reinsurance partners in terms of participation? I know presentation says, you're going to switch to a fixed percentage or fixed retention rather than a sliding scale. But can you just talk about the interest that you're hearing right now for that?

Yes. I will be the first to admit, aggregate coverage is difficult to come by these days, a lot of companies have struggled with placing their aggregates. We're in a unique position because we have one strategic partner who provides a flexible limit, and it is part of a shared limit with our core catastrophe reinsurance program on the 1:1 placement, 6:1 placement. So we've got a great deal of flexibility in how we can utilize that limit and structure something that works for both parties. So I will admit that, we understand it's got to work for them as well, and we want to address that. And we certainly -- the primary goal this year is to have some fixed retention instead of one that varies with premium. Because of that phenomenon, where as the retention goes up, if your losses are unchanged, the possibility exists for you to recapture losses previously ceded and have cat losses incurred in a quarter where you didn't really have any new cat. So that's what we'd like to solve for. We don't have that finalized. So stay tuned on that. But our goal is to have a fixed amount of cat and stop our losses at that point in time.

Okay. Excellent. Thank you for that. All right. Can you just -- in the press release this evening, you talked about UPC Re and you reached an exhaustion point. Can you just maybe explain to me what that is?

Well, UPC was a participant on layer one of our core reinsurance program. So they had a $12.5 million exposure that was hit by Hurricane Laura. And so they don't -- they max -- they hit those maximum liability under their contract. So we -- and that's included in, obviously, the $125 million of net name windstorm losses retained in this quarter.

Got it. But your tower is full cascading, right? So the higher layers will drop down for any future events, correct?

Oh yes, absolutely. That's all cat -- that was -- we fully collateralized that participation. But yes, it doesn't change the structure at all. And everything is cascaded down. There are no gaps in coverage in our program.

Okay. Perfect. And if I think about the additional quota share that you're looking to place, and I think about kind of the Q4 storms, how much buffer do you think in your RBC ratios kind of do you expect to have after this? So if Eta does come, or maybe another storm, would that buffer be enough that you won't have to do, maybe something else to address surplus? Anything you can comment on there?

I would just say, we don't want to be anywhere near that 300% line. If we can help it, we want to be well above it. We're going to do our best to give us a margin of safety there that is reasonable. And that's about all we can say at this point in time. RBC is a complicated animal. But the de-risking of the company, that is ongoing right now. And the additional reinsurance support should have us in a good position at year-end.

Great. Maybe one last one, maybe numbers. How much cash do you have at the Holdco? And what was the surplus at $930 million?

The unrestricted liquidity at the Holdco was $42.2 million at September 30, and the statutory surplus for group was $371 million.

Great. Thank you so much.

Thank you. That concludes our question-and-answer period. I'd now like to turn the call back to management for closing remarks okay.

This is Dan. Thanks again for your time and attention. I want to say that, I continue to be excited about the future with the executive team we've put together over the last quarter and our employees and our key distribution and reinsurance partners, enabling us to navigate this market together. So thanks again.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.