Hello, and welcome to the United Insurance Holdings Corp Q1 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Adam Prior with The Equity Group. Please go ahead.

Thanks, Kevin, 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 its website. You're also welcome to contact our office at (212) 836-9606, and I'd 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 products of the Company and subsidiaries. Actual results from UPC may differ materially from those results anticipated in these forward-looking statements as a result of risks and uncertainties, including those described from time to time in UPC's filings with the U.S. Securities and Exchange Commission. UPC specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of 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.

Hello, and thanks for joining us on our first quarter earnings call. I'm Dan Peed, Chairman and CEO of UPC. I plan to offer an overview, and then Brad Martz will go over specific numbers, and then we'll take some questions. The first quarter yielded an underlying combined ratio of 90.4%, which is a slight improvement on a year-over-year basis. Our first quarter cats, including winter storm Uri, caused a loss near $24 million net, somewhat better than planned and benefiting from a reduced AOP cat retention in our 2021 reinsurance program. As such, we were set to deliver results for the first quarter on track with plan and in line with our expected transition year. However, due to unusual loss development patterns in February and especially in March, at the end of the first quarter, we did an analysis of our exposure to the accelerating litigation trends in Florida. This resulted in a $30 million strengthening of both cat and non-cat prior year reserves focused in our Florida personal line disclosures. This drove a disappointing after tax core loss for the quarter of approximately $19.4 million. Subsequent to closing the quarter, we are very encouraged with last Friday's Florida legislative changes and believe that they will help to mitigate the accelerating litigation experienced in Florida. Given our substantial exposure to Florida, we believe this will result in significant improvements for UPC and will make a material difference to our ultimate losses incurred in Florida, while allowing UPC to keep the promise and stand strong for our investors, business partners and policyholders. As mentioned above, while our underlying combined ratio improved slightly year-over-year to 90.4%, we need to target the low 80s. To drive an underwriting profit and continue expanding our underlying margins, we need to continue driving up revenue…

Thank you, Dan, and hello. 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 related to the Company performance. For the quarter ended March 31, 2021, the Company reported a GAAP net loss of $17.8 million or $0.41 a share compared to a loss of $12.7 million or $0.30 per share last year. Our core loss of $19.4 million or $0.45 per share represented a $28.5 million decline from core income of $9.1 million or $0.21 a share in the first quarter last year. As Dan mentioned, the deterioration in core results was driven by a $30 million charge to strengthen loss reserves due to higher-than-expected prior year loss development. This irregular loss development deviated from historical patterns in February and March due to higher frequency of litigation and a rise in severity fueled by higher material costs. This trend continued in April and was factored into our reestimation of ultimate loss liabilities at quarter end. Page 6 of our investor presentation paints a nice picture of the litigation trends we've seen since 2017 and why legislative changes in Florida were needed. We applaud every leader in Florida who helped make that happen. Assuming these changes become law on or about July 1, I believe it's a game changer and should have a positive impact on future results over time. Our GAAP and core losses also included $24 million or $0.44 a share of current year catastrophe losses consistent with our preannouncement. Winter storm Uri was approximately $16 million, with the remaining $8 million stemming from nine smaller cat events during the first quarter. Gross premiums written for the quarter decreased $23.5 million or…

[Operator Instructions] Our first question today is coming from Greg Peters from Raymond James.

Hi, Good Afternoon. I'd like to focus first on the litigation charts you put on Page 6, some of the commentary you had in other parts of your presentation. So the legislation was passed, and it's going to go into effect on July 1. So there's two parts to the litigation question. First of all, there are other parties that are -- have observed the litigation and observed what's been passed and have suggested that while it might help a little bit on the margin, it's not going to go far enough to fixing the problem. And the second part of the litigation question would be if the trends accelerated in March -- February, March and now -- and it goes into effect July 1, should we expect that chart that's on Page 6 on the right-hand side of the page to go up even further as there's a rush to the filing date to get more claims filed? And will that result in a poor loss ratio in the second quarter?

Thanks, Greg. This is Dan. So we've heard a lot of feedback from the various parties on how effective the legislation will be. And of course, we did not get everything that was originally in the Senate Bill 76. And there were a few key things that were removed. However, from the standpoint of just the dynamics of a claim and litigation, there's quite a bit of good stuff that puts more structure around that process and makes it more fair than it has been. Florida has been really difficult. And I think for people that are really close to the situation, they can see that there will be changes in how those claims are addressed. So we feel like that will make a significant difference including like the 2-year time frame as it applies to the tail and stuff like that. So we have heard the various things. And the fact is that we won't really know until we see how this impacts some of the claims. Your second question, which is really what do we expect out of Q2, I would expect that we'll have something of a rush to the courthouse. But of course, when we're looking at our reserves, we're thinking about how that impacts the future. And so we would not project the Q2 number of litigation events to continue to grow into Q3 or Q4. We obviously, we would project that to come down dramatically. So I don't think that, that will have an impact -- a negative impact on how we look at reserves at the end of Q2.

Thank you for that answer. And then just as a follow-up, I know you report the underlying number. I'm just curious about how meaningful the underlying number is in the context of the unfavorable reserve development. It would suggest the $29 million with -- or $29.769 million, it would suggest that, that is -- you had understated the underlying loss ratio in prior quarters. So actually, the actual underlying loss ratio or underlying combined ratio is running higher than what you're reporting. Am I looking at that wrong?

Greg, this is Brad. I'll try that one. I think the underlying number tends to help with comparability between periods by stripping out the noise. So for example, if some of the data that emerged in the second half of the first quarter this year was available at year-end when we were making certain decisions, and that $30 million had been put into our year-end numbers, you'd be talking about a pretty significant improvement in the combined ratio potentially. That's the sort of thing that distorts comparability, and the underlying metric is just one of many metrics. We think all are important, especially the combined ratio. I don't want to deemphasize the combined whatsoever, but it is a way to help improve comparability.

I got it. And then the last question would be on the reinsurance and risk-based capital. I guess with this first quarter results, your risk-based capital ratios deteriorated. Obviously, with the reinsurance, you have an opportunity to sort of reset that. How are you thinking about risk-based capital ratios as we go through the second quarter and the reinsurance renewals? And maybe you want to give us an update because that all ties in with the first quarter results, where they are, et cetera.

Yes. We're comfortable with our capital position. We've put a lot of work and thought into that. Obviously, at year-end, with some of the additional reinsurance protections we put in place both at year-end and at January 1 with our all other perils catastrophe excess to loss program, which did help lower our retention of risk from winter storm Uri. And we're going to do the same thing for our six 1 renewals. So that is going to take pressure off of some of the earnings volatility that we've seen in recent years as we start to take more reasonable retentions of risk relative to our capital. But the derisking of the portfolio is really driving down our net premium risk, and that is the primary driver of required capital. So actual capital will obviously be determined by the frequency and severity of losses in the second half of the year, but we're trying -- we're doing everything in our power to improve our risk portfolio and drive down our required capital.

[Operator Instructions] Our next question today is coming from Elyse Greenspan from Wells Fargo.

Hi, thanks. My first question, I think, Dan, you started off your discussion by saying you're targeting a low 80s on an underlying basis. Could you just give us a sense -- kind of provide an update on a time frame when you guys would expect to get there?

Okay. Well, the way to get there is, of course, to drive down our loss costs and increase our revenue. So we're on a run rate -- we have achieved a 10-point -- let's say, 10.2% or 10.4% rate increase, looking backwards, and we have filings -- there's two filings in Florida for 14.7%. And I think Texas, Louisiana, South Carolina, North Carolina and New York, which all average around 15%, in addition to the 10% that we achieved through last year. So, on the exposure management and on the loss cost side, we've taken a number of steps from the standpoint of underwriting and risk selection to try to eliminate what we call the bottom decile of our portfolio. So those steps will try to move that underlying combined ratio down into the low 80s. When is a good question. I mean, it moves around a little bit, obviously, with how quarters go. But we would certainly hope that we're there by the end of this year, 2021.

Okay. That's helpful. Then in terms of the color that you guys gave around bringing down your net cat costs, right? And just in reference to what we saw last year from the event. So this is following the addition -- the full placement of your reinsurance cover as you see it getting placed, right, as of June 1? I mean, it sounds like you have all the commitments for the program, but basically, you expected that the loss, I think you said $70 million, right, that's basically after we go through the full renewal of the program?

So the -- what we said was at the most $70 million, $25 million for the first and the second occurrences and the $70 million aggregate. We're working to potentially bring that down even further, and we hope to have news over the next couple of weeks. But yes, that would be applicable at June 1. We have a separate, what we call, all other perils cat tower that we placed at [1/1], which helped us in our Uri loss and gave us a net loss that was reduced from that outside of hurricane. So that retention applies to named storms, the $25 million.

Okay. That's helpful. And how much, Brad, sorry, I think I might have missed some of your commentary on capital in your prepared remarks. I think you were talking about having to contribute some capital to the pooled entities just because of the reserve charge in the quarter. Did you provide a number? Or can you just kind of re-highlight to us what you said?

Certainly. We -- I had mentioned in my remarks that we had approximately $40 million of cash on hand -- unrestricted cash on hand at the hold-co level, and we intended to utilize up to half of that liquidity for contribution. Those have not been finalized yet in terms of exact amounts, but we do want to backfill the hole that was caused by the reserve charge that we feel was prudent and warranted given the loss development activity we saw. So that's essentially what was communicated.

Okay, great. And then a couple of quick numbers ones. I had heard from another reinsurer -- a reinsurer, actually, sorry, that they said that even though it's kind of more than three years out, that they're still seeing some adverse development on Irma. So have you guys seen your gross loss from that event move recently like in the current quarter?

Yes, we did reevaluate Irma at March 31 as well, and our gross loss increased $150 million for Irma.

From the end of last year?

That's correct.

Okay. And then one last one. So there's been some events in April, just in terms of some of the storms. I've heard some at the end of the month could be, I guess, of more significant losses. Is there anything that we should think about you guys in terms of April to date, maybe having more or perhaps you're less exposed to some of the events that we've seen so far?

Sure. Yes, we can acknowledge some cat activity in April, but nothing out of the ordinary, and we don't have anything to preannounce at this time.

Okay. Thanks for the color.

You're welcome.

We have reached end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, we just want to thank everybody for being here. And thanks again.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.