American Coastal Insurance Corporation (ACIC) Q4 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to United Insurance Holdings Corp. Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Karin Daly, Vice President at the Equity Group.

Thank you, and good afternoon, everyone. UPC Insurance has also made this broadcast available on its website at upcinsurance.com. A replay will be available for approximately 30 days following the call. Additionally, you can find copies of UPC's earnings release and presentation in the Investors section of the Company's website. Speaking today will be Chairman of the Board and Chief Executive Officer, R. Daniel Peed; and President and Chief Financial Officer, Brad Martz. On behalf of the company, I'd like to note that statements made during this call that are not historical facts are forward-looking statements. The company believes these statements are based on reasonable estimates, assumptions and plans. However, if these estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those expressed in or implied by the forward-looking statements. Factors that could cause actual results to differ materially may be found in our filings with the U.S. Securities and Exchange Commission, in the Risk Factors section of our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Forward-looking statements speak only as of the date on which they are made and except as required by applicable law, we undertake no obligation to update or revise any forward-looking statements. Now I'd like to turn the call over to Dan Peed. Dan?

Thanks, Karen. Hello, and thanks for joining us on our fourth quarter earnings call. I'm Dan Peed, Chairman and CEO of UPC Insurance. I'm planning to offer an overview and discussion of some of our results and activities and then Brad Martz will provide more specific numbers. And then we'll take questions. Results for Q4 demonstrate that we are making good progress through our 2021 transition year plan. Core income improved on both a quarter-over-quarter and a year-over-year basis. Year-over-year, it improved from a loss of $58 million in Q4 of 2020 to a loss of $1 million in Q4 of 2021. Quarter-over-quarter, it improved from a loss of $15.5 million in Q3 '21 to a loss of $1 million in Q4 '21. Core income, excluding named windstorms, was down slightly from a profit of $3.3 million in Q4 2020 to a loss of $1 million in Q4 2021. This is due mostly to our de-risking plan with higher reinsurance costs associated with a significantly reduced hurricane retention. These additional costs are expected to be offset through 2022 as significant and compounding rate increases earn their way through the portfolio. As such, as we exit our transition year of '21, we expect a growing underlying profitability margin, leading to an underwriting profit in '22 and achievement of our targeted ROEs in '23. We continue to execute on our strategic plan to bring personal lines and commercial lines to a 50-50 balance. We ended 2021 with a premium mix of 63% to 37% personal to commercial, down from 75-25 at the end of 2020. At this rate, we are ahead of pace to achieve 50-50 in 3 years. On the personal line side, at the end of Q4, we sold renewal rights to our portfolios in Georgia, North Carolina and South Carolina. When combined with last year's renewal rights sale of our 4 Northeast states; we've reduced personal lines TIV by 44%. In our continuing portfolio, through exposure management and risk selection, we've reduced TIV exposure by 15.8% in 2021 and currently have a run rate over 4% per quarter through at least third quarter 2022. While decreasing exposure, we've increased rates in average across the personal lines portfolio of 11.3% in Q4 and 11.5% for the year of 2021. Rates are compounding and accelerating, and we expect to continue to achieve significant rate increases throughout '22. We Compounding rate increases are beginning to earn their way through the portfolio, which will accelerate through '22 and into '23. The Commercial Lines portfolio continues to perform well with premium ending the year up nearly 20% and exposure approximately flat. In American Coastal, we have a market leader in Florida commercial residential risks, which is positioned extremely well to grow profitably in one of the hardest Florida markets in 15 years. For 2022, we anticipate additional rate increases consistent with the 20% in 2021. In summary, the fourth quarter results reflect our continuation of our plan for a return to underwriting profitability in '22 and target ROEs in '23. We are ahead of our 3-year schedule in achieving the 50-50 balance between commercial lines and personal lines. We're trimming our personal lines portfolio both by selling renewal rights as well as ongoing exposure management and risk selection. Our Commercial Lines business is performing well and positioned to grow into the hard market anticipated in Florida for at least the next 2 to 3 years. With that, I'll turn it over to Brad Martz.

Thank you, Dan, and hello. This is Brad Martz, 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-K for more information regarding the company's performance. For the quarter ended December 31, 2021, UIHC reported a GAAP net loss of $2.3 million or $0.05 a share compared to a loss of $33.9 million or $0.79 a share last year. Our core loss of $1 million or $0.02 a share improved significantly compared to a core loss of $58.1 million or $1.35 a share last year. On Page 4 of our investor presentation, we highlight that our core loss included $4.5 million of net retained CAT losses, which were partially offset by $3.5 million of favorable reserve development. Despite our lower hurricane retention and aggregate reinsurance protections, we did not incur any named windstorm losses in the current quarter, which was in stark contrast to the $78 million of net retained losses from named windstorms in the fourth quarter of 2020. Removing the effect of named windstorms improves comparability of our core results for the prior year, which did decrease by $4.3 million as Dan mentioned, due primarily to our higher reinsurance spend in the current year intended to reduce earnings volatility and protect capital. Gross premiums written for the quarter declined 47.3 million or approximately 15% and gross premiums earned decreased 6.1% to $342 million due to continued exposure management in our personal lines portfolio as well as the cancellation of all policies in Connecticut and Rhode Island, consistent with our intent to transfer that business to HCI Group. Pages 8 through 11 of our investor presentation support Dan's comments that we're getting significantly more rate in both commercial lines and personal lines while keeping the risk we want. Page 12 provides a summary of our business in force at December 31, with and without the states where renewal rights were sold to demonstrate the good progress we're making toward our goal of a more balanced risk portfolio. Ceded earned premiums were 196.8 million, an increase of 32.4 million or 20% year-over-year, due primarily to more business being ceded via the 100% quota share reinsurance program for the Northeast Region and the 23% quota share session for American Coastal Insurance Company. These sessions are partially offset by ceded losses and ceding commission income earned in the current period. Other items included in total revenues during the fourth quarter were $7.2 million of fee income that increased year-over-year due to the renewal rates agreement announced in December to transfer the risk of loss in our Southeast Region, the HCI Group. Net investment income of $3 million declines year-over-year, due to lower invested assets and net investment losses of $2.3 million declined due to fixed income sales during the quarter to meet liquidity needs. And we also had unrealized gains from equities of $1.5 million. UPC's fourth quarter net loss and loss adjustment expense was $85.5 million, a decrease of $99.6 million or 54% year-over-year. Catastrophe losses added roughly 8.5 points to our net loss and combined ratios with the impact of favorable reserve development being about 2.5 points on those same ratios. Our underlying loss and loss adjustment expense was $76.5 million, down $1.6 million or 2% year-over-year. This produced an underlying net loss ratio of 52.7%, which was up roughly 13.5 points from 39.1% in Q4 last year. The increase can be attributed mainly to ceded premiums earned, as shown in our ceding ratio of 57.6%, which increased 12.5 points compared to the same period last year. Roughly 5 points of that change is related to ACIC's, American Coastal's 23% quota share and nearly 7 points as related to the HCI quota share in the Northeast Region. Page 5 of our investor presentation breaks down the key ratios for the year compared to the previous 5 years and our 6-year averages. Here, you will see that our net loss and expense ratios measured against gross brands earned showed improvement, but risk transfer via reinsurance pressured the same results measured against net premiums earned. Page 6 of our investor presentation summarizes our results by line of business and continues to show profitable results for commercial lines in the current period, but much improved results for personal lines year-over-year. Given our rapidly evolving insurance portfolio, our Form 10-K will provide additional disclosure and transparency as we move from a single reporting segment to breaking out our results in more detail between personal lines and commercial lines going forward. Page 7 of our investor presentation provides an update on litigation trends for United Property and Casualty Insurance Company compared to the industry basket of Florida homeowner carriers. Our experience has been consistent with the industries, which indicates a downward trend in the frequency of new lawsuits filed in Florida during the second half of 2021. UPC's operating expenses were $72.9 million, a decrease of 26% year-over-year. This decline was driven mainly by higher ceding commission income during the current quarter, which is reflected in lower acquisition costs. However, our net expense ratio increased approximately [seven tenth to a point] to 50.2%, inclusive of all reinsurance costs. Page 13 of our investor presentation provides some select balance sheet data. UPC's total assets were $2.7 billion, including cash and investments of $965 million. The modified duration of our fixed income holdings was approximately 4 years with an overall composite rating of A. And for the year, our GAAP equity attributable to UIHC stockholders declined approximately 21% to $312.4 million with a book value per share of $7.20 and tangible book value per share of $5.10. We are still in the process of finalizing our statutory results. We do expect all our carriers to have RBC in excess of 300% upon adding additional capital prior to filing our annual statements subject to regulatory approval. Finally, on Page 14 of our investor presentation recaps our strategy to be a top quartile specialty underwriter of CAT exposed property insurance. I firmly believe the company is much better positioned for sustainable long-term success given the reduced exposure base and numerous underwriting improvement initiatives we've implemented during 2021. That concludes our prepared remarks. We thank you for your continued interest in UPC Insurance and are now happy to take any questions.

[Operator Instructions] Our first question is from Greg Peters with Raymond James. Please go ahead.

This is actually Sidney Schultz calling in for Greg. My first question is more of a broader one. We've been hearing rhetoric around the Florida homeowners market regarding legislative changes. And so I'm just curious if you guys could provide any insight on what you might be seeing in that?

This is Dan. Obviously, we can speak to a couple of things. One would be the changes last summer, SB 76. As we saw in our investor presentation, we did see the number of new litigation -- new claim -- new litigant lawsuits drop off through August and September of last year and be reduced by about half through the end of 2021. It's hard to tell whether that's -- it's hard to tell the impact that, that will have over the long term, but it has given us some ability to respond to the lawsuits better. The 10-day pre-suit notification is important. And then the second part of your question might be more as to rumors about this year. And we have heard a lot of rhetoric but really aren't prepared to -- we don't have any way to handicap the legislature any better than anybody else. There are some proposals that are on the table that definitely would improve the environment in Florida, the reduced attachment point of the Florida Hurricane Catastrophe Fund would be important as one of the key things, if that helps you.

Yes. I would just add we are monitoring it actively. Our team is all over it, Senate Bill 1728 presented by Senator Boyd has got some compelling features that we're actively monitoring. But I think Dan is right, it's too early to speculate with up 2.5 weeks left in session, lots of changes are expected towards the end of the session.

Okay. And then for my second question. Just looking -- I know you guys have been able to take rate and reduced exposure. And so I'm just curious if there's any other underwriting actions you guys are taking or planning to take that maybe we should keep in mind when looking through 2022 and 2023? Or maybe just anything you guys think is important for us to keep in mind.

Yes. This is Dan again, and I'll take a stab at that. We have -- I think I've seen the list of about 60 underwriting actions, material underwriting actions that we've taken over the last 18 months. So certainly, we are doing a lot of different activities. We're closely monitoring and assessing the age and the condition of the roofs as something that we do better now than we did before. We have developed a technology and InsurTec tool that actually can assist us in assessing the profitability of each one of the accounts down to the policy level. We have withdrawn from many of our various different products in different states that were small and not going to reach scale. Those are something off the top of my head, but we have a long list of underwriting actions that we've taken.

Yes. I would just add. This is Brad, I would just add, the big changes, obviously, are the fact that the Northeast Region and Southeast Regions are transitioning away. So that's going to definitely impact gross premiums [indiscernible] gross premiums earned as well as net premiums earned when compared to the prior periods.

[Operator Instructions] The next question is from Elyse Greenspan with Wells Fargo.

My first question. You guys said you expect to get back to -- get to your ROE targets, I guess, in '23. So I just want to confirm, is that target still for the mid-teens? And then could you give us a sense when you point to, right, getting the underwriting income, right, in '22? What do you think the ROE should shake out in 2022 relative to that target?

So this is Dan, thanks. Our plan has been and that we haven't really enunciated or we've talked about since last year and even in mid-2020, would be to have 2021 as our transition year. We needed to de-risk and deleverage the portfolio. We spent more money on reinsurance. And as you can see, we've de-risked the portfolio in many different ways. And then the second step of that in 2022 would be to achieve an underwriting profit. And that's all we've really specified, but our target ROEs, which are in the mid-teens plus an aggregate -- an annual aggregate retention for CAT in -- by the end of 2023. So it's hard to -- we really can't put a projection, a specific number on 2022, but we would expect to achieve a good underwriting profit. That's the plan.

Okay. And then you alluded to -- you guys highlighted that some of the reinsurance and other business transfers, right, impacted the underlying loss ratio on a net earned basis in the quarter. Would you expect that to continue and just help us think about kind of modeling the underlying loss ratio as you think about 2022?

Sure. Elyse, this is Brad. The key assumption for 2022 is going to be the 06/01 reinsurance renewal. The company has taken several steps to mitigate the risk of cost increases at June 1. Notably, having some multiyear protection, our reduced exposure base that's ultimately leading to less limit being required year-over-year. So there are a number of things we've done to properly position ourselves in that regard. So I think we will fare better than most in terms of the overall net effect of potential reinsurance cost increases just based on the fact that we're going to meet significantly less limit year-over-year. We've also got embedded protections with the amount of CAT limit in our quota share, which should be helpful. And if there are changes to the Florida Hurricane Catastrophe Fund this year, those could be very, very meaningful. We can't -- obviously, we're not planning on that. We're modeling out our business around a fairly consistent ceding ratio, consistent to 2021.

So then when you guys say, right, underwriting profit, what are you modeling in for 2022 for net cats? I'm assuming there is a retention plus some kind of the smaller CAT events that we typically see, but what are you assuming could be the net CAT load this year?

CAT is inherently unpredictable, so we hesitate to give any specific point estimates for CAT. I think we've always encouraged people to develop estimates consistent with our historical experience but also apply prospective changes in our risk portfolio, including rate increases. So if you're looking at a CAT loss ratio, I mean you have to obviously consider the rising rate environment we're in. But the frequency and severity of named winds -- CAT losses from named windstorms and all other perils is not something we're going to provide guidance on.

Okay. And then one last one. Brad, I think you mentioned that you expect all your carriers to have an RBC in excess of 300%. But you did say that you -- upon adding additional capital. Can you give us any sense on what capital you expect to add?

It's still to be determined. We've still got a few pieces of the annual statements to finalize before we can get finalized the actual RBC output. But we will make capital contributions to a few of our companies, not all. I mean we've got some companies that are overcapitalized and are well in excess of 300%, a couple that are right there and might need a little bit of additional capital prior to filing our annual statements. And we've previewed that with our regulators and don't see a problem with doing that. But we certainly are committed to ensuring all of our statutory entities have adequate risk-adjusted capitalization.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Dan Peed for closing remarks.

Thank you. And with that, we'll wrap up our call for today. I want to thank our entire team for their tireless efforts, and thanks to all of you for joining us on our call today. Thanks again.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.