Earnings Call Transcript - ACIC Q4 2020

Operator, Operator

Greetings, and welcome to the United Insurance Holdings Corp. Fourth Quarter and Year-End Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Adam Prior of The Equity Group.

Adam Prior, Investor Relations Representative, The Equity Group

Thanks Brock 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 we'd be happy to send a copy. In addition, UPC Insurance has made this broadcast available on its website.

Daniel Peed, Chairman and CEO

Thanks, Adam. Hello and thanks for joining our call. I'm Dan Peed, Chairman and CEO of UPC. I'd like to offer an overview and then Brad Martz will provide some more detailed numbers. And then we'll take questions. For Q4, UPC was again impacted by a high level of CAT activity, including tropical storms Delta, Zeta, and Eta, which combined with non-named CAT drove a net CAT loss of approximately $107 million and a core loss of $58 million. We watch core income excluding the windstorm very closely as a proxy for our underlying portfolio performance, and it was an $0.08 profit in Q4 versus a $0.34 loss last year. That makes a strong $0.42 per share improvement. This measure shows consistent quarterly year-over-year improvement, up nearly $18 million in Q4 and $60 million for full year 2020. The gross underlying loss ratio, which excludes CAT, was 21.5% versus 32.1% last year, mostly due to increasing rates and more stringent risk selection and underwriting activities. The underlying combined ratio improved to 88.5% from 103.1% last year, which shows a dramatic turnaround in our underlying portfolio performance. We expect this to continue to improve as rate increases and risk selection activities achieved in 2019 and 2020 make their way through the portfolio. This is expected to be offset by the increased reinsurance spend on a significantly reduced CAT occurrence and aggregate retention, as well as our increased exposure cession in 2021. We'll talk more about that in a few minutes. So, for full year 2020 results, we were impacted by an unprecedented frequency of a dozen named windstorms, breaking the record set over a hundred years ago in 1916 of nine named storms. For UPC, as a coastal property specialist with a portfolio from Texas to Maine, even though most of the storms were low to moderate in severity, the high frequency drove an elevated level of net potential losses.

Brad Martz, President and CFO

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-K for more information regarding the company's performance.

Operator, Operator

Thank you. At this time, we will conduct a question-and-answer session. The first question today comes from Greg Peters of Raymond James. Please proceed with your question.

Greg Peters, Analyst, Raymond James

Good afternoon. I guess to start things off, probably appropriate and I recognize it's really early. But it would be appropriate for you guys to sort of comment on how you're thinking about what's unfolding in Texas and where the company's exposure might land.

Brad Martz, President and CFO

Good afternoon, Greg. Thanks for your question. Sure. First our hearts go out to our friends and family in Texas. It's a terrible situation and that's what we're here for. That's why UPC exists. UPC's exposure to the winter storm Uri is primarily in the Tier 1 and Tier 2 counties in Texas. So, market share analysis may be difficult and may not be useful as it relates to our losses. We do have plans to report it and do expect to incur losses, but it's far too early to comment on our potential ultimate gross or net retained losses at this time. We do have appropriate reinsurance protections in place. Our AOP (all-other-perils) CAT reinsurance program that we announced back in January lays out the terms for effective protection. There's a $15 million retention, and then there's also quota share protection that would reduce our retention further to approximately $10.4 million for that event. So, it's likely we'll preannounce our estimated CAT losses for the first quarter near the end of March or beginning of April. But our focus right now is taking care of our policyholders, our agents, and our associates in their time of need.

Greg Peters, Analyst, Raymond James

Got it. Thanks for the answer. I wanted to go back to two things. First, Dan, during your comments I think you were talking about how much of the reinsurance has been renewed for the expected June renewal; there was a siren in the background so it was hard to hear your comments. Could you reread that? And also, Dan, I believe you said your target is $25 million per occurrence and $70 million aggregate for named events for the upcoming storm year. Is that correct?

Daniel Peed, Chairman and CEO

Yeah. So, to answer your question, as opposed to rereading it, I'd just say that we have quota share protections, with portions effective January 1st as well as some multi-year portions and then, of course, the FHCF. So we have currently — I'll use the word pre-agreed — about 87.5% of the limit for the June 1 renewal that we feel like we'll need is already done. Those comments aren't fully signed, but they're agreed in principle. So that puts us in a really good position as we work towards finalizing that treaty. The second part of the equation is, specifically, we plan to reduce our named storm retention to $25 million per occurrence and $70 million in the aggregate because we have a cascading tower. We've worked with our reinsurers to cap our aggregate, or be very close to that with a very minor ancillary aggregate. So that if we were to go through 2020 again, the pool of companies would have a $70 million aggregate. We have a couple of little ancillary retentions on the non-pool companies, but that's the bulk of it.

Greg Peters, Analyst, Raymond James

Thanks. I'll ask the last question. I know I have a lot of others, but the last question I'll ask is: as you worked through this major change, one of the statistics you report is your ceding ratio. I think your ceding ratio was 45.1% in 2020 versus 45.7% in 2019. How do you expect that ceding ratio to look in 2021, given you're talking about buying a lot more reinsurance protection, relatively speaking?

Brad Martz, President and CFO

Greg, this is Brad. I'll take that one. We do expect it to increase, but really primarily driven by quota share. Now that we've expanded our quota share program as of December 31st, adding American Coastal to the mix and increasing the percentage ceded for United Property & Casualty and Family Security Insurance Company, that's going to drive a pretty big change in ceded premiums earned year-over-year. But there is a corresponding benefit to ceded losses and lower acquisition costs through ceding commission income. So some of the components of the P&L are changing and the ceded premium earned is going to increase the ceding rate.

Greg Peters, Analyst, Raymond James

All right. And then just, I guess, one small detail. On page 14 of your slide deck, you say as of December 31st, the premiums in-force were $1.39 billion, but then in the language, the left, you say $900 million of premium in-force. I assumed the $900 million of premium in-force is less sort of like the pro forma number after the renewal rights and all the changes. Is that how I should be thinking about it?

Brad Martz, President and CFO

That's correct. You add the $350 million of premium in-force for commercial lines referenced in that middle paragraph, and the $900 million of premium in-force as footnoted down below excludes the discontinued products and the territories where there were renewal rights.

Greg Peters, Analyst, Raymond James

Got it. Thank you.

Daniel Peed, Chairman and CEO

You're welcome.

Operator, Operator

The next question comes from Elyse Greenspan of Wells Fargo. Please proceed with your question.

Elyse Greenspan, Analyst, Wells Fargo

Hi. Thanks. Good evening. My first question, a follow-up: I just want to make sure on the Texas storm, appreciate that it's an ongoing event and the color you gave in response to Greg's question. So, I guess, your understanding is whether what you're thinking too is that it will be one event. I guess when you think about the reinsurance protections, I think is maybe potentially multiple events with Uri, but it sounds like there'll be one event that could help on your net retention to $10.4 million?

Brad Martz, President and CFO

Yeah. Hi, Elyse. This is Brad. I believe that will be the case. We can't confirm that for sure at this time. It's still too early, but I believe the bulk of the loss will be contained into a single event.

Elyse Greenspan, Analyst, Wells Fargo

And away from Texas, obviously Texas is a pretty big ongoing event, but away from that, it does seem that most other losses probably were pretty light so far in the first quarter away from Texas?

Brad Martz, President and CFO

January was a quiet month on the CAT front. Thank goodness.

Elyse Greenspan, Analyst, Wells Fargo

Okay. That's helpful. And then, so a couple of few other questions. In your prepared remarks, I think it was you Dan, you mentioned flat earned premium after you were going through some of the moving components in terms of rate increases, and then the extra reinsurance that you guys are buying, is that a comment on net earned premium, or was that on a gross basis?

Daniel Peed, Chairman and CEO

That was more on a gross basis and general from the perspective that we're decreasing exposure but increasing rates. So that yield — and again, that was after the renewal rights were out on the remainder of the portfolio — we were expecting the increasing rates to kind of offset the decreasing exposure.

Elyse Greenspan, Analyst, Wells Fargo

Okay. And then, in the slide deck and in the prepared remarks, slide talked about kind of a 50/50 split between personal and commercial. Is there a timeframe when you ultimately want to get the business mix split in line with those parameters?

Daniel Peed, Chairman and CEO

No. I mean, you're right. It is an eventual target. I would say it's more mid-term. I'd say that's our goal in the three- to five-year timeframe.

Elyse Greenspan, Analyst, Wells Fargo

Okay. That's helpful. And then, obviously, I think you guys mentioned 2021 being a bit of a transition year, given a lot of the moving parts. Looking kind of beyond that, it sounds like rate would return to showing some growth and improvement. Are there return targets, like how you see from an ROE perspective for 2021 and then the out years going forward aligned with the business plans in the slide deck?

Brad Martz, President and CFO

We have those targets in the short term and long term. Our long-term target is a 15% return on equity, inclusive of our net retained average annual loss for hurricane. That is the long-term goal. That is where we're marching towards in pricing and underwriting and managing our exposure base. But in the short term, as you mentioned, it'll be somewhere between recent results and our target.

Elyse Greenspan, Analyst, Wells Fargo

Okay. That's helpful. One last one. You guys had to kind of work on the pooling arrangement and the changing plan; I'm assuming you guys have been in discussions with Demotech. Can you provide any color on those discussions in reference to these initiatives?

Daniel Peed, Chairman and CEO

Yeah. I think so far the discussions we've had with Demotech related to our plans to expand underwriting and get into writing specialty commercial property on a direct basis with our new carrier and pooling capital have been very favorable. The pooling arrangement is an under-leveraged part of our organization, and we're well positioned for growth. Demotech is very comfortable with the pooling arrangement we have with our pool group. The risk-based capital is strong, and we did not have to use any holding company liquidity to prop up surplus at year-end, so we feel like we still have tremendous financial flexibility. The reinsurance transactions we did certainly helped. As we reduced direct writings over time, we'll be able to step down the quota share. The quota share is part of our approach to buying catastrophe reinsurance. We appreciate that quota share includes CAT protection and real risk transfer. I don't know if that'll change long-term, but as it relates to managing leverage, we'd like to bring down direct writings and reduce the quota share in step over time. So you'll see some slight growth in net premium earned, but the direct and ceded components are what's going to change over the next few years.

Elyse Greenspan, Analyst, Wells Fargo

Okay. That's helpful. Thanks for all the color.

Operator, Operator

Our next question comes from Ron Bobman of Capital Returns. Please proceed with your question.

Ron Bobman, Investor/Analyst, Capital Returns

Hi. Thanks a lot. Good evening. I had a couple of questions. You provide a lot of good, important detail. Brad, the $10 million that you mentioned, and Dan, the 89%. Brad, when you referenced the $10 million as it relates to Texas, it was a little bit over $10 million. You mentioned AOP treaty, which I think is all-other-perils treaty. I got confused because I think of this Texas event as a named storm, this Uri. Did I mishear you, or do I not sort of understand the point you were trying to make?

Brad Martz, President and CFO

When we refer to named windstorms, we're talking about storms that are named or numbered by the National Hurricane Center. So really we're referring to hurricanes and tropical cyclones when we're talking about named windstorms. All-other-perils (AOP) CAT would include perils like winter storms, and Uri is a winter storm, not a named windstorm. So Uri would be covered under the AOP treaty rather than the named windstorm treaties. We do bifurcate our treaties, which I think gives us a competitive advantage because a lot of companies lump all perils into one treaty, and it becomes difficult to manage that exposure.

Ron Bobman, Investor/Analyst, Capital Returns

Okay. Now I understand. And that's a different treaty applies. Gotcha. Thanks. When you — and you essentially put a ceiling as to what Texas could mean on a net loss basis, which is really the most important thing for the company. But there's been all sorts of market estimates, single-digit billions up to $20-plus billion. When you look at the claims flow you've received so far, and I know it's only a handful of days since the events in Texas, and you compare it to maybe something like your experience with Harvey or other events the company has seen in the past, what's your early estimate as far as the market loss from this event compared to Harvey or independent of Harvey? Any wisdom you could share?

Daniel Peed, Chairman and CEO

From the standpoint of the market loss, we've seen a lot of modeling coming through. Karen Clark's estimate was in the teens of billions, and a large portion of that is commercial. We do not have a lot of commercial exposure in Texas; our exposures are mostly personal lines. Our claims are coming in and they're within our expectations so far, and we've seen claims counts drop off already. I can't really give a definitive industry-wide estimate beyond what modelers are saying, but we believe our portfolio will be less exposed to the large commercial losses that drive some of those very large industry estimates.

Ron Bobman, Investor/Analyst, Capital Returns

Relative to your Harvey numbers, do you think your gross number will be less than, equal to, or more than your Harvey numbers?

Daniel Peed, Chairman and CEO

We had a lot of claims in Harvey; many of them were flood claims which we did not cover. For this event, the average claim might be a little higher, but the number of claims will likely be lower than Harvey.

Ron Bobman, Investor/Analyst, Capital Returns

Okay. Thanks. Appreciate the help. Dan, when you mentioned in your prepared remarks about the renewal deal, and I'm sure you disclosed this. I'm sorry, you did not mention Massachusetts, but I thought the company has a decent footprint in Massachusetts. Did I miss it? Was it explicitly excluded from the renewal rights and how big is that book?

Daniel Peed, Chairman and CEO

Thanks for catching that. I misspoke earlier. It's Massachusetts, not Maine. The total premium that was involved in the renewal rights was about $130 million across those four states.

Ron Bobman, Investor/Analyst, Capital Returns

Okay. And then, my last question was a follow-up to Elyse's question about the longer term return profile. Brad, you mentioned mid-teens ROE as a target. What is the average annual hurricane loss you model once you get through the 2021 transition year and are in 2022? How many retentions is that?

Brad Martz, President and CFO

Right now, we're estimating for 2021 that average annual hurricane loss to be around $40 million and our goal will be to try and drive that lower. It depends on what we do at the June 1 renewal. Retention of risk is an annual decision; we're not locked into a specific risk profile. We want to drive that down and ensure the marginal change in rates we're getting through rate and underwriting actions exceeds the marginal change in reinsurance costs and loss costs. We're seeing that happen, and that's why we're seeing improvement in the underlying results.

Ron Bobman, Investor/Analyst, Capital Returns

Okay. I'm wondering when you get to 2022 and if you have the $25 million event retention and $70 million aggregate retention, if you were to exhaust those retentions, what's the ROE profile in that scenario assuming your policy retention stays at current levels and your rate trajectory continues? I guess is that scenario likely to be double-digit ROE?

Brad Martz, President and CFO

That's a good question, but there's a lot of variables that go into that. It depends on retention, average annual rate increases, and reinsurance costs and structure. We model those variables, set targets and try to optimize, but it's dependent on many factors. We believe the long-term target is achievable over the next couple of years, but I can't give a precise ROE under that exact hypothetical without running the modeling assumptions.

Ron Bobman, Investor/Analyst, Capital Returns

Okay. Last question: How has the Florida Office of Insurance Regulation's response and tolerance for rate increases been for companies seeking increases? Have they been cooperative, middling, or not so cooperative?

Brad Martz, President and CFO

I can't speak for other companies, but our interactions with regulatory relations in Florida have been outstanding. We applaud the Florida office for supporting our need for additional rate and our desire to buy down retentions and lock some of those reinsurance costs into our rate filings and be intellectually honest with loss reserves and get those costs into our rates as fast as possible. We're getting ready to make another filing before the end of the month, seeing another 14.7% here in Florida. We've moved from an annual cycle; this will be another cycle of rate change in Florida, and so far it has not been a problem. We'll monitor it carefully going forward.

Ron Bobman, Investor/Analyst, Capital Returns

Okay. Thanks a lot. I hope the weather is more favorable for everybody.

Brad Martz, President and CFO

Thanks for your questions.

Daniel Peed, Chairman and CEO

Thank you.

Operator, Operator

The next question is from Bill Broomall of Dowling & Partners. Please proceed with your question.

Bill Broomall, Analyst, Dowling & Partners

Great. Thank you. If I could just continue on Ron's question about Texas. Any thoughts you might have on what a typical claim like a burst pipe would typically cost in your experience in the past? And then two, any thoughts on demand surge with everything going on and what that might look like in Texas?

Brad Martz, President and CFO

Thanks for your question, Bill. As far as average severity for burst pipes, that is all over the board and varies widely by claim circumstances, so I don't want to give a specific average that might be misleading. As for demand surge, we look at models and try to estimate both the modeled expected loss and the 500-year return period for winter storm. Our portfolio's modeled gross loss for that peril is approximately $90 million, so that would be well within the AOP reinsurance program.

Bill Broomall, Analyst, Dowling & Partners

Got it. Okay. Perfect. Thank you. And I was just wondering on this Skyway Technologies initiative — I'm assuming that's personal residential. Can you talk about what states you'll be operating in and timing on that, please?

Daniel Peed, Chairman and CEO

Yeah. So, we're going to start off with Florida only, and it would be personal lines. We have American Coastal, which is the number one market share in commercial residential condominium associations, and we also sell an HO6 product, which is the condominium unit owners product that is well-suited to a direct-to-consumer type of offering. Those are the areas we're starting in and we'll develop it from there. We have a target of being active with this by the end of the year, although that's subject to completion.

Brad Martz, President and CFO

I'd add that the technological capabilities are there and investments have been made. We're excited about leveraging the underwriting we've done on the commercial residential portfolio that we already insure — the shells and structures — and moving direct to those consumers with primary and secondary characteristics in hand. That will allow us to develop a very slick offering for those unit owners in Florida. HO3 is a natural evolution and, obviously, beyond Florida over time.

Bill Broomall, Analyst, Dowling & Partners

Perfect. Thank you. And just a point of clarification: I don't remember who said it, Dan or Brad. But you talked about trimming your PML and TIV annually. Can you explain that a little more? I kind of missed the details.

Daniel Peed, Chairman and CEO

That was me. I was trying to verbalize that we expect to be trimming our PML exposure and our TIV exposure while at the same time achieving rate increases, which makes our top line mostly flat. So those were general comments about reducing exposure while increasing average premium.

Brad Martz, President and CFO

Page 20 of the investor presentation shows a couple of charts illustrating that point. One chart shows the change in premium relative to the change in TIV — premiums up significantly more than exposures. Our pool group's 100-year PML moved down almost 9% over the last 12 months, which is evidence of reducing exposure. If we can maintain premium levels flat through rate increases while the exposure base shrinks, that's a recipe for margin improvement because that exposure base drives reinsurance costs and loss costs.

Bill Broomall, Analyst, Dowling & Partners

Perfect. Thank you very much.

Daniel Peed, Chairman and CEO

You're welcome.

Operator, Operator

The next question is from Ron Bobman of Capital Returns. Please proceed with your question.

Ron Bobman, Investor/Analyst, Capital Returns

Thanks. Brad, did you say that the one-in-500-year modeled loss for the portfolio is $90 million or $900 million gross?

Brad Martz, President and CFO

$90 million for the winter storm peril.

Ron Bobman, Investor/Analyst, Capital Returns

Okay. All right. Thanks a lot. That explains it.

Operator, Operator

There are no additional questions at this time. I would like to turn the call back to management for closing remarks.

Daniel Peed, Chairman and CEO

Okay. This is Dan. Thanks. With that, we'll wrap up the call today. I want to thank our investors, but also thank our entire team here, including our executive leadership team and especially our claims department for all their efforts and perseverance as we work through the 2020 unprecedented hurricane season. Thanks to all.

Operator, Operator

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