Earnings Call Transcript - ACIC Q1 2021

Operator, Operator

Hello, and welcome to the United Insurance Holdings Corp Q1 Conference Call. At this time, all participants are in a listen-only mode. The operator will now provide 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.

Adam Prior, Moderator, The Equity Group (Investor Relations)

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.

Dan Peed, Chairman and Chief Executive Officer

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 and driving down the loss and reinsurance costs through risk selection and exposure management. We're making good progress. For revenue, our rate increases are continuing with a 10.4% rate increase achieved year-to-date on personal lines renewal business and nearly 19% on personal lines new business. We anticipate the hardening rates will continue and renewal business rate increases to even accelerate. We have filed rate increases in Florida, Texas, South Carolina, North Carolina, Louisiana, and New York, averaging nearly 15%. Renewal retention rates remained strong. We have curbed new business dramatically as part of our exposure management plan. For exposure management, we are ahead of pace, reduced by 13% our pool of PML by September 30 on a year-over-year basis, which will result in over $300 million less reinsurance limit need. This takes a lot of pressure off our June 1st catastrophe reinsurance placement. To date, we expect to finish our placement soon. And as of today, we are oversubscribed on our core catastrophe placement. The program includes a significantly reduced occurrence and aggregate retention for hurricane exposure to the pooled companies of almost $25 million per occurrence for first and second events and less than $70 million in the aggregate. This retention level when applied against the 2020 hurricane season would have yielded about one-third of the actual $208 million retention last year. Our commercial lines business fared well, and results are outlined in our investor supplement, which can be found on UPC's website. American Coastal continues with the number one market share of the admitted commercial residential in Florida and is writing in a very firm market. The newly legislated Citizens changes, which include the annual rate increase glide path, inclusion of the reinsurance cost to the 100-year and the 20% keep-out premium will positively impact terms for the Florida commercial residential space. We continue to be on track to roll out our Journey E&S platform and our direct-to-consumer technology product with Skyway Technologies, both planned for the second half of 2021. We will have more information on our plans for these platforms as we near rollout. As stated previously, we expect '21 to be a transition year, but we remain well positioned to continue expanding our underlying margin while also significantly cutting our net catastrophes. We plan to take advantage of the accelerating rate increases in our opportunities in E&S and direct-to-consumer technology. The property cat market remains as hard as it has been in years, especially the Florida personal lines market. With that, I'll turn it over to Brad.

Brad Martz, President and Chief Financial Officer

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 7% from a year ago, driven primarily by a $21 million or 9.4% decline in personal lines, consistent with our strategy to de-risk and reshape our homeowners' insurance risk portfolio. Commercial premium production was down slightly due to lower assumed E&S premiums written of $19 million, which was offset by strong premium growth in American Coastal's admitted commercial residential portfolio of $16.5 million or up 18% year-over-year, driven by higher rates. Ceded earned premiums were $210.7 million, an increase of $57.7 million or approximately 38% year-over-year due to more business being ceded via our quota share reinsurance programs. Other items included in total revenue during the first quarter included $5.1 million of fee income related to our renewal rights transaction in the Northeast that was completed in January. Unrealized gains from equity securities of $2.6 million and investment income of $3.6 million, which declined $3.3 million or 48% from the prior year due to lower yields and dividends from equities. UPC's first quarter net loss and loss adjustment expense was $115.8 million, an increase of $12.9 million or 12.6% year-over-year. Net retained cat losses added over 16 points, and the prior year reserve development adds over 20 points to our net loss and combined ratio. Excluding these two items, the underlying loss in LAE was $62 million, down $24.8 million or 29% year-over-year. This produced an underlying gross loss ratio of 17.4%, which improved nearly eight points compared to 25.2% a year ago due primarily to higher ceded losses, and our underlying net loss ratio of 42.5% improved approximately three points from 45.4% in the first quarter last year, which is a better baseline for comparison this period since it includes both ceded premiums and losses. UPC's operating expenses were $69.9 million, a decrease of $17 million or 20% year-over-year. This decline was driven almost entirely by higher ceding commission income in the current quarter, which is reflected in lower acquisition costs. Excluding fee and commissions, total operating expenses increased roughly $1.7 million a year. Our gross expense ratio for the year was 19.6%, which compares favorably to 25.2% a year ago, including the benefit of ceding commissions. In contrast, our net expense ratio increased 2.6 points to 47.9%, inclusive of reinsurance costs. Speaking of reinsurance, our team made exceptional progress on renewing our core catastrophe reinsurance program that will become effective June 1, 2021. I'm happy to report we've secured commitments from our reinsurance partners in excess of the total limit being sought, and are now in the process of determining final allocation of lines. We're able to retain our aggregate cascading structure, which we believe provides superior protection against risk or ruin. And the risk-adjusted cost increase is likely to be in the mid-single digits, but is not finalized yet because we are still evaluating various options related to reducing our occurrence in aggregate retention. As Dan mentioned, the most significant change we expect to make this year is reducing potential earnings volatility in the second half of 2021 from named windstorms. We look forward to announcing all the details later this month once the terms are finalized, but wanted to express today that our program is in great shape and much improved compared to a year ago. On the balance sheet, UPC's total assets were $2.8 billion, including cash and investments of approximately $1.2 billion. The modified duration of our fixed income holdings increased to 4.4 years, but our composite rating of A plus remain unchanged. GAAP equity attributable to UIHC stockholders declined approximately 9% from year-end to $359 million with a book value per share of $8.32. Our unrestricted liquidity at the holding company was approximately $40 million at quarter end, but we intend to utilize up to half of that liquidity for capital contributions to our pooled group of companies, given the impact of our reserve charge had on the statutory surplus this quarter. Finally, I would also like to preview our intent to refresh our currently stale, dated shelf-registration statement. We can't provide any additional details regarding future plans to access capital markets at this time, but we always want to be properly positioned to do so. Thanks for your valuable time and interest in our company, and that concludes our prepared remarks. We are now happy to take any questions.

Operator, Operator

Our first question today is coming from Greg Peters from Raymond James.

Greg Peters, Analyst, Raymond James

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

Dan Peed, Chairman and Chief Executive Officer

Thanks, Greg. This is Dan. We’ve heard a lot of feedback from various parties about how effective the legislation will be. We didn’t get everything that was originally in Senate Bill 76 and a few key things were removed. However, from the standpoint of claims and litigation dynamics, there is a lot that puts more structure around the process and makes it fairer than it has been. Florida has been particularly difficult, and those close to the situation can see there will be changes in how those claims are addressed. We believe that will make a significant difference, including the two-year time frame as it applies to tail coverage and similar provisions. We’ve heard the various viewpoints, and the truth is we won’t really know until we see how this impacts claims. On your second question about Q2, I would expect a rush to the courthouse. When we set reserves, we consider the future impact, so we would not expect the Q2 spike in litigation events to continue into Q3 or Q4. We would expect it to come down dramatically, and I don’t think that will have a negative impact on our reserves at the end of Q2.

Greg Peters, Analyst, Raymond James

Thank you for that answer. As a follow-up, I know you report the underlying number. I'm curious how meaningful the underlying number is in the context of the unfavorable reserve development. It would suggest that the $29,769,000 indicates you understated the underlying loss ratio in prior quarters. So the actual underlying loss ratio, or underlying combined ratio, is running higher than what you're reporting. Am I looking at that wrong?

Brad Martz, President and Chief Financial Officer

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.

Greg Peters, Analyst, Raymond James

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.

Brad Martz, President and Chief Financial Officer

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

Operator, Operator

Our next question today is coming from Elyse Greenspan from Wells Fargo.

Elyse Greenspan, Analyst, Wells Fargo

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

Dan Peed, Chairman and Chief Executive Officer

Okay. The way to get there is to reduce our loss costs and increase our revenue. We are on a run rate and have achieved a 10.2% to 10.4% rate increase looking backward, and we have filings in progress, including a filing in Florida for 14.7%. Texas, Louisiana, South Carolina, North Carolina and New York all average around 15%, in addition to the roughly 10% we achieved last year. On exposure management and the loss cost side, we have taken a number of underwriting and risk selection steps to try to eliminate what we call the bottom decile of our portfolio. Those steps should move the underlying combined ratio down into the low 80s. Timing is a good question, as it moves around a bit with quarterly results, but we would certainly hope to be there by the end of 2021.

Elyse Greenspan, Analyst, Wells Fargo

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

Dan Peed, Chairman and Chief Executive Officer

So 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 on January 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.

Elyse Greenspan, Analyst, Wells Fargo

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?

Brad Martz, President and Chief Financial Officer

Certainly. I mentioned in my remarks that we had approximately $40 million of unrestricted cash on hand at the holding company level, and we intended to use up to half of that liquidity for contributions. Those amounts have not been finalized yet, but we do want to backfill the shortfall caused by the reserve charge, which we believe was prudent and warranted given the loss development activity we observed. So that's essentially what was communicated.

Elyse Greenspan, Analyst, Wells Fargo

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

Brad Martz, President and Chief Financial Officer

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.

Elyse Greenspan, Analyst, Wells Fargo

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?

Brad Martz, President and Chief Financial Officer

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.

Elyse Greenspan, Analyst, Wells Fargo

Okay. Thanks for the color.

Brad Martz, President and Chief Financial Officer

You're welcome.

Operator, Operator

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.

Dan Peed, Chairman and Chief Executive Officer

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

Operator, Operator

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.